Wednesday, January 16, 2008

Subprime Litigation Wave Hits Ambac Financial Group

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On January 16, 2008, plaintiffs’ lawyers filed a securities lawsuit in the Southern District of New York against Ambac Financial Group and certain of its directors and officers, raising allegations in connection with the company’s disclosures concerning its provision of insurance for collateralized debt obligations. A copy of the plaintiff’s counsel’s January 16 press release can be found here. A copy of the complaint can be found here.

According to the press release, the complaint alleges that

during the Class Period, defendants issued materially false and misleading statements regarding the Company’s business and financial results related to its insurance coverage on collateralized debt obligations ("CDO") contracts. According to the complaint, the true facts, which were known by the defendants but concealed from the investing public during the Class Period, were as follows: (i) that the company lacked requisite internal controls to ensure that the Company’s underwriting standards and its internal rating system for its CDO contracts were adequate, and, as a result, the Company’s projections and reported results issued during the Class Period were based upon defective assumptions and/or manipulated facts; (ii) that the Company’s financial statements were materially misstated due to its failure to properly account for its mark-to-market losses; (iii) that, given the deterioration and the increased volatility in the mortgage market, the Company would be forced to tighten its underwriting standards related to its asset-backed securities, which would have a direct material negative impact on its premium production going forward; (iv) that the Company had far greater exposure to anticipated losses and defaults related to its CDO contracts containing subprime loans, including even highly rated CDOs, than it had previously disclosed; (v) that the Company had far greater exposure to a potential ratings downgrade from one of the credit ratings agencies than it had previously disclosed; and (vi) that defendants’ Class Period statements about the Company’s selective underwriting practices during the 2005 through 2007 timeframe related to its CDOs backed by subprime assets were patently false; as the Company’s underwriting standards were at best aggressive and at a minimum were completely inadequate. As the truth began to be disclosed, shares of Ambac common stock plummeted, causing substantial losses to investors.
Ambac now joins MBIA as a triple-A rated bond insurer whose disclosures in connection with its provision of insurance for mortgage-backed securities has resulted in a securities lawsuit. As discussed in my recent post (here) concerning the MBIA lawsuit, there have also been three other bond insurers sued in subprime-related securities lawsuits.

I have added the Ambac lawsuit to my running tally of subprime-related securities lawsuits, which can be found here. The addition of the Ambac lawsuit brings the total number of subprime-related securities lawsuits (including lawsuits against credit rating agencies and against residential construction companies) to 39. The Ambac lawsuit is the second subprime-related securities lawsuit filed in 2008.

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