Ambac Dodges Shareholder Action Over Puerto Rican Debt Exposure

   (CN) – Ambac Financial Group won dismissal of a shareholder class action suit accusing the insurer of concealing the true risk of its exposure to more than $10 billion in Puerto Rican bonds.
Ambac is a holding company whose subsidiaries provide financial guarantee products, including insurance on $2.5 billion in Puerto Rican debt, plus $8 billion in additional exposure for interest due on the bonds.
As Puerto Rico’s debt ballooned to unmanageable levels, the bonds insured by Ambac were downgraded by credit rating agencies “no less than 224 times during the class period,” according to the complaint.
Shareholders say the company’s risk exposure on these bonds was “assigned an ambiguous internal rating of ‘BIG’ – meaning below investment grade,” allegedly meant to disguise the extreme risk of default.
When Puerto Rico’s governor announced in early 2015 that the island’s debt was “not payable,” and he would seek significant concessions from creditors, Ambac’s share price fell roughly 29 percent from $22.38 per share to $15.91 per share. Later that year, Ambac took a $514.5 million goodwill impairment charge, causing another 12 percent decline in its share price.
However, U.S. District Judge Richard M. Berman dismissed the complaint, finding shareholders failed to show Ambec executives made any actionable misstatements or omissions about the company’s exposure to Puerto Rican debt.
The disclosure only of the principal owed on the bonds – $2.5 billion – but not the approximately $8 billion owed in interest was in line with industry standards, the judge found.
“A review of public SEC filings of insurers during the class period other than Ambac indicates that other bond insurers reported par value for their insured bonds, excluding interest owed,” Berman said.
Ambac’s categorization of Puerto Rican bonds as “BIG” was also industry-wide practice, and cannot support a claim for securities fraud, according to the 27-page judgment.
Further, the island’s financial plight frequently made headlines, meaning that Puerto Rico’s risk of default was common public knowledge, readily available to any investor.
Therefore, information contradicting CEO Diana Adams’ optimistic statements regarding the company’s future profitability was public knowledge, not private information that the company was withholding from investors, and, again, cannot support the shareholders’ fraud claims. 

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