UPDATE 1-RBS says did not mislead investors in $6.5 bln lawsuit defence

Fri Dec 13, 2013 5:54pm EST

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* RBS defence document says 2008 cash call not forced on it

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By Steve Slater

LONDON, Dec 13 (Reuters) - Royal Bank of Scotland said it and its former bosses might have made bad business decisions in the past but that did not mean they misled investors or acted illegally, as the bank defended itself against a 4 billion pound (US$6.5 billion) lawsuit from shareholders.

RBS's defence document, lodged in London's High Court late on Friday, said "it was clear to the market" that the bank's core Tier 1 capital ratio -- a key measure of financial strength -- was "significantly below 4 percent" at the time of a rights issue in 2008, even though it did not publish a figure.

RBS said the rights issue prospectus gave an accurate picture of its capital position and made clear the fundraising was part of a plan to rebuild its capital ratios.

RBS also rejected the allegation that it was forced into the 12 billion pound rights issue by Britain's financial regulator. The bank's directors at the time voluntarily launched the cash call that is at the heart of the lawsuit, according to a copy of the defence document seen by Reuters.

The Royal Bank of Scotland Shareholder Action Group is suing the bank and four former directors on behalf of about 100 institutions and 10,000 private shareholders, alleging they were misled over the bank's financial strength in a rights issue prospectus published months before RBS almost collapsed.

Fred Goodwin, the disgraced former chief executive of RBS who was ousted at the time of the government bailout, is among the directors accused.

"Had shareholders been given the true picture of the bank's position, they would have had a better opportunity to assess the risks which caused the shares to collapse and led to billions of pounds of losses for private and institutional shareholders alike," the action group said in a statement on Friday.

RBS is 82 percent owned by the UK government after a 45 billion pound taxpayer bailout in October 2008, after the rights issue which was announced the previous April.

"While RBS and its former directors made some business decisions that have been criticised, this does not mean that they misled investors or acted illegally," RBS said in a statement.

"We believe we have strong defences to the claims that are being brought against the group and that is why we intend to defend these vigorously and to protect the interests of our shareholders including UK taxpayers."

The defence document said the allegations reflect the benefit of hindsight and said the last four months of 2008 witnessed "unprecedented and unforeseeable turmoil" in financial markets.

"Contrary to the allegation made by the claimants, the rights issue was not forced on RBS by the (Financial Services Authority)," it said.

Goodwin and other directors decided to proceed with the rights issue on April 4, 2008, five days before Goodwin met with FSA boss Hector Sants, the document said.

The Shareholder Action Group could be joined by some of Britain's biggest institutional investors, which are part of a separate group considering lodging a claim.

Prudential, Standard Life, Legal & General and the Universities Superannuation Scheme (USS) are part of the group, which took up about 10 percent of the 12 billion pound rights issue under scrutiny.

The case poses a dilemma for large institutions, however, as some remain leading RBS shareholders and could see the value of their investments sink if the Edinburgh-based lender loses the case.

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.

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