NU Online News Service

MBIA will pay $75 million for trying to cover up close to $170million in losses through a fraudulent reinsurance scheme.

Under an agreement announced today, the Armonk, N.Y.-based bondinsurer will pay a $50 million penalty to the Securities andExchange Commission, $10 million to investors and $15 million inpenalties to the state of New York. The case also involves the NewYork Attorney General's office and the New York State InsuranceDepartment.

The $50 million to the SEC will be placed in a Fair Fund to bepaid to investors.

Under the agreement, MBIA will hire an independent consultant toexamine other specialized bond transactions in which MBIA wasengaged. The company also restated earnings from 1998 in its thirdquarter report for 2006.

While admitting no guilt or denying the charges, the company didenter into a cease and desist order.

The case stems from the bankruptcy of Allegheny Health,Education and Research Foundation (AHERF) in 1998, when the companydefaulted on $256 million in bonds MBIA insured.

To allegedly cover up an anticipated $170 million in losses,MBIA engaged three companies for reinsurance contracts that were infact loans to cover up losses and prop up the company's stock atthat time.

According to an assurance agreement filed by New York AttorneyGeneral Eliot Spitzer in November 2005, MBIA Chief FinancialOfficer Juliette S. Tehrani engaged three insurers, Munich Re, Axa,and Zurich, to provide insurance policies retroactively to theAHERF default, totaling $170 million. In return, MBIA would paypremiums of $340 million to cover the insurance payments, accordingto an SEC filing.

An SEC spokesman said he could not comment, but a source saidthat the agreement, signed by the state in 2005, was awaiting SECapproval.

As side agreements fell apart in 2004, auditors and reportersbegan to question the transfer of risk, and several attempts to doso by MBIA failed. This eventually led to investigations by theattorney general's office, insurance department and SEC.

In the agreement, the attorney general alleges that both Ms.Tehrani and then Chief Executive Officer and Chairman David Elliottbenefited from the fraud in bonus and stock options of more $2.5million. Mr. Elliott retired in 1999. Ms. Tehrani left the companyin 1999, according to a company spokesman.

In a statement, Gary C. Dunton, MBIA CEO said, "We are pleasedthat the AHERF-related investigations are fully behind us," addingthat the company has cooperated fully.

The company said the independent consultant began work in 2006,and no additional enforcement actions are expected in the case.

An SEC spokesman said this ends its investigation of MBIA,except for the review of specific reinsurance transactions.

"This office will continue to focus on investor protection andon pursuing corporations that spread misleading information to dupeinvestors and regulators," said New York Attorney General Andrew M.Cuomo. "Corporations must not be allowed to engage in fictitioustransactions to manipulate their financial reports."

"We are pleased they cooperated with this investigation and thatthose adversely affected by MBIA's conduct will be compensated,"said Acting Insurance Superintendent Eric R. Dinallo. "Theintegrity and transparency of the bond insurance market isessential and must be maintained."

As far as ratings, Standard & Poor's said today that thesettlement would have no effect on MBIA's "triple-A-rating."S&P said the money was reserved and that the company hassufficient capital to cover the payment.