NDB board and auditors face derivative action over Rs.13.2bn fraud

​National Development Bank PLC (NDB) has formally announced that a minority shareholder has filed a derivative action against the bank, its board of directors and its external auditors, over a massive internal fraud. 
The lawsuit, filed by M. Thiyagaraja in the Commercial High Court of the Western province, under case number 21/2026/CO, names Ernst & Young and its partners, who served as the bank’s external auditors as of December 31, 2025, as respondents. 
The legal proceedings commenced on May 8, 2026, with the legal counsels making initial submissions regarding the procedural issues tied to the issuance of notices. Following these submissions, the court reserved its order for May 13, 2026. 
In a subsequent market filing, the bank confirmed that the High Court judge ordered the petitioner to serve notice on all respondents, making it returnable on May 26, 2026. The court has also fixed the matter for support by the petitioner.
​This unprecedented legal challenge stems from the fallout of a severe internal fraud that recently shook the Sri Lankan banking sector.  NDB initially disclosed the fraud on April 2, 2026, with an estimated impact of approximately Rs.380 million but shockingly revised the exposure to Rs.13.2 billion just days later. 
The fraud was reportedly executed through electronic transfers, particularly during weekends when monitoring was weaker, helping the transactions avoid immediate detection. 
The derivative action reportedly alleges that this severe capital erosion was perpetrated over an extended period, causing a massive anomalous balance sheet inflation that went completely undetected by the internal risk frameworks. 
The petition argues that this abnormal spike in specific financial asset balances should have been a glaring red flag for both the directors and auditors at Ernst & Young, representing a colossal failure of basic risk and compliance audits.
​In response to the crisis, swift actions have been taken on multiple fronts. Several individuals, including an assistant manager of the bank’s payment and settlement division and his brother, have been arrested by the law enforcement authorities. 
The investigation has now taken an international turn, with the Criminal Investigation Department requesting the assistance of Interpol. A team of Interpol experts specialising in virtual currency is scheduled to arrive in Sri Lanka to aid the probe.  Furthermore, an independent forensic review is underway, with Deloitte India appointed to conduct a thorough and impartial review of the fraud and its causes. 
The Central Bank of Sri Lanka has also intervened, directing the bank to suspend cash dividends to the shareholders and restrict discretionary payments while extending the regulatory support to maintain liquidity. 
​As the investors digest the sheer scale of the financial restatement and ensuing legal and regulatory actions, the stock performance reflects a cautious but attentive market.  At the close of recent trading, NDB shares were quoted at Rs.114.75, recording a slight decline of Rs.0.50 or 0.43 percent, from the previous close of Rs.115.25. This muted negative price action suggests that while the initial shock of the Rs.13.2 billion capital hit has already been largely priced in by the market, the investors remain hesitant to initiate new positions amidst the lingering governance overhang.