Northern Rock faces class action scrutiny

UK - FTSE 100-listed company Northern Rock could yet be the subject of a shareholder class action suit over the management's reactions to its financing position in the August credit crunch.

Anthony Maton, partner at the London office of Cohen Milstein Hausfeld & Toll (CMHT), said the company is investigating whether there are grounds for a class action on behalf of shareholder investors, following the banking group management's activity in recent weeks to secure the refinancing of its mortgage book through the Bank of England.

The law firm, known for its presence in earlier US securities class actions, is looking on behalf of its institutional investor and pension fund clients at whether there is a legal case for compensation, on the grounds Northern Rock should have acted sooner to inform investors there could be a problem with its financing position, thereby preventing significant losses to investors when the share price began to fall on September 14.

Northern Rock is thought to have previously raised around 73% of its assets through the financial markets until credit liquidity dried up on August 9.

Evidence now suggests the Bank of England may have known as long ago as August 14 of a potential problem with Northern Rock's financing position but the banking group did not make any announcement about the BoE loan approval until September 14.

"It is fair to say is there are people invested in Northern Rock who want to know what their options are but without wanting to put their head above the parapet," said Maton.

"We are looking at the arguments made by Northern Rock about events since August 9, when the [credit] world turned, because at that point there was some duty on Northern Rock to inform the market as to what had changed and why it had changed.

"If they had done so, it is possible investors might have taken a different course based on the information that had been made available", when deciding whether they continue to hold Northern Rock shares, continued Maton.

It is unclear at this stage whether a class action will definitely take place, stressed Maton, as CMHT will be able to come to its judgement "very quickly" but any decision by investors on whether to pursue action could then be determined by the background activity in the market and the position of the company.

That said, prospect of a class action has been further heightened by the formation today of the Shareholder Action Group against the bank's management committee to seek specific answers to questions regarding the funding debacle and the public's subsequent panic withdrawal of assets from deposit accounts.

European pension funds have been getting increasingly involved in securities class actions over recent years, as they see it as part of their fiduciary duty to recover compensation from listed companies if they believe their investment return potential from shares held was reduced by the ‘misleading' actions of management.

However, aside from the recent Shell class action, most cases are usually filed in the US as there is currently no general legal framework across Europe for securities class actions, CMHT noted in July. (See earlier IPE story: Pan-European foundation could raise "serious" class actions)

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