April 20, 2012 / 7:29 PM / in 6 years

MBIA, BofA to face off in May on insurer's restructuring

NEW YORK (Reuters) - MBIA Inc’s (MBI.N) 2009 restructuring will be on trial next month, when Bank of America Corp (BAC.N) and two other lenders try to show that New York state insurance department acted unreasonably in approving it.

“I have to determine whether their approval was arbitrary and capricious,” Justice Barbara Kapnick said in a hearing before an overflowing courtroom in a New York state court in Manhattan. She will preside over a non-jury trial beginning on May 14 that is expected to last two to four weeks.

Bank of America, Natixis SA (CNAT.PA) and Societe Generale (SOGN.PA) are the only plaintiffs remaining among the 18 that in 2009 sued MBIA and then-New York Insurance Commissioner Eric Dinallo, who let MBIA segregate its troubled structured-finance business from its traditional municipal bond business.

The banks claimed the restructuring was intended to defraud policyholders and that $5 billion was siphoned from the MBIA Insurance unit at their expense.

The banks brought two lawsuits against MBIA, with the state insurance department, now part of the state Department of Financial Services, a defendant in one of them. The May 14 trial will address the case involving the New York state agency.

Robert Giuffra, a lawyer for the banks, said at Friday’s hearing that the restructuring should be undone, and that MBIA should “do it over on current financial information.”

He said that Armonk, New York-based MBIA, which has denied any wrongdoing, hid its finances when it sought approval to restructure.

Giuffra also said he wants to question MBIA Chief Executive Jay Brown, whom he said engaged in insider trading by trading company stock in advance of approval of the restructuring.

    Brown, who watched Friday’s hearing in the courtroom, in an interview called the insider trading accusations “outrageous” and said they had no place in the court proceeding.

    “I think that’s so far afield, and so not fact-based,” Brown said. “All of the trades were approved, and these were all purchases, not sales.”

    Among those expected to testify are Dinallo, who is now a partner at law firm Debevoise & Plimpton, and Jack Buckmiller, an insurance department analyst who reviewed MBIA. Expert testimony would be limited, the judge said.

    “This case really addresses the actions of the insurance department in approving this transaction,” the judge said. “It’s not a case about all these terrible intentional things, about concealing,” that MBIA is accused of having done.

    The case is ABN Amro Bank NV et al v Dinallo, New York State Supreme Court, New York County, No. 601846/2009.

    Reporting By Karen Freifeld; Editing by Steve Orlofsky

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