A federal appeals court on Monday gave new life to a shareholder lawsuit accusing MBIA Inc of securities fraud over a reinsurance transaction that caused the bond insurer to restate six years of results.
The 2nd U.S. Circuit Court of Appeals said a federal district court should reconsider whether plaintiffs led by two pension funds waited too long to sue MBIA, in light of an April 2010 U.S. Supreme Court decision involving Merck & Co.
It also directed the district court to consider some defenses by MBIA, once the world’s largest bond insurer.
The pension funds had accused MBIA of improperly treating the reinsurance transaction as income rather than a loan. But a district court judge had in September 2009 found the pension funds’ claims barred by a two-year statute of limitations.
“We remain confident that on reconsideration, the district court will once again dismiss this litigation,” said Kevin Brown, a spokesman for Armonk, New York-based MBIA.
The lawsuit was brought by the City of Pontiac General Employees’ Retirement System in Michigan, and the Southwest Carpenters Pension Trust in Los Angeles.
It arose from the 1998 bankruptcy of Pennsylvania’s Allegheny Health, Education and Research Foundation (AHERF), the largest U.S. nonprofit healthcare collapse.
AHERF had defaulted on some hospital bonds that MBIA had guaranteed, leaving MBIA with a $170 million loss. To protect its credit rating, MBIA got reinsurance to cover the loss.
In 2005, MBIA restated results to treat that transaction as a loan, rather than as income. Two years later, it paid $75 million to settle related regulatory fraud charges.
Writing for a 2nd Circuit panel, Chief Judge Dennis Jacobs said the statute of limitations starts to run when a reasonably diligent investor would have found a violation, not when a reasonable investor would have begun investigating.
“It makes sense to link the standard for ‘discovering’ the facts of a violation to the plaintiff’s ability to make out or plead that violation,” Jacobs wrote.
In the Merck case, the Supreme Court unanimously rejected the argument that investors waited too long to pursue fraud claims over the safety of the painkiller Vioxx, which Merck withdrew from the market in 2004.
MBIA faces other lawsuits arising from its bond insurance activities, including by a dozen banks challenging its 2009 restructuring overseen by New York insurance regulators.
The restructuring came after MBIA piled up large losses from insuring mortgages and other debt that proved toxic.
Smaller rival Ambac Financial Group Inc. filed for bankruptcy in November after suffering similar losses.
In afternoon trading, MBIA shares were down 1.5 percent at $11.13 on the New York Stock Exchange.
The case is City of Pontiac General Employees’ Retirement System et al v. MBIA Inc, 2nd U.S. Circuit Court of Appeals, No. 09-4609. (Reporting by Jonathan Stempel in New York, editing by Matthew Lewis)