A federal appeals court in Atlanta refused to reconsider a ruling that bond insurer Financial Securities Assurance Inc. has no standing to file securities fraud charges against underwriter Stephens Inc. for alleged misrepresentations made in connection with $69.9 million of now-defaulted bonds issued for a solid waste disposal and recycling facility in Georgia in 1998.

In an order issued Tuesday, the U.S. Court of Appeals for the Eleventh Circuit denied FSA’s request for a rehearing of the ruling against it that a three-judge appeals court panel issued in September. In its order, the appeals court said that none of the judges on the court indicated any support for a rehearing.

FSA can either drop its efforts to appeal the ruling or petition the Supreme Court within 90 days to take up the case, which has been closely watched by both the insurance and securities industries.

An FSA spokesperson yesterday declined to comment on the order and the insurer’s plans.

The case revolves around 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 in part with tax-exempt bonds issued by the Solid Waste Management Authority of Crisp County, Ga. The bonds defaulted in 2000, forcing FSA to pay bondholders.

FSA filed a lawsuit against Stephens in a federal court in Atlanta in late 2000, charging the underwriter with federal securities fraud law and state common law fraud violations. The bond insurer claimed Stephens 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 enough revenue to pay debt service on the bonds.

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

The court sided with Stephens in two separate rulings, one that dismissed the federal charges against it in 2001 before either side traded information, and the other that dismissed the state claims against the underwriter in 2004 before a trial could be held,

FSA appealed the dismissal of the federal claims in 2004.

The appeals court panel initially sided with FSA in May, ruling that the insurer could file securities fraud charges against Stephens. The panel said FSA “has standing as a purchaser of a contingent interest in the bonds” by virtue of its insurance policy. Stephens asked the panel to reconsider the ruling.

Then in September, the panel completely reversed itself and sided with Stephens, ruling, “Although by the insurance policy’s own terms FSA acquired the bonds upon default by the authority, we conclude that at the time of such transfer the instruments FSA acquired were no longer ‘securities’ as required for standing under Rule 10b-5 of the Securities Exchange Act of 1934, which provides the legal foundation for securities fraud suits.”

FSA “did not acquire a ‘security’ because, by the [official statement’s] own terms, FSA acquired no right to receive interest or principal in the bonds after disbursement,” the panel stated, adding, “Under the OS, once the bonds or a portion of the bonds were redeemed, the owners of such bonds or portions thereof ceased to be entitled to any benefit or security under the bond resolution.”


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