The City watchdog is probing the “accuracy and completeness” of information given to investors by HBOS before the bank’s rescue by Lloyds TSB last year.
Details of the Financial Services Authority’s investigation surfaced in documents published alongside Lloyds Banking Group’s £21billion fundraising.
The probe centres on the £4billion rights issue launched by HBOS in April 2008 — less than four months before the Lloyds takeover was announced, according to a Sunday newspaper.
The FSA is “conducting a supervisory review into the accuracy and completeness of financial disclosures made by HBOS” which Lloyds is “co-operating fully with, the documents said.
When the rights issue was launched, Andy Hornby, the then HBOS chief executive, said the group was “optimistic about the fundamental prospects for our core businesses”. The bank, he added, was “well placed to deliver long-term, sustainable growth”.
But HBOS’s reckless lending was exposed in the wake of the crisis triggered by the Lehman Brothers collapse in September last year.
The UK Government is now a 43% shareholder in the combined group after pumping in an initial £17billion.
Just over £2billion of this has been repaid, but the taxpayer will pump in another £5.7billion under the fundraising plans announced last week.
Shareholders in both banks approved the merger last year but, in the prospectus, Lloyds said an investigation could lead to a heightened risk of legal action or “public sanction”.
HBOS interests included Halifax and the Bank of Scotland.
The UK Shareholders Association is also considering a possible legal move. Spokesman Roger Lawson said: “We have always said that one of the possible grounds for complaint of the HBOS shareholders was that rights issue. There were a number of issues at HBOS – particularly their approach to risk management.”
The FSA declined to comment on individual firms.
A Lloyds spokesman said: “We never comment on matters of a regulatory nature.”