Banks Face Big Lawsuit From NY's Battery Park

Wall Street banking behemoths seem to be still paying for the risky dealings they undertook before the financial crisis. Recently, according to Bloomberg, Battery Park City Authority – a public-benefit corporation – slapped charges on units of Citigroup Inc. (C), JPMorgan Chase & Co. (JPM) and Bank of America Corporation (BAC) over the issuance of auction-rate securities.

: banks

Battery Park City Authority filed the lawsuit in New York State Supreme Court in Manhattan. The charge was related to auction-rate securities worth $635 million issued by Battery Park to finance debt. The auction-rate securities include municipal bonds, corporate bonds and preferred stocks, with a long-term nominal maturity for which interest rates are regularly reset through Dutch auctions.

The accusation was directed at Citigroup Global Markets Inc., the US-based brokerage and securities arm of Citigroup; J.P. Morgan Securities Inc. (now known as J.P. Morgan Securities LLC), a division of JPMorgan; and BofA’s Merrill Lynch, Pierce, Fenner & Smith.

Battery Park City Authority claimed that the plaintiffs misrepresented facts about the structure and market of the bonds. Further, by placing their own bids in every auction in which they were the main broker-dealers, these banking units gave the false impression of the economy being better than what it was.

Notably, the auction-rate securities market was worth $330 billion before it collapsed during the financial crisis as the demand subsided. Therefore, investors who held the aforementioned securities were unable to sell these, which led them to incur losses. Hence, Battery Park City Authority has sought a compensation of more than $50 million from the plaintiffs.

Litigation woes related to risky dealings before the financial crisis have been hounding major U.S. banks in the recent past. With the rise in legal expenses eating into profitability and the sluggish pace of economic recovery, the future looks bleak for these banks. However, investors who suffered losses due to such dealings are expected to get respite.

Currently, Citigroup carries a Zacks Rank #5 (Strong Sell) while JPMorgan and BofA carry a Zacks Rank #3 (Hold). A better-ranked banking major is SunTrust Banks, Inc. (STI) with a Zacks Rank #2 (Buy).