Ambac Financial Group, the holding company for bankrupt bond insurer Ambac Assurance, has agreed to settle a lawsuit claiming it misled shareholders about the risks the company took on insuring subprime mortgages.

The holding company will pay out $27.1 million to plaintiffs, which includes $2.5 million Ambac had already placed in an escrow account, according to court documents.

Co-defendants in the case along with Ambac are underwriters UBS, Goldman Sachs, JPMorgan, Citi, HSBC, Merrill Lynch and Wachovia.

In the settlement, the underwriters agreed to pay $5.9 million, bringing the total to $33 million.

The lead plaintiffs include the Chicago Public School Teachers’ Pension and Retirement Fund, the Arkansas Teacher Retirement System, and the Mississippi Public Employees’ Retirement System. Other plaintiffs are the Painting Industry Insurance and Annuity Funds, Stanley Tolin, and Edward Walton.

The lawsuit was filed in January 2008 by the plaintiffs, claiming there were violations of federal securities laws. Plaintiffs accused the holding company of insuring risky structured finance transactions linked to subprime mortgages and collateralized debt obligations.

According to court documents, lead plaintiffs and the defendants participated in several in-person mediations before an agreement in principle was reached that would resolve the claims in the complaint.

A spokesman for Ambac and Kaplan Fox & Kilsheimer LLP, the counsel for the plaintiff, declined to comment. Counsel for the underwriters, Paul Weiss Rifkind Wharton & Garrison, did not return calls seeking comment.

The defendants continue to deny any wrongdoing.

“The settling defendants have denied and continue to deny that they have committed any act or omission giving rise to any liability and-or violating of law, including any violations of the federal securities laws or any other legal obligation or duty potentially giving rise to the settled claims, and are entering into this settlement to eliminate the burden and expense of further litigation,” court documents said.

Ambac Financial filed for bankruptcy under Chapter 11 in November 2010. Its primary operating unit, muni bond insurer Ambac Assurance Corp., ran into serious trouble in late 2007 because of decaying credit quality in its structured finance policies, which included contracts guaranteeing to cover losses on mortgage bonds and credit default swaps.

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