Commonwealth Bank of Australia is facing a massive class action

Commonwealth Bank of Australia (ASX:CBA) could get sued by its own shareholders…

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The Commonwealth Bank of Australia (ASX: CBA) share price could come under more pressure today after law firm IMF Bentham Ltd (ASX: IMF) announced it is preparing to fund a potentially huge class action against the bank.

The litigation funder is inviting anyone who purchased CBA shares between 17 August 2015 and 3 August 2017 to join the action in a claim against the bank for breaching its continuous disclosure obligations with regard to its compliance with the AML / CTF Act 2006.

If a claim is successful the compensation payable in a class action is always determined by calculating losses suffered by investors that occurred as a result of the breaches of the law. Normally a court (or the lawyers will negotiate) will work out what a share price would have been over the period but for the disclosure breaches and then work out the difference as to what it actually traded for. The difference over any given period is then considered the approximate quantum of investors' losses.

For example if a court determines CBA shares would have been selling for $70 instead of $80 if it had admitted its AML problems over 2016 an investor could claim losses for approximately $10 per share purchased.

Of course the litigant lawyers (such as Slater & Gordon Limited (ASX: SGH) or Maurice Blackburn) will take a big chunk of the compensation, while the litigation funder in IMF Bentham will also recoup all its costs from the compensation bill plus high additional fees. This then can sometimes leave as little as half the actual compensation awarded leftover to the shareholding members of the class action.

Generally litigation funders like IMF Bentham will not take on a case unless they have a high degree of certainty that they will win and that the claim is large enough to make it profitable after costs. This is because if a claim is lost the litigation funder must wear the substantial costs.

Given that the CBA class action is over a two-year timeframe with a huge class of potential members even if losses incurred are large per member, it still could be facing a needle-moving compensation bill.

Motley Fool contributor Tom Richardson has no position in any of the stocks mentioned. You can find Tom on Twitter @tommyr345 The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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