Lloyds lawyer says 'no value left in HBOS' comment taken out of context

By Kirstin Ridley

LONDON (Reuters) - A note jotted down by a senior director of Lloyds Banking Group during a 2008 board meeting saying there was "no value left in HBOS" ahead of an ill-fated takeover was taken out of context, a lawyer for Lloyds told a London court on Wednesday.

Around 6,000 investors allege they were misled by Lloyds over a state-engineered rescue of HBOS by Lloyds at the height of the credit crisis that ultimately led to a 20.5 billion pound ($29 billion) bailout of Lloyds. The case could come to trial next year.

Shareholders say the "financially disastrous" acquisition wiped billions off the bank's share market value and are seeking about 350 million pounds in damages.

A lawyer for Lloyds told a pre-trial hearing that the note, written by former Lloyds board director Archie Kane on Oct. 10, 2008 while the bank's board debated whether to proceed with the HBOS deal, referred to earlier terms on the table at the time.

In a witness statement referred to in court, Kane has said he believed at the time that the deal would create value once terms had been renegotiated, the lawyer said. Lloyds did not immediately respond to requests for a copy of the statement.

Lloyds bosses valued Britain's biggest mortgage lender at around 5.9 billion pounds when they recommended the all-share HBOS purchase to shareholders. But the lender's shares were "valueless" at the time, the shareholder claimants allege.

Lloyds lawyers on Wednesday sought to persuade the judge to strike out the claim that HBOS shares had been valueless, an argument described as "flawed" and "fundamentally misconceived" in a debate in court about accounting values.

HBOS, formed out of the 2001 merger of former English building society Halifax and the 300-year-old Bank of Scotland, was supposed to become a new force in banking.

It embarked on a strategy of aggressive growth, relying partly on wholesale funding. But the collapse of Lehman Brothers in 2008, coupled with a ballooning loan book, spooked investors into withdrawing billions just as money markets seized up.

Investors allege they were not told HBOS was receiving emergency support from the Bank of England and U.S. Federal Reserve, which peaked at around 25.4 billion pounds and $18 billion respectively. They also allege Lloyds secretly loaned HBOS 10 billion pounds in 2008 to allow it to continue trading.

Lloyds has vowed to defend itself against the lawsuit.

"The group's position remains that we do not consider there to be any merit to these claims and we will robustly contest this legal action," a Lloyds spokesman said.

In a long-delayed report published last November, the Bank of England and Financial Conduct Authority said they would consider banning up to 10 executives linked to the 2008 collapse of the bank from senior business roles.

($1 = 0.7095 pounds)

(Reporting by Kirstin Ridley; editing by Susan Thomas)