Lawsuit Against BofA to Continue

On Wednesday, Reuters reported that U.S. District judge William Pauley in Manhattan refrained to cancel the legal charges made by shareholders, led by a Pennsylvania school pension fund, against Bank of America Corporation ( BAC - Analyst Report ) , accusing it of misleading them. For this, the shareholders are seeking billions of dollars in compensation.

However, the judge has dismissed several claims pertaining to the executives and directors, including the CEO of BofA and many underwriters.

The shareholders had alleged that BofA misinformed them about the risks involved in perilous mortgage loans and its reliance on the faulty Mortgage Electronic Registration System Inc. (MERS). Due to this, the shareholders encountered huge losses. According to the judge, the investigation concluded that BofA was indeed involved in such fraudulent practices, and therefore he permitted the shareholders to proceed with the lawsuit.

The officials at BofA have claimed that the disclosure regarding the usage of MERS was properly made. However, the circumstances suggest a different story.

Background

During 2009-2010, the new issuance of shares by BofA included shares issued to repay the dues related to Troubled Asset Relief Program (TARP). To induce investors to invest in these shares, BofA deliberately did not divulge any information relating to the weakness of mortgage buyback claims, flawed internal controls and compliances to various rules. Moreover, the bank’s dependence on MERS was not disclosed.

MERS, which provides database for mortgage servicers, has been accused by the shareholders of sloppy record keeping. Its performance was so disgraceful that it failed to furnish data for legal foreclosures of several delinquent mortgage loans.

Therefore, the shareholders filed the lawsuit against BofA in the U.S. District Court of New York.

Earlier this year, along with BofA, the New York Attorney General also dragged JPMorgan Chase & Co. ( JPM - Analyst Report ) , Wells Fargo & Company ( WFC - Analyst Report ) into the court over fraudulent record keeping of mortgage loans through MERS. The banks had tried to get these lawsuits dropped, but failed.

Conclusion

BofA’s legal troubles look far from over. Dubious practices have dented its reputation and litigation costs are bound to hurt its financials to an extent.

Shares of BofA currently retain a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we also maintain a long-term Neutral recommendation on the stock.