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Commonwealth Bank of Australia is facing a massive legal bill

Market sentiment is up and bank stocks will be among the beneficiaries of the positive mood but it remains to be seen if the share price of the Commonwealth Bank of Australia (ASX: CBA) will keep pace with its peers.

Australia’s largest listed bank has been hit with a new class action by four multi-billion-dollar US pension funds who are chasing CBA for compensation as a result of the share market losses they suffered due to its failure to disclosure breaches in the anti-money laundering law.

This is a self-fulfilling cycle of sorts. The latest lawsuit (it’s not the only class action against the bank) will put additional pressure on CBA’s share price, and the lower it falls, the bigger the potential compensation bill if the class action is successful.

The latest lawsuit will seek compensation for anyone who bought shares in the CBA between June 16, 2014 and August 3, 2017.

This covers a period when CBA’s share price hit a record high of over $95 a share compared to its Tuesday’s closing price of $74.36. The period is also longer than a rival class action brought by Maurice Blackburn and that means more shareholders may be eligible to join the latest lawsuit.

What’s more, news reports alleging that the bank allowed “persons of interests” to open bank accounts and use the bank to launder money will only strengthen the plaintiffs’ case.

The banking sector is already under pressure with CBA’s peers National Australia Bank Ltd. (ASX: NAB), Australia and New Zealand Banking Group (ASX:ANZ) and Westpac Banking Corp (ASX: WBC) struggling against a number of headwinds, including the Banking Royal Commission.

But CBA could underperform the sector and the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) as it has bigger legal woes to deal with – at least at this stage.

The US pension funds that have started the class action include the California State Teachers Retirement System, Teachers Retirement System of Texas, Massachusetts Pension Reserves Investment Management Board, and Colorado Public Employees Retirement Association.

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Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, National Australia Bank Limited, and Westpac Banking. The Motley Fool Australia owns shares of National Australia Bank Limited. 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 Scott Phillips.

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