Private investors in failed bank Northern Rock (NRK) say the compensation process for their holdings has been ‘rigged’ to cheat them out of a fair settlement.

As part of the nationalisation of the bank the Government is due to appoint a valuer to decide how much the shares are worth. But the Northern Rock Shareholders Action Group (NRSAG) says the valuation will be based on the bank being in administration.

NRSAG spokesman, Roger Lawson, says: ‘The company was not in administration, and was trading normally and as a going concern. Such terms of reference for the valuation of any company are likely to result in a negligible valuation.’

Hedge fund SRM is also reportedly ready to team up with NRSAG in a legal battle. David Greene, partner at Edwin Coe (which represented shareholders in the Railtrack case against the Government) is examining whether the state’s compensation scheme is in breech of the Human Rights Act 1998.

Newspaper reports say the compensation scheme may leave investors with as little as 5p. NRSAG says a figure ‘more like £5’ would be fair.

‘The UK Government confiscated the shares even through there was good private sector solution which would have enabled the company to recover and to repay the debts to the Bank of England,’ says Lawson.

Aside from arguments over a fair price for compensation, SRM and RAB Capital – the other hedge fund on Northern Rock’s register – have pointed the finger at the Bank of England governor Mervyn King for being responsible for the bank’s collapse.

The hedge funds are said to be considering naming individuals in a claim – it is speculated this could include King or the chancellor Alistair Darling.