The Canadian Press
A U.S. federal judge has dismissed a shareholder lawsuit against CIBC (TSX:CM) claiming that the big Canadian bank misled investors about its exposure to the U.S. subprime mortgage market.
The decision was made by a Manhattan court judge who said the bank was only one of many financial institutions that did not foresee just how great a toll the U.S. mortgage market downturn would take on its bottom line.
District judge William Pauley wrote in his decision that CIBC could not have anticipated “an unprecedented paralysis of the credit market and a global recession” which caused many financial institutions to implode.
“Looking back, a full turn of the wheel would have been appropriate. That CIBC chose an incremental response, while erroneous in hindsight, is as plausible an explanation for the losses as an inference of fraud,” Pauley wrote.
The judge added that the shareholder lawsuit also failed to show that CIBC executives misrepresented any of the information they knew about the market in either financial statements or press releases.
The bank said Wednesday it was “pleased with the decision to dismiss this lawsuit and the court’s recognition that the allegations had no legal merit.”
CIBC was the Canadian bank hit hardest by the credit crunch in the United States, with billions of dollars in writedowns from various credit-related items.
The bank has faced numerous lawsuits in both Canada and the United States over how it presented its subprime exposure to shareholders.
The subprime mortgage market was one of the fundamental causes of the financial and economic meltdown in the U.S. The mortgages were offered to risky borrowers at low teaser rates that eventually increased. When homebuyers couldn’t pay the new monthly charges, many defaulted on their homes and house prices started falling rapidly in many parts of the U.S. southern and western states where the lending practice proliferated.
Billions of dollars of such mortgages were packaged by Wall Street banks and sold to investors around the world. However, when the underlying mortgages proved worthless in may cases, it led to a string of financial collapses that battered many of the world’s biggest banks.
In Canada, subprime lending was not as big a problem and recent changes to lending rules have made it more difficult for banks to lend high-ratio mortgages to risky borrowers.
Shares in CIBC lost 11 cents to $75.36 in Wednesday trading on the Toronto Stock Exchange.