The latest suit that Bank of America (NYSE:BAC) has been named as a defendant in is unlike any others I've seen. Previous suits have blamed BAC's Countrywide unit for selling mortgages to people that couldn't afford to pay them or some similar issue. While I found those to be somewhat distasteful considering the buyer has to agree to take a mortgage on; a case, I suppose, could be made that the sellers of the mortgage acted improperly. This suit by the city of Providence, Rhode Island takes government confiscation to an entirely different level, and it's so ridiculous and infuriating, I couldn't keep myself from commenting.
In essence, the city is asking for unspecified damages on behalf of anyone who bought or sold stocks in the past five years. In other words, most of the people in this country would potentially have a piece in this lawsuit. The fact that this lawsuit is allegedly on behalf of all public investors is the first ridiculous point. Second, how would anyone ever prove or disprove that BAC and the other defendants "rigged securities markets to divert billions of dollars from buyers and sellers?" How, exactly, is that a claim?
The fact is that it isn't a real claim, and what's actually behind this suit is the city of Providence attempting to pay for its own budgetary sins by confiscating money fairly earned by private institutions through the course of their normal operations. I have to suspect that the city's attorneys know this suit doesn't have a snowball's chance in you-know-where of actually going to court and producing a favorable result. However, I do think that Providence thinks these defendants will simply fork over a few hundred million dollars as a settlement to make them go away. A few hundred million between the dozens of defendants named isn't much, but that is material money to Providence; this is a money grab at its finest.
As someone who is long BAC, I sincerely hope that does not happen. First, this suit is beyond ridiculous and Providence should be embarrassed. Even if naming every who's-who in the securities industry as a defendant would work, there is no way to prove anything was or wasn't rigged. And who does Providence think they are? A nondescript city in a tiny state has no right to tell the securities industry what it can and can't do.
What happens if this case goes to court, and by some miracle, Providence wins? The suit is filed on behalf of all public investors, but somehow I doubt checks would be mailed out upon victory or settlement. This suit isn't on behalf of all investors; it's on behalf of Providence's checking account.
The implications for shareholders are potentially great. Specifically referencing BAC, if this sham lawsuit produces some kind of payout to Providence, I will consider unloading my BAC long position simply based on that eventuality. If Providence, a municipality with absolutely zero right to sue in this manner, can win some kind of settlement or verdict, that means dozens of these sham lawsuits will pop up and billions of dollars will be confiscated from the banking industry, BAC included. A very, very dangerous precedent would be set if Providence actually receives any kind of payout in this case.
BAC shareholders should take notice with whatever happens with this ridiculous suit. The fact is that Providence is simply trying to confiscate money from private companies to pay its own bills, and that this lawsuit has nothing to do with "rigging" the markets. If it wasn't this, it would be something else, but the real point here is that if Providence wins, you may want to consider selling your stakes in any large banks, because the lawsuit flood gates will open, potentially confiscating billions of dollars more from the large banks.
Disclosure: I am long BAC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.