Milbank’s Litigation & Trial team secured an important dismissal of a lawsuit pending in federal court in New York that asserted federal securities fraud claims against Ambac, as well as current and former senior officers and directors, alleging principally that Ambac and individual defendants concealed Ambac’s credit risk and loss exposure to Puerto Rico bonds Ambac insured.
On September 5, 2017, Judge Richard M. Berman of the Southern District of New York issued a 37-page opinion rejecting all claims against the defendants, which he noted were contained in a 241-page Amended Complaint, agreeing with Ambac and the individual defendants that (1) the complaint lacked allegations of any actionable misstatement or omission by Ambac or any individual defendant and (2) the complaint failed to plead that any defendant acted with “scienter,” or intent to defraud.
The central issue in the case was whether the plaintiff had alleged actionable misstatements or omissions, with intent to defraud, relating to Ambac’s exposure to the Puerto Rico bonds it insured. The court held that Ambac and the individual defendants, represented by Milbank, “argue persuasively” that the plaintiff had not. One of the central misstatements alleged was whether Ambac had misrepresented its exposure by disclosing in its SEC filings the “net par” exposure the Puerto Rico bonds. The court found that the plaintiffs failed to allege that the company violated “a single Generally Accepted Accounting Principle or industry standard” in its SEC disclosures and also observed that Ambac had disclosed, repeatedly and during the Class Period, additional details regarding its exposure on its website. The court held that plaintiff “falls short of plausibly alleging a misstatement or omission.”
The court also held that Ambac followed standard practices when it described its Puerto Rico bonds as "below investment grade" rather than using more specific grades to describe the underlying credit risk. Furthermore, Ambac did not open itself up to legal action by telling investors in late 2013 and early 2014 that it did not expect to suffer losses on those bonds because those comments were issued with cautionary warnings that Ambac had taken some reserves on the bonds and was closely monitoring the developing situation in Puerto Rico.
Finally, the court concluded that even if plaintiff had an actionable misstatement or omission, the complaint should still be dismissed because the plaintiff did not plead facts to support a “strong inference” of scienter required by the federal securities laws. It observed that Ambac’s disclosures through the Class Period referred investors to the fact that Ambac had taken loss reserves on its exposure and Ambac repeatedly warned investors of the risk of default in its SEC filings. The court noted that Ambac and individual defendants “contend persuasively” that plaintiff’s claims that Ambac knew Puerto Rico would default are classic fraud-by-hindsight claims that should be rejected.
The Milbank team was led by partners Scott A. Edelman and Jed Schwartz with associates Amina Akram and Jonathan Lamberti.
