Royal Bank Of Scotland To Pay $1B Over Right Issue Charges

The state-owned British bank, The Royal Bank of Scotland Group (LON:RBS) plc (TO:RBS) , has agreed to pay a fine of 800 million pounds ($1 billion) in an out-of-court settlement to majority of the claimants. This is being done to settle charges that it misled shareholders ahead of a 12 billion pound rescue fundraising at the height of the financial crisis in 2008.

The bank has reached a settlement with three of the five claimant groups representing hundreds of shareholders involved in the lawsuit. These groups had sued the company for over 4 billion pounds, for allegedly misrepresenting its financial health at the time of its 2008 rights issue. The investors lost nearly 80% of their money when RBS collapsed a few months later and had to be bailed out by the British government, costing the taxpayers more than 45 billion pounds. At present, the bank is over 70% controlled by the government.

The settlement has been made with Standard Life (LON:SL), Legal & General, Aviva (LON:AV) and Prudential (LON:PRU) and the Universities Superannuation Scheme (USS), which collectively bought about 10% of the 2008 share issue.

In addition, the company mentioned that it is now making efforts to reach a settlement with the other two groups to avoid a potentially embarrassing trial in Mar 2017. The intention is to split the 800-million penalty among the five shareholders group upon approval by all the claimants. This split settlement adds a fresh dimension to an unprecedented English lawsuit that already stands out for its size and complexity.

However, unlike the other claimants, RBS Shareholder Action Group, the largest of the claimant groups representing 27,000 retail investors, is planning to take to court former senior executives, including the former chief executive, Fred Goodwin, alongside the bank.

The bank is currently attempting to settle a range of fines and lawsuits related to its alleged misconduct before and during the financial crisis, which have hindered its plans to return to profit and private ownership.

Although the company has set aside an unprecedented amount to cover an out-of-court settlement, for a case involving allegations of misrepresentation, the settlement represents a good deal for the bank. The settled amount accounts for nearly one-fifth of the original demand and will avoid the costs and risks of years of lengthy trials and appeals at a time when the bank’s finances have become more constrained by a bunch of fines and other lawsuits.

Bottom Line

The current litigation issue follows the investigation by the U.S. Department of Justice (DoJ), penalizing the bank for allegedly mis-selling residential mortgage-backed securities (RMBS) in the run up to the 2008 financial downturn.

Last week, the bank was the biggest failure in the Bank of England's annual stress test of lenders, partially owing to a mounting legal cost for misconduct that analysts and lawyers had previously estimated, could cost the bank up to $27 billion.

JPMorgan Chase & Co.’s (NYSE:JPM) executives faced a similar probe from the DoJ for alleged sale of faulty mortgage securities prior to the 2008 financial crisis. Additionally, among other major banks, Citigroup Inc. (NYSE:C) and Morgan Stanley (NYSE:MS) have paid billions of dollars to the U.S. financial regulators as penalties for settlement against charges of business malpractices in the pre-crisis period.

Royal Bank of Scotland currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

Shares of the company have declined more than 43% so far this year on the NYSE, underperforming the 2.7% growth for the Zacks categorized Foreign Banks industry.

Zacks' Top Investment Ideas for Long-Term Profit

How would you like to see our best recommendations to help you find today’s most promising long-term stocks? Starting now, you can look inside our portfolios featuring stocks under $10, income stocks, value investments and more. These picks, which have double and triple-digit profit potential, are rarely available to the public. But you can see them now. Click here >>