(Adds suit against JPMorgan, details, byline)
By Karen Brettell
NEW YORK Aug 7 Ambac Financial Group Inc
ABK.N is suing Citigroup Inc (C.N) and Credit Suisse Group
CSGN.VX, alleging the companies misrepresented the risks of
mortgage-backed assets in a deal Ambac insured.
The lawsuit, filed in New York State Supreme Court on
Monday, seeks to void $2 billion in some of the credit default
swap protection Ambac wrote on risky residential mortgages in a
deal originated by Citigroup or be awarded damages for losses.
Ambac sold the protection to Citigroup through a
collateralized debt obligation named Ridgeway Court Funding II
in June 2007. Credit Suisse Alternative Capital, part of Credit
Suisse Group, managed the selection of assets in the CDO.
"We believe this suit is without merit and will defend
ourselves vigorously," said Citigroup spokeswoman Danielle
Credit Suisse spokesman Duncan King said the bank is
reviewing the complaint and declined further comment.
In the suit, Ambac accused Citigroup of using the CDO as a
means of dumping risky assets the bank had failed to sell,
knowing that the value of the securities was in steep decline.
Credit Suisse, in turn, allowed Citigroup to dump toxic
assets in the portfolio in order to generate management fees
and win favor from the bank, Ambac said. Credit Suisse managed
about $6 billion in volume in Citigroup CDO deals, or about 50
percent of that business at Credit Suisse, Ambac said in the
Credit Suisse "allowed Citigroup to hijack the portfolio
for the purpose of dumping leftovers from Citigroup's prior CDO
and residential mortgage backed securities offerings that it
had been unable to sell," Ambac said.
Ambac accuses Citigroup of providing false market values
for assets underlying the CDO, which had been accumulated for
the deal over the course of six months.
At the time the deal was closing, Citigroup told Ambac that
the assets on average were being given a market value of 96
percent of their initial value, when in fact the securities
were worth less than 79 percent under a fair valuation, Ambac
Citigroup overpaid for some assets by as much as 30
percent, effectively rendering the deal insolvent at its
launch, Ambac said.
Citigroup also misrepresented the risks of the debt to
ratings agencies in order to receive high ratings, which were
key to Ambac agreeing to insure the assets, Ambac said.
Separately, Ambac is also seeking damages from JPMorgan
Investment Management, part of JPMorgan (JPM.N), claiming the
asset manager acted inappropriately in investing almost
entirely in risky mortgages in a CDO it managed, called
Ballantyne Re plc.
By failing to diversify, JPMorgan breached its duty to
provide "reasonable income while providing a high level of
safety of capital" and has caused the deal to lose around $1
billion of its $1.65 billion portfolio, Ambac said in a suit
filed in May.
Ambac sold $900 million in protection on the CDO in 2006.
JPMorgan spokeswoman Mary Sedarat said the suit is "without
merit and we are going to defend it vigorously."
Ambac, which on Friday reported a $2.4 billion loss for the
second quarter, has been pushed to the brink of insolvency by
writing protection on mortgage bonds.
Ambac competitor MBIA Inc (MBI.N) in April filed a suit
against Merrill Lynch, now owned by Bank of America (BAC.N),
for damages from losses the company took on mortgage-backed
CDOs. For details see [ID:nN30143879].
(Editing by James Dalgleish)