Financial Security Assurance Inc. does not plan to further challenge an appeals court ruling that it had no standing to file securities fraud charges against underwriter Stephens Inc. for alleged misrepresentations the insurer claimed the firm made in connection with $69.9 million of now-defaulted bonds issued in 1998 to finance a solid-waste disposal and recycling facility in Georgia.

The bond insurer had until April 21 to petition the U.S. Supreme Court to review the Sept. 18 ruling by a three-judge panel of the U.S. Court of Appeals for the Eleventh Circuit in Atlanta that found FSA was not a purchaser or seller of the municipal securities, a prerequisite to filing federal securities fraud charges.

But Betsy Castenir, FSA's managing director of corporate communications, said yesterday: "I can confirm that we did not appeal." She declined to comment on why FSA decided not to take any further action.

Legal experts, however, said the ruling is only binding on the three states in the eleventh circuit: Georgia, Alabama, and Florida.

FSA's decision lets stand a ruling in a case that has been closely watched by muni market participants because it revolves around whether insurers could sue muni bond transaction participants for securities fraud under federal law if they believe they have been materially misled or given false information about bonds they insured.

The case had drawn friend-of-the-court briefs from both the insurance and dealer trade groups and the ruling was applauded by both Stephens and the Securities Industry and Financial Markets Association, who had claimed a decision in FSA's favor would have been unprecedented and would have significantly changed the legal and working relationships among deal participants.

The case centered on a solid waste disposal and recycling facility in Cordele, Ga., which never reached its operational capacity and was shut down several months after startup. The facility was financed initially with short-term bank loans and, later, with tax-exempt bonds issued by the Crisp County Solid Waste Management Authority. The bonds defaulted in 2000, forcing FSA to pay the bondholders.

FSA filed a lawsuit against Stephens in the U.S. District Court for the Northern District of Georgia in Atlanta in late 2000, charging it with both federal securities fraud and common law fraud violations. FSA claimed the underwriter misled it, in a request for proposals for credit enhancement and in bond documents, about the operational capability of the facility and the facility's ability to bring in sufficient revenue to pay debt service on the bonds.

But Stephens argued that it had no duty to disclose information to FSA and contended the insurer failed to conduct adequate due diligence on the facility and the financing.

The court sided with Stephens in two separate rulings. It dismissed the federal charges in 2001 before either side traded much information. It dismissed the state claims in 2004 after information had been exchanged but before any trial could be held.

FSA appealed in 2004 and a three judge federal appears court panel issued a ruling in May 31, 2006 that sided with FSA. Stephens appealed that ruling and the same panel reversed itself in a ruling issued Sept. 18.

FSA challenged the new ruling, asking the full appeals court to review it, but the court refused to take it up, stating in a Jan. 22 order that none of the judges supported a rehearing.


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