Lawyer warns of securities fraud lawsuits over foreclosure crisis

Bank of America faces lawsuit over charges of witholding information on failings, and others could follow

US banks could be hit with more lawsuits over the foreclosure crisis, warns one lawyer, although much hinges on the market reaction to the latest lawsuit to be filed against Bank of America Corporation.

Bank of America is the first US financial institutions to be cited for securities fraud relating to the foreclosure crisis, in a lawsuit filed at the start of April.

Dom Auld, of counsel at law firm Labaton Sucharow, says the nature of the fraud means other institutions might not face the type of class-action suit filed against Bank of America if the market does not react to disclosure on the scale of failings.

"One thing about fraud actions is that they have to cause damages. It's kind of counterintuitive, but you can commit a fraud, and if it doesn't damage anybody it's not really a fraud," he says.

As a result, he argues, if a bank issues a statement admitting issues with foreclosure processing and "the market just yawns", it will be unlikely to face suits such at those filed in New York against Bank of America. "You have to believe the market might have already assumed that was coming and therefore it was already priced," says Auld. "It seemed in Bank of America's case the market didn't yawn so much – it said this was material and this is a much bigger problem than the market thought it was."

He adds: "Are there going to be other cases like it? My guess is probably, but it really depends [on market reactions]."

Labaton Sucharow joined together with other law firms to file a class-action suit against Bank of America at the start of the month in the southern district of New York District Court over the failure of the institution to disclose issues in foreclosure processing failings between mid-2008 and late 2010.

"We're maintaining Bank of America was essentially not accurate in disclosing its risk," says Auld. "Our take would be that, ultimately, Bank of America at some point during that period knew it would have problems in recording these mortgages and processing foreclosures, and to not admit that to the market is fraud."

However, Auld notes recent financial results from US institutions suggest banks have not been mortally wounded by the foreclosure crisis, saying JP Morgan, Bank of America and Citi all "seem to be able to make money despite the fact they still have what I would say is a mortgage hangover", something he puts down to strong diversification on their part.

"They do lots of things and they make money in lots of different ways. Their results certainly aren't stellar at the moment, but they're quite adept at pasting over their problems with the panacea of quarterly success," he says.

Nonetheless, he warns, "I don't really feel like much got resolved. I don't think anything has changed in terms of the way they are exposed to potential problems that relate to their foreclosure practices."

Bank of America declined to comment on the New York suit.