BofA Favored by Appeals Court - Analyst Blog

The declaration by the 2nd U.S. Circuit Court of Appeals in New York on Monday favoring Bank of America Corporation BAC came as a breather for the banking giant. The court did not hold it accountable to shareholders for concealing a tentative lawsuit worth $10 billion against it. The news was reported by Reuters.

The lawsuit was filed by American International Group, Inc. AIG on Aug 8, 2011, alleging that BofA, along with its acquired units Countrywide and Merrill Lynch, had sold risky mortgage-backed securities worth more than $28 billion in the pre-crisis period that resulted in huge losses for the insurer.

The lawsuit greatly impacted BofA and its stockholders, as the company lost nearly 20.3% on that very day. Later, a Houston-based investment firm, Camcorp Interests Ltd, alleged that BofA, with prior information about the tentative lawsuit, should have informed its shareholders beforehand.

However, the 2nd U.S. Circuit Court, ruled down the allegation on lack of evidence that indicated foul play. According to the Court, the bank is not obligated to inform its shareholders about a lawsuit that is yet to be filed. Moreover, as words of a tentative lawsuit were already doing rounds in the market, BofA did not find the disclosure necessary.  

Legal hassles pertaining to malpractices in the pre-crisis period continue to haunt Wall Street biggies including BofA, JPMorgan Chase & Co. JPM, Morgan Stanley MS and Citigroup. Their profitability is still marred by the one-time legal expenses and compliance costs related to long-drawn litigations.

In April, a Bloomberg report affirmed settlement talks between BofA and the U.S. Department of Justice, though in a nascent stage. The anticipated settlement amount of over $13 billion overshadows the historic JPMorgan settlement on troubled mortgages.

Going forward, though we see an improvement in BofA's top line driven by investment banking as well as consumer and business banking, we remain skeptical about an expected rise in legal expenses.

Presently, BofA carries Zacks Rank #5 (Strong Sell).

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