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In re MBIA Inc. Securities Litigation

February 13, 2007

IN RE MBIA INC. SECURITIES LITIGATION


OPINION AND ORDER

This document relates to: ALL ACTIONS

Plaintiffs bring this consolidated securities fraud class action alleging that MBIA Inc.'s financial statements were materially misstated because MBIA improperly treated a series of transactions in 1998 as reinsurance agreements, and the associated proceeds as income, although they were in fact disguised loans.

Defendants move to dismiss under Fed. R. Civ. P. 9(b) and 12(b)(6). They argue that plaintiffs' claims are time-barred because plaintiffs should have discovered the alleged fraud no later than December 2002 and the first complaint in these actions was not filed until April 5, 2005. Defendants also argue that plaintiffs have not adequately pled that the alleged misstatements were material, or were made with scienter, or that the alleged fraud caused plaintiffs' loss.

I. Background

Lead plaintiffs, the Southwest Carpenters Pension Trust and the City of Pontiac General Employees' Retirement System, bring this putative class action on behalf of all purchasers of MBIA, Inc.'s securities between August 5, 2003 and March 30, 2005 against MBIA, Inc., six current and former MBIA officers, a former MBIA Chairman and Chief Executive Officer, and MBIA's current Chairman.*fn1 The first count of the complaint alleges that all defendants violated Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and SEC Rule 10b-5 promulgated thereunder. The second count alleges liability under Section 20(a) of the Exchange Act against all individual defendants as "control persons" of MBIA.

Except where otherwise stated, the following facts are alleged in the Consolidated Amended Class Action Complaint ("the complaint") and are accepted as true for purposes of this motion.

A. MBIA and the 1998 Transactions

MBIA's primary business is selling financial guarantee insurance to public finance and structured finance clients. Through its wholly owned subsidiary, MBIA Insurance Corporation, MBIA guarantees the payment of principal and interest on bonds issued by its clients, in exchange for a premium. MBIA's clients are able to pay lower interest on bonds guaranteed by MBIA because MBIA has a "Triple A" claims paying ability rating*fn2 from the major credit rating agencies. As long as the saving on interest is more than the premium MBIA charges, its clients have an incentive to purchase MBIA's guarantee.

In 1998, one of MBIA's financial guarantee clients was the Delaware Valley Obligated Group ("DVOG"), a Philadelphia area medical group that was part of the Allegheny Health Education and Research Foundation ("AHERF"), a Pennsylvania medical group. MBIA had insured $256 million of outstanding AHERF bonds.*fn3 In July 1998, AHERF announced that DVOG would file for bankruptcy, obliging MBIA to pay DVOG bondholders $170 million in principal and interest.

That large a loss would have diminished MBIA's loss reserves and jeopardized its Triple A credit rating. To avoid that, MBIA made a series of transactions with three reinsurance companies. In September 1998, Muenchener ReuckversicherungsGesellshaft ("Munich Re") and AXA Re Finance S.A. ("AXA Re") each agreed to insure MBIA for up to $50 million in losses, and Converium Reinsurance (North America) Inc. (formerly known as Zurich Reinsurance (North America), Inc.) ("Converium") agreed to insure MBIA for up to $70 million in losses (Munich Re, AXA Re and Converium collectively will be referred to as "the Reinsurers"). In exchange for this $170 million commitment, MBIA paid $3.85 million in premiums to the Reinsurers ($2 million to Munich Re, $1.5 million to AXA Re and $350,000 to Converium). MBIA accounted for those transactions as "retroactive reinsurance agreements" and booked their proceeds as income, thus offsetting MBIA's loss on the AHERF bonds, and avoiding a potential downgrade in MBIA's credit rating.

To induce the Reinsurers to cover the $170 million, MBIA made a series of side agreements with them, which plaintiffs allege were not publicly disclosed. MBIA promised to transfer insurance policies on the highest rated bonds in its portfolio, along with the associated premiums, to the Reinsurers over a period of six years.

On March 8, 2005, MBIA announced that there was probably also an undisclosed promise by MBIA to relieve AXA Re of a portion of the risk MBIA had ceded to Converium, who ceded it to AXA Re. Compl. ¶¶ 41, 42, 118.

B. MBIA's Disclosures and News Reports Regarding the 1998 Transactions

On September 29, 1998, MBIA issued a press release describing those transactions. MBIA announced that it: has obtained $170 million of reinsurance that it expects will cover anticipated losses arising from the bankruptcy of the Delaware Valey Obligated Group (DVOG). As a result, the company does not expect exposure to this insured credit to affect its earnings or reduce its unallocated loss reserve.

. . . . "As part of our risk management efforts, the company has entered into strategic business relationships with highly rated reinsurers to provide them with future business as part of the reinsurance agreement. The cost of these reinsurance arrangements over the next few years will have a minimal impact on earnings while strengthening our claims-paying resources and risk management capabilities," said Richard L. Weill, MBIA vice chairman.

Potenza Decl., Ex. 2. MBIA's 1998 10-K (filed March 30, 1999) similarly reported:

As part of the company's portfolio shaping activity in 1998, the company has entered into facultative share reinsurance agreements with highly rated reinsurers that obligate the company to cede future premiums to the reinsurers through January 1, 2005. . . .

. . . In 1998, $170.0 million was received in reinsurance recoveries related to the bankruptcy of a Pennsylvania hospital group.

Compl. ¶ 48. Substantially identical language was included in MBIA's 1999 10-K (filed March 29, 2000) and 2000 10-K (filed March 30, 2001). Compl. ¶¶ 50, 52. Those filings also contained the delphic language: "Certain reinsurance contracts in 1998 were accounted for on a retroactive basis in accordance with SFAS [Statement of Financial Accounting Standards] ...


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