Co-op Bank's Largest Hedge Fund Investor Aurelius Capital Sells Stake Amid Paul Flowers Scandal (Photo: Reuters)
Co-op Bank's Largest Hedge Fund Investor Aurelius Capital Sells Stake Amid Paul Flowers Scandal (Photo: Reuters)

The Co-op Bank's largest hedge fund investor has sold nearly its entire stake in the embattled lender amid the former chairman Paul Flowers scandal, who was found to be embroiled in crack cocaine, crystal meth and ketamine-fuelled sex orgies.

While Aurelius Capital had agreed to sell nearly all its Co-op Bank shares to its rival Perry Capital before the scandal emerged, the hedge fund had apparently signed off on the deal once the Flowers revelations became public, say several media reports.

The Co-op Bank is one of UK's smallest lenders with 6.5 million customers and a 1.5% share of the current account market.

The group pledged to review its "democratic structure" and stressed the need to "modernise" itself following a £1.5bn (€1.8bn, $2.5bn) black hole in its balance sheet.

This led to a number of executives leaving, including Flowers, and a new recapitalisation programme.

While there are no details over the exact amount of financial interest Aurelius has in the group, the recapitalisation programmes would have given the hedge fund less than 9.9% of the troubled lender's shares.

The move will come as another blow to Co-op's investor base as the lender revealed that it has lost current customers as a result of Flowers' scandal and that competition from other banks, and the introduction of seven-day account switching may have contributed "to an increase the bank has seen in the switching out of current accounts."

On 22 November, police arrested Flowers, as part of an investigation into the supply of illegal drugs.

According to a police statement, authorities confirmed that "Flowers has been taken to a police station in West Yorkshire where detectives will continue their enquiries."

On the same day, Chancellor George Osborne launched an independent inquiry into embattled Co-operative Bank as it is engulfed in controversy.

Meanwhile, the Co-op has launched a "root and branch" investigation into how the embattled lender is run after a video emerged of its former chairman, who is also a Methodist minister, handing over money to buy hard drugs.

The group also pledged to review its "democratic structure" and stressed the need to "modernise" itself.

"We need to modernise to ensure that the interests of all our seven million members are properly and directly represented in the oversight of our business activities," said the Co-op in a statement.

"Given the serious and wide-ranging nature of recent allegation, the new executive management team has started a fact-finding process to look into any inappropriate behaviour at the Co-operative Group or the Co-operative Bank and to take action as necessary."

The leader of the board that appointed Flowers, Len Wardle, has also resigned.

According to a statement by the Co-operative Group, Wardle has stepped down with immediate effect and will be replaced by Ursula Lidbetter.

"The recent revelations about the behaviour of Paul Flowers, the former chair of the Co-operative Bank, have raised a number of serious questions for both the bank and the group," said Wardle.

"I led the board that appointed Paul Flowers to lead the bank board and under those circumstances I feel that it is right that I step down now, ahead of my planned retirement in May next year.