Investors in a trust of Ambac Financial Group Inc. debt securities have filed a class-action lawsuit against the company, alleging it published false or misleading statements about its financial and operating conditions with either intentional or reckless disregard for the company's true condition.

The plaintiffs say that Ambac lowered its own underwriting standards in order to spur profits and later failed to properly disclose losses the company incurred on housing-related securities it guaranteed, according to the lawsuit filed last month in the U.S. District Court for the Southern District of New York.

"Defendant chose to ignore the deterioration of the originator's lending standards, changing Ambac's own underwriting standards so that the company could insure more and more of these poor-quality loans," says the lawsuit, filed by attorneys at Gardy & Notis LLP.

The lawsuit also names former chief executive officer and president Robert Genader and current chief financial officer Sean Leonard as defendants. Ambac would not comment, citing company policy not to comment on pending legal issues.

The lawsuit relates to a New York Stock Exchange-traded trust that contained $37.5 million of the $400 million of debt securities Ambac issued in 2007. Ambac planned to use the proceeds from the sale of directly issued, subordinated capital securities to buy back stock.

The trust securities came to market with an issuance price of $25 per class A certificate on July 16, 2007. As a result of many of the losses and write-downs Ambac incurred, the value of the securities fell to $2.47 on Nov. 18, the lawsuit says.

The suit alleges that beginning in 2005, Genader pushed for a company-wide effort to increase net profits to above $1 billion. Ambac became more reliant on structured finance products for growth and failed to keep up its surveillance needs and other expenses to monitor the portfolio.

"Under the leadership of Genader, Ambac's focus turned to the generation of greater profits in lieu of risk management and loss avoidance," the lawsuit says.

The suit claims Ambac has made a number of false and misleading statements to investors, either by knowing and not disclosing or recklessly not knowing about a number of developments, including the lower underwriting standards of mortgage originators and Ambac itself. It cites a number of conference calls and press appearances where Ambac failed to disclose its true financial position and the condition of the market for the structured finance securities it guaranteed.

In addition, Ambac waited too long to recognize losses on parts of its portfolio, according to the lawsuit. It said the company's reported loss would have declined to $10.45 billion from $3.24 billion in 2007 had it taken the proper mark-to-market write-downs.

The lawsuit notes that the price of the securities collapsed in January 2008 when the company revealed $5.4 billion in mark-to-market write-downs and $1.1 billion in actual impairments after assuring investors for months that its residential mortgage-backed securities-related exposures were of a "superior quality." As a result of those and other losses, the suit says, the $3.7 billion in earnings reported by Ambac between 2002 and 2007 "would be more than wiped out by the massive write-downs and increased reserves."

"Prior to and during the class period, Ambac reported strong earnings. Unfortunately, for investors these earnings were false and were achieved only by improperly valuing Ambac's book of highly risky securities," the lawsuit says.

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