Four of Britain's largest institutional investors are part of a group considering suing state-owned Royal Bank of Scotland (RBS.L) over a share offer under disgraced former Chief Executive Fred Goodwin.
Prudential (PRU.L) and Universities Superannuation Scheme (USS) were named in court on Tuesday, alongside fund majors Standard Life (SL.L) and Legal & General (LGEN.L). They are part of a group that took up about 10 percent of the record 12 billion pound ($19 billion) rights issue in 2008, only to see the value of RBS's stock plummet.
Months after the cash call, RBS came close to collapse and had to be taken over by the state.
Thousands of shareholders are already claiming more than 4 billion pounds from RBS, alleging they were misled over the bank's financial strength in the rights issue prospectus published months before the bank spectacularly imploded.
But the case poses a dilemma for large institutions, some of which remain leading RBS shareholders. They want to underline the need for improved corporate governance, but would see the value of their investments sinking if the Edinburgh-based lender loses the case.
"In our case, you are talking really about investments that are made via index funds. And where there's a rights issue, you really do not have much choice on whether to subscribe," noted one source close to a major investor.
"If subscribing therefore causes a loss, it should be investigated whether the rights issue prospectus was accurate or not."
USS, Standard Life, Legal & General and Prudential all declined to comment.
The fund management arm of Legal & General owns a 1.02 percent stake in RBS, that of Standard Life holds 0.5 percent and Prudential's M&G fund management arm has 0.5 percent, according to Thomson Reuters data. USS is a large pension scheme that invests via other fund managers.
In an emailed statement, RBS said of shareholder lawsuits: "The Group considers that it has substantial and credible legal and factual defenses to the claims and will defend itself vigorously."
"FRED THE SHRED"
The collapse of RBS, once a small Scottish retail bank whose aggressive expansion brought it to its knees as the credit crisis raged, was averted only by a 45 billion pound taxpayer bailout and billions more spent in state-backed loans. The bank is 81 percent state-owned.
Goodwin, dubbed "Fred the Shred" for his cost-cutting policies, received a knighthood for services to banking in 2004 but was widely blamed for many of RBS's later troubles, and was stripped of his title in 2012.
At a largely procedural pre-trial hearing at London's High Court, a judge gave RBS until November 29 to file its defense to claims filed to date.
He provisionally set a November 12 date for a hearing at which lawyers representing the two groups of shareholders who have filed a case - and two others which are considering filing one - to discuss cost sharing.
The RBoS Shareholder Action Group is made up of about 12,600 shareholders, mostly retail investors. It is represented by law firm Bird & Bird, is suing RBS as well as four former directors, including Goodwin and former Chairman Tom McKillop.
A second lawsuit is being brought against RBS by law firm Stewarts Law, representing around 50 institutional investors.
The large institutions considering a suit have appointed corporate litigation firm Quinn Emanuel. A fourth set of retail investors, whose claims are under 5,000 pounds each, have appointed lawyers Leon Kaye and are considering options.
The judge said that although separate groups of investors could continue to be represented by separate lawyers, a lead lawyer in court would ensure efficiency.
And with other shareholders possibly waiting in the wings, he also set an April cut-off date at which new groups can join the current case.