FOR IMMEDIATE RELEASE
MBIA TO PAY $75 MILLION TO SETTLE FRAUD INVESTIGATION
Acting New York State Insurance Superintendent Eric R. Dinallo, New York State Attorney General Andrew M. Cuomo and the United States Securities and Exchange Commission (SEC) today announced agreements resolving investigations of the nations leading bond insurer. The investigations stem from a 1998 scheme to disguise $170 million in losses on bonds insured by MBIA.
Acting Superintendent Dinallo said: "Our examination found that MBIA violated the insurance laws and regulations of the State of New York. We are pleased they cooperated with this investigation and that those adversely affected by MBIAs conduct will be compensated. MBIA restated its earnings and will be subject to an independent consultants review to help ensure these actions are not repeated. The integrity and transparency of the bond insurance market is essential and must be maintained."
Attorney General Andrew M. Cuomo said, "This office will continue to focus on investor protection and on pursuing corporations that spread misleading information to dupe investors and regulators. Corporations must not be allowed to engage in fictitious transactions to manipulate their financial reports."
The agreements follow an Insurance Department examination begun in 2004. MBIA, Inc., and MBIA Insurance Corporation (collectively "MBIA") have agreed to reforms and a review of their practices by an independent consultant, and will pay a total of $75,000,000 in restitution and penalties. MBIA will pay a $15,000,000 civil penalty to the State of New York, and $60,000,000 in disgorgement and restitution to shareholders.
MBIA is in the business of providing financial guarantees for bond issuers such as states and municipalities. Through these guarantees, MBIA assures purchasers of a given bond that the bonds issuer will make interest and principal payments on time. An Insurance Department examination and an investigation by the Attorney Generals office revealed that contrary to MBIAs claims, it had suffered significant losses in 1998.
On July 21, 1998, a Pennsylvania hospital chain named the Allegheny Health, Education and Research Foundation ("AHERF") defaulted on $256 million of bonds that MBIA had guaranteed. MBIA was aware at the time of the pending loss, which it internally estimated at between $95 and $100 million, which exceeded the companys unallocated loss reserve of $75 million.
Rather than take a loss that would dwarf any previous loss it had suffered, MBIA entered into a fraudulent scheme to avoid booking the loss. It borrowed money to cover the AHERF losses from three reinsurers Munich Re (Am Re) ("Munich Re"), Axa Re Finance ("Axa Re") and Zurich Re then disguised the loan payments as insurance premiums, misleading investors on the impact of the AHERF loss on MBIAs business.
MBIA had to agree to pay the three reinsurers every cent back of their money, plus a profit. This allowed MBIA to avoid taking a $170 million charge to earnings in 1998 the net present value of the $256 million in bonds and fraudulently overstate net income by approximately 25%. It also created the perception that MBIA had weathered the AHERF loss without significant damage.
In addition to civil penalties and restitution, MBIA has agreed to undertake the following actions, including:
Cease and desist with respect to any future violations of securities laws;
Restate earnings on a GAAP basis for the years 1998 to 2004 to properly account for the AHERF transaction;
Hire an independent consultant who will comprehensively review and make recommendations within six months on certain areas including:
MBIAs accounting for and disclosures concerning its investment in Capital Asset Holdings, GP, Inc.;
MBIAs accounting for and disclosures concerning its exposure on notes issued by the US Airways 1998-1 Repackaging Trust; and
MBIAs accounting for and disclosures concerning any remediation transaction from Jan. 1, 1998 to present in connection with which MBIA, Inc., or any of its affiliates repaid or acquired all or substantially all of an issue of insured securities insured by MBIA Insurance Corp., with certain specified exceptions.
The agreement also allows for expanding the independent consultants scope if warranted.