One of the largest municipal bond insurers in the country has agreed to pay $75 million to settle securities fraud charges. The charges were brought against MBIA Inc. by the SEC, the New York State Insurance Department, and NY Attorney General Andrew M. Cuomo.
In agreeing to pay the charge fees, the New York-based firm is not denying or admitting guilt. MBIA will pay $1 in disgorgement and a $50 million penalty-based on its agreement wit the SEC-the total will be put in a Fair Fund for investors. MBIA will also abide by a cease-and-desist order, as well as work with an independent consultant to look at specific transactions that MBIA took part in.
The firm will also pay $10 million in disgorgement fees to investors and $15 million in penalties to satisfy its agreements with the NY entities. It will also restate all earnings from 1998-2004.
According to government regulators, MBIA orchestrated a fraudulent, $170 million transaction in 1998 to cover up its first big loss that it experienced when Allegheny Health, Education and Research Foundation, a Pennsylvania hospital chain, defaulted on $256 million worth of bonds that the MBIA had agreed to guarantee. The SEC says that MBIA made it seem that it had bought reinsurance contracts, rather than let it be known that it had suffered such a big loss.
According to prosecutors, MBIA actually borrowed $170 million from three reinsurers and agreed in secret to pay each of them back, with interest. To make sure that MBIA’s accountants wouldn’t notice this unusual activity and so that they would approve these transactions, the reinsurers were given contracts that were intentionally written so that it was not clear whether they would have to pay out. In reality, the reinsurers and MBIA knew that they would be asked to pay, and this would make the $170 million that the MBIA had borrowed ineligible for reinsurance accounting.
To pay the $170 million back to the three reinsurance companies, MBIA formed other reinsurance agreements worth hundreds of millions of dollars in future MBIA business. These were low risk agreements and all of the other reinsurers were reimbursed. MBIA also made a secret side deal with one reinsurer by verbally agreeing to re-assume nearly all of the risk on future business. This left the reinsurer with practically no risk and all premiums. The loan as “reinsurance income” for its $170 million loss was therefore fraudulent because there was no risk transferred to the reinsurer. The bond insurer company is also accused of misrepresenting its loss estimate to auditors and overstating its net income by about 25%, turning its loss into a profit.
Following an internal investigation that discovered the oral agreement with the reinsurer, MBA reinstated $70 million of reinsurance proceeds as a loan in March 2005. The remaining $100 million was restated in November that year.
Shepherd Smith Edwards & Kantas LTD LLP represents clients who have been the victim of securities fraud. Our team of experienced attorneys are committed to helping investors across the U.S. recover losses that were caused by the inappropriate behavior of stockbrokers or their firms. By contacting us online, you are entitled to a free consultation. Contact Shepherd Smith Edwards & Kantas LTD LLP today.
Bond insurer to pay $15M penalty to N.Y., $60M in restitution, The Business Review, January 29, 2007
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