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On Tuesday,Jed Rakoff, the U.S. District Judge in Manhattan, approved Bank of America Corporation’s (BAC - Analyst Report) $315 million settlement with investors related to the Public Employees' Retirement System of Mississippi pension fund. The settlement was made to compensate investors for misleading them regarding the risks associated with mortgage-backed securities issued by the Merrill Lynch unit of BofA.
Rakoff concluded that the facts and figures submitted by BofA were satisfactory. Moreover, he commented that, "the settlement is, in all respects, fair, reasonable, and adequate, and in the best interests of the settlement class members." Rakoff had a trial in March 2012 over the settlement.
Though BofA did not admitted any wrongdoing, Merrill Lynch, purchased by the investment bank in 2009, averred that losses faced by investors were attributable to downturn in economy and housing bubble.
In December 2011, BofA agreed to settle the charges against the suit, which investors filed in the U.S. District Court in New York, accusing it of misleading investors by misrepresenting facts in its mortgage-backed securities of over $16.5 billion. Securities were sold in 18 offerings between 2006 and 2007.
The complaint lodged in December 2008 claimed that BofA deceptively sold the sub-prime mortgage-linked securities, which eventually failed. Additionally, it misrepresented the value of instrument by providing materially misleading statements.
These investments were backed by inferior quality mortgages provided by subprime lenders Countrywide Financial Corp., First Franklin Financial, and IndyMac Bancorp, which got bankrupt in 2008.
Most recently, in February 2012, a $9.8 million settlement by Goldman Sachs Group Inc. (GS - Analyst Report) related to a Ponzi scheme was approved by a federal judge. The settlement, in particular, was reached by Goldman’s clearing and execution division and the Ponzi scheme refers to that of Arthur Nadel's, which was unraveled following the financial crisis.
Goldman also agreed to pay $550 million towards legal charges in 2010, followed by JPMorgan Chase & Co. (JPM - Analyst Report), who faced regulatory charges in June 2011 and paid $153.6 million. All these cases had intricate investments called collateralized debt obligations, backed largely by mortgages securities.
However, in November 2011, Jed Rakoff rejected Citigroup Inc.’s (C - Analyst Report) $285 million settlement with the U.S. Securities and Exchange Commission (SEC). The settlement was to compensate investors for misleading them regarding a housing market related collateralized debt obligation (CDO).
According to the judge, absence of proper documents prevented him from giving a green signal to the settlement. Moreover, he condemned regulators for depriving the general public of their right of knowing the details of Citi’s wrongdoing in the deal.
Rakoff has scheduled a trial on July 16, 2012, though Citi and the SEC might come up with a new settlement for the judge’s approval in advance.
Previously, in September 2009, Rakoff had dismissed a $33 million settlement between the SEC and BofA. The deal was related to civil charges imposed on BofA. The bank was accused of misleading shareholders when it acquired Merrill Lynch at a time when the financial crisis was at its peak in 2008. BofA failed to disclose the payment of $5.8 billion in bonuses to employees even though it recorded $27.6 billion yearly loss.
With the settlement of the lawsuits, BofA plans to move forward with its business strategies after attempting to end issues related to the financial crisis. Moreover, pending lawsuits further trigger financial hassles while blemishing the company’s image.
Therefore, it is in the interest of the company to resolve such matters at the earliest. Moreover, the investors, who are deprived of their hard-earned money, are at peace after the settlement is made.
BofA currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we also maintain a long-term Neutral rating on the stock.
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