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Former shareholders in Northern Rock yesterday accused the government of cheating them of compensation when the bank was nationalised last year.
In the high court, lawyers representing the two largest shareholders argued that the government had unfairly rigged an independent valuation of the bank to ensure investors would end up with next to nothing.
Michael Beloff, counsel for the second largest shareholder, RAB Capital, described the compensation scheme as an "elaborate and sophisticated charade".
The government seized control of Northern Rock last February, the first large-scale nationalisation since the 1970s and the largest victim of the credit crisis at that time.
By taking the bank into public ownership, the Treasury rejected a management buyout and a bid from Virgin founder Sir Richard Branson. An independent auditor, Andrew Caldwell from accountants BDO Stoy Hayward, was hired by the Treasury in September and asked to assess how much the shares were worth at the time the bank was taken into public ownership. The government instructed the valuer to assume that the business would have otherwise gone into administration, meaning that the shares would be worthless.
At the time of the nationalisation, shares in Northern Rock were changing hands at 90p.
The Treasury "chose to nationalise on terms that will ensure that the former shareholders receive, at best, derisory compensation for their shares", said Lord Pannick, who is acting for SRM Global, which owned 11.5% of the bank.
He said the assumptions underlying the compensation scheme "will ensure that the government obtains full ownership of this valuable business having paid nothing, or next to nothing, for it, and so inevitably makes a profit when it sells it off in due course."
The investors argue that the shares were worth at least £3 at the time of the nationalisation. Of the private sector solutions, the Virgin proposal would have paid up to £2.07 and the management buyout up to £4.48, according to estimates prepared by SRM.
"It is clearly disproportionate that all of the profit should be enjoyed by the government and none by the shareholders whose assets were nationalised," Lord Pannick told Lord Justice Stanley Burnton and Mr Justice Silber.
The hearing is expected to last four days, with Beloff continuing his argument today, followed by another shareholder, Legal & General, and then representatives of the 150,000 small investors.
If judgment goes against the government, it would be forced to reconsider the terms set out to the independent valuer.
The Treasury has argued that without support from it and the Bank of England Northern Rock would have gone into liquidation. In a statement yesterday, it reiterated the pledge that Caldwell's assessment would be "independent and based on the value of the company without tax-payer support".
The shareholders argue that the bank was a going concern and had a strong asset base, albeit hit by short-term liquidity problems. They contend that the loans and other guarantees had been provided with "penal interest rates" and were not an act of charity.
They also argue that there was no chance that the support would have been withdrawn and Northern Rock allowed to go bust. "SRM would not have invested if Northern Rock had not been supported by the government," Lord Pannick said.
Northern Rock has been reducing its mortgage book to repay the taxpayer and claims to be well ahead of target, returning £15.4bn by the end of September.
The investors are basing their case on the European Convention on Human Rights.
Roger Lawson, of the UK Shareholders Association, which represents private investors, told BBC Radio 4; "We take many risks as shareholders but we don't accept the risk normally that the government will confiscate one's property without fair compensation. We are going to court to get a fair and independent valuation."
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