On Tuesday,Jed Rakoff, the U.S. District Judge in Manhattan,
approved
Bank of America Corporation
's (
BAC
) $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.
Background
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.
Competitors
Most recently, in February 2012, a $9.8 million settlement by
Goldman Sachs Group Inc.
(
GS
) 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
), 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
) $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.
Our Viewpoint
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.
BANK OF AMER CP (BAC): Free Stock Analysis
Report
CITIGROUP INC (C): Free Stock Analysis Report
GOLDMAN SACHS (GS): Free Stock Analysis Report
JPMORGAN CHASE (JPM): Free Stock Analysis
Report
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