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Why some of the largest shareholders in Commonwealth Bank of Australia (ASX:CBA) are suing the bank

Our largest mortgage lender is facing a new battlefront as some of its biggest institutional investors have launched a class action lawsuit against the bank.

That isn’t worrying the market at the moment though as the share price in Commonwealth Bank of Australia (ASX: CBA) gained 0.3% in morning trade to $72.94 when the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) is up 0.2%.

This is the second class action by shareholders that has hit the Commonwealth Bank and is spearheaded by law firm Phi Finney McDonald. The bank announced in October last year that Maurice Blackburn had commenced a class action against it on behalf of shareholders and that it will be “vigorously defending” both lawsuits.

The latest class action isn’t worrying investors too much as the market was probably expecting further legal challenges against the bank after it admitted breaking anti-money laundering laws and paid the biggest fine in Australian corporate history of $700 million.

The difference between the Phi Finney lawsuit and the Maurice Blackburn one is the shareholders the former is representing.

The latest class action is backed by some of the world’s largest institutional investors in Australia, North America and Europe. According to Business News Australia, the plaintiffs include California State Teachers Retirement System, the Teachers Retirement System of Texas, the Massachusetts Pension Reserves Investment Management Board, and the Colorado Public Employees Retirement Association.

Phi Finney is claiming compensation for these shareholders who bought shares in Commonwealth Bank of Australia between June 16, 2014, and August 3, 2017.

That’s a pretty wide net and if there is a silver lining, the share price loss during the period is relatively modest. Shares in Commonwealth Bank slipped 0.4% during the period, slightly below the 4.5% gain by the top 200 stock index.

Of course, it depends on when a shareholder bought and sold the stock that matters most when calculating potential compensation with the stock hitting a record high of $95.80 in March 2015.

At least the stock has not halved in value or more, which is much more than we can say of other badly behaving companies like Blue Sky Alternative Investments Ltd (ASX: BLA) or GetSwift Ltd (ASX: GSW).

Even less extreme examples like AMP Limited (ASX: AMP) are nursing bigger losses for their poor corporate governance.

Nonetheless, make no mistake. Commonwealth Bank is being attacked on multiple fronts. It faces an increasingly hostile operating environment and the risk of a harder than expected landing for our property market.

The last thing shareholders need is for the bank to be assaulted on the legal and regulatory front. I would be staying away from Commonwealth Bank for the moment as this isn’t the time to be buying into the beaten-down stock despite its seemingly attractive valuation.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. 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 Scott Phillips.

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