The nasty litigation between a group of banks and the bond insurer MBIAjust got nastier.
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A lawyer for the banks has accused Joseph W. Brown Jr., MBIA’s chief executive, of illegally trading in MBIA stock while in possession of confidential information. The insider trading claim was made during a hearing late Friday at Federal District Court in Manhattan.
Robert J. Giuffra Jr., the banks’ lawyer, said that Mr. Brown was “pregnant with inside information” about MBIA’s pending February 2009 restructuring when he bought his company’s stock in the months before the announcement.
“Mr. Giuffra’s accusations are false and irresponsible,” Marc E. Kasowitz, a lawyer for MBIA, said in a statement. “All of Mr. Brown’s stock purchases were approved in advance by counsel, fully disclosed, and in full compliance with both securities laws and company policies.”
MBIA’s restructuring is at the center of the banks’ lawsuit, which accuses the insurer of defrauding them when it split itself into two operations, separating its traditional municipal bond insurance business from its exposures to mortgage-backed securities. They say that the restructuring — made in the depths of the financial crisis — was a sham, making it likely that MBIA would eventually be able to avoid paying out losses from insuring mortgage-backed securities owned by the banks.
When MBIA disclosed the restructuring, its stock price popped about 30 percent, rising to $4.51 a share on Feb. 18, 2009, from $3.48 a share a day earlier. Its stock closed at $9.61 on Friday.
The insider trading claims against Mr. Brown are just the latest salvo in the morass of litigation weighing on MBIA since the collapse of the housing market. MBIA, along with a host of other bond insurers, ran into deep trouble when many of the mortgage-backed securities that they had insured went sour.
A group of 18 banks originally brought a lawsuit in New York state court against MBIA. Fourteen of the banks have settled, including Morgan Stanley, which late last year agreed to drop out of the case in exchange for a $1.1 billion payment from MBIA. The four remaining plaintiffs areBank of America, UBS, Société Générale, and Natixis.
The banks’ lawsuit is one of three different cases involving MBIA related to its 2009 restructuring.
Aurelius Capital Management, a hedge fund that owns mortgage-backed securities insured by MBIA, is the lead plaintiff in a federal case alleging the same claims as the banks. And the banks are plaintiffs in a state-court action seeking to reverse the New York Insurance Department’s approval of MBIA’s restructuring.
MBIA has also gone on the offensive, filing several lawsuits against financial institutions. Among them is an action in New York state court against Bank of America and its Countrywide unit. The insurer has accused Countrywide of lying to it about the quality of the mortgages that were bundled into securities insured by MBIA.
There was also a hearing on Friday in the Countrywide litigation on whether MBIA can depose Brian T. Moynihan, the chief executive of Bank of America. The bank’s lawyers have resisted this request, and on Friday accused the bond insurer of trying to depose Mr. Moynihan for “harassment purposes” and argued that it would impose “unnecessary burdens” on him.
The judge presiding over the MBIA-Countrywide dispute did not issue a ruling on Friday.
There was also nothing resolved during Friday’s session in federal court. In the unusual hearing, Richard J. Sullivan, a federal judge, and Barbara R. Kapnick, a state court justice, sat side by side to try to resolve disputes in the parallel state and federal lawsuits brought by the banks and Aurelius, respectively. (Judge Sullivan ceded his large, plush chair to Judge Kapnick, and sat instead next to her in a smaller, less commodious-looking chair brought in for the hearing.)
The central issue debated during the session was the scope of a subpoena that the banks had issued to the state insurance department. The subpoena requested information related to the department’s discussions about MBIA’s application to split into two operations.
Mr. Kasowitz, the lawyer for MBIA, and a lawyer for the state agency argued that the request was overbroad and redundant. MBIA has already produced 22 million documents, he said.
The lawyers on all sides sparred and interrupted each other throughout the hearing. At one point, David W. Ichel, a lawyer at Simpson Thacher & Bartlett representing Aurelius, began speaking over Judge Sullivan, who cut him off.
“You make a lot of money, but I get to wear this,” Mr. Sullivan said, tugging on his robe. “So you can’t interrupt me.”
The level of vitriol peaked when Mr. Giuffra accused Mr. Brown, MBIA’s chief executive, of insider trading. Mr. Giuffra raised the issue in the context of suggesting that Mr. Brown and the other MBIA’s executives had a financial motive to execute the restructuring.
According to securities filings, Mr. Brown made four purchases of MBIA stock worth a total of about $1 million from November 2008 to January 2009. MBIA submitted its application to the insurance department in December 2008.
In the fall of 2008, the state’s insurance department discussed MBIA’s potential restructuring with the company’s executives, according to an affidavit filed by Eric R. Dinallo, the former state insurance superintendent, as part of the litigation. Mr. Dinallo said that given MBIA’s problems at the time, he was open to considering the insurer’s restructuring proposal.
MBIA’s lawyer, Mr. Kasowitz, took umbrage at the accusations during the hearing. He called them “irresponsible” and said that Mr. Giuffra made the claim only because the news media were present.
Mr. Brown, who owns about 4.3 million shares, or about $41 million worth of MBIA stock, has not sold a share since rejoining the company as its chief executive in February 2008. He served an earlier stint in the post from 1999 to 2004.
During one heated exchange on Friday, Judge Sullivan warned the lawyers that, at least in his courtroom, they needed to tone it down. If not, the judge said, “the two of you can settle this on the street corner.”