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UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

x In re MBIA INC. SECURITIES LITIGATION

This Document Relates To:

ALL ACTIONS.

: : : : : : x

Civil Action No. 05-CV-03514(LLS)

CLASS ACTION

CONSOLIDATED AMENDED CLASS ACTION COMPLAINT FOR VIOLATIONS OF FEDERAL SECURITIES LAWS

Lead Plaintiffs (as defined below), by their undersigned attorneys, on behalf of themselves

and the Class they seek to represent, for their Consolidated Amended Securities Class Action

Complaint, make the following allegations against Defendants (defined below), based upon the

investigation conducted by and under the supervision of Plaintiffs’ counsel, which included a review

of filings submitted by MBIA, Inc. (“MBIA” or the “Company”) to the Securities and Exchange

Commission (“SEC”), interviews with former employees, consultations with experts and

consultants, as well as regulatory filings and reports, securities analysts’ reports and advisories about

the Company, press releases and other public statements issued by the Company. Except as alleged

herein, underlying information relating to Defendants’ misconduct and the particulars thereof is not

available to Plaintiffs and the public and lies within the possession and control of Defendants and

other MBIA insiders, thus preventing Plaintiffs from further detailing Defendants’ misconduct at this

time. Plaintiffs believe that substantial additional evidentiary support will exist for the allegations

set forth herein after a reasonable opportunity for discovery.

NATURE OF THE ACTION

1. This is a securities class action on behalf of purchasers of the securities of MBIA

between August 5, 2003 and March 30, 2005, inclusive (the “Class Period”), seeking to pursue

remedies under the Securities Exchange Act of 1934 (the “Exchange Act”).

2. Defendant MBIA engages in providing financial guarantee insurance, investment

management services, and municipal and other services to public finance, and structured finance

clients on a global basis. MBIA’s primary business is to guarantee principal and interest on

bonds issued by its clients in exchange for a premium paid to MBIA. MBIA’s clients pay a

premium to have its bonds insured because MBIA’s “Triple-A” rating will lower the client’s

interest cost. As long as the premium MBIA charges is less than what the client is saving in

interest costs, MBIA can market its product as a way for issuers to save money.

3. This case concerns earnings management and accounting fraud. As detailed herein,

MBIA engaged in improper accounting practices which served to artificially inflate and distort its

reported financial results. As a result of these improper accounting practices, MBIA’s financial

results issued during the Class Period were materially overstated and its financial statements were

prepared in violation of Generally Accepted Accounting Practices (“GAAP”) and, therefore,

materially false and misleading when issued.

4. The AHERF Transaction: In 1998, MBIA suffered a loss when Allegheny Health,

Education and Research Foundation (“AHERF”), a Pennsylvania medical group whose bonds were

insured by MBIA, went into bankruptcy and its bonds were rendered worthless. As the insurer of the

bonds, MBIA was required to pay bondholders the outstanding principal and interest. Rather than

book a loss on the AHERF default, MBIA engaged in complex scheme to avoid recognizing the loss

in 1998.

5. Specifically, MBIA structured a series of “retroactive” reinsurance agreements with

three reinsurers, Converium Reinsurance (North America) Inc. (formerly known as Zurich

Reinsurance (North America), Inc.) (“Converium”), AXA Re Finance S.A. (“AXA Re”) and

Muenchener Rueckversicherungs-Gesellshaft (“Munich Re”). Pursuant to these retroactive

reinsurance agreements, the three reinsurers gave MBIA $170 million ($70 million from Converium

and $50 million each from AXA Re and Munich Re) to mitigate the Company’s losses from the

AHERF issued bonds. MBIA and the reinsurers also entered into undisclosed “side agreements” by

which MBIA guaranteed the reinsurers risk-less business over a six year period. In substance, the

retroactive reinsurance agreements were really loans from the reinsurers to MBIA as the reinsurers

were guaranteed future reinsurance business from MBIA and the future business presented virtually

no risk to the reinsurers that they would have to pay on the reinsurance, i.e., MBIA promised to

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reinsure the highest credit quality bonds with the reinsurers. In essence, MBIA agreed to buy

reinsurance that it knew it did not need.

6. Although the reinsurers “lost” money initially on the retroactive reinsurance

agreements with MBIA, they were guaranteed their money back plus a profit. MBIA disguised these

transactions as reinsurance policies rather than loans to take advantage of favorable accounting

afforded to such reinsurance policies. This deception allowed MBIA to use the “insurance proceeds”

to offset underwriting losses, reducing the impact on its financial statements. However, if the

agreements were accounted for properly as loans, MBIA would have had to account for its losses on

the AHERF’s bonds in 1998. Investors were never told that the Company had disguised loans as

reinsurance agreements in order to avoid recognizing a loss in 1998 and calling into question its

highly coveted AAA credit rating.

7. In November 2004, MBIA announced that it had received subpoenas from the SEC

and the New York Attorney General’s office requesting information with respect to non-traditional

or loss investigation insurance products developed, offered or sold by MBIA to third parties.

8. Then, on March 8, 2005, MBIA admitted that its financial statements for 1998 and

subsequent years were materially false and misleading when issued and announced that it would be

restating its financial statements for fiscal years 1998-2003. Specifically, MBIA represented that the

restatement was being made to correct the accounting treatment for two reinsurance agreements that

MBIA entered into in 1998 with Converium Re. The Company did not restate for its agreements

with AXA Re or Munich Re, although, as detailed herein, those agreements were similarly structured

to the Converium reinsurance agreements and should have also been restated.

9. The next day, MBIA announced that it had received a subpoena from the U.S.

Attorney’s Office for the Southern District of New York seeking information related to the

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reinsurance agreements it entered into in connection with the loss it incurred in 1998 on bonds

insured by MBIA that were issued by AHERF.

10. Finally, on March 30, 2005, MBIA advised investors that the previously-announced

government investigations had been broadened and intensified. The Company further announced

that it received additional requests from the NYAG’s Office and SEC that supplement the subpoenas

it received in late 2004.

11. Upon this news, the price of MBIA stock declined $4.36 per share, or over 7%, to

close at $52.28 per share, on unusually heavy trading volume.

12. Recent news reports have indicated that the governmental investigations of MBIA

have continued to escalate and that the Company is exploring settlement talks with the regulators.

JURISDICTION AND VENUE

13. The claims asserted herein arise under and pursuant to Sections 10(b) and 20(a) of the

Exchange Act [15 U.S.C. §§78j(b) and 78t(a)] and Rule 10b-5 promulgated thereunder by the

Securities and Exchange Commission (“SEC”) [17 C.F.R. §240.10b-5].

14. This Court has jurisdiction over the subject matter of this action pursuant to 28 U.S.C.

§1337 and Section 27 of the Exchange Act [15 U.S.C. §78aa].

15. Venue is proper in this District pursuant to Section 27 of the Exchange Act, and 28

U.S.C. §1391(b), as and many of the acts and practices complained of herein occurred in substantial

part in this District.

16. In connection with the acts alleged in this complaint, defendants, directly or

indirectly, used the means and instrumentalities of interstate commerce, including, but not limited to,

the mails, interstate telephone communications and the facilities of the national securities markets.

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PARTIES

17. By Court Order dated July 25, 2005, Southwest Carpenters Pension Trust and the

City of Pontiac General Employees’ Retirement System (collectively, “Lead Plaintiffs”) were

appointed Lead Plaintiffs. Lead Plaintiffs purchased MBIA stock during the Class Period, as set

forth in their certifications, which were previously filed with the Court and are incorporated herein

by reference, and were damaged thereby.

18. Defendant MBIA is a Connecticut corporation with its principal place of business

located at 113 King Street, Armonk, NY 10504. The Company, through its subsidiaries, is a

financial guarantor and a provider of specialized financial services.

19. (a) Defendant Gary Dunton (“Dunton”) is, and was at all relevant times, MBIA’s

President. He became MBIA’s Chief Executive Officer (“CEO”) in May 2004.

(b) Defendant Neil G. Budnick (“Budnick”) served as MBIA’s Chief Financial

Officer (“CFO”) and Vice President until May 2004. At that time, he was named president of MBIA

Insurance Corporation.

(c) Defendant Joseph W. Brown (“Brown”) is, and was at all relevant times,

MBIA’s Chairman.

(d) Defendant Douglas C. Hamilton (“Hamilton”) is, and was at all relevant

times, MBIA’s Assistant Vice President and Controller.

(e) Defendant Nicholas Ferreri (“Ferreri”) has been MBIA’s Chief Financial

Officer since May 2004.

(f) Defendant Julliette S. Tehrani (“Tehrani”) was MBIA’s Executive Vice

President, CFO and Treasurer until September 1998 (the time of the reinsurance agreements) and

then became the special assistant to defendants Elliot and Brown. Defendant Tehrani executed the

“retroactive” reinsurance agreements as part of the AHERF transaction. - 5 -

(g) Defendant David H. Elliot (“Elliot”) was MBIA’s Chairman and CEO until

May 1999. He is currently the Chairman of Channel Re, a Bermuda reinsurance company of which

MBIA has approximately a 17% interest.

(h) Defendant Richard L. Weill (“Weill”) was MBIA’s Vice President and

Secretary from 1992 to April 2004.

(i) Defendants Budnick, Dunton, Brown, Hamilton, Ferreri, Tehrani, Elliot and

Weill are collectively referred to herein as the “Individual Defendants.”

20. Because of the Individual Defendants’ positions with the Company, they had access

to the adverse undisclosed information about the Company’s business, operations, operational

trends, financial statements, markets and present and future business prospects via access to internal

corporate documents (including the Company’s operating plans, budgets and forecasts and reports of

actual operations compared thereto), conversations and connections with other corporate officers and

employees, attendance at management and Board of Directors meetings and committees thereof and

via reports and other information provided to them in connection therewith.

21. It is appropriate to treat the Individual Defendants as a group for pleading purposes

and to presume that the false, misleading and incomplete information conveyed in the Company’s

public filings, press releases and other publications as alleged herein are the collective actions of the

narrowly defined group of defendants identified above. Each of the above officers of MBIA, by

virtue of their high-level positions with the Company, directly participated in the management of the

Company, was directly involved in the day-to-day operations of the Company at the highest levels

and was privy to confidential proprietary information concerning the Company and its business,

operations, growth, financial statements, and financial condition, as alleged herein. Said defendants

were involved in drafting, producing, reviewing and/or disseminating the false and misleading

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statements and information alleged herein, were aware, or recklessly disregarded, that the false and

misleading statements were being issued regarding the Company, and approved or ratified these

statements, in violation of the federal securities laws.

22. As officers and controlling persons of a publicly-held company whose common stock

was, and is, registered with the SEC pursuant to the Exchange Act, and was, and is, traded on the

New York Stock Exchange (“NYSE”), and governed by the provisions of the federal securities laws,

the Individual Defendants each had a duty to disseminate promptly, accurate and truthful

information with respect to the Company’s financial condition and performance, growth, operations,

financial statements, business, markets, management, earnings and present and future business

prospects, and to correct any previously-issued statements that had become materially misleading or

untrue, so that the market price of the Company’s publicly-traded common stock would be based

upon truthful and accurate information. The Individual Defendants’ misrepresentations and

omissions during the Class Period violated these specific requirements and obligations.

23. The Individual Defendants participated in the drafting, preparation, and/or approval

of the various public and shareholder and investor reports and other communications complained of

herein and were aware of, or recklessly disregarded, the misstatements contained therein and

omissions therefrom, and were aware of their materially false and misleading nature. Because of

their Board membership and/or executive and managerial positions with MBIA, each of the

Individual Defendants had access to the adverse undisclosed information about MBIA’s business

prospects and financial condition and performance as particularized herein and knew (or recklessly

disregarded) that these adverse facts rendered the positive representations made by or about MBIA

and its business issued or adopted by the Company materially false and misleading.

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24. The Individual Defendants, because of their positions of control and authority as

officers and/or directors of the Company, were able to and did control the content of the various SEC

filings, press releases and other public statements pertaining to the Company during the Class

Period. Each Individual Defendant was provided with copies of the documents alleged herein to be

misleading prior to or shortly after their issuance and/or had the ability and/or opportunity to prevent

their issuance or cause them to be corrected. Accordingly, each of the Individual Defendants is

responsible for the accuracy of the public reports and releases detailed herein and is therefore

primarily liable for the representations contained therein.

25. Each of the defendants is liable as a participant in a fraudulent scheme and course of

business that operated as a fraud or deceit on purchasers of MBIA securities by disseminating

materially false and misleading statements and/or concealing material adverse facts. The scheme: (i)

deceived the investing public regarding MBIA’s business, operations, management and the intrinsic

value of MBIA securities; (ii) enabled the Company to complete an offering of $350 million

aggregate principal amount of senior notes; (iii) enabled defendants Dunton and Brown to receive

over $30 million of options and restricted stock as part of their employment contract which called for

the defendants to receive huge paydays if the stock stayed above $60 per share for ten consecutive

trading days; and (iv) caused Plaintiffs and other members of the Class to purchase MBIA’s

securities at artificially inflated prices.

PLAINTIFFS’ CLASS ACTION ALLEGATIONS

26. Plaintiffs bring this action as a class action pursuant to Federal Rule of Civil

Procedure 23(a) and (b)(3) on behalf of a Class, consisting of all those who purchased or otherwise

acquired the securities of MBIA between August 5, 2003 and March 30, 2005, inclusive (“the

Class”) and who were damaged thereby. Excluded from the Class are defendants, the officers and

directors of the Company, at all relevant times, members of their immediate families and their legal - 8 -

representatives, heirs, successors or assigns and any entity in which defendants have or had a

controlling interest.

27. The members of the Class are so numerous that joinder of all members is

impracticable. Throughout the Class Period, MBIA common shares were actively traded on the

NYSE. While the exact number of Class members is unknown to Plaintiffs at this time and can only

be ascertained through appropriate discovery, Plaintiffs believe that there are hundreds or thousands

of members in the proposed Class. Record owners and other members of the Class may be identified

from records maintained by MBIA or its transfer agent and may be notified of the pendency of this

action by mail, using the form of notice similar to that customarily used in securities class actions.

28. Plaintiffs’ claims are typical of the claims of the members of the Class as all members

of the Class are similarly affected by defendants’ wrongful conduct in violation of federal law that is

complained of herein.

29. Plaintiffs will fairly and adequately protect the interests of the members of the Class

and has retained counsel competent and experienced in class and securities litigation.

30. Common questions of law and fact exist as to all members of the Class and

predominate over any questions solely affecting individual members of the Class. Among the

questions of law and fact common to the Class are:

(a) whether the federal securities laws were violated by defendants’ acts as

alleged herein;

(b) whether statements made by defendants to the investing public during the

Class Period misrepresented material facts about the business, operations and management of MBIA;

and

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(c) to what extent the members of the Class have sustained damages and the

proper measure of damages.

31. A class action is superior to all other available methods for the fair and efficient

adjudication of this controversy since joinder of all members is impracticable. Furthermore, as the

damages suffered by individual Class members may be relatively small, the expense and burden of

individual litigation make it impossible for members of the Class to individually redress the wrongs

done to them. There will be no difficulty in the management of this action as a class action.

SUBSTANTIVE ALLEGATIONS

The Company

32. Defendant MBIA is engaged in providing financial guarantee insurance, investment

management services, and municipal and other services to public finance, and structured finance

clients on a global basis. The Company conducts its financial guarantee business through its wholly

owned subsidiary, MBIA Insurance Corporation.

33. The Company engaged in a series of improper accounting practices which served to

artificially inflate and distort its reported financial results. As a result of these improper accounting

practices, MBIA’s financial results issued during the Class Period were materially overstated and its

financial statements were prepared in violation of GAAP and, therefore, materially false and

misleading when issued.

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The AHERF Fraud

MBIA Engaged in Improper Accounting Practices which Artificially Inflated its

Reported Financial Results

34. In mid-1998, MBIA was facing a crisis. The Company had insured $256 million of

the net par outstanding of Delaware Valley Obligated Group (“DVOG”) bonds.1 In July 1998,

AHERF announced that DVOG would be part of a bankruptcy reorganization filing. This meant that

MBIA was obligated to pay AHERF bondholders principal and interest.

35. In an attempt to mitigate its losses on the AHERF bonds, MBIA entered into a series

of retroactive reinsurance agreements with three reinurers: Converium, AXA Re and Munich Re as

follows:

(a) On September 1, 1998, MBIA entered into a retroactive reinsurance

agreement with Munich Re, whereby Converium insured MBIA “up to” $50 million in losses

occurred under the agreement. For its services, MBIA paid $2 million as a premium to Munich Re.

This agreement was executed by defendant Tehrani. [Source: Agreement attached as an exhibit to

MBIA 1998 Form 10-K].

(b) On September 1, 1998, MBIA entered into a retroactive reinsurance

agreement with AXA Re, whereby AXA Re insured MBIA “up to” $50 million in losses occurred

under the agreement. For its services, MBIA paid $1.5 million as a premium to AXA Re. This

agreement was executed by defendant Tehrani. [Source: Agreement attached as an exhibit to MBIA

1998 Form 10-K].

1 DVOG is an entity comprising of five hospitals and a medical university in the Philadelphia area that is part of AHERF.

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(c) On September 15, 1998, MBIA entered into a retroactive reinsurance

agreement with Converium, whereby Converium insured MBIA “up to” $70 million in losses

occurred under the agreement. For its services, MBIA paid $350,000 as a premium to Converium.

This agreement was executed by defendant Tehrani. [Source: Agreement attached as an exhibit to

MBIA 1998 Form 10-K].

36. In all, the three reinsurers agreed to pay MBIA $170 million in return for a sum of

less than $4 million. The three reinsurers collectively and immediately took an approximate $166

million loss on these agreements.

37. According to a former executive assistant to defendants Elliott and Weill, among

others, who was employed at MBIA from 1978 to 2004 (“CW 1”), when it became clear that

AHERF was going to cause a loss, there was a flurry of activity around defendant Weill’s office.

According to MBIA’s former Vice President in its Finance Department, who was employed from

1989 to 2001 (“CW 2”), MBIA knew that it was to take a loss and was looking to reinsure the

AHERF deal after the fact. According to CW 2, the incentive given to these reinsurers for their

immediate loss was the promise of “sharing future premiums in other deals.” According to CW 1,

the AHERF “side agreements” were put together by defendants Tehrani and Elliott who met with

Converium, AXA Re and Munich Re. Defendants Tehrani and Elliott were constantly “in and out”

of defendant Weill’s office to consult him on the deal. Not only were defendants Tehrani, Elliott and

Weill knowledgeable of the reinsurance agreements, MBIA’s Executive Policy Committee and its

auditors were aware and signed off on it as well. According to CW 2, MBIA had employee

meetings wherein MBIA told the attendees that these reinsurance agreements were a way to avoid

taking a “huge hit” on its loss reserves. According to a former MBIA employee who worked for the

Company from February 2000 to July 2004 (“CW 4”), by entering into these “retroactive”

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reinsurance deals, MBIA was able to “maintain its pristine veneer and protect the ‘Triple A’ credit

rating.” Moreover, CW 4 stated that “everything comes back to the ‘Triple A’ credit rating. If the

‘Triple A’ credit rating goes south, [MBIA is] out of business.”

38. Upon receiving the proceeds from their reinsurance agreements, MBIA booked the

proceeds as income and reduced the impact that the AHERF transaction would have on its loss

reserves and ultimately its “Triple A” credit rating. In accounting terms, these “retroactive”

reinsurance agreements would have been acceptable had a real risk been passed along to the

reinsurers. However, the reinsurers took on very minimal risk, if any at all. The reinsurers were

promised that they would reinsure policies on the highest rated bonds in MBIA’s client portfolio.

Indeed, according to a former MBIA financial analyst who worked at the Company from 1987 to

2002 (“CW 3”), at the time AHERF transaction was occurring, senior management asked him/her to

cherry pick the ‘A’ quality policies from MBIA’s portfolio that were low risk so that they could pass

it on to the reinsurers. According to a former MBIA employee, who was employed at the Company

from 1998 to 2001, (“CW 5”), the reinsurance agreements were “nothing other than a loan in

disguise.”

39. MBIA has disclosed that it entered into an oral agreement with Converium whereby

MBIA agreed to cede $102 million of premiums to Converium over a six-year period ending

October 1, 2004. Moreover, MBIA would assume the risk from AXA Re that MBIA ceded to

Converium and Converium retroceded to ARF. However, MBIA has not disclosed that oral

agreements, such as the one with Converium, were entered into with AXA Re and Munich Re as

well. MBIA’s admission that it entered into a “side agreement” with Converium along with identical

“retroactive” reinsurance agreements with AXA Re and Munich Re is further evidence that “side

agreements,” such as the one that caused the restatement, existed with AXA Re and Munich Re.

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40. During the Class Period, MBIA improperly failed to disclose and delayed the

recognition of loss on its insured bond portfolio.

MBIA Admits That Its Financial Statements for FY 1998-2003 Were Materially False and Misleading

41. On March 8, 2005, the Company issued a press release announcing that it would be

restating its financial statements for 1998 and subsequent years. Specifically, the restatement

corrected the accounting treatment for two reinsurance agreements that MBIA entered into in 1998

with Converium. The press release continued, in pertinent part, as follows:

As a result of this restatement, MBIA’s financial results for 1998 will reflect a third quarter incurred loss of $70 million related to $265 million of bonds insured by MBIA that were issued by Allegheny Health, Education and Research Foundation (AHERF). The after-tax loss will be approximately $47 million, resulting in net income for the year of approximately $386 million, or $2.57 per share, down 11% from $433 million or $2.88 per share as originally reported.

MBIA estimates that its earnings will be reduced by approximately $6 million (or four cents per share) in 1999, $4 million (or 3 cents per share) in 2000, $3 million (or two cents per share) in 2001 and will have a de minimis effect in 2002. MBIA estimates that its earnings will increase by approximately $2 million (or one cent per share) in 2003 and $4 million (or three cents per share) in 2004. The Company expects to finalize these estimates and file its 2004 audited financial statements in its 10K by the March 16 deadline. The restatement could result in a delay in this filing.

The two reinsurance agreements with Converium consisted of an excess of loss agreement and a quota share agreement. Under the excess of loss reinsurance agreement, Converium reimbursed MBIA for $70 million of the $170 million loss experienced by MBIA in the third quarter of 1998 on the $265 million of MBIA-insured bonds issued by AHERF, which was recorded as an offset to the loss. Under the reinsurance agreement, MBIA agreed to cede to Converium on a quota share basis new business written with an aggregate of $101 million in net ceded premiums over a six-year period ending October 1, 2004, which was accounted for in the same manner as other quota share treaties.

Under separate agreements to which MBIA was not a party, Converium reinsured the risk that it assumed from MBIA under the quota share agreement for losses in excess of $13 million to AXA Re Finance S.A. (ARF), a subsidiary of AXA Re S.A. ARF contended that, in connection with its agreement to assume this risk from Converium, there was an oral agreement with MBIA under which MBIA would replace ARF as a reinsurer to Converium by no later than October 2005.

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In October 2004, MBIA management recommended that the Audit Committee of the Board of Directors undertake an investigation of the AHERF reinsurance arrangement, including whether such an oral agreement existed between MBIA and ARF. The Audit Committee retained outside counsel and initiated an investigation in October 2004. The outside counsel’s investigation has been substantially completed. While the investigation has not conclusively determined whether an oral agreement in fact existed, MBIA has been advised, however, that it appears likely that such an agreement or understanding with ARF was made in 1998.

In light of this additional information, MBIA has decided to correct its accounting for the agreements and restate its 1998 and subsequent financial statements with respect to the Converium excess of loss agreement and the quota share agreement. MBIA now believes that the appropriate accounting treatment for the excess of loss and quota share reinsurance agreements with Converium is to record the $70 million paid by Converium under the excess of loss agreement as a deposit and to record the subsequent premium cessions under the quota share agreement as a repayment of the deposit with imputed interest.

As previously disclosed, in November 2004 MBIA received subpoenas from the Securities and Exchange Commission (SEC) and the New York Attorney’s General Office (NYAG) related to non-traditional reinsurance arrangements, including the AHERF reinsurance transaction. The company is cooperating fully with the SEC and the NYAG in their investigations.

In addition to the agreements with Converium related to AHERF, MBIA had agreements with two other reinsurers, ARF and Munich Re, under which those reinsurers reimbursed MBIA for $100 million of AHERF losses incurred by MBIA. MBIA also separately entered into quota share reinsurance agreements with these reinsurers under which it agreed to cede on a quota share basis new business written with an aggregate of $97 million in adjusted gross premiums to ARF and $98 million in adjusted gross premiums to Munich Re over a six-year period ending October 1, 2004. These reinsurers assumed new risk on a pro rata basis in exchange for these premiums. MBIA continues to believe that its accounting for the excess of loss and quota share agreements with ARF and Munich Re is appropriate.

In the fourth quarter of 2004, MBIA assumed from ARF the previously ceded policies that ARF had assumed directly from MBIA under its quota share agreement with MBIA and also reinsured ARF for substantially all of the business that ARF assumed from Converium under the Converium quota share agreement.

42. In its form 10-K for the fourth quarter and fiscal year ended December 31, 2004, the

Company provided the following with regard to its restatement:

The Company has restated its previously issued consolidated financial statements for 1998 and subsequent years to correct the accounting treatment for two reinsurance agreements entered into in 1998 with Converium Reinsurance (North America) Inc.,

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(formerly known as Zurich Reinsurance (North America), Inc.) (Converium). The restatement adjustments resulted in a cumulative net reduction in shareholders’ equity of $59.2 million, or 1%, as of December 31, 2001 and an increase to previously reported net income of $22 thousand for the year ended December 31, 2002. For the year ended December 31, 2003, the restatement adjustments resulted in an increase to previously reported net income of $2.3 million.

In 1998, the Company incurred a $170 million loss related to $265 million of MBIA-insured bonds issued by Allegheny Health, Education and Research Foundation (AHERF). At that time, the Company entered into an excess of loss reinsurance agreement with Converium, which reimbursed the Company $70 million. This $70 million reimbursement was recorded as an offset to the $170 million AHERF related loss. At the same time that MBIA Corp. arranged the excess of loss reinsurance agreement, it entered into a separate quota share reinsurance agreement with Converium that obligated the Company to cede $102 million of premiums to Converium over a six-year period ending October 1, 2004.

In October 2004, the Company’s management recommended that the Audit Committee of the Company’s Board of Directors undertake an investigation of the reinsurance agreements related to AHERF, including whether an oral agreement existed between the Company and AXA Re Finance S.A. (ARF) that the Company would assume the risk from ARF that MBIA ceded to Converium and Converium retroceded to ARF. The Audit Committee retained outside counsel and initiated an investigation in October 2004. The outside counsel’s investigation has been substantially completed. While the investigation has not conclusively determined whether an oral agreement in fact existed, the Company has been advised, however, that it appears likely that such an agreement or understanding was made in 1998. Based on this information, the Company could no longer be certain that for financial reporting purposes, insurance risk was transferred to Converium with respect to the excess of loss and quota share reinsurance agreements. Therefore, the Company has corrected its accounting for these agreements by recording the $70 million received from Converium under the excess of loss agreement as a deposit and recorded subsequent premium cessions to Converium under the quota share agreement as a repayment of the deposit with imputed interest.

43. The following tables present the effects of the restatement on the consolidated

financial statements of MBIA for 1998-2003:

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1998 Reported

1998 Restated

Consolidated Statement of Income Data: Net premiums written 520,986 525,218 Increase in deferred premiums revenue (96,436) (100,587) Premiums earned 424,550 424,631 Insurance revenues 812,444 812,525 Loss and loss adjustment expenses 34,683 104,683 Operating expenses 70,330 72,609 Insurance income 672,818 600,620 Income from continuing operations before 553,857 481,659 Provision for income taxes 127,504 102,235 Income from continuing operations 426,353 379,424 Net income 432,728 385,799 Diluted EPS: Income from continuing operations 2.84 2.53 Net income 2.88 2.57 Consolidated Balance Sheet Data: Prepaid reinsurance premiums 352,699 348,548 Total assets 11,826,202 11,822,674 Loss and loss adjustment expense reserves 299,752 299,752 Current income taxes 0 0 Deferred income taxes, net 343,896 319,250 Other liabilities 253,159 321,206 Total liabilities 8,033,985 8,077,386 Retained earnings 2,246,221 2,199,292 Shareholders’ equity 3,792,217 3,745,288

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1999

Reported 1999 Restated

Consolidated Statement of Income Data:Net premiums written 453,615 470,543 Increase in deferred premiums revenue (10,819) (26,455) Premiums earned 442,796 444,088 Insurance revenues 853,778 855,070 Loss and loss adjustment expenses 198,454 200,339 Operating expenses 80,082 88,530 Insurance income 538,542 529,501 Income from continuing operations before 371,684 362,643 Provision for income taxes 60,380 57,216 Income from continuing operations 311,304 305,427 Net income 320,530 314,653 Diluted EPS: Income from continuing operations 2.07 2.03 Net income 2.13 2.09 Consolidated Balance Sheet Data:Prepaid reinsurance premiums 403,210 383,423 Total assets 12,263,899 12,247,017 Loss and loss adjustment expense reserves 467,279 469,164 Current income taxes 0 0 Deferred income taxes, net 32,805 7,277 Other liabilities 241,217 300,784 Total liabilities 8,750,798 8,786,722 Retained earnings 2,486,478 2,433,672 Shareholders’ equity 3,513,101 3,460,295

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2000 Reported

2000 Restated

Consolidated Statement of Income Data:Net premiums written 498,092 515,020 Increase in deferred premiums revenue (51,739) (65,783) Premiums earned 446,353 449,237 Insurance revenues 893,550 896,434 Loss and loss adjustment expenses 51,291 52,996 Operating expenses 83,066 90,329 Insurance income 723,217 717,133 Income from continuing operations before 689,173 683,089 Provision for income taxes 173,775 171,646 Income from continuing operations 515,398 511,443 Net income 528,637 524,682 Diluted EPS: Income from continuing operations 3.47 3.44 Net income 3.56 3.53 Consolidated Balance Sheet Data:Prepaid reinsurance premiums 442,622 408,791 Total assets 13,894,338 13,864,940 Loss and loss adjustment expense reserves 499,279 502,869 Current income taxes 0 0 Deferred income taxes, net 252,463 226,334 Other liabilities 262,588 312,490 Total liabilities 9,670,925 9,698,288 Retained earnings 2,934,608 2,877,847 Shareholders’ equity 4,223,413 4,166,652

- 19 -

2001 Reported

2001 Restated

Consolidated Statement of Income Data:Net premiums written 629,864 646,792 Increase in deferred premiums revenue (105,994) (119,091) Premiums earned 523,870 527,701 Insurance revenues 974,641 978,472 Loss and loss adjustment expenses 56,651 58,345 Operating expenses 80,498 86,411 Insurance income 795,059 791,283 Income from continuing operations before 765,116 761,340 Provision for income taxes 197,941 196,619 Income from continuing operations 567,175 564,721 Net income 570,091 567,637 Diluted EPS: Income from continuing operations 3.80 3.78 Net income 3.82 3.80 Consolidated Balance Sheet Data:Prepaid reinsurance premiums 507,079 460,151 Total assets 16,257,005 16,210,077 Loss and loss adjustment expense reserves 575,709 580,993 Current income taxes 22,419 17,022 Deferred income taxes, net 272,665 246,178 Other liabilities 306,891 345,778 Total liabilities 11,474,367 11,486,654 Retained earnings 3,415,517 3,356,302 Shareholders’ equity 4,782,638 4,723,423

- 20 -

2002 Reported

2002 Restated

Consolidated Statement of Income Data:Net premiums written 753,405 770,333 Increase in deferred premiums revenue (164,896) (176,880) Premiums earned 588,509 593,453 Insurance revenues 1,006,982 1,011,926 Loss and loss adjustment expenses 61,688 62,223 Operating expenses 87,401 91,776 Insurance income 810,224 810,258 Income from continuing operations before 779,739 779,773 Provision for income taxes 200,950 200,962 Income from continuing operations 578,789 578,811 Net income 579,087 579,109 Diluted EPS: Income from continuing operations 3.92 3.92 Net income 3.92 3.92 Consolidated Balance Sheet Data:Prepaid reinsurance premiums 521,641 462,729 Total assets 18,894,334 18,835,422 Loss and loss adjustment expense reserves 615,508 621,327 Current income taxes 17,648 12,024 Deferred income taxes, net 471,534 445,286 Other liabilities 345,031 371,712 Total liabilities 13,400,983 13,401,264 Retained earnings 3,895,112 3,835,919 Shareholders’ equity 5,493,351 5,434,158

- 21 -

2003 Reported

2003 Restated

Consolidated Statement of Income Data:Net premiums written 1,033,072 1,050,000 Increase in deferred premiums revenue (300,075) (310,129) Premiums earned 732,997 739,871 Insurance revenues 1,378,619 1,385,493 Loss and loss adjustment expenses 72,888 73,555 Operating expenses 108,130 110,751 Insurance income 1,139,694 1,143,280 Income from continuing operations before 1,145,296 1,148,882 Provision for income taxes 333,815 335,070 Income from continuing operations 811,481 813,812 Net income 813,585 815,916 Diluted EPS: Income from continuing operations 5.60 5.61 Net income 5.61 5.63 Consolidated Balance Sheet Data:Prepaid reinsurance premiums 535,728 466,762 Total assets 30,393,219 30,324,253 Loss and loss adjustment expense reserves 684,995 691,481 Current income taxes 14,554 9,627 Deferred income taxes, net 552,740 527,050 Other liabilities 422,257 434,307 Total liabilities 24,134,204 24,122,100 Retained earnings 4,593,486 4,536,624 Shareholders’ equity 6,259,015 6,202,153

Pre Class Period False and Misleading Statements

44. During the period prior to August 5, 2003, the Company issued numerous press

releases and filed quarterly and annual reports with the SEC describing its financial performance.

As alleged herein, the Company has admitted that its financial statements during this period were

materially false and misleading and restated its financial statements for fiscal years 1998 to 2003.

45. On February 2, 1999, the Company issued a press release announcing its financial

results for the fourth quarter and year end of 1998, the period ended December 31, 1998. For the

quarter, the Company reported net income of $116.2 million and diluted earnings per share of $1.16

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per share. For the year, the Company reported net income of $432.7 million and diluted earnings per

share of $4.32 per share. Defendant Elliot, commenting on the results, stated, in pertinent part, as

follows:

MBIA posted strong operating results for the quarter and the year. Robust demand for our guarantee drove our annual gross premiums written to record levels. The successful integration of CapMAC Holdings and 1838 Investment Advisors in 1998 significantly expanded our capabilities in the global structured finance and investment management markets. During the year, we began reorganizing our municipal and financial services businesses to improve profitability and to deliver integrated revenue enhancement products and services nationwide. Looking ahead, the outlook remains very bright across all of our major business lines.

46. MBIA’s financial results for the fourth quarter and year end of 1998, the period

ending December 31, 1998, were repeated in the Company’s Report on Form 10-K filed with the

SEC on or about March 30, 1999, which was signed by defendants Elliot, Brown and Dunton,

among others (the “1998 10-K”). In its Management’s Discussion and Analysis of Financial

Condition and Results of Operations, the 10-K reported, in pertinent part, the following:

1998 was a rewarding but challenging year for MBIA. We posted strong operating results in our insurance and investment management segments, increasing shareholder value while preserving and strengthening our Triple-A rating. In 1998 we merged with and successfully completed the integration of CapMAC Holdings Inc. (CapMAC), a leading insurer of structured finance transactions, and 1838 Investment Advisors, Inc. (1838), a full-service asset management firm. These mergers established strong foundations for growth in both our core insurance and asset management segments, and have already achieved combined results that exceed the sum of the individual parts. On the other hand, the year also produced two significant disappointments. The first--the bankruptcy of a large issuer whose debt was insured by MBIA--was mitigated by our general loss reserving policy and our prudent reinsurance program. The second—unacceptable returns in our municipal services segment--was addressed through reorganization and consolidation. All in all, 1998’s strong financial results continued to strengthen our balance sheet and Triple-A ratings. [Emphasis added.]

47. With regard to its calculation of loss reserves as a result of the AHERF transaction,

the 1998 10-K stated, in pertinent part, as follows:

As mentioned previously, the bankruptcy of a large issuer -- specifically a Pennsylvania hospital group--was a significant disappointment in 1998. The large

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increase in the case-specific reserve reflects our current estimate of anticipated losses arising from this group. At this time our outstanding reserve for this claim, net of reinsurance, totals $163 million. To date we have received $170 million in reinsurance recoveries and have paid $18 million for debt service and loss adjustment expenses. After reinsurance, the amount incurred by MBIA for this loss totaled $11 million in 1998.

Over the three-year period from 1996 through 1998, our provision for losses and LAE increased in tandem with new business writings in accordance with our loss reserving methodology. The changes in the case-specific reserve had no impact on our net income since they were offset by corresponding changes in the unallocated portion of the total reserve.

48. With regard to its reinsurance agreements, the 1998 10-K reported, in pertinent part,

the following:

As part of the company’s portfolio shaping activity in 1998, the company has entered into facultative share reinsurance agreements with highly rated reinsurers that obligate the company to cede future premiums to the reinsurers through January 1, 2005. Certain reinsurance contracts in 1998 were accounted for on a retroactive basis in accordance with SFAS 113.

Ceding commissions received from reinsurers before deferrals were $37.2 million, $20.8 million and $13.7 million in 1998, 1997 and 1996, respectively. In 1998, $170.0 million was received in reinsurance recoveries related to the bankruptcy of a Pennsylvania hospital group.

49. On February 3, 2000, MBIA issued a press release announcing its financial results for

the fourth quarter and year end of 1999, the period ended December 31, 1999. For the quarter, the

Company reported net income of $126.9 million and diluted earnings per share of $1.27 per share.

For the year, the Company reported net income of $320.5 million and diluted earnings per share of

$3.19 per share. Defendant Brown, commenting on the results, stated, in pertinent part, as follows:

We reported solid operational results for the fourth quarter while our financial performance was in line with our expectations. During 1999, we took decisive action to better position MBIA for long-term profitable growth. We instituted a more disciplined approach to pricing and risk selection, strengthened our balance sheet, and more effectively managed our capital position. We posted strong results in our insurance operations by continuing to write higher quality business at higher margins and greater returns. We were very pleased by our investment management operations which had a record year as assets under management grew to over $30 billion and operating earnings grew 40 percent. Our strong growth prospects across all of our

- 24 -

business lines, coupled with the significant actions taken in 1999 to build shareholder value, will enable the company to return to its historical earnings growth patterns in 2000 and beyond.




among others. With regard to its reinsurance agreements, the 10-K reported, in pertinent part, the

following:

As part of the company’s portfolio shaping activity in 1998, the company entered into facultative share reinsurance agreements with highly rated reinsurers that obligate the company to cede future premiums to the reinsures through January 1, 2005. Certain reinsurance contracts in 1998 were accounted for on a retroactive basis in accordance with SFAS 113, “Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts”.



the fourth quarter and year end of 2000, the period ended December 31, 2000. For the quarter, the

Company reported net income of $136.2 million and diluted earnings per share of $1.38 per share.

For the year, the Company reported net income of $528.6 million and diluted earnings per share of

$5.33 per share. Defendant Brown, commenting on the results, stated, in pertinent part, as follows:

We reported acceptable operational and financial results for the fourth quarter and the year as we continued to build toward our long-term financial targets. Our insurance operations showed strong growth in our structured finance and international businesses, which helped offset reduced activity in the domestic municipal market. We were very pleased by our investment management operations, which had a record year in assets under management and operating earnings. Looking forward, the company is well positioned to take advantage of very favorable growth prospects domestically and internationally across all of our business lines.

- 25 -




among others (the “2000 10-K”). With regard to its reinsurance agreements, the 2000 10-K

reported, in pertinent part, the following:

As part of the company’s portfolio shaping activity in 1998, the company entered into facultative reinsurance agreements with highly rated reinsurers that obligate the company to cede future premiums to the reinsurers through January 1, 2005. Certain reinsurance contracts in 1998 were accounted for on a retroactive basis in accordance with SFAS 113, “Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts.”

* * *




quarter, the Company reported net income of $156.4 million, diluted operating earnings per share of

$1.03 per share and earnings per share of $1.05. For the year, the Company reported net income of

$570.1 million, diluted operating earnings of $3.88 per share, and diluted earnings per share of $3.82

per share. Defendant Brown, commenting on the results, stated, in pertinent part, as follows:

2001 was a favorable year for global credit enhancement, and MBIA garnered a good share of the profitable business produced in world capital markets. Our continued focus on underwriting and costs produced very satisfying growth in operating income for both the year and the fourth quarter. Demand for credit enhancement remains very strong, which bodes well for MBIA’s results over the next few years.



- 26 -


among others.

55. In December 2002, Gotham Partners, a then well known hedge fund investor, issued a

research report entitled Is MBIA Triple-A? In its report, Gotham Partners criticized MBIA for having

an unusually high degree of leverage for a bond issuer and stated that MBIA did not deserve its

“Triple A” rating. In particular, the research report characterized the AHERF reinsurance

transactions as a “loss- deferral, earnings-smoothing device.”

56. Investors were not put on notice of any fraud described in the Gotham Partners report

because in an immediate response, on December 9, 2002, MBIA issued the following statement

vehemently denying all of the allegations:

MBIA Inc. (NYSE: MBI) today said that the 66-page “research report” issued earlier today by Gotham Partners is not independent objective research but rather a negative advocacy piece by a hedge fund that has shorted MBIA stock and has also taken a speculative position in derivatives on MBIA-insured debt.

Gotham’s objective is to profit from its positions if its “research report” results in a decline in MBIA’s stock price or a widening of spreads on these types of derivatives.

MBIA Chairman Jay Brown said, “Many of the points raised in the Gotham report are patently wrong, and demonstrate a clear lack of understanding. We stand firmly by the soundness of our book of business and the quality of our underwriting. We also believe in the transparency of the capital markets and support the right of investors to take long or short positions and to voice their opinions in appropriate public forums. However, especially at a time when the integrity of Wall Street research is undergoing unprecedented scrutiny, investors should carefully consider the credibility of any negative report issued by a hedge fund that would directly benefit from a decline in MBIA’s share price. MBIA will respond to any points that it determines merit a further response and will take all actions necessary to protect our shareholders, policyholders and constituents.”



quarter, the Company reported net income of $121.4 million and diluted earnings per share of $0.84

per share. For the year, the Company reported net income of $579.1 million and diluted earnings per

- 27 -

share of $3.92 per share. Defendant Brown, commenting on the results, stated, in pertinent part, as

follows:

2002 ended as it began with turbulent capital markets and lack of consensus about the coming year. Against this backdrop, we were very pleased with both our insurance new business production and the ongoing resilience of our credit portfolio. Our disappointing asset management performance was inevitable given the severe drop in the equity markets.

Looking ahead, we see more of the same economic climate that we have operated in for the past few years. This will continue to fuel extraordinary demand for financial guarantee products, which is evidenced by the level of requests we have in the pipeline. Our biggest challenge will remain our ability to close transactions on terms and prices that meet our underwriting and return standards. We expect another very satisfactory year.



SEC on or about March 29, 2003, which was signed by defendants Brown and Dunton, among

others.

59. The statements referenced above in ¶¶45-54, 56-58 were each materially false and

misleading when made because they failed to disclose and/or misrepresented the following adverse

facts, among others:

(a) that MBIA was materially overstating its financial results by engaging in

improper accounting practices. As detailed herein, MBIA has admitted that its prior financial reports

are materially false and misleading and restated its results for fiscal years 1998-2003 because MBIA

improperly accounted for proceeds received from reinsurance agreements as income rather than as a

loan to take advantage of the favorable accounting treatment given to such proceeds;

(b) that the proceeds received from the reinsurance agreements should have been

considered a loan because MBIA promised the reinsurers, through secret oral “side agreements,” that

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they would send future business to the reinsurers. Accordingly, there was no transfer of risk in the

reinsurance agreements;

(c) that the Company lacked adequate internal controls and was therefore unable

to ascertain its true financial condition;

(d) that as a result of the foregoing, as set forth in ¶¶92-129, MBIA’s financial

statements were not prepared in accordance with GAAP and were materially false and misleading;

and

(e) that as a result of the foregoing, the values of the Company’s earnings and net

income were materially overstated at all relevant times.

60. These statements referenced above in ¶¶45-54, 56-58 remained live and uncorrected

throughout the Class Period.

Materially False and Misleading Statements Made During the Class Period

61. The Class Period begins on August 5, 2003. On that date, MBIA issued a press

release announcing its financial results for the second quarter of 2003, the period ending June 30,

2003. For the quarter, the Company reported diluted earnings per share of $1.51 and net income of

$217.9 million. Defendant Budnick commented on the Company’s performance, stating, in pertinent

part, as follows:

MBIA recorded strong financial results for the first half of 2003, driven by increased insurance revenues. Earned premiums grew a very healthy 25 percent, reflecting strong top line production at very attractive pricing levels over the past few years. Demand for MBIA’s guarantee across all sectors of the global capital markets continues to be strong and our insured portfolio has held up well in a stressful economic environment.

62. MBIA’s financial results for the second quarter of 2003, the period ending June 30,

2003, were repeated in the Company’s Report on Form 10-Q filed with the SEC on or about August

14, 2003, and was signed by defendants Budnick and Hamilton.

- 29 -

63. On November 4, 2003, MBIA issued a press release announcing its financial results

for the third quarter of 2003, the period ending September 30, 2003. For the quarter, the Company

reported diluted earnings per share of $1.31 and net income of $190.4 million. Defendant Dunton

commented on the Company’s performance, stating, in pertinent part, as follows:

MBIA posted record top line production driven by very strong results from our domestic and international public finance operations. We are pleased that we were able to achieve this growth while maintaining our stringent underwriting and pricing standards. Strong demand for our guarantee continues unabated in the global capital markets.

64. MBIA’s financial results for the third quarter of 2003, the period ending September

30, 2003, were repeated in the Company’s Report on Form 10-Q filed with the SEC on or about

November 13, 2003, and was signed by defendants Budnick and Hamilton.


the fourth quarter and year end of 2003, the period ending December 31, 2003. For the quarter, the

Company reported diluted earnings per share of $1.25 and net income of $182.0 million. Defendant

Dunton commented on the Company’s performance, stating, in pertinent part, as follows:

MBIA had its best year ever in 2003. Significant demand across our product lines resulted in record top line production and bottom line results as well as extraordinary high credit quality of business written. Our team did an excellent job of capitalizing on significant global market opportunities as over 40 percent of business production came from international operations. With an improving global economy and continuing strong demand for the financial guarantee product, MBIA’s outlook remains favorable

66. MBIA’s financial results for the fourth quarter and year end of 2003, the periods


SEC on or about March 12, 2004, and was signed by defendants Brown and Hamilton, among

others.

- 30 -

67. The statements referenced above in ¶¶61-66 were each materially false and
















and



68. On February 13, 2004, the Company issued a press release announcing that Channel

Re has been formed and funded.

69. On May 4, 2004, MBIA issued a press release announcing its financial results for the

first quarter of 2004, the period ending March 31, 2004. For the quarter, the Company reported net

- 31 -

income of $207.6 million and diluted earnings per share of $1.42. Defendant Dunton commented on

the Company’s performance, stating, in pertinent part, as follows:

While MBIA’s operating income for the first quarter was solid, significantly lower new business production was a disappointment. The quarter was characterized by tighter spreads, which decreased insured penetration across all markets and increased competition. While business activity has accelerated recently, the weak first quarter will make it difficult to match 2003’s record new business production. Over the longer term, we remain confident that the global capital markets will continue to expand, providing attractive opportunities for new business growth.

70. MBIA’s financial results for the first quarter of 2004, the period ending March 31,

2004, were repeated in the Company’s Report on Form 10-Q filed with the SEC on or about May 7,

2004, and was signed by defendants Budnick and Hamilton.

71. On August 3, 2004, MBIA issued a press release announcing its financial results for

the second quarter of 2004, the period ending June 30, 2004. For the quarter, the Company reported

diluted earnings per share of $1.48 and net income of $217.1 million. Defendant Dunton


MBIA posted strong results for the second quarter of 2004. While our pipeline of new business opportunities remains steady, difficult market conditions will make it unlikely that the company will match last year’s record new business production. However, we remain confident that the market will return to a more balanced view of risk and that demand for our product will grow over the long-term as the global capital markets continue to expand.

72. MBIA’s financial results for the second quarter of 2004, the period ending June 30,

2004, were repeated in the Company’s Report on Form 10-Q filed with the SEC on or about August

6, 2004, and was signed by defendants Ferreri and Hamilton.

73. On November 2, 2004, MBIA issued a press release announcing its financial results

for the third quarter of 2004, the period ending September 30, 2004. For the quarter, the Company

reported diluted earnings per share of $1.29 and net income of $186.0 million. Defendant Dunton


- 32 -

MBIA posted solid operating results for the first nine months of 2004, despite the challenging market environment for new business production. We remain determined to aggressively pursue high-quality, profitable business without compromising our underwriting and pricing discipline. Although top line production can fluctuate considerably from year to year, we are confident that we can profitably grow our business at historical levels over the longer term.

74. MBIA’s financial results for the third quarter of 2004, the period ending September

30, 2004, were repeated in the Company’s Report on Form 10-Q filed with the SEC on or about

November 5, 2004, and was signed by defendants Ferreri and Hamilton.

75. On November 17, 2004, the Company issued a press release announcing the pricing

of a public offering of $350 million aggregate principal amount of senior notes due 2034. According

to the press release, proceeds of the debt offering will be used to redeem the outstanding $50 million

aggregate principal amount of MBIA’s 6.95 percent notes due 2038 and for general corporate

purposes. The Company also anticipates that proceeds will be used to redeem the outstanding $100

million aggregate principal amount of MBIA’s 8.00 percent notes due 2040 in December 2005.

76. The statements referenced above in ¶¶69-74 were each materially false and










- 33 -







and



77. On November 18, 2004, MBIA issued a press release announcing that it received

subpoenas from the SEC and the New York Attorney General’s office requesting information with

respect to non-traditional or loss mitigation insurance products developed, offered or sold by MBIA

to third parties from January 1, 1998 to the present. The press release continued, in pertinent part, as

follows:

The subpoenas do not identify any specific transaction, and MBIA believes the subpoenas were issued in connection with an industry-wide investigation of non-traditional insurance products. MBIA intends to cooperate fully with the Securities and Exchange Commission and the New York Attorney General’s request for documents. [Emphasis added.]

78. Upon this news, shares of the Company’s stock fell $1.73 per share, or 3%, to close at

$60.27 per share.

79. On November 23, 2004, the Company issued a follow-up press release with regard to

the subpoenas. The press release supplied additional information about the regulatory subpoenas,

stating in pertinent part as follows:

The subpoenas did not identify any specific transaction.

- 34 -

In a subsequent call made by the Company to the SEC, a representative of the SEC indicated that the investigation will include the reinsurance arrangements entered into by MBIA in 1998 in connection with the bankruptcy of the Delaware Valley Obligated Group (DVOG), an entity that is part of Pittsburgh-based Allegheny Health, Education and Research Foundation (AHERF).


the fourth quarter and year end of 2004, the period ending December 31, 2004. For the quarter, the

Company reported diluted earnings per share of $1.36 and net income of $193.4 million. Defendant

Dunton commented on the Company’s performance, stating, in pertinent part, as follows:

MBIA’s financial and operating results for 2004 were solid, despite a very challenging market environment characterized by tight credit spreads and increased levels of competition. New business production in insurance operations, while down from last year’s record results, was still among the highest in the company’s history. Critical to the long-term success of our franchise, we continued to maintain our strict underwriting standards in this demanding environment.

While we believe that current market conditions will likely continue this year, we have a solid pipeline across most of our product lines. For 2005, we expect operating earnings per share, excluding refundings, to increase by 10 to 12 percent, but then return to the 12 to 14 percent growth range in 2006-2007. We anticipate that operating ROE will be at the lower end of the 12 to 14 percent range in 2005 due to our strong capital position and the projected decline in refunding volume. Looking forward to 2006 and 2007, we expect that operating ROE will improve and be within the 12 to 14 percent range. We continue to manage MBIA to provide long-term growth in shareholder value, and we remain very optimistic about the prospects for our global franchise.

81. The statements referred to above in ¶¶77, 79-80 were each materially false and

misleading for the reasons stated above in ¶76.

82. Then, on March 8, 2005, the Company issued a press release announcing that it would

be restating its financial statements for fiscal years 1998 - 2003. Specifically, the restatement is

being made to correct the accounting treatment for two reinsurance agreements that MBIA entered

into in 1998 with Converium Re (previously known as Zurich Reinsurance North America). The

press release continued, in pertinent part, as follows:

- 35 -

As a result of this restatement, MBIA’s financial results for 1998 will reflect a third quarter incurred loss of $70 million related to $265 million of bonds insured by MBIA that were issued by Allegheny Health, Education and Research Foundation (AHERF). The after-tax loss will be approximately $47 million, resulting in net income for the year of approximately $386 million, or $2.57 per share, down 11% from $433 million or $2.88 per share as originally reported.

MBIA estimates that its earnings will be reduced by approximately $6 million (or four cents per share) in 1999, $4 million (or 3 cents per share) in 2000, $3 million (or two cents per share) in 2001 and will have a de minimis effect in 2002. MBIA estimates that its earnings will increase by approximately $2 million (or one cent per share) in 2003 and $4 million (or three cents per share) in 2004. The Company expects to finalize these estimates and file its 2004 audited financial statements in its 10K by the March 16 deadline. The restatement could result in a delay in this filing.

The two reinsurance agreements with Converium consisted of an excess of loss agreement and a quota share agreement. Under the excess of loss reinsurance agreement, Converium reimbursed MBIA for $70 million of the $170 million loss experienced by MBIA in the third quarter of 1998 on the $265 million of MBIA-insured bonds issued by AHERF, which was recorded as an offset to the loss. Under the reinsurance agreement, MBIA agreed to cede to Converium on a quota share basis new business written with an aggregate of $101 million in net ceded premiums over a six-year period ending October 1, 2004, which was accounted for in the same manner as other quota share treaties.

Under separate agreements to which MBIA was not a party, Converium reinsured the risk that it assumed from MBIA under the quota share agreement for losses in excess of $13 million to AXA Re Finance S.A. (ARF), a subsidiary of AXA Re S.A. ARF contended that, in connection with its agreement to assume this risk from Converium, there was an oral agreement with MBIA under which MBIA would replace ARF as a reinsurer to Converium by no later than October 2005.

In October 2004, MBIA management recommended that the Audit Committee of the Board of Directors undertake an investigation of the AHERF reinsurance arrangement, including whether such an oral agreement existed between MBIA and ARF. The Audit Committee retained outside counsel and initiated an investigation in October 2004. The outside counsel’s investigation has been substantially completed. While the investigation has not conclusively determined whether an oral agreement in fact existed, MBIA has been advised, however, that it appears likely that such an agreement or understanding with ARF was made in 1998.

In light of this additional information, MBIA has decided to correct its accounting for the agreements and restate its 1998 and subsequent financial statements with respect to the Converium excess of loss agreement and the quota share agreement. MBIA now believes that the appropriate accounting treatment for the excess of loss and quota share reinsurance agreements with Converium is to record the $70 million paid by Converium under the excess of loss agreement as a deposit and to record the

- 36 -

subsequent premium cessions under the quota share agreement as a repayment of the deposit with imputed interest.

As previously disclosed, in November 2004 MBIA received subpoenas from the Securities and Exchange Commission (SEC) and the New York Attorney’s General Office (NYAG) related to non-traditional reinsurance arrangements, including the AHERF reinsurance transaction. The company is cooperating fully with the SEC and the NYAG in their investigations.

In addition to the agreements with Converium related to AHERF, MBIA had agreements with two other reinsurers, ARF and Munich Re, under which those reinsurers reimbursed MBIA for $100 million of AHERF losses incurred by MBIA. MBIA also separately entered into quota share reinsurance agreements with these reinsurers under which it agreed to cede on a quota share basis new business written with an aggregate of $97 million in adjusted gross premiums to ARF and $98 million in adjusted gross premiums to Munich Re over a six-year period ending October 1, 2004. These reinsurers assumed new risk on a pro rata basis in exchange for these premiums. MBIA continues to believe that its accounting for the excess of loss and quota share agreements with ARF and Munich Re is appropriate.

In the fourth quarter of 2004, MBIA assumed from ARF the previously ceded policies that ARF had assumed directly from MBIA under its quota share agreement with MBIA and also reinsured ARF for substantially all of the business that ARF assumed from Converium under the Converium quota share agreement.

83. On March 9, 2005, the Company issued a press release announcing that it received an

additional subpoena from the U.S. Attorney’s Office for the Southern District of New York seeking

information related to the AHERF transaction.

84. Finally, on March 30, 2005, MBIA announced that the previously-announced

governmental investigations had now been broadened and intensified. On that date, the Company

issued a press release announcing that it received additional requests from the NYAG and SEC that

supplement the subpoenas it received in late 2004.

85. Upon this news, shares of the Company’s stock fell $4.36 per share, or over 7%, to

close at $52.28 per share, on unusually heavy trading volume.

86. On May 16, 2005, in an article entitled THE MYSTERY OF THE $ 890 BILLION

INSURER; MBIA guarantees the safety of bonds that fund everything from the Eurotunnel to

- 37 -

commercial aircraft to cities across America. A relentless short-seller charges that its business

model isn’t sound. Can he be right?, Fortune, concerning other “shady” deals in MBIA’s past,

reported, in pertinent part, as follows:

MBIA has another odd deal in its past. Another huge chunk--some $ 114 million--of the $ 586 million in losses MBIA has declared have come from a company called Capital Asset, which purchased tax liens. MBIA bought roughly 50% of the company in 1996 and took a majority position in late 1998. MBIA immediately tried to sell the company; then, in 1999, it wrote down the value of Capital Asset by $ 102 million. Then MBIA refinanced the tax liens via securitizations. MBIA guaranteed the deals, and in 2004 it was still taking losses on them.

The question is, why did MBIA increase its stake in Capital Asset in 1998? At the time, an MBIA spokesman told the press, “MBIA thinks the business ... has even more promise in the future.” In an interview with FORTUNE in March, Brown said that Capital Asset was a “fraudulent shop,” and that MBIA made its purchase to “take control of the problem.” It’s not clear what happened at Capital Asset, but one person familiar with the company says that MBIA knew it had a big problem. This person suspects that MBIA bought its second stake and refinanced the tax liens to delay taking losses. MBIA denies doing so. Its attorney says the idea that MBIA “viewed or could have viewed [Capital Asset] as a ‘fraudulent shop’ is simply wrong and not supported by the record.” Brown now says his earlier declaration was a “emotional statement” that has been “taken out of context.”

It’s true that the entire bond insurance industry tries to avoid losses. And MBIA is proud of what it calls “surveillance” and “remediation.” For every time MBIA does take a loss, “there are hundreds that we find a way” to avoid a hit, says Brown. That may range from MBIA’s own collection agents calling nonpaying credit card holders to what the head of this division, Mitch Sonkin, calls “moral suasion.” Brown even says that MBIA likes to do business with companies that need it. “When you’re trying to fix something, you want to be the big guy in the room,” he says. Adds Dunton: “We provide you with access to low-cost capital, so if there’s a problem, fix it. I wouldn’t say it, but that’s an unspoken rule in the industry.”

But among its peers MBIA has a reputation for aggressiveness, and this raises questions: Is there such a thing as inappropriate pressure? When will the company admit that a deal has gone bad? And just how much do the rating agencies really know?

In Grady County, Okla., MBIA insures $ 12.7 million of $ 17.6 million in debt that was used to build a jail. In late 2004 the jail, struggling to make interest payments, said it would lay off staff. And so, in what state officials say was an apparent attempt to get Oklahoma’s government to take over the jail’s debt--which it is in no way obligated to do--MBIA for a period stopped doing business in Oklahoma. “It’s easy to say now that the deal was too risky, but MBIA made a bad judgment, and they

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should not expect us to step in and bail them out,” says James Joseph, Oklahoma’s state bond advisor.

As yet, there is no resolution to the jail’s crisis, and Grady County sheriff Kieran McMullen says that the jail is looking for a way to make the bond payment due in May. But MBIA has not yet taken a reserve.

MBIA also seemed reluctant to warn investors that it had a problem with $ 73 million of debt that belonged to the Fort Worth Osteopathic Hospital. As early as 2003, the hospital was unable to meet certain terms of its debt agreement, and in mid-2004 it missed a payment. But the first warning of trouble any outsider would have gotten came in late September, when Moody’s, which until that point had rated the hospital’s bonds investment grade, downgraded the noninsured bonds to junk. And it wasn’t until Oct. 7--just one day before Fort Worth Osteopathic announced that it was shutting its doors--that MBIA said it would take a $ 50 million reserve. MBIA says that this was “consistent with its loss- reserving methodology.” MBIA also says it can collect another $ 22 million from a “sale or liquidation of the hospital’s assets,” which is why it reserved just $ 50 million instead of the full $ 73 million. But in early 2005 the hospital was sold for less than $ 8 million. MBIA says it can recover the rest from sales of real estate and other assets.

Fort Worth also makes you wonder how closely the rating agencies scrutinize MBIA’s existing deals. Brown, who claims that the agencies regularly review some 98% of transactions, says that this is why MBIA is not a black box. “I don’t care who you mention, Citigroup, Bank of America--they don’t have anyone looking over their shoulder at every single transaction,” he says. But if that’s the case, how did Moody’s miss the problems at Fort Worth Osteopathic? A Moody’s spokesperson told Dow Jones that “we know as much as Fort Worth Osteopathic Hospital and MBIA were willing to disclose. It comes down to an honor system as to how much these guys share.” A former senior agency employee says the agencies simply don’t have the manpower to regularly review deals. “It’s a lie that the rating agencies look at every transaction,” he says.

The agencies all say they devote significant resources to regular surveillance. Moody’s says the idea that MBIA doesn’t regularly reveal information is “inaccurate.”

A problem deal like Fort Worth Osteopathic also raises an issue that has been hovering over MBIA since Ackman identified it in his initial report. Are the company’s tiny reserves really an adequate reflection of the risk in its portfolio? MBIA has $ 693 million in net reserves, $ 401 million of which are already dedicated to cover known losses on specific deals like AHERF. MBIA says its policy is to book a so-called case reserve only when it knows for certain it has a loss, and when that loss “can be reasonably estimated.” The remaining $ 292 million are “unallocated” reserves, or money set aside to cover potential losses that have not yet been identified. MBIA has arrived at this figure by setting aside 12% of the premium it is scheduled to earn. In other words, it assumes an 88% gross profit margin each year.

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On the face of it, 12% may sound like a large number, but remember, MBIA’s premium is just a sliver, perhaps 20 basis points, of the total value of its insurance. For example, if MBIA insured a $ 1,000 deal, and it earned 20 basis points, or $ 2, as a premium, then over the life of the deal it would put away just 12% of $ 2, or 24 cents, as reserves.

The heart of the matter, though, may not be so much the actual level of reserves, but the fact that in bond insurance there is discretion in how companies determine both revenues and reserves. As MBIA’s filings note, determining reserves is an “inherently uncertain process involving numerous estimates and subjective judgments by management.” As for revenues, when the company collects an up-front premium, its policy is to recognize a greater percentage of that in the early years of a deal. Changing this methodology “would materially affect the company’s financial results,” notes MBIA’s financial statements. Indeed, the way in which MBIA records revenues and expenses like reserves are precisely why it has that 40% net margin.

87. On August 19, 2005, MBIA issued a press release announcing that it received a

“Wells Notice” from the SEC. The Wells Notice indicates that the SEC is considering a civil

injunctive action against the Company alleging violations of federal securities laws “arising from

MBIA’s action to retroactively reinsure losses it incurred from the AHERF bonds MBIA had

guaranteed, including, but not limited to, its entering into excess of loss agreements and quota share

agreements with three separate counterparties.” The Company also announced that it is in

preliminary discussions with the NYAG and the New York State Insurance Department regarding

the possible resolution of potential civil charges that the NYAG’s Office might bring in connection

with the AHERF reinsurance transactions.

88. On September 6, 2005, in an article entitled Prosecutors Eye Ex-Chairman of MBIA,

CFO.com reported the following:

A former CFO of the bond insurer is also reportedly under investigation for her involvement in a 1998 side agreement.

Former MBIA Inc. chairman and chief executive officer David H. Elliott is in the cross-hairs of federal prosecutors, who are probing the circumstances that led to the world’s largest bond insurer to restate seven years of earnings, according to Bloomberg, citing people familiar with the matter.

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The U.S. Attorney’s Office for the Southern District of New York is reportedly looking into whether Elliott approved a 1998 side deal to cover losses that should have been paid by another insurer. Elliott’s attorney, Steven Peikin of Sullivan and Cromwell, declined comment to the wire service.

“Any agreement that starts with the word ‘side’ is suspect,” said former federal prosecutor E. Lawrence Barcella Jr., now a defense lawyer at Paul, Hastings, Janofsky and Walker, according to Bloomberg. “The government, particularly the Southern District of New York, is being very aggressive across the board on these things.”

Elliott became chief executive in 1992 and chairman in 1994, according to Bloomberg, and retired from both positions in 1999.

Investigators also have evidence that former chief financial officer Julliette Tehrani was directly involved in the 1998 side agreement, reported Bloomberg. Tehrani resigned her position in September of that year to become a special assistant to then-chairman Elliott; she no longer works at MBIA, the wire service added.

In March, MBIA announced that it will restate its financials for the past seven years as a result of its accounting for two 1998 reinsurance agreements with Converium Re, previously known as Zurich Reinsurance North America. And last month, the insurer disclosed that the Securities and Exchange Commission may bring civil charges stemming from a reinsurance arrangement it made several years ago with a unit of the Pittsburgh-based Allegheny Health, Education, and Research Foundation

89. The market for MBIA’s securities was open, well-developed and efficient at all

relevant times. As a result of these materially false and misleading statements and failures to

disclose, MBIA’s securities traded at artificially inflated prices during the Class Period. Plaintiff and

other members of the Class purchased or otherwise acquired MBIA securities relying upon the

integrity of the market price of MBIA’s securities and market information relating to MBIA, and

have been damaged thereby.

90. During the Class Period, defendants materially misled the investing public, thereby

inflating the price of MBIA’s securities, by publicly issuing false and misleading statements and

omitting to disclose material facts necessary to make defendants’ statements, as set forth herein, not

false and misleading. Said statements and omissions were materially false and misleading in that

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they failed to disclose material adverse information and misrepresented the truth about the Company,

its business and operations, as alleged herein.

91. At all relevant times, the material misrepresentations and omissions particularized in

this Complaint directly or proximately caused or were a substantial contributing cause of the

damages sustained by plaintiff and other members of the Class. As described herein, during the

Class Period, defendants made or caused to be made a series of materially false or misleading

statements about MBIA’s business, prospects and operations. These material misstatements and

omissions had the cause and effect of creating in the market an unrealistically positive assessment of

MBIA and its business, prospects and operations, thus causing the Company’s securities to be

overvalued and artificially inflated at all relevant times. Defendants’ materially false and misleading

statements during the Class Period resulted in plaintiff and other members of the Class purchasing

the Company’s securities at artificially inflated prices, thus causing the damages complained of

herein.

MBIA’s Financial Reporting During the Class Period Were Materially False and Misleading and Violated GAAP

92. At all relevant times during the Class Period, MBIA represented that its financial

results were prepared in accordance with GAAP.2 These representations were materially false and

misleading because, as it has admitted, MBIA’s financial reporting was materially misstated during

the Class Period. When MBIA announced that it was restating its earnings for the past six years and

that it had received additional subpoenas from the SEC and the New York State Attorney General’s

2 GAAP are those principles recognized by the accounting profession as the conventions, rules and procedures necessary to define accepted accounting practices at a particular time. Generally Accepted Auditing Standard (“GAAS”) §AU 411.02. Regulation S-X [17 C.F.S §210.4-01(a)(1)] states that financial statements filed with the SEC that are not prepared in conformity with GAAP are presumed to be misleading and inaccurate.

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Office, each of which called into question the integrity of the Company’s financial reporting during

the Class Period, the price of MBIA stock dropped significantly.

MBIA’s Admission that its Financial Disclosures During the Class Period Were Materially False and Misleading

93. On March 8, 2005, MBIA announced that its reported earnings since 1998 were

inflated by a cumulative total of $54 million due to its improper accounting of non-traditional or

loss-migration insurance products associated with the 1998 bankruptcy of the Pennsylvania non-

profit hospital group, AHERF.3 In its 2004 Form 10-K, MBIA disclosed:

The Company has restated its previously issued consolidated financial statements for 1998 and subsequent years to correct the accounting treatment for two reinsurance agreements entered into in 1998 with Converium Reinsurance (North America) Inc., (formerly known as Zurich Reinsurance (North America), Inc.) (Converium). The restatement adjustments resulted in a cumulative net reduction in shareholders’ equity of $59.2 million, or 1%, as of December 31, 2001 and an increase to previously reported net income of $22 thousand for the year ended December 31, 2002. For the year ended December 31, 2003, the restatement adjustments resulted in an increase to previously reported net income of $2.3 million.

In 1998, the Company incurred a $170 million loss related to $265 million of MBIA-insured bonds issued by Allegheny Health, Education and Research Foundation (AHERF). At that time, the Company entered into an excess of loss reinsurance agreement with Converium, which reimbursed the Company $70 million. This $70 million reimbursement was recorded as an offset to the $170 million AHERF related loss. At the same time that MBIA Corp. arranged the excess of loss reinsurance agreement, it entered into a separate quota share reinsurance agreement with Converium that obligated the Company to cede $102 million of premiums to Converium over a six-year period ending October 1, 2004.

In October 2004, the Company’s management recommended that the Audit Committee of the Company’s Board of Directors undertake an investigation of the reinsurance agreements related to AHERF, including whether an oral agreement existed between the Company and AXA Re Finance S.A. (ARF) that the Company would assume the risk from ARF that MBIA ceded to Converium and Converium retroceded to ARF. The Audit Committee retained outside counsel and initiated an investigation in October 2004. The outside counsel’s investigation has been

3 Non-traditional or loss-migration insurance products are otherwise known as finite-risk insurance.

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substantially completed. While the investigation has not conclusively determined whether an oral agreement in fact existed, the Company has been advised, however, that it appears likely that such an agreement or understanding was made in 1998. Based on this information, the Company could no longer be certain that for financial reporting purposes, insurance risk was transferred to Converium with respect to the excess of loss and quota share reinsurance agreements. Therefore, the Company has corrected its accounting for these agreements by recording the $70 million received from Converium under the excess of loss agreement as a deposit and recorded subsequent premium cessions to Converium under the quota share agreement as a repayment of the deposit with imputed interest. [Emphasis added.]

94. On September 6, 2005, in an article entitled MBIA’s Former CEO Elliot Probed Over

Reinsurance, Bloomberg reported:

MBIA’s Inc.’s former chairman and chief executive officer, David H. Elliott, is being investigated by U.S. prosecutors in connection with a reinsurance agreement that caused the world’s biggest bond insurer to restate seven years of earnings, people familiar with the matter said.

The U.S. attorney in Manhattan is probing whether Elliott approved a secret arrangement to cover losses that were supposed to be paid by another insurer, the people said. Witnesses have told investigators that he blessed the 1998 side deal, they said. Elliott’s attorney, Steven Peikin of Sullivan & Cromwell in New York, declined to comment. [Emphasis added.]

95. The September 6, 2005 Bloomberg article also stated that “[i]nvestigators have

evidence that [defendant] Tehrani . . . was directly involved” with the AHERF reinsurance

transaction. In fact, MBIA announced the $170 million reinsurance transaction just eight days after

defendant Tehrani became Elliott’s “special assistant.”

96. Section 13 of the Securities Exchange Act of 1934 (i.e., the Foreign Corrupt Practices

Act) requires companies to devise and maintain a system of internal control sufficient to reasonably

assure that transactions are recorded in accordance with GAAP and the SEC’s Staff Accounting

Bulletin (“SAB”) No. 101 which requires companies to create and maintain policies, procedures, and

internal controls sufficient to ensure that any agreements or alterations to contracts by “side

agreements” are properly recognized and reported. Here, any such policies, procedures, and

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internal controls, even if they did exist, would have been meaningless in that they were, by

MBIA’s own admission, “likely” overridden by the highest levels of the Company’s management.4

97. Indeed, the only reason why such “side agreements” needed to exist was to allow

MBIA to improperly account for the AHERF loss by surreptitiously masking the true terms and

conditions of the Company’s arrangement with the reinsurers of AHERF’s bonds. Accordingly,

MBIA has now admitted that it was “likely” that defendants deliberately intended to materially

misstate the Company’s reported financial results.

98. Thereafter, David Elliott deliberately deceived investors in his 1998 letter to the

Company shareholders:

I mentioned earlier that the year was not without disappointments. The most daunting, perhaps, occurred in our public finance operations. In July, several entities within the Allegheny Health and Education Research Foundation (AHERF) declared bankruptcy. In October, they were sold at auction. Having insured some $256 million net par outstanding of AHERF’s debt, we were in the difficult position of absorbing the largest loss in our company’s history.

We were prepared for this position, unwelcome though it was. With almost $8 billion in claims-paying resources, we had ample funds on hand to meet any large loss. And with $170 million of reinsurance, our loss reserves, our earnings and our Triple-A ratings were unaffected.

The AHERF situation reinforced our commitment to the rigorous analysis and management of risk. We are fiercely proud of our near-perfect record of no losses. We don’t like to lose, and that’s why we’re the best in the business. [Emphasis added.]

99. Indeed, MBIA has now admitted that its willingness to “win” was at any cost.

4 AICPA’s 1998/1999 Audit Risk Alert defines side-agreements as agreements hidden from the entity’s board of directors and outside auditors that materially alter the terms and conditions of recorded transactions.

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MBIA’s Financial Misstatements During the Class Period Were Material

100. As a result of the foregoing deceptions, MBIA restated its annual financial statements

from 1998 through 2003. In so doing, MBIA has made the determination that such financial

statements were materially misstated because GAAP, in Accounting Principles Board (“APB”)

Opinion No. 20 provides that only materially misstated financial statements need be retroactively

restated.

101. During the Class Period, MBIA filed its annual 2003 Form 10-K with the SEC. Such

Form 10-K included MBIA financial results for 1998. MBIA has now admitted that such results

were materially overstated. In fact, MBIA’s income from continuing operating before taxes and

net income were overstated by approximately 15% and 12%, respectively.

102. In addition to materially misstating the Company’s 1998 operating results, MBIA has

admitted that improper accounting for the AHERF transaction materially distorted the Company’s

post 1998 financial metrics. For example, MBIA has admitted that operating expenses were

understated by approximately 10%, 8%, 6%, 5% and 3% in fiscal 1999, 2000, 2001, 2002 and 2003,

respectively.

103. Moreover, and as noted below, MBIA’s financial reporting during the Class Period

remains uncorrected and materially misstated.

104. MBIA has now admitted that certain of the financial results it reported during the

Class Period were materially misstated as a result of its improper accounting for the AHERF

transaction and that such misstatement was “likely” an intentional act perpetrated by the Company’s

management at the highest levels.

105. As noted in the SEC’s SAB No. 99:

For the reasons noted above, the staff believes that a registrant and the auditors of its financial statements should not assume that even small intentional

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misstatements in financial statements, for example those pursuant to actions to “manage” earnings, are immaterial. While the intent of management does not render a misstatement material, it may provide significant evidence of materiality. The evidence may be particularly compelling where management has intentionally misstated items in the financial statements to “manage” reported earnings. In that instance, it presumably has done so believing that the resulting amounts and trends would be significant to users of the registrant’s financial statements. The staff believes that investors generally would regard as significant a management practice to over- or under-state earnings up to an amount just short of a percentage threshold in order to “manage” earnings. Investors presumably also would regard as significant an accounting practice that, in essence, rendered all earnings figures subject to a management-directed margin of misstatement. [Footnotes deleted, emphasis added.]

MBIA’s Violations of GAAP

106. GAAP, in Statement of Financial Accounting Standards (“SFAS”) No. 113 explains

that insurance enterprises may obtain indemnification against claims associated contracts it has

written by paying (ceding to) another insurance enterprise (a reinsurer) an amount in exchange for

the reinsurer’s agreeing to reimburse the insurer a specified portion of the claims covered by the

insurance policy.

107. SFAS No. 113 provides that in order for the payment by an insurance enterprise to a

reinsurer to be treated as a reinsurance transaction for accounting purposes, the risk of loss

associated with the claims being reinsured must be transferred to the reinsurer. Otherwise, the

payment is nothing more than a loan to the reinsurer by the insurance company. Accordingly,

unless there has been a bona-fide transfer of risk of loss to a reinsurer associated with potential

claims covered by the insurance policy, any payment by an insurance company to the reinsurer is

nothing more than a financing arrangement between an insurance company and the reinsurer.

108. In the summer of 1998, MBIA incurred a $170 million loss on $265 million of

AHERF’s bonds it insured when AHERF went bankrupt. Thereafter, in the fall of 1998, MBIA

entered into “retroactive” reinsurance arrangements which purportedly “transferred” its $170 million

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exposure on the AHERF bonds to three reinsurers, Converium Reinsurance, AXA Re Finance and

Munich Re.

109. As a result, MBIA was able to forgo having to record $170 million in losses in fiscal

1998 on the AHERF bonds it previously guaranteed.5 As a result, MBIA’s management received

$36 million in bonuses for meeting financial performance measures in 1998 that would not have

been met if MBIA did not improperly account for its $170 million loss on the AHERF bonds.

110. Pursuant to the reinsurance arrangements, Converium reimbursed MBIA $70 million

on its $170 million AHERF loss and AXA Re and Munich Re each reimbursed MBIA $50 million.

These reimbursements were received by MBIA in exchange for approximately $3.85 million in

premiums it paid collectively to Converium, AXA and Munich. Accordingly, Converium, AXA and

Munich collectively incurred $166.15 million in economic losses on the AHERF bonds they

“reinsured” on the very same day they executed the “reinsurance” arrangements with MBIA.

111. Obviously, Converium, AXA and Munich would not incur such losses without a

quid-pro-quo. This quid-pro-quo came in the form of what MBIA now refers to as “separate”

contemporaneous agreements that MBIA executed with Converium, AXA Re and Munich Re.

112. Pursuant to the separate agreements, MBIA was obligated to respectively cede $102

million, $97 million and $98 million of premiums on low-risk portions of its portfolio to Converium,

AXA and Munich over a six-year period ending October 1, 2004.

113. Accordingly, the Company paid premiums to the reinsurers of approximately $297

million over a six year period. If these paybacks to the reinsurers were to be made in six equal

5 MBIA’s 1998 earnings from continuing operating before taxes totaled $553.9 million. Accordingly, had MBIA reported a $170 million loss on its guarantee of AHERF’s bonds, its reported pretax profit would have been $383.9 million, or more than 30% less than it actually reported.

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annual installments, the reinsurers earned an approximate 16% annual return on what was, in

substance, a $170 million loan transaction.6

114. Indeed, the portions of MBIA’s portfolio that were reinsured to Converium, AXA and

Munich were of such low risk that when questioned about the separate agreements, a Moody’s

analyst stated “they are ceding portions of their book that they would rather not be, because they

represent low-risk portions of their portfolio.” In fact, CW 3 – a former MBIA analyst - stated that

she was asked to cherry pick the highest rated bonds in her portfolio so that MBIA’s insurance

policies associated with them could be reinsured to Converium, AXA and Munich in exchange for

their agreeing to assume MBIA’s losses on AHERF.

115. In assessing whether a bona-fide transfer of risk for financial reporting purposes has

occurred, paragraph 58 of SFAS No. 113 provides:

Determining whether a reinsurance contract indemnifies the ceding enterprise against loss or liability relating to insurance risk requires a complete understanding of all contracts or agreements with related reinsurers. Although an individual contract may appear to indemnify the ceding enterprise, the risk assumed by the reinsurer through one reinsurance contract may have been offset by other contracts or agreements. A contract does not meet the conditions for reinsurance accounting if features of the reinsurance contract or other contracts or agreements directly or indirectly compensate the reinsurer or related reinsurers for losses. That compensation may take many forms, and an understanding of the substance of the contracts or agreements is required to determine whether the ceding enterprise has been indemnified against loss or liability relating to insurance risk. [Emphasis added.]

116. Converium, AXA Re and Munich Re did not accept any risk on the AHERF bonds; in

fact they collectively assumed $166.15 million in economic losses on the day they executed the

reinsurance arrangements with MBIA because the AHERF bonds were already in default. Indeed

6 GAAP, in FASB’s Statement of Concepts (“Concepts Statement”) No. 2 ¶160 provides that accounting should not subordinate the economic substance of a transaction to its legal form.

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the only reason why the reinsurers accepted such losses was because they were contemporaneously

offset via “separate” low-risk or virtually no risk agreements. These separate agreements repaid the

reinsurers $297 million over a six-year period, effectively providing them with an approximate 16%

return on the $170 payments to MBIA. As such, the reinsurers never assumed the risk of loss

required by SFAS No. 113 for MBIA to account for the arrangements with Converium, AXA Re and

Munich Re as reinsurance contracts.

117. As a result of its improper accounting, MBIA was able to defer the recognition of the

loss in 1998 on $170 million AHERF bond default and spread such loss over an ensuing six year

period and maintain its AAA rating.

118. Moreover and in furtherance of defendants’ intent to deceive investors, MBIA has

failed to properly restate the AHERF transaction in accordance with GAAP.7 As noted above,

MBIA has restated its accounting for the $70 million reimbursement it received from Converium.

MBIA has stated that it restated such transaction because it is “likely” that defendant Elliott entered

into an oral agreement whereby MBIA would assume “the risk from [AXA Re] that MBIA ceded to

Converium and Converium retroceded to [AXA Re].”

119. While MBIA has corrected its accounting for the Converium transaction associated

with the AHERF transaction, it has improperly failed to correct its improper accounting for the

collective $100 million in reimbursements from AXA Re and Munich Re associated with the

AHERF transactions, otherwise evidencing defendants’ on-going intent to deceive investors.

7 GAAP provides that previously issued financial statements which are materially misstated as a result of an oversight or a misuse of facts that existed at the time are to be retroactively restated. See, e.g., APB Opinion No. 20.

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120. As a result, MBIA’s reported financial results during the Class Period remain

materially false and misleading for the reasons alleged herein. Indeed, MBIA has failed to correct its

false and misleading financial results due to fears that it will lose its much coveted AAA credit

rating.

121. MBIA’s response to questions posed to it about the propriety of the Company’s

accounting for the AHERF’s transaction prior to its financial restatement, otherwise evidences the

defendant’s intent to mislead investors. For example, in response to questions raised about the

AHERF transaction, MBIA issued the following statement on its Web Site:

Investor Inquiries/Frequently Asked Questions

(Updated as of 1/22/04)

Question

Why are the MBIA reinsurance arrangements related to the Allegheny Health, Education and Research Foundation (AHERF) different from the type of insurance policy that AIG issued to Brightpoint and for which Brightpoint and AIG were recently sanctioned by the SEC?

Answer

MBIA’s reinsurance arrangements related to its AHERF loss are completely different from the AIG Brightpoint arrangements.

AIG/Brightpoint Arrangement

According to press reports, it is our understanding that in the AIG Brightpoint arrangement, AIG sold Brightpoint a policy that was designed to allow Brightpoint to fund a loss, but that had no real economic substance. Under this arrangement, Brightpoint agreed to pay AIG a substantial premiums over time to cover the loss and AIG made the loss payment to Brightpoint. Apparently, AIG had an oral agreement to repay Brightpoint almost the full amount of the premium paid by Brightpoint net of a $100,000 fee that AIG retained. We do not believe that this arrangement was disclosed by Brightpoint.

MBIA AHERF Arrangement

Under the AHERF arrangement, several reinsurers reimbursed MBIA $170 million for losses incurred with respect to $265 million of MBIA insured bonds issued by AHERF. This facility was placed by MBIA after AHERF filed for bankruptcy in

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order to reduce MBIA’s exposure to loss. At the time MBIA arranged the facility, it did not know the extent of the loss, and the facility was structured in three successive excess of loss facilities that aggregated $170 million. In the third quarter of 1998, MBIA booked and incurred loss related to AHERF, which was offset by reinsurance. Through June 30, 2003, MBIA has made payments of approximately $109 million under the AHERF policy. The reinsurance arrangements were announced by MBIA, reviewed by MBIA’s auditors, rating agencies, insurance regulators and were fully disclosed.

MBIA did not have any agreement to reimburse the reinsurers for the loss they paid. As part of this reinsurance arrangement, MBIA entered into quota share reinsurance agreements with the same reinsurers under which MBIA agreed to cede to them a specified amount of financial guarantee business over several years. Under these reinsurance agreements, the reinsurers agreed to assume both existing and future risk from MBIA and MBIA ceded the related reinsurance premiums. The reinsurer’s assumed real new risk in exchange for these premiums. Since joining the MBIA treaty, these- reinsurer’s assumed over $30 billion of insured par outstanding that represents a wide cross section of MBIA’s insured portfolio. [Emphasis added.]

122. In substance and in fact, MBIA did have to agree to reimburse the reinsurers for the

losses they incurred on the AHERF transaction. In fact, but for such agreements, the reinsurers

would have never assumed $170 million of existing losses in exchange for $3.85 million in

premiums. MBIA’s purported separate agreements provided the reinsurers with the means to re-

coop such losses and receive an attractive return on the payments given to MBIA. As noted in SFAS

No. 113, reinsurance accounting is improper if the “features of the reinsurance contract or other

contracts or agreements directly or indirectly compensate the reinsurer or related reinsurers for

losses.” [Emphasis added.]

123. GAAP requires that financial statements account for existing uncertainties as to

probable losses. Pursuant to SFAS No. 60, a liability for unpaid costs relating to insurance contracts,

included estimates of costs relating to incurred but not reported claims, shall be accrued and charged

against earnings when an insured event occurs. SFAS No. 5 also provides that contingencies should

be recognized and reported as a charge to income when information existing at the date of the

financial statements indicates that it is probable (e.g., a likely chance) that a liability has been

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incurred and the amount of such loss can be reasonably estimated. In addition, SFAS No. 5 requires

that financial statements disclose contingencies when it is at least reasonably possible (e.g., a greater

than slight chance) that a loss may have been incurred. The disclosure shall indicate the nature of

the contingency and shall give an estimate of the possible loss, a range of loss, or state that such an

estimate cannot be made. Id.

124. In violation of GAAP, MBIA improperly failed to disclose and delayed the

recognition of loss on its insured bond portfolio during the Class Period. As SEC Deputy Chief

Accountant, Scott A. Taub, stated on December 6, 2004:

As background, remember that FASB Statement No. 5 covers the accounting for contingent liabilities, and requires the recording of an accrual if payment is both probable and estimable. Moreover, Statement 5 requires disclosures of the nature of any material contingency, including the amounts that might be paid, if a loss is at least reasonably possible. In addition, the SEC’s MD&A rules require discussion of items that might affect the company’s liquidity or financial position in the future, including contingent liabilities.

Given these requirements, the recording of a material accrual for a contingent liability related to an event that occurred several years before should not be the first disclosure regarding that contingency. Rather, disclosures regarding the nature of the contingency and the amounts at stake should, in most cases, have already been provided. Disclosures should discuss the nature of the contingency and the possible range of losses for any item where the maximum reasonably possible loss is material. Vague or overly broad disclosures that speak merely to litigation, tax, or other risks in general, without providing any information about the specific kinds of loss contingencies being evaluated are not sufficient. [Emphasis added.]

125. Defendants had the responsibility to select GAAP that were appropriate to reflect

business activities in accordance with Section 13 of the Exchange Act of 1934. As Section 13 of the

Securities Exchange Act of 1934 provides:

Every issuer which has a class of securities registered pursuant to Section 12 of this title and every issuer which is required to file reports pursuant to Section 15(d) of this title shall - -

A. make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer; and

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B. devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that - -

i. transactions are executed in accordance with management’s general or specific authorization;

ii. transactions are recorded as necessary (a) to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and (b) to maintain accountability for assets;

iii. access to assets is permitted only in accordance with management’s general or specific authorization; and

iv. the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.

126. As it has admitted, MBIA violated GAAP and materially distorted its operating

performance during the Class Period. In addition to the accounting improprieties stated above,

MBIA presented its financial statements during the Class Period in a manner which also violated at

least the following provisions of GAAP:

(a) The concept that financial reporting should provide information that is useful

to present and potential investors and creditors and other users in making rational investment, credit

and similar decisions (Concepts Statement No. 1, ¶34);

(b) The concept that financial reporting should provide information about the

economic resources of an enterprise, the claims to those resources, and the effects of transactions,

events and circumstances that change resources and claims to those resources (Concepts Statement

No. 1, ¶40);

(c) The concept that financial reporting should provide information about how

management of an enterprise has discharged its stewardship responsibility to owners (stockholders)

for the use of enterprise resources entrusted to it. To the extent that management offers securities of

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the enterprise to the public, it voluntarily accepts wider responsibilities for accountability to

prospective investors and to the public in general (Concepts Statement No. 1, ¶50);

(d) The concept that financial reporting should provide information about an

enterprise’s financial performance during a period. Investors and creditors often use information

about the past to help in assessing the prospects of an enterprise. Thus, although investment and

credit decisions reflect investors’ expectations about future enterprise performance, those

expectations are commonly based at least partly on evaluations of past enterprise performance

(Concepts Statement No. 1, ¶42);

(e) The concept that financial reporting should be reliable in that it represents

what it purports to represent. That information should be reliable as well as relevant is a notion that

is central to accounting (Concepts Statement No. 2, ¶¶58-59);

(f) The concept of completeness, which means that nothing is left out of the

information that may be necessary to ensure that it validly represents underlying events and

conditions (Concepts Statement No. 2, ¶79); and

(g) The concept that conservatism be used as a prudent reaction to uncertainty to

try to ensure that uncertainties and risks inherent in business situations are adequately considered.

The best way to avoid injury to investors is to try to ensure that what is reported represents what it

purports to represent (Concepts Statement No. 2, ¶¶95, 97).

127. In failing to file financial statements with the SEC which conformed to the

requirements of GAAP, MBIA disseminated financial statements that were presumptively

misleading and inaccurate. The Company’s Class Period Forms 10-K and 10-Q filed with the SEC

were also materially false and misleading in that they failed to disclose known trends, demands,

commitments, events, and uncertainties that were reasonably likely to have a material adverse effect

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on the Company’s liquidity, net sales, revenues and income from continuing operations, as required

by Item 303 of Regulation S-K.

MBIA’s False and Misleading Reporting and Certifications of Disclosure and Internal Controls

128. As a result of the rash of recent corporate accounting scandals, Congress enacted the

Sarbanes-Oxley Act (“SOX”) in 2002, in part, to heighten the responsibility of public company

directors and senior managers associated with the quality of financial reporting and disclosures made

by their companies. The SEC revised Item 307 and added Item 308 of Regulation S-K [17.C.F.R.

229.307 and 308] to required companies to disclose the conclusions of its principal executive and

principal financial officer on the effectiveness of the Company’s disclosure controls and procedures

and disclose a report by management on it’s internal control over its financial reporting.8 As a result,

MBIA’s fiscal 2003 and 2004 Forms 10-K disclosed, in all material respects:

As of the end of the period covered by this report, an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) was performed under the supervision and with the participation of the Company’s senior management, including the Chief Executive Officer and the Chief Financial Officer. Based on that evaluation, the Company’s management, including the CEO and the CFO, concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.

The Chief Executive Officer and Chief Financial Officer have also concluded that there were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation described in the preceding paragraph that

8 The Securities Exchange Act Rules and Regulations defines disclosure controls: (1) as controls and other procedures designed to ensure that the information required to be disclosed to investors under The Securities Exchange Act is recorded, processed, summarized and reported; and internal control over financial reporting as a process designed by, or under the supervision of, the issuer’s principal executive and principal financial officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.

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occurred during the fiscal [period], that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

129. These representations, which were materially false and misleading for the reasons

alleged herein, were wrongfully certified by defendants Brown, Budnick and Ferreri and included as

part of MBIA’s filings with the SEC:9

I, . . ., certify that:

I have reviewed the . . . Report of MBIA Inc. (the “Company”) on Form . . . for the period ending . . . as filed with the Securities and Exchange Commission on the date hereof (the “Report”);

Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Report;

Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this Report;

The Company’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Report is being prepared;

(b) evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Report based on such evaluation; and

9 MBIA made similar representations and defendants Brown, Budnick and Ferreri signed similar certifications which were included in MBIA’s Brown and Budnick Forms 10-Q that it filed with the SEC.

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(c) disclosed in this Report that there were no change in the Company’s internal control over financial reporting that occurred during . . . that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

The Company’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and to the audit committee of the board of directors:

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

Loss Causation/Economic Loss

130. During the Class Period, as detailed herein, Defendants engaged in a scheme to

deceive the market and a course of conduct that artificially inflated MBIA’s common stock price and

operated as a fraud or deceit on Class Period purchasers of MBIA common stock by issuing false

and misleading financial statements for the fiscal years ended 1998, 1999, 2000, 2001, 2002 and

2003. Moreover, Defendants have failed to fully restate those periods and are now the subject of a

continuing government investigation which may lead to further restatements of those periods. When

Defendants’ prior misrepresentations and fraudulent conduct were disclosed and became apparent to

the market, MBIA common stock fell precipitously as the prior artificial inflation came out of

MBIA’s common stock price. As a result of their purchases of MBIA common stock during the

Class Period, Plaintiffs and the other Class members suffered economic loss, i.e., damages under the

federal securities laws.

131. By entering into “side agreements” with three reinsurers whereby the reinsurers paid

MBIA for its loss on the AHERF transaction in exchange for sharing in premiums on future “low

risk” or virtually “no risk” deals, Defendants improperly accounted for the proceeds it received

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under the reinsurance contracts as income which materially lessened the impact that the AHERF

transaction would have on its loss reserves. Therefore, Defendants presented a misleading picture of

MBIA’s business and prospects. Thus, instead of truthfully disclosing during the Class Period the

true risks that MBIA was exposed to, Defendants caused MBIA to conceal the existence of these

“side agreements.”

132. Defendants’ false and misleading statements had the intended effect and caused

MBIA common stock to trade at artificially inflated levels throughout the Class Period, reaching as

high as $67.13 per share on March 3, 2004.

133. As a direct result of Defendants’ admissions and the public revelations regarding the

restatement of its earnings for the past six years and that it had received additional subpoenas from

the SEC and the New York State Attorney General’s Office, which could lead to additional

restatements, MBIA’s common stock price plummeted approximately 8%, falling from $56.64 per

share. This drop removed the inflation from MBIA’s common stock price, causing real economic

loss to investors who had purchased the Company’s common stock during the Class Period.

134. The more than 7% decline in MBIA’s common stock price at the end of the Class

Period was a direct result of the nature and extent of Defendants’ fraud finally being revealed to

investors and the market. The timing and magnitude of MBIA’s common stock price declines

negate any inference that the loss suffered by Plaintiffs and the other Class members was caused by

changed market conditions, macroeconomic or industry factors or Company-specific facts unrelated

to the defendants’ fraudulent conduct. The economic loss, i.e., damages, suffered by Plaintiffs and

the other Class members was a direct result of Defendants’ fraudulent scheme to artificially inflate

MBIA’s common stock price and the subsequent significant decline in the value of MBIA’s common

stock when Defendants’ prior misrepresentations and other fraudulent conduct was revealed.

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Additional Scienter Allegations

135. As alleged herein, defendants acted with scienter in that defendants knew that the

public documents and statements issued or disseminated in the name of the Company were

materially false and misleading; knew that such statements or documents would be issued or

disseminated to the investing public; and knowingly and substantially participated or acquiesced in

the issuance or dissemination of such statements or documents as primary violations of the federal

securities laws. As set forth elsewhere herein in detail, defendants, by virtue of their receipt of

information reflecting the true facts regarding MBIA, their control over, and/or receipt and/or

modification of MBIA’s allegedly materially misleading misstatements and/or their associations

with the Company which made them privy to confidential proprietary information concerning

MBIA, participated in the fraudulent scheme alleged herein.

136. Defendants were further motivated to engage in this course of conduct in order to: (i)

complete an offering of $350 million aggregate principal amount of senior notes – one day prior to

receiving the first set of subpoenas from the SEC and the NYAG office; (ii) maintain its “Triple A”

rating with credit agencies such as Standard & Poor’s, Moody’s and Fitch; losing its “Triple A”

rating would have severe ramifications: new bond issuers would cease doing business with MBIA,

which would effect future revenue streams; and (iii) allow defendants Dunton and Brown to receive

over $30 million of options and restricted stock as part of their employment contract which called for

the defendants to receive huge payouts if the price of MBIA stock stayed above $60 per share for ten

consecutive trading days.

Applicability of Presumption of Reliance: Fraud on the Market Doctrine

137. At all relevant times, the market for MBIA’s securities was an efficient market for the

following reasons, among others:

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(a) MBIA’s stock met the requirements for listing, and was listed and actively

traded on the NYSE, a highly efficient and automated market;

(b) As a regulated issuer, MBIA filed periodic public reports with the SEC and

the NYSE;

(c) MBIA regularly communicated with public investors via established market

communication mechanisms, including through regular disseminations of press releases on the

national circuits of major newswire services and through other wide-ranging public disclosures, such

as communications with the financial press and other similar reporting services; and

(d) MBIA was followed by several securities analysts employed by major

brokerage firms who wrote reports which were distributed to the sales force and certain customers of

their respective brokerage firms. Each of these reports was publicly available and entered the public

marketplace.

138. As a result of the foregoing, the market for MBIA’s securities promptly digested

current information regarding MBIA from all publicly available sources and reflected such

information in MBIA’s stock price. Under these circumstances, all purchasers of MBIA’s securities

during the Class Period suffered similar injury through their purchase of MBIA’s securities at

artificially inflated prices and a presumption of reliance applies.

No Safe Harbor

139. The statutory safe harbor provided for forward-looking statements under certain

circumstances does not apply to any of the allegedly false statements pleaded in this complaint.

Many of the specific statements pleaded herein were not identified as “forward-looking statements”

when made. To the extent there were any forward-looking statements, there were no meaningful

cautionary statements identifying important factors that could cause actual results to differ materially

from those in the purportedly forward-looking statements. Alternatively, to the extent that the - 61 -

statutory safe harbor does apply to any forward-looking statements pleaded herein, defendants are

liable for those false forward-looking statements because at the time each of those forward-looking

statements was made, the particular speaker knew that the particular forward-looking statement was

false, and/or the forward-looking statement was authorized and/or approved by an executive officer

of MBIA who knew that those statements were false when made.

COUNT I

Violation of Section 10(b) of the Exchange Act Against and Rule 10b-5

Promulgated Thereunder Against All Defendants

140. Plaintiffs repeat and reallege each and every allegation contained above as if fully set

forth herein.

141. During the Class Period, defendants carried out a plan, scheme and course of conduct

which was intended to and, throughout the Class Period, did: (i) deceive the investing public

regarding MBIA’s business, operations, management and the intrinsic value of MBIA securities; (ii)

enable the Company to complete an offering of $350 million aggregate principal amount of senior

notes; (iii) enabled defendants Dunton and Brown to receive over $30 million of options and

restricted stock as part of their employment contract which called for the defendants to receive huge

payouts if the price of MBIA stock stayed above $60 per share for ten consecutive trading days; and

(iv) cause plaintiffs and other members of the Class to purchase MBIA’s securities at artificially

inflated prices. In furtherance of this unlawful scheme, plan and course of conduct, defendants, and

each of them, took the actions set forth herein.

142. Defendants: (a) employed devices, schemes, and artifices to defraud; (b) made untrue

statements of material fact and/or omitted to state material facts necessary to make the statements not

misleading; and (c) engaged in acts, practices, and a course of business which operated as a fraud

and deceit upon the purchasers of the Company’s securities in an effort to maintain artificially high

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market prices for MBIA’s securities in violation of Section 10(b) of the Exchange Act and Rule 10b-

5 promulgated thereunder.

143. Defendants, individually and in concert, directly and indirectly, by the use, means or

instrumentalities of interstate commerce and/or of the mails, engaged and participated in a

continuous course of conduct to conceal adverse material information about the business, operations

and future prospects of MBIA as specified herein.

144. These defendants employed devices, schemes and artifices to defraud, while in

possession of material adverse non-public information and engaged in acts, practices, and a course of

conduct as alleged herein in an effort to assure investors of MBIA’s value and performance and

continued substantial growth, which included the making of, or the participation in the making of,

untrue statements of material facts and omitting to state material facts necessary in order to make the

statements made about MBIA and its business operations and future prospects in the light of the

circumstances under which they were made, not misleading, as set forth more particularly herein,

and engaged in transactions, practices and a course of business which operated as a fraud and deceit

upon the purchasers of MBIA securities during the Class Period.

145. Each of the Individual Defendants’ primary liability, and controlling person liability,

arises from the following facts: (i) the Individual Defendants were high-level executives and/or

directors at the Company during the Class Period and members of the Company’s management team

or had control thereof; (ii) each of these defendants, by virtue of his responsibilities and activities as

a senior officer and/or director of the Company was privy to and participated in the creation,

development and reporting of the Company’s internal budgets, plans, projections and/or reports; (iii)

each of these defendants enjoyed significant personal contact and familiarity with the other

defendants and was advised of and had access to other members of the Company’s management

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team, internal reports and other data and information about the Company’s finances, operations, and

sales at all relevant times; and (iv) each of these defendants was aware of the Company’s

dissemination of information to the investing public which they knew or recklessly disregarded was

materially false and misleading.

146. The defendants had actual knowledge of the misrepresentations and omissions of

material facts set forth herein, or acted with reckless disregard for the truth in that they failed to

ascertain and to disclose such facts, even though such facts were available to them. Such

defendants’ material misrepresentations and/or omissions were done knowingly or recklessly and for

the purpose and effect of concealing MBIA’s operating condition and future business prospects from

the investing public and supporting the artificially inflated price of its securities. As demonstrated

by defendants’ overstatements and misstatements of the Company’s business, operations and

earnings throughout the Class Period, defendants, if they did not have actual knowledge of the

misrepresentations and omissions alleged, were reckless in failing to obtain such knowledge by

deliberately refraining from taking those steps necessary to discover whether those statements were

false or misleading.

147. As a result of the dissemination of the materially false and misleading information

and failure to disclose material facts, as set forth above, the market prices of MBIA’s securities were

artificially inflated during the Class Period. In ignorance of the fact that market prices of MBIA’s

publicly-traded securities were artificially inflated, and relying directly or indirectly on the false and

misleading statements made by defendants, or upon the integrity of the market in which the common

stock trades, and/or on the absence of material adverse information that was known to or recklessly

disregarded by defendants but not disclosed in public statements by defendants during the Class

Period, plaintiffs and the other members of the Class acquired MBIA securities during the Class

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Period at artificially high prices and were damaged thereby when the truth became known and the

inflation in the stock was removed.

148. At the time of said misrepresentations and omissions, plaintiffs and other members of

the Class were ignorant of their falsity, and believed them to be true. Had plaintiffs and the other

members of the Class and the marketplace known the truth regarding MBIA’s financial results,

which were not disclosed by defendants, plaintiffs and other members of the Class would not have

purchased or otherwise acquired their MBIA securities, or, if they had acquired such securities

during the Class Period, they would not have done so at the artificially inflated prices which they

paid. By virtue of the foregoing, defendants have violated Section 10(b) of the Exchange Act, and

Rule 10b-5 promulgated thereunder.

149. As a direct and proximate result of defendants’ wrongful conduct, plaintiffs and the

other members of the Class suffered damages in connection with their respective purchases and sales

of the Company’s securities during the Class Period.

COUNT II

Violation of Section 20(a) of the Exchange Act Against the Individual Defendants

150. Plaintiff repeats and realleges each and every allegation contained above as if fully set

forth herein.

151. The Individual Defendants acted as controlling persons of MBIA within the meaning

of Section 20(a) of the Exchange Act as alleged herein. By virtue of their high-level positions, and

their ownership and contractual rights, participation in and/or awareness of the Company’s

operations and/or intimate knowledge of the false financial statements filed by the Company with the

SEC and disseminated to the investing public, the Individual Defendants had the power to influence

and control and did influence and control, directly or indirectly, the decision-making of the

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Company, including the content and dissemination of the various statements which plaintiff contends

are false and misleading. The Individual Defendants were provided with or had unlimited access to

copies of the Company’s reports, press releases, public filings and other statements alleged by

plaintiff to be misleading prior to and/or shortly after these statements were issued and had the

ability to prevent the issuance of the statements or cause the statements to be corrected.

152. In particular, each of these defendants had direct and supervisory involvement in the

day-to-day operations of the Company and, therefore, is presumed to have had the power to control

or influence the particular transactions giving rise to the securities violations as alleged herein, and

exercised the same.

153. As set forth above, MBIA and the Individual Defendants each violated Section 10(b)

and Rule 10b-5 by their acts and omissions as alleged in this Complaint. By virtue of their positions

as controlling persons, the Individual Defendants are liable pursuant to Section 20(a) of the

Exchange Act. As a direct and proximate result of defendants’ wrongful conduct, plaintiffs and

other members of the Class suffered damages in connection with their purchases of the Company’s

securities during the Class Period.

WHEREFORE, plaintiffs pray for relief and judgment, as follows:

(a) Determining that this action is a proper class action, designating plaintiffs as

class representatives under Rule 23 of the Federal Rules of Civil Procedure and plaintiffs’ counsel as

Class Counsel;

(b) Awarding compensatory damages in favor of plaintiffs and the other Class

members against all defendants, jointly and severally, for all damages sustained as a result of

defendants’ wrongdoing, in an amount to be proven at trial, including interest thereon;

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(c) Awarding plaintiffs and the Class their reasonable costs and expenses incurred

in this action, including counsel fees and expert fees; and

(d) Such other and further relief as the Court may deem just and proper.

JURY TRIAL DEMANDED

Plaintiffs hereby demand a trial by jury.

DATED: October 3, 2005 LERACH COUGHLIN STOIA GELLER RUDMAN & ROBBINS LLP SAMUEL H. RUDMAN (SR-7957) DAVID A. ROSENFELD (DR-7564) MARIO ALBA JR. (MA-7240)

MARIO ALBA JR.

200 Broadhollow Road, Suite 406 Melville, NY 11747 Telephone: 631/367-7100 631/367-1173 (fax)

Lead Counsel for Plaintiffs

DeCARLO & CONNOR DANIEL M. SHANLEY 533 South Fremont Avenue, 9th Floor Los Angeles, CA 90071-1706 Telephone: 213/488-4100 213/488-4180 (fax)

MILBERG WEISS BERSHAD & SCHULMAN LLP BARRY WEPRIN One Pennsylvania Plaza New York, NY 10119-0165 Telephone: 212/594-5300 212/868-1229 (fax)

Attorneys for Plaintiffs

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Documents

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW …securities.stanford.edu › filings-documents › 1034 › MBI05_01 › ... · 2006-12-15 · 5. Specifically, MBIA structured