UPDATE 2-Ambac, banks settle investor suits for $33 mln

* Investors said Ambac misled them about risks

* Ambac filed Chapter 11 bankruptcy in November

By Jonathan Stempel

NEW YORK, May 6 (Reuters) - Ambac Financial Group Inc (ABKFQ.PK), insurers and some of its bank underwriters agreed to pay $33 million to settle investor litigation that accused the bond insurer of hiding the risks it took on by guaranteeing risky mortgage debt.

Ambac will pay $2.5 million already being held in escrow, while insurers for its officers and directors will pay $24.6 million, according to settlement papers filed with the federal court in Manhattan. Seven banks will pay $5.9 million under a separate settlement, the papers show.

Court approval is required for both settlements.

Once the nation's second-largest bond insurer, Ambac filed for Chapter 11 bankruptcy protection from creditors last Nov. 8. A restructuring of larger rival MBIA Inc (MBI.N), which like Ambac suffered large losses insuring risky mortgage debt, is being challenged in New York's highest court.

"We're pleased with these settlements, which we think are a very good result for the class, particularly since Ambac is in bankruptcy," Steven Singer, a partner at Bernstein Litowitz Berger & Grossmann LLP, which represented the investors, said in an interview.

Ambac did not immediately return a call seeking comment.

The investors accused Ambac and officials including former Chief Executive Robert Genader of misleading them into believing the company insured only "the safest" transactions.

Instead, they said Ambac reached for profit by guaranteeing billions of dollars of risky collateralized debt obligations and residential mortgage debt, and writing credit default swaps to protect investors in the debt against default.

The complaint quoted a 2006 internal memo from an Ambac managing director who, referring to some Ambac-backed debt, told a company credit risk committee that some of their own underwriters "would not touch [them] with a ten foot pole."

The lawsuit covered investors who bought Ambac stock and bonds between Oct. 25, 2006 and April 22, 2008, as a Feb. 2007 Ambac subordinated debt issue known as a DISCS offering.

Lead plaintiffs are the Public School Teachers' Pension and Retirement Fund of Chicago, the Arkansas Teachers Retirement System and the Public Employees' Retirement System of Mississippi.

The banks included Bank of America Corp (BAC.N), Citigroup Inc (C.N), Goldman Sachs Group Inc (GS.N), HSBC Holdings Plc (HSBA.L), JPMorgan Chase & Co (JPM.N), UBS AG (UBSN.VX) and Wells Fargo & Co (WFC.N), court papers show.

The case is In re: Ambac Financial Group Inc Securities Litigation, U.S. District Court, Southern District of New York, No. 08-00411. (Reporting by Jonathan Stempel in New York, editing by Bernard Orr)