Bank of America Investor Suit Over AIG Claims Rejected

Bank of America Corp. investors can’t proceed with a lawsuit alleging they should have been warned that American International Group Inc. was preparing its own suit against the bank in 2011 over billions of dollars in mortgage-backed security losses, a judge ruled.

Bank of America “cautioned investors that it faced substantial and rising litigation risks,” U.S. District Judge John G. Koeltl said in a ruling posted today in Manhattan federal court. The judge also found that the likelihood of AIG litigation and its approximate cost were disclosed in the press and available to investors even though the specifics were allegedly not in the company’s public filings.

The Charlotte, North Carolina-based bank and its officers “argue correctly that the alleged omissions did not mislead investors because information about BoA’s exposure to MBS litigation generally, and AIG’s claim in particular, was in the public domain,” Koeltl wrote.

AIG, the New York-based insurer, sued Bank of America in August 2011 over $10 billion in losses on mortgage-bond investments, saying it was the victim of a “massive fraud.” The insurer said the bank and businesses it took over -- Countrywide Financial Corp. and Merrill Lynch & Co. -- misled AIG as they sought to profit from the bundling of mortgages into securities.

Bank of America’s stock fell 20 percent the day the AIG lawsuit was filed.

‘Grossly Understated’

Bank of America and the other defendants created mortgage securities backed by shoddy loans and sold the investments based on inflated credit ratings that masked their true risk, AIG said in its complaint. Offering materials “grossly understated” the risks of loans tied to the securities the insurer purchased, the company said.

The investors’ lawsuit is In Re Bank of America AIG Disclosure Securities Litigation, 11-cv-06678, U.S. District Court, Southern District of New York (Manhattan). The underlying case is American International Group Inc. v. Bank of America Corp., 11-cv-06212, U.S. District Court, Southern District of New York (Manhattan).

Before it's here, it's on the Bloomberg Terminal.