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January 12, 2009 2:00 am

Northern Rock investors fight

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Northern Rock investors, ranging from the hedge funds that gambled tens of millions of pounds on the bank's recovery to a woman who inherited 1,000 shares from her grandmother, will pile into the High Court this week to challenge the government over their right to compensation.

With demonstrations planned for some of the same Northern Rock branches where customers queued to withdraw their money in Britain's first bank run in more than a century, the case will undoubtedly raise fresh questions over how the government responded to the crisis.

SRM Global and RAB Capital, two hedge funds that together held a stake of about 20 per cent in the bank before it was nationalised in February, have joined forces with about 150,000 individual shareholders to sue the Treasury for allegedly rigging how Northern Rock would be valued to avoid paying them compensation. Legal & General, one of the UK's biggest institutional investors, is also backing the case, claiming the government, which agreed to give emergency financial support to the bank in September 2007, in effect changed the terms of the deal.

But observers hoping the hearings will unearth embarrassing revelations about the Treasury's behind-the-scenes machinations - as emerged in a 2005 court battle over the government's decision to force railways operator Railtrack into administration - may be disappointed.

In contrast to that case, which famously gave us civil servant commentary about "grannies losing their blouses" and former minister Stephen Byers telling an "untruth" in the witness stand, there is only a small sheaf of witness statements to sift through in the Northern Rock litigation. Lawyers representing the shareholder groups say they will demand additional disclosure from the government at the outset of the hearing. Of particular interest is the full advice the government received from investment bank Goldman Sachs before it made the decision to nationalise the lender, which has never been released.

Evidence submitted by John Kingman - the Treasury official who now heads the company that manages taxpayers' multi-billion-pound stake in the British banking industry - about the government's stance on Northern Rock's future profitability could also prove controversial.

Shareholders of the first lender plunged into crisis by the implosion of the credit markets claim that they have been treated less favourably than other banks that have since received huge capital injections from the government to stay afloat.

Some of the key figures involved in the case, including Jon Wood, the former star UBS trader who left to set up SRM Global, and David Greene, the lawyer who has handled several class action-style claims in the UK, are both known for their love of a scrap.

Yet even they concede that at its core, the shareholders' case is based on a fairly narrow legal argument, far removed from the wider political row over the banking bail-out.

Under legislation passed in February, Northern Rock's shareholders will receive compensation as determined by an independent valuer of what the bank would be worth if all financial assistance had been withdrawn and it had been placed into administration.

The shareholders claim those parameters in effect render their shares worthless, and should be lifted.

www.ft.com/northernrock

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