Aurelius Capital Master Ltd. and UBS have withdrawn from suits against bond-insurer MBIA Inc.
Hedge fund Aurelius was the litigant in one of three suits against MBIA trying to reverse its 2009 transformation into two companies.
MBIA and other financial guarantors experienced severe losses after insuring mortgage-backed securities. When the recession hit in 2008, real estate values plunged, unemployment spiked and many homeowners stopped making payments on their mortgages. The securities turned out to be worth far less than had been promised.
Many banks asked MBIA to fulfill its pledge on insuring the securities, putting financial pressure on the company.
To help deal with its economic troubles, the company decided in 2009 to place its municipal insurance business into a new unit.
In response to MBIA's split, more than a dozen plaintiffs, mainly banks, sued MBIA. Over time, several of the banks have dropped out after reaching settlements with MBIA.
Aurelius filed suit against MBIA in March 2009. In its complaint, Aurelius claimed in a "massive fraudulent conveyance … transaction … the MBIA defendants stripped over $5.4 billion of assets from MBIA Insurance, in a calculated and cynical effort to enrich structurally junior economic stakeholders, while leaving some $241 billion of policyholders stranded in a denuded insurer that will be unable to meet its obligations as they come due."
In the complaint Aurelius had asked for, among other things, the reversal of the transformation and MBIA to award damages to Aurelius.
On Wednesday attorneys for Aurelius and MBIA notified the United States District Court Southern District of New York of the end of the suit. Also on Wednesday MBIA filed a form with the U.S. Securities and Exchange Commission indicating that a confidential settlement had been reached.
The end of the Aurelius suit leaves two suits against MBIA's transformation. Bank of America Merrill Lynch, Natixis and Société Générale are plaintiffs in both suits.
One of these two suits, called the Article 78 suit, is expected to go to trial on May 14. The other one is still many months away from trial.
Regarding Aurelius' end of its suit against MBIA, MBIA spokesman Kevin Brown said, "The settlement of this case is another important step toward resolving all of the litigation contesting our transformation."
Aurelius and attorneys for Aurelius declined to comment on the settlement.
A third suit against MBIA continues. However, the banks are not challenging MBIA's transformation in that suit. Instead the suit aims to prevent MBIA's subsidiary National Public Finance Guarantee from paying dividends while the other two suits continue.
In other MBIA news, UBS notified the New York Supreme Court of New York County Wednesday that it was withdrawing from the transformation suits and the dividend-blocking suit. Reuters news service reported UBS's intention to withdraw from the suits in mid-March.
In another positive legal development for MBIA, on Tuesday the judge in MBIA's suit against Bank of America approved MBIA's request that the bank's chief executive officer be deposed in the case. The bank had contested the deposition.
MBIA's stock was up 13% on Thursday.