BofA's $850M Lawsuit To Be Dismissed? - Analyst Blog

Breathing respite for Bank of America Corporation BAC, U.S. District Judge Max Cogburn hinted that he may turn down a lawsuit filed by the U.S Department of Justice (:DOJ) against the banking bellwether. The news was reported by Reuters. The lawsuit pertains to the sale of risky residential mortgage backed securities (:RMBS).

In Aug 2013, the DOJ had sued BofA underlying Financial Institutions Reform, Recovery and Enforcement Act (:FIRREA). The bank was accused of misleading investors by selling faulty RMBS worth $850 million, thereby resulting in huge losses for them.

Investors purchasing these securities included Wachovia Bank National Association, which was later acquired by Wells Fargo & Co. WFC and the Federal Home Loan Bank of San Francisco.

Later in Mar 2014, the U.S. Magistrate Judge, David Cayer, had suggested the dismissal of the case. However, his recommendation was subject to review by District Judge, Max Cogburn.

According to Cayer, the allegations by the DOJ did not meet certain criteria. It was alleged that the bank had presented false statements to government agencies. However, the investors – Wachovia and the Federal Home Loan Bank of San Francisco – were not government agencies. Moreover, the FIRREA Act is not concerned with malpractices associated with the sale of securities.

Though Cogburn did not assign a formal ruling, he supported Cayer's suggestion and mentioned that the DOJ seems to lack enough evidence to support the claim. He added that the DOJ might be offered another chance to reframe their charges.

Further, Cogburn also indicated the lawsuit filed by the Securities and Exchange Commission (:SEC) on a similar pretext would, however, continue. This likely verdict is also in line with Cayer's recommendation regarding the same.

Separately, BofA is in talks with the DOJ and many states to pay at least $12 billion in a bid to settle several litigations and probes related to its pre-crisis mortgage practices. Though the aforementioned lawsuit related to the sale of RMBS is not the main part of the bank's ongoing negotiation, its upholding might worsen the overall scenario for BofA.

BofA has lately been embroiled in legal hassles. Since the financial crisis, the Wall Street Biggie has paid hefty fines to settle lawsuits and repurchase securities, thereby severely affecting its results.

If the lawsuit filed by DOJ is eventually dismissed, it might reduce the legal hassles for the company to some extent. However, BofA will be still left grappling under substantial legal burdens.

BofA currently carries a Zacks Rank #5 (Strong Sell). Better-ranked banks include BofI Holding, Inc. BOFI and Central Pacific Financial Corp. CPF. Both these stocks sport a Zacks Rank #1 (Strong Buy).

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