Bloomberg reported that Brussels-based Royal Park Investments SA/NV – set up in 2009 by Fortis Bank SA/NV, the Belgian state and BNP Paribas SA (BNPQY - Free Report) – has sued Bank of America Corporation (BAC - Free Report) for the losses it incurred from investments in risky residential mortgage backed securities (RMBS). Royal Park alleged that BofA made false representations while selling RMBS worth more than $1.6 billion.
Though the lawsuit against BofA was filed in New York State Supreme Court in Manhattan on October 26, the court disclosed the news on Monday as it was closed last week due to Hurricane Sandy. As per the court filings, Royal Park is seeking damages exceeding $713 million for the losses incurred.
Royal Park charged BofA of issuing misleading statements regarding underwriting standards that were used while issuing RMBS. The firm also alleged that the company’s offer documents contained untrue statements and omissions including the percentage of owner-occupied properties. These led to huge losses as the market value of RMBS continued to plummet.
Apart from BofA, Royal Park had filed similar lawsuits against many other large banks including Goldman Sachs Group Inc. (GS - Free Report) , Deutsche Bank AG (DB - Free Report) , Credit Suisse Group (CS - Free Report) and JPMorgan Chase & Co. (JPM - Free Report) in July. The firm is seeking damages related to losses due to investments in risky MBS.
BofA has been on sticky grounds as it has been held responsible by many financial institutions as well as the regulatory authorities of misrepresenting documents related to RMBS and MBS. Most of these are related to the sale of securities during the height of the housing bubble that later led to the financial crisis in 2008.
In the third quarter of 2012, BofA settled three lawsuits where the foreign firms – Dexia SA, Sealink Funding Ltd. and Bayerische Landesbank – had accused it of providing misleading information at the time of selling MBS. Yet, the company did not disclose the amount paid to settle the cases.
We believe that these litigations will adversely impact BofA’s financial credibility going forward. However, the investors who were duped of their hard earned money will get some respite.
BofA currently retain a Zacks #3 Rank, which translates into a short-term Hold rating. Also, considering the fundamentals, we maintain a long-term ‘Neutral’ recommendation on the shares.