In a major relief to Bank of America Corporation (BAC), a federal judge in New Jersey dismissed most of a lawsuit filed by Prudential Financial, Inc. (PRU) in 2013, over sale of faulty residential mortgage-backed securities (“RMBS”) in the run up to the 2008 financial crisis. Prudential had accused BofA of misrepresenting the quality of nearly $1.9 billion of RMBS that soured later on.
The U.S. District Judge, Stanley Chesler in Newark, NJ, while dismissing almost all the claims, stated that Prudential was unable to prove that BofA and its unit Merrill Lynch had lied about the quality of underlying loans that backed RMBS to the rating agencies. Further, Prudential cannot bank on the ‘after-the-fact’ computer analysis, which shows that defendants, while arranging for 54 securitizations between 2004 and 2007, knew about the methodical overstatement of property assessments.
Nevertheless, the judge ruled that Prudential can resubmit a claim related to 21 securitizations, where BofA acted as underwriter and was not a sponsor or issuer. Notably, back in Apr 2014, Judge Chesler had dismissed certain charges by Prudential, owing to its failure to state a valid claim for relief.
We believe that the dismissal of the lawsuit will act as a positive catalyst for BofA. Over the past one year, the company has paid billions of dollars as settlement amounts associated with its business conduct. This, in turn, has adversely impacted the company’s financials.
Despite BofA claiming that majority of its legacy MBS lawsuits have been resolved, we believe that the company’s legal issues will continue to make headlines. Nevertheless, the negative impact from the same on its financials is expected to diminish.
Apart from BofA, several other major global banks continue to face legal issues for their business conduct in the past. These include JPMorgan Chase & Co. (JPM), Morgan Stanley (MS), Citigroup Inc. and Wells Fargo & Company.
Currently, BofA carries a Zacks Rank #4 (Sell).
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