MBIA Inc. isn’t losing its fraud case against Merrill Lynch without a fight.
New York County Supreme Court granted Merrill’s motion to dismiss the case in its entirety Feb. 1, but MBIA lawyers informed the court Thursday that it would file “a second amended complaint” based on new investigations within the next few weeks.
The largest bond insurance holding company in the U.S. sued Merrill in April 2009. The case involves 11 credit default swaps, insurance-like contracts that had a face value of $5.7 billion. MBIA sold them to protect four collateralized debt obligations of asset-backed securities.
Before the financial crisis, MBIA ran the most active triple-A-rated bond insurer in the country.
Its deep exposure to mortgage-backed products caused its ratings to plummet and it has been unable to write new policies for more than two years.
Merrill — which has since merged to become Bank of America Merrill Lynch — induced MBIA to protect the CDOs based on marketing materials it published between July 2006 and March 2007.
MBIA claims the bank had “superior knowledge” of the risks inherent in the products.
Five of the six complaints MBIA filed against Merrill were dismissed in April 2010. The final count — a breach-of-contract claim that could have won MBIA monetary damages — was dismissed last week.
Judge Bernard J. Fried sided with Merrill’s defense that both entities were sophisticated parties and that Merrill could not guarantee any products would maintain their triple-A credit quality.
It was an “undisputed fact,” Fried added, that the information detailing the contents of the CDOs were “not exclusively” in Merrill’s possession.
In MBIA’s amended complaint — briefly summarized and submitted to the court Thursday by New York-based law firm Quinn Emanuel Urquhart & Sullivan — the bond insurer claims that recent investigations show Merrill “did in fact have exclusive knowledge” of the CDO contents.
Court documents that were filed in April show MBIA agreed to “unconditionally and irrevocably” guarantee the contracts “without the assertion of any defenses to payment, including fraud in the inducement or fact.”
In addition, it signed a disclaimer agreeing it was capable of assessing, understanding, and assuming the risks of the policy.
MBIA’s case rests on showing that Merrill deliberately sought to have its most toxic assets insured at a time when it had exclusive knowledge of their deterioration. The insurer has called the transaction a scheme “to offload billions of dollars of deteriorating U.S. subprime mortgages and other collateral.”
