Saturday, August 20, 2005
MBIA Inc., a large municipal bond insurance company, disclosed that it has received a Wells Notice from the SEC indicating that the Enforcement Division staff intends to recommend to the Commission the filing of a civil action for securities fraud. The case involves MBIA's purchase of "finite risk insurance," which is the same product that is at the heart of the AIG-General Re investigation. The issue in the investigations is whether the contracts actually transferred risk, or whether they were used as accounting window-dressing but were not legitimate insurance transactions. According to MBIA's press release (here):
The Wells Notice indicates that the Staff is considering recommending that the SEC bring a civil injunctive action against the Company alleging violations of federal securities laws 'arising from MBIA's action to retroactively reinsure losses it incurred from the AHERF bonds MBIA had guaranteed, including, but not limited to, its entering into excess of loss agreements and quota share agreements with three separate counterparties.' "
MBIA notes that it is cooperating in the investigations by the New York Attorney General and the Department of Justice, in addition to the SEC investigation, and that it "is unable to predict the outcome of the investigations or whether its current efforts to resolve them on a fair and appropriate basis will be successful." In English, the negotiations for a global settlement are continuing. I would certainly expect an agreement in the near future, which may well involve a deferred prosecution agreement and a hefty civil monetary penalty. (ph)