Shareholders sued Colonial BancGroup Inc. this week alleging the company misled them about what it had to do to gain Treasury Department funds.

On Monday, the Washington law firm Klafter Olsen & Lesser LLP filed a suit in the U.S. District Court for the Middle District of Alabama representing shareholders who bought the $26 billion-asset Montgomery, Ala. company's stock between Dec. 2 and Jan. 27.

The suit claims that the company's Dec. 2 announcement declaring its preliminary approval to sell $550 million in preferred stock to the government omitted the fact that it would need to raise $300 million on its own before receiving the funds.

Colonial made the disclosure of special conditions on Jan. 27 when it announced a fourth-quarter loss of $825 million.

Colonial's stock rose 54% when it announced the preliminary approval, to $3.08 a share. Shares fell 46.2%, to 83 cents, Jan. 28, the day after it reported its fourth-quarter loss.

The company's stock fell 21 cents Tuesday, to 70 cents a share. However, analysts said the decline was largely driven by investor reaction to the Treasury Department's new approach to repairing the financial services industry.

A Colonial spokeswoman declined to comment Tuesday.

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