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NEW YORKA federal judge has dismissed a proposed shareholder class action lawsuit charging that MBIA Inc. defrauded investors by using sham reinsurance transactions to mask a $170 million bond loss in 1998.
U.S. District Judge Louis L. Stanton ruled Tuesday that the suit is barred by the two-year statute of limitations in the Sarbanes-Oxley Act.
Armonk, N.Y.-based financial guarantee insurer MBIA agreed last month to pay $75 million to settle U.S. Securities & Exchange Commission fraud charges related to the 1998 reinsurance deals. The retroactive reinsuranceplaced with AXA Re Finance S.A., Munich Reinsurance Co. and Converium Reallowed MBIA to avoid taking a $170 million loss on bonds issued by a bankrupt affiliate of Allegheny Health, Education and Research Foundation of Pittsburgh. In side agreements, MBIA promised to repay the reinsurers by transferring future bond business, and regulators charged that MBIA should have accounted for the deals as loans rather than as reinsurance.
MBIA restated its financial results twice in 2005 in connection with the AHERF loss.
In April 2005, shareholders leveled similar fraud charges in the first in a series of proposed class action suits that were later consolidated in federal court in New York.
In his ruling, though, Judge Stanton found that the consolidated action is barred by a Sarbanes-Oxley provision that requires suits to be filed within two years of the discovery of facts constituting a securities law violation.
In MBIA's case, investors were warned of the AHERF situation no later than December 2002, when hedge fund Gotham Partners Management Co. issued a report questioning the reinsurance transactions and quoting an MBIA official comparing them to "borrowing" money and repaying it later, the judge wrote.
Although MBIA attacked the report as unfounded and motivated by Gotham's short position in MBIA stock, investors were on notice and should have investigated the alleged improprieties, Judge Stanton concluded.
Shareholder plaintiffs likely will appeal the ruling to the 2nd U.S. Circuit Court of Appeals, said Barry A. Weprin, a shareholder lawyer with Milberg Weiss & Bershad L.L.P. in New York.