Aurelius and MBIA Settle Lawsuit Over 2009 Reorganization

Aurelius Capital Management LP and MBIA Inc. (MBI) settled a lawsuit in which the hedge fund claimed the 2009 split of MBIA’s bond-insurance business hurt owners of $240 billion of debt while benefiting stock investors.

Lawyers for Aurelius and MBIA, in a filing yesterday in federal court in Manhattan, asked for the case to be dismissed with each side bearing its own costs. Terms of the settlement weren’t disclosed in the filing.

“The settlement of this case is another important step toward resolving all of the litigation contesting our transformation,” Kevin Brown, a spokesman for Armonk, New York- based MBIA, said in an e-mailed statement.”

Aurelius and Fir Tree Partners funds said in a complaint filed in March of 2009 that the reorganization, in which MBIA stripped $5.4 billion of assets and its U.S. municipal business from a unit that went on to mainly insure structured-finance bonds, represented “the height of insidious greed.”

The insurer split its insurance business in 2009 with permission from New York state regulators in an effort to revive the public-finance business. About two dozen banks and investment firms including Morgan Stanley and Bank of America Corp. sued the insurer and regulators after the split.

The new division holds the state and local bond guarantee business the insurer seeks to maintain and left the old unit holding soured mortgage-backed debt. Some lenders claimed the restructuring was a “fraudulent conveyance” that rendered the old insurer, MBIA Insurance Corp., insolvent.

David Ichel, a lawyer for Aurelius, didn’t immediately respond to a phone message seeking comment on the settlement.

Separately, UBS AG (UBSN) is withdrawing from litigation in New York state court against MBIA over the insurer’s restructuring, according to a stipulation filed yesterday.

MBIA rose $1.21, or 13 percent, to $10.28 in New York Stock Exchange composite trading today.

The case is Aurelius Capital v. MBIA, 09-cv-02242, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Edvard Pettersson in Los Angeles at epettersson@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

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