MBIA Settles Securities Fraud Charges

by Glen Shapiro, LawAndTax-News.com, New York

31 January 2007

The US Securities and Exchange Commission on Monday announced settled securities fraud charges against MBIA Inc., one of the nation’s largest insurers of municipal bonds, arising out of a sham reinsurance transaction that was restated in 2005, which the company had previously entered into to avoid having to recognize a $170 million loss.

MBIA suffered the loss when, in 1998, the Allegheny Health, Education and Research Foundation (AHERF) defaulted on bonds guaranteed by MBIA and MBIA was forced to make good on its guarantee. MBIA addressed analyst concerns about its expected losses on the AHERF bonds by representing that it had obtained reinsurance to cover them.

In fact, MBIA had agreed through concessions on other reinsurance agreements to compensate the reinsurers for the losses they were certain to incur on the AHERF contracts. The improper use of the reinsurance contracts enabled MBIA to convert what would otherwise have been the company’s first-ever quarterly loss into a profit and reverse the decline in MBIA’s stock price.

Under the settlement, MBIA consented to a cease-and-desist order, to pay a $50 million penalty, and to retain an independent consultant to examine a number of other specified transactions to which MBIA was a party.

Mark K. Schonfeld, Director of the Commission’s Northeast Regional Office, announced that:

“This case arose out of our industry-wide investigation of the abuse of finite insurance and reinsurance policies to burnish the books of public companies. Here, MBIA purchased a sham reinsurance policy to make a $170 million loss disappear from its financial statements. In fact, MBIA was simply reimbursing its reinsurers the full amount of the covered losses.”

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