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A lawsuit filed by the U.S. Securities and Exchange Commission (SEC) against Bank of America Corporation (BAC - Analyst Report) was recommended to be continued by a U.S. Magistrate Judge David Cayer. The news was confirmed on Monday in a Reuters report.

It was alleged that BofA sold faulty residential mortgage backed securities (RMBS) worth more than $855 million in the pre-crisis period. The company misled investors by compromising on the quality of 1191 loans that backed these securities.

Among the investors who purchased these loans, were Wachovia Bank National Association, which was later acquired by Wells Fargo & Company (WFC - Analyst Report), and the Federal Home Loan Bank of San Francisco.

In Aug 2013, the Department of Justice (DOJ) and the SEC filed two separate civil lawsuits against BofA pertaining to the aforementioned RMBS sale. Last Thursday, Judge Cayer hinted at the dismissal of the lawsuit filed by the DOJ. However, charges slapped by the SEC under the Securities Act of 1933 were upheld as the Judge found evidence that reflected violation of the Act.

Judge Cayer maintained that BofA concealed as well as misinterpreted facts and information related to the RMBS. The company, in its disclosures to the investors, had also manipulated the proportion of loans that went through third-party brokers to 42% from the actual figure of 70%

Nevertheless, the recommendations made by Judge Cayer will be reviewed by U.S. District Judge Max Cogburn in Charlotte.

Litigations related to the sale of risky mortgage loans have weighed heavily against the profitability of the Wall Street biggies like BofA. Since 2010, the company has shelled out more than $50 billion to settle mortgage related issues.

The stringent regulations seem to constraint the earnings of the companies, thereby resulting in losses for shareholders. However, these regulations ensure a more sustainable and secure investment environment over the long term.

Other banking behemoths faced with similar legal hassles include Morgan Stanley (MS - Analyst Report) and Citigroup Inc. (C - Analyst Report).

BofA currently carries a Zacks Rank #4 (Sell).

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