British pension funds are to sue Sir Fred Goodwin and the Royal Bank of Scotland in the American courts for hundreds of millions of pounds, The Times has learnt.

Cherie Blair has been hired by two local authority funds to seek compensation for the “massive losses” incurred when RBS was bailed out and the share price collapsed.

They claim that on multiple occasions RBS and Sir Fred, its former chief executive, “falsely reassured” investors that the bank was in good health when it was “effectively insolvent” because of bad loans.

The lawsuit is being taken on behalf of North Yorkshire and Merseyside council pension funds, which have a combined value of about £4 billion.

It names RBS and its entire board of directors, including the former chairman Sir Tom McKillop, as defendants.

It has been submitted to a court in New York, accusing Sir Fred of “hubris” for insisting on a disastrous lending and acquisition strategy that ran the bank into the ground. Class action lawsuits are common in the US, where the courts are more flexible and less expensive.

The class action lawsuit is open to all European and US investors in RBS to join. So far, only a Dutch metal workers scheme has joined, but Mrs Blair said that she would coordinate with other RBS shareholders “with the aim of securing justice for as wide a pool of affected investors as possible”.

The former Prime Minister’s wife is acting in a professional capacity as Ms Booth, QC. She told The Times that she agreed to take on the case because of the “massive losses inflicted on local authority pension schemes and other UK institutions who were the largest investors in RBS”. She added: “It’s also about the potential to protect investors in the future by significantly raising the standards for good governance in major UK companies.”

The case – an unusual one for Ms Booth, who is better known for her work as a human rights and employment lawyer – could prove embarrassing for the Government, which has been criticised for its failure to ensure proper regulatory oversight of RBS and other banks in recent years.

There was outrage at the size of Sir Fred’s pension, given that his bank had to be bailed out by the State after posting a loss of £24 billion for 2008. He refused pleas, led by the Chancellor Alistair Darling, to give up some of his £700,000 annual pension voluntarily. UKFI, which manages the taxpayers’ interest in the bank, is exploring legal avenues to see whether part of the pension can be clawed back.

A series of investigations have been opened into Sir Fred’s stewardship of RBS, looking in particular at his involvement in sponsorship schemes.

The class action hopes to force RBS to change its corporate governance. Ms Booth is working alongside Coughlin Stoia Geller Rudman & Robbins, the Californian law firm that secured $7 billion in compensation for Enron investors.

If the case is lost the losers don’t have to pay the other side’s costs.

Although RBS and the funds are British, they can bring the lawsuit in the US because RBS conducted a significant amount of business there. Ms Booth said: “Most of the problems that have brought the bank to its knees have originated and have been concealed in its US operations.”

RBS refused to comment.

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