U.S. District Court Judge Richard Sullivan issued a decision yesterday denying the MBIA defendants' motion to dismiss a class action fraudulent conveyance lawsuit.
The suit was brought by Simpson Thacher on behalf of clients Aurelius Capital and Fir Tree Capital in the Southern District of New York. It was over the bond insurer's February 2009 so-called "transformation" deals.
Until February 2009, MBIA's principal operating subsidiary, MBIA Insurance Corp. was the world’s largest “monoline” financial guaranty insurer of municipal bonds as well as structured finance products such as RMBS and CMBS, other ABS and CDOs, according to a release from Simpson Thacher.
The lawsuit alleges that the publicly traded parent company MBIA orchestrated a huge fraudulent conveyance transaction. Through this deal, the MBIA defendants stripped over $5.4 billion of assets from MBIA Insurance Corp. at the height of the worldwide financial meltdown to create a separate U.S. municipal bond insurance subsidiary, a move that left MBIA Insurance Corp. insolvent. This also left the firm without enough capital and unable to satisfy the claims of its policyholders who purchased around $241 billion in MBIA Insurance-wrapped structured finance products.
Following the transactions, MBIA Insurance Corp. policy obligations, which had been sold by MBIA as 'AAA'-rated, were reduced to junk status by Moody's Investors Service. Additionally, MBIA Insurance preferred stock started selling for ten cents on the dollar and credit default protection against MBIA Insurance default required an upfront payment of 70 cents for every dollar of protection sought.
MBIA moved to dismiss the complaint last May, mainly on the ground that the deals had been approved by the New York Insurance Department.
In response, Aurelius and Fir Tree contended that the MBIA defendants misled the NY Insurance Department to obtain the approvals for the deals by grossly understating their projected losses by billions of dollars
The two companies added that these approvals did not address the fraudulent conveyance and bad faith claims presented in the lawsuit. The suit could also not be dismissed based upon Insurance Department approvals for which they were not given notice or an opportunity to be heard in the approval process.
MBIA also asked the court to abstain from handling the case in favor of the similar state court fraudulent conveyance lawsuits brought by 19 banks against the MBIA companies. Following oral argument, Sullivan denied the motion to dismiss in all respects.