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Third Avenue funds sue MBIA’s subsidiaries

The complaint alleges, among other things, that the recent corporate “transformation” announced by MBIA was illegal

Third Avenue Management, an investment adviser, has announced that three of the mutual funds managed by the company have commenced litigation in Delaware Chancery Court against MBIA Insurance Corporation and MBIA Insurance Corporation of Illinois, subsidiaries of MBIA.

The complaint alleges, among other things, that the recent corporate “transformation” announced by MBIA was illegal and was accomplished without due consideration in an attempt to defraud holders of MBIA Insurance Corporation’s debt.

The complaint describes how three of the mutual funds managed by the company (Third Avenue funds) purchased notes issued by MBIA Insurance Corporation in February 2008 (the surplus notes) based upon the balance sheet of that entity and representations that this and other capital raises would be conducted to recapitalise and revitalise MBIA Insurance Corporation following losses in its structured finance insurance business.

Little more than a year later, however, MBIA announced that MBIA Insurance was transferring approximately $5 billion in cash and its entire profitable domestic public finance business to another entity (MBIA Insurance Corporation of Illinois) that has no obligation under the surplus notes.

The complaint asserts that, of the roughly $5 billion transferred, approximately $2.1 billion was transferred for no consideration. The complaint alleges that the domestic public finance insurance business of MBIA Insurance and another $2.9 billion in cash was transferred to MBIA Illinois in exchange for an inadequate and pretextual “ceding commission”.

The complaint asserts that these transfers have left MBIA Insurance Corporation only with “toxic” structured finance and credit derivative insurance liabilities and a credit rating that was downgraded deep into junk territory. The complaint asserts that, as a result, MBIA Insurance now has no viable business or earnings. The complaint alleges that these transfers were illegal and unfair and resulted in damages to the Third Avenue funds’s investment in the surplus notes. Third Avenue seeks an unwinding of the transfers or the award of appropriate monetary damages.

Martin Whitman, chairman of the Third Avenue funds, said: We are now being improperly denied the benefit of our investment — namely, a well-capitalised insurance company that is able to conduct a profitable business insuring municipal bonds. MBIA has stripped that business away from us and left us with a run-off portfolio that is likely worthless. Ironically, MBIA is now in the marketplace attempting to raise capital for the new entity, despite Third Avenue’s bad experience with MBIA’s last capital raise which has given rise to this litigation.