Report claims Britain's Lloyds misled investors over HBOS fraud

By Lawrence White and Emma Rumney

LONDON (Reuters) - An internal Lloyds Banking Group (LLOY.L) report written by a former manager at the bank and published on Tuesday alleges serious misconduct by the lender over the handling and disclosure of a fraud at its HBOS Reading unit.

The report, written in 2013 after the Lloyds manager had taken her concerns to the police, alleges HBOS executives knew of the fraud as early as 2004 and failed to properly disclose it, with far-reaching implications given Lloyds' takeover of HBOS in 2009.

It also states Lloyds mishandled its investigation and disclosure of the fraud following that takeover.

"This report was provided to the FCA and the police at the time, in 2014," a spokesman for Lloyds said, referring to the regulator, the Financial Conduct Authority (FCA).

The former Lloyds manager began looking into the bank's handling of the fraud case on her own initiative, and was then asked to write the report when she alerted the bank's Audit department, the Lloyds spokesman said.

Lloyds did not in its statement address the substance of the report's allegations that it misled investors over its financial health by not disclosing the fraud earlier.

Lawmakers last week urged Lloyds to publish the report, which the bank had declined to do on the grounds it contained sensitive information about its customers.

Scottish businessman Neil Mitchell, a frequent critic of Britain's big banks, published the report online on Tuesday, saying it was in the public interest.

The report has circulated privately among regulators and law enforcement officials for years but has not been made available to the public.

Six people including two former HBOS bankers were jailed last year for a combined 47 years for their role in the fraud, in which the conspirators enriched themselves at the expense of the bank’s business clients.

The report says that if HBOS had properly disclosed the fraud in its 2007 annual report, the 4 billion pound ($5.3 billion) 2008 rights issue that stabilised its precarious financial position, and its subsequent takeover by Lloyds, would not have happened.

Its publication comes at a sensitive time for Lloyds as it attempts to move past a painful legacy of missteps before and during the financial crisis.

That process has been complicated by ongoing scrutiny of the bank's handling of the HBOS fraud.

Britain's financial watchdog is conducting a probe into HBOS and what its executives knew of the fraud, while a retired judge is probing whether Lloyds then properly investigated the incident after it bought HBOS in 2009.

That report will likely not be published until late next year at the earliest, Reuters reported in May.

Britain's National Crime Agency has also widened a review into the fraud at HBOS to look into allegations that fell outside of the initial criminal investigation.

(Reporting By Lawrence White and Emma Rumney; Editing by Keith Weir and Edmund Blair)