Nation's Leading Insurer Settles Allegations Of Securities And Accounting Fraud For $75 Million

NEW YORK, NY (January 29, 2007)—Attorney General Andrew M. Cuomo, the United States Securities and Exchange Commission (SEC), and the New York State Insurance Department today announced agreements with MBIA, Inc., the nation’s leading financial guarantor to settle allegations of securities and accounting fraud.  The allegations stem from a fraudulent $170 million transaction which MBIA engineered in 1998 to conceal the first major loss in its corporate history. 

Under the agreement with the Attorney General, MBIA Inc., the Armonk, New York based insurer has agreed to pay penalties totaling $15 million, disgorge $10 million to investors, and restate its earnings for the years 1998 through 2004.  Under the separate SEC agreement, MBIA will pay $50 million in penalties, which will be placed in a Fair Fund for the benefit of investors.  MBIA also agreed to adopt business reforms pursuant to the settlements, including the retention of an independent consultant to examine its accounting and disclosures concerning a number of other transactions.

Attorney General Andrew M. Cuomo said, “This office will continue to focus on investor protection and on pursuing corporations that spread misleading information to dupe investors and regulators.  Corporations must not be allowed to engage in fictitious transactions to manipulate their financial reports.”

Acting Superintendent of the Insurance Department Eric R. Dinallo said, “Our examination found that MBIA violated the insurance laws and regulations of the State of New York.  We are pleased they cooperated with this investigation and that those adversely affected by MBIA’s conduct will be compensated. MBIA restated its earnings and will be subject to an independent consultant’s review to help ensure these actions are not repeated.  The integrity and transparency of the bond insurance market is essential and must be maintained.”

The Attorney General’s ten-month investigation revealed that MBIA entered into a scheme to mask the earnings effect of a major loss it suffered in 1998 when a Pennsylvania hospital chain, Allegheny Health, Education and Research Foundation (“AHERF”) defaulted on $256 million of bonds MBIA had guaranteed.
Under the scheme, MBIA borrowed a total of $170 million (the net present value of the loss) from three reinsurers to retrospectively cover its AHERF related losses.  MBIA secretly agreed to pay back each reinsurer in full with interest.  MBIA then fraudulently accounted for this loan as “reinsurance income” on its income statement to offset its $170 million loss. 

To qualify as reinsurance, however, a transaction must transfer insurance risk to the reinsurer.  MBIA’s agreements with the reinsurers appeared to transfer such risk, but MBIA entered into two separate undisclosed side agreements which secretly negated the risk of loss.  MBIA also misrepresented its estimate of the AHERF loss to its auditors.

As a result of these subterfuges, MBIA was able to book the $170 million loan as reinsurance and avoided taking a charge to its 1998 earnings.  The 1998 financials it issued in March 1999 overstated its net income by approximately 25%.
In addition to overstating its 1998 income, MBIA disseminated other false and misleading information into the marketplace. 

  • In July of 1998 — even though MBIA had internally assessed its AHERF related losses at $95-100 million — it issued a press release stating that its loss reserves of approximately $75 million would be adequate to cover the AHERF losses. 
    In September 1998, it announced that it had obtained $170 million of reinsurance to cover its AHERF loss when in fact the arrangements were loans which would have to be paid back in full with interest. 
  • In 2003, it made statements denying the compensatory nature of the transactions when in fact the only reason the reinsurers agreed to pay the AHERF loss was because such an agreement existed.

The investigation underlying today’s announcement was led by Assistant Attorneys General James J. Park and Roger L. Waldman of the Investment Protection Bureau.