This excerpt taken from the MBI 8-K filed Jul 30, 2007.
5. No Evidence that MBIA Made Any Material Misrepresentations to Reinsurers
First, we know that although MBIA voluntarily paid off the A notes, without awaiting any claim on MBIAs policy, MBIA made full disclosure when asking reinsurers to pay. Witnesses from both MBIA and one of the reinsurers cited the follow the fortunes language in Article 12 of the treaties, which suggested reinsurers were legally obliged to pay even in the absence of a claim on MBIAs policy. This undermines any incentive to misrepresent that a claim had been filed. In the December 2002 Notices of Payment that MBIA sent to reinsurers, MBIA told reinsurers that it had made a loss settlement payment in connection with the policy. A Loss by definition requires reinsurers to pay if a claim is filed on MBIAs policy pursuant to Articles 6 and 9 of the treaties; however, there is no clear definition of a loss settlement payment. We found no evidence that the term loss settlement payment was intended to misrepresent that a claim had been filed or to mislead reinsurers in any material way. The majority of reinsurers (4 reinsurers contributing 91% of the reinsurance) had extensive details of the remediation strategy as early as October 2002 and knew that this was a voluntary payment (i.e., that no claim had been filed on MBIAs policy). Witnesses from one of the reinsurers who had reinsured a large portion of the deal (33% of the reinsurance) confirmed during their interview that MBIA did not withhold any material information. Witnesses from a reinsurer who had little contact with MBIA and provided only 3% of the reinsurance on the deal told us the same, and specifically told us that they knew, before they paid, that no claim had been filed on MBIAs policy.
Second, the reinsurers did not rely on MBIAs accounting treatment of the remediation. Some documents suggest that MBIA had advised some of the reinsurers that it would account for the transaction as a loss settlement, which might be interpreted to mean that MBIA would account for the transaction as a paid loss rather than as an investment. Reinsurers told us that MBIAs accounting treatment was informative but did not determine how the reinsurers accounted for the transaction on their own books. MBIAs accounting treatment, in fact, does not appear to have been material to any reinsurer. One of the reinsurers advised us that it was more concerned about incurring no economic loss than about MBIAs accounting treatment. Another reinsurer advised us that although it did not know that MBIA was going to account for the transaction as an investment when it paid MBIA, MBIAs accounting treatment would not have mattered to the reinsurer.
Finally, we found that MBIA did not intentionally misrepresent to any reinsurers that MBIA and the reinsurers would incur no economic loss from their participation in this remediation. MBIA told the four largest reinsurers on the deal that it expected no economic loss on the remediation. Of those four, the two who contributed the majority of reinsurance on the deal were able to verify MBIAs calculations and determine for themselves whether they would incur any economic loss. Those two reinsurers received the data underlying MBIAs conclusions, including the cash flow analysis.