American shareholders are suing Britain's Lloyds Banking Group
Victor Blank, who stepped down as chairman the following year, former chief executive Eric Daniels and the bank itself have been named in a class action filed in New York, which claims they had a reckless disregard for the truth.
The bank's board is accused of making misleading statements about the government-engineered takeover, which at the time Daniels called a fantastic opportunity to create the UK's leading financial services group and create great value for both sets of shareholders.
Weeks later, however, Lloyds had to turn to the state for a bailout, surrendering a 43 percent stake in return for a 17 billion pound ($26.4 billion) injection of taxpayers' money.
Lawyers said shareholders were not told about a deterioration in HBOS's finances, and the extent of the problem only became known when the bank posted a worse-than-expected 10 billion pound loss in February 2009.
They said HBOS was technically insolvent within weeks of the deal being announced and was relying on funding from the Bank of England and the United States Federal Reserve Bank to stay afloat, but this information was withheld from investors.
Shares in Lloyds have fallen from about 165 pence just before the announcement of talks with HBOS to close at 25.5 pence on Friday.
The action over violations of the Exchange Act is being fronted by shareholder Albert Ross of Louisiana.
Lloyds declined to comment.
(Reporting by Paul Sandle; Editing by David Cowell)