A federal judge in New York Tuesday dismissed a lawsuit filed by the Louisiana Stadium and Exposition District that contended it was sold a worthless bond insurance policy by Financial Guaranty Insurance Co.
Judge Loretta Preska of the U.S. District Court for the Southern District of New York dismissed the case with prejudice. It is one of several cases involved in a multi-district litigation known as “In Re Merrill Lynch Auction Rate Securities Litigation.”
The district operates the Louisiana Superdome in New Orleans. The case involves $238.5 million of taxable auction-rate bonds it sold in March 2006 to refinance higher interest-rate debt and rebuild the Superdome after the facility was damaged in September 2005 by Hurricane Katrina.
In the complaint, the Superdome district alleged that Merrill Lynch & Co. improperly manipulated the auction-rate securities market and FGIC sold it a worthless policy on the bonds and for a debt service reserve fund. The judge heard oral arguments in the case in early April.
The case was originally filed in the Eastern District of Louisiana, but in June 2009 was moved to New York in a consolidation of similar ARS suits.
Louisiana and the Superdome district filed suit in January 2009 against FGIC, which insured all but $56 million of the 2006 bonds, along with lead underwriter Merrill Lynch, over alleged security law violation.
The district said it was misled by Merrill Lynch over the potential volatility of the auction-rate bonds if buyers could not be found, and sought return of its $13 million in bond insurance premiums.
Merrill Lynch has since been taken over by Bank of America.
When FGIC’s credit was downgraded by the rating agencies in early 2008, the auctions on the bonds failed and the interest rate reset at 12%.
When that happened, the district saw its monthly debt service on the bonds go to $1.2 million from $300,000. The bonds are supported with revenue from the district’s 4% hotel tax.
After several failed auctions, the state purchased the bonds to provide the district with lower debt service.
James Swanson, a lawyer with the New Orleans firm of Fishman Haygood Phelps Walmsley Willis & Swanson, which represents the Superdome district, said Preska’s ruling would be appealed.
“We obviously disagree with the ruling,” Swanson said. “The judge said, essentially, that we shouldn’t have relied on FGIC to provide us with credit enhancement over the 30-year life of the bonds.”
“The district paid $13 million for bond insurance, and that is a huge premium, because it was told that FGIC’s insurance would enhance the credit of the debt over the lifetime of the bonds,” Swanson said. “We believe that was a reasonable expectation.”
In her 46-page ruling, Preska said FGIC did not promise that the credit enhancement provided by the bond insurance would be good for 30 years.
“Neither the commitment letters nor the policies contain a clause guaranteeing FGIC’s triple-A credit ratings or credit enhancement for the 30-year life of the bonds,” she said.
“The commitment letters make clear that the parties were contracting for the issuance of the policies, not for FGIC to maintain its triple-A ratings for the life of the bonds,” the judge said.
Attorneys for FGIC were not available for comment before press time. FGIC officials had no comment.