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In a legal setback to Bank of America Corporation (BAC - Free Report) , the U.S. District Judge Max O. Cogburn Jr ruled that the company must face a lawsuit filed by the U.S Department of Justice (DOJ). The lawsuit pertains to the sale of $850 million worth of residential mortgage-backed securities (RMBS) in the years preceding the financial crisis.

While giving the ruling in the favor of the DOJ, Cogburn granted 30 days to the complainant for filing a revised petition. Further, the judge announced the continuation of a related case by the Securities and Exchange Commission against BofA.

The Backdrop

In Aug 2013, the DOJ had sued BofA under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA). The company was accused of misleading investors by selling faulty RMBS, 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 - Free Report) 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, Cogburn.

Last week, 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. However, he added that the DOJ might be offered another chance to reframe their charges.

Road Ahead

Despite the ruling going against it, BofA still retains a chance to challenge the amended case to be filed by the DOJ.

Of late, BofA has been embroiled in quite a few legal hassles. Since the financial crisis, the company has been paying hefty fines to settle lawsuits and repurchase securities, thereby severely affecting its results.

Separately, BofA was 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. Although the aforementioned lawsuit is not the main part of the bank’s ongoing negotiations, its upholding will likely further worsen the overall scenario for BofA. Notably, the talks have presently hit a deadlock after the DOJ refused BofA’s $12 billion offer to settle the inquiries.

BofA currently carries a Zacks Rank #4 (Sell). Some better-ranked banks include KeyCorp. (KEY - Free Report) and First Republic Bank (FRC - Free Report) . Both these stocks hold a Zacks Rank #2 (Buy).

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