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MBIA agrees to $75 million finite settlement


ARMONK, N.Y.--MBIA Inc. on Monday said it will pay $75 million to settle charges of securities fraud and misuse of finite reinsurance leveled by state and federal regulators.

The settlements end investigations into the Armonk, N.Y.-based financial guarantee insurer's alleged use of sham reinsurance transactions in 1998 to mask a $170 million bond loss incurred on its guarantee of bonds issued by a bankrupt unit of Allegheny Health, Education & Research Foundation of Pittsburgh.

MBIA did not admit or deny any wrongdoing as part of two separate agreements, one with the U.S. Securities and Exchange Commission and the other with the New York State Insurance Department and the Office of the New York Attorney General.

Under the agreements, $60 million will be paid in policyholder restitution, and $15 million will be paid as a civil penalty to New York. MBIA will also pay the SEC $1 in disgorgement of its alleged gains from the deal.

In addition, MBIA under the settlements consented to a cease-and-desist order relating to future violations of securities laws, and agreed to retain an outside consultant to review other potentially problematic transactions.

The independent consultant within six months must review and provide recommendations for MBIA's accounting for and disclosure of its investment in Capital Asset Holdings GP, Inc. and its accounting for and disclosure of its exposure to the US Airways 1998-1 Repackaging Trust, among other things.

In a statement, New York State 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."

"We are pleased that the AHERF-related investigations are finally behind us," MBIA's chief executive officer, Gary C. Dunton, said in a statement.

Mark K. Schonfeld, director of the SEC's Northeast Regional Office, said: "This case arose out of our industrywide 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."

MBIA's $75 million settlement sum was previously accounted for in November 2005, when it set aside $75 million in reserves for expected settlements of regulatory investigations (BI, Nov. 14, 2005).