On Friday, South Korea-based Woori Bank, a unit of
Woori Finance Holdings Co. Ltd.
), sued Merrill Lynch unit of
Bank of America Corporation
). Woori's complaint accuses the investment bank of creating and
selling seven collateralized debt obligations (CDOs) that were made
up of residential mortgage-backed securities in 2005 and 2006.
CDOs typically repackage bonds and other assets into new
securities. These are not traded on a public exchange, and hence
allow the firms like BofA to generate fees by brokering deals
between buyers and sellers. However, CDOs have performed dismally
since these were invested in securities comprising sub-prime
mortgages, which are known to have larger-than-average risk of
defaulting in the market. Eventually, the market downturn shattered
the investment banker's expectations and led to huge losses for the
Woori alleged that Merrill issued misleading statements and
omissions related to the mortgage-backed securities and also
concealed the risks associated with the securities. The company
claims that the documents used in offering these securities
contained untrue statements or omissions regarding the risks
involved in these investments. These misrepresentations of the
risks provoked investments, which virtually have no value at
Woori has filed the lawsuit in the New York State Supreme Court
in Manhattan. The company demands for damages worth $143 million
along with other penal charges.
Recently, the U.S. District Judge in Manhattan approved BofA's
$315 million settlement with investors related to the Public
Employees' Retirement System of Mississippi pension fund. The
settlement was made to compensate the investors as BofA misled
these investors by giving them deceptive information on risks
associated with mortgage-backed securities issued by its Merrill
BofA denied all the charges made against it. However, Merrill
Lynch, which was purchased by the investment bank in 2009, averred
that the losses faced by the investors were attributable to the
downturn in economy and housing bubble.
) also faced similar legal charges made by Woori Bank. The
complaint lodged claims that Citi misrepresented documents as an
underwriter in the sale of CDOs and residential mortgage-backed
securities, which turned Woori's $95 million investment, made
during 2006 and 2007, into loss.
Numerous lawsuits alleging BofA of such wrongdoings would surely
dent its reputation and financials. However, we believe that the
investors, who have lost their hard-earned money in such
investments, should feel relieved.
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.
BANK OF AMER CP (BAC): Free Stock Analysis
CITIGROUP INC (C): Free Stock Analysis Report
WOORI FIN-ADR (WF): Free Stock Analysis Report
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