- Ambac Financial Group Improperly Received Upstreamed Value at the Expense of Ambac Assurance Policyholders
- Systemic Conflicts of Interest Seen between Parent and Operating Company
- Fundamental Lack of Transparency Detailed in Complaint
Policyholders with over $1 billion of securities and other indebtedness insured by Ambac Assurance Corporation ("AAC") and placed in a segregated account filed today a motion to enable litigation that would seek to enjoin AAC's parent, Ambac Financial Group, Inc. ("Ambac" or "AFG") (NYSE: ABK), from fraudulently accepting dividend payments from AAC and utilizing AAC's net operating losses without fair consideration being paid to AAC. The motion was filed with the Circuit Court of Dane County, Wisconsin, which is supervising rehabilitation proceedings of the segregated account into which over $57 billion of policies insured by AAC were transferred.
Specifically, the complaint seeks to enjoin AFG from removing "assets from AAC without fair consideration at a time when AAC is failing to pay its policyholders' claims as they come due and AFG has publicly declared that it is likely to file its own bankruptcy proceedings under the United States Bankruptcy Code in the near future."
In addition, the complaint alleges that AAC paid in excess of $230 million in dividends to AFG and certain preferred shareholders of AAC in 2008 and 2009 - at a time when AAC's financial condition was deteriorating precipitously, projected claims payments and loss impairments were mounting, and its liquid claims-paying resources were eroding. The complaint seeks to recover these amounts.
The lawsuit alleges that, "[t]he Policyholders, who are owners of or managers of funds that own securities and other indebtedness insured by AAC, have attempted to obtain a commitment from AAC and AFG that no value, which would otherwise be a fraudulent transfer, will be transferred to AAC's parent without fair consideration. AAC and AFG have refused to make such a commitment, though their decision-making on the issue is impeded by the systemic conflicts of interest between them. For example, the same law firm serves as the principal legal counsel for both AFG and AAC and has been advising them as to all of the events alleged herein. AAC and AFG also share the same financial advisor in connection with their financial restructurings, including the rehabilitation proceedings, the June Settlement [a June 2010 settlement of certain policies], and AFG's impending bankruptcy. The directors of AAC and AFG have been identical, and there is significant overlap between their officers. This common management further demonstrates the utter lack of arm's length dealing between these two entities despite their dire financial condition."
The complaint further alleges that, "[d]espite its dire financial condition, AAC has nevertheless insisted on preserving its ability to make dividend payments and to otherwise transfer substantial value to AFG for no consideration. For example, under the terms of [the 'June Settlement'], AAC can transfer to AFG up to approximately $59.5 million per year to cover AFG's own operating and debt service expenses. Similarly, because of a June 2010 amendment to a tax sharing agreement between AFG and AAC, AFG is permitted to utilize AAC's valuable net operating loss tax carryforward to offset certain forms of income without compensating AAC for such use. The amount of AFG's use of AAC's net operating losses could easily be more than $1 billion." The complaint alleges that "[t]hese transfers should not be permitted. Absolutely no value should be transferred from AAC to its parent AFG while policyholders and creditors of AAC have claims that have not been paid in full."
In filing the motion, the plaintiffs stated that, "Despite our best efforts to obtain appropriate information to assure a rehabilitation plan for AAC that serves the best interests of all policyholders and is in the public good, the shared leadership teams of both Ambac and AAC have chosen to turn a deaf ear. Instead, they appear intent on engaging in an effort to pursue a plan using a process that lacks any transparency - at great cost to policyholders and to the detriment of the public - while at the same time diverting value to the parent company at policyholder expense."
Policyholders who had involuntarily been placed into the AAC segregated account include the plaintiffs, other policyholders of AAC-wrapped residential mortgage-backed securities, government-sponsored entities, insurance companies, pension funds and other institutional investors.
The complaint was included in a filing today asking the Wisconsin court to clarify an ex parte temporary restraining order issued on March 24, 2010, when the Wisconsin Office of the Commissioner of Insurance filed its initial petition to rehabilitate AAC's segregated account. Unlike holders of policies left in AAC's general account, holders of policies placed in the segregated account are barred from seeking any loss payments from AAC on their insurance policies. The temporary restraining order by its terms did not enjoin actions against AFG, AAC's parent. The plaintiffs are seeking clarification that the filing of the complaint against AFG will not violate the earlier court order restraining actions against AAC.
Contacts:
Media Contact:
Kekst and Company
Jeremy Fielding/
Lin-Hua Wu
212-521-4800/415-391-4665
