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Aurelius, MBIA settle federal suit


NEW YORK (Reuters)—MBIA Inc. has settled a lawsuit filed by Aurelius Capital Management, a hedge fund that owns mortgage-backed securities insured by MBIA.

A stipulation dismissing the suit was filed Wednesday in federal court in Manhattan. The terms of the settlement were not immediately made public. Aurelius, a hedge fund, sued the bond insurer in March 2009.

Aurelius alleged that MBIA's decision to split its municipal insurance business from its structured finance unit breached the insurer's covenant of good faith and fair dealing with its policyholders. The structured finance unit had suffered huge losses from the mortgage crisis.

The Aurelius lawsuit claimed dividing MBIA's businesses left "some $241 billion of policyholders stranded in a denuded insurer that will be unable to meet its obligations as they come due."

MBIA's restructuring was approved by the New York State Insurance Department in 2009.

"The settlement of this case is another important step toward resolving all of the litigation contesting our transformation," said Kevin Brown, a spokesman for Armonk, N.Y.-based MBIA.

David Ichel, an attorney for Aurelius, did not immediately respond to a request for comment.

Last month, U.S. District Judge Richard Sullivan ordered MBIA to allow four high-level employees to be deposed and that Aurelius produce its chairman, Mark Brodsky, for a deposition. Also in March, Judge Sullivan took the unusual step of conducting a joint hearing with New York state Judge Barbara Kapnick, who is presiding over related lawsuits, to address document requests Aurelius made of the New York State Department of Financial Services.

Bank of America Corp. and two other banks are suing MBIA and the Insurance Department in state court over approval of the restructuring. Those suits have not been resolved. Fifteen other banks have already agreed to settle similar claims.

In a court filing on Monday, Bank of America, Natixis S.A. and Societe General, said MBIA hid its financial condition from the insurance department when it sought approval in 2009.

The banks accused MBIA of concealing analyses projecting billions in losses in commercial mortgage-backed securities. A Lehman Brothers study the insurer commissioned even indicated the insurer may have been insolvent at the time, the banks said in a filing.

MBIA spokesman Mr. Brown said after the Monday filing that MBIA disputed the banks versions of events. He said the insurance department did a "thorough" review and the approval was proper.

The banks' law suit is scheduled for trial May 14 in New York state Supreme Court.

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