Last April, to cap a remarkable run of settlements with plaintiffs who claimed its 2009 restructuring was a naked attempt to rope off $5 billion from its ailing structured finance business, the bond insurer MBIA reached a confidential settlement with the hedge fund Aurelius. Aurelius had filed a purported class action in Manhattan federal court on behalf of all of MBIA's structured finance policyholders. It litigated for more than two years alongside the coalition of banks that challenged MBIA's restructuring in two New York state-court cases, and held out almost until the last two of those banks -- Bank of America and Societe Generale -- went to trial in their regulatory case against MBIA and the state officials who approved the spinoff of its healthy municipal bond business. When Aurelius settled, however, it was only on its own behalf. The policyholder class it purported to represent was never certified, so claims by other policyholders remained a potential problem for MBIA.

If New York State Supreme Court Judge Barbara Kapnick, who presided over the bank regulatory case last spring, had issued a ruling that MBIA's restructuring was properly approved by the state insurance department, that decision might have precluded suits by policyholders reluctant to spend money on a low-odds case. But three months after the conclusion of the regulatory trial, Kapnick has not come down with an opinion. And on Monday, a mortgage-backed securities investor called CQS took advantage of the uncertainty, filing a 36-page complaint in federal court in Manhattan that repeats the allegations we've already seen from Aurelius and the banks, with a gloss of additional evidence that emerged in the banks' regulatory case. (In an email statement, MBIA spokesman Kevin Brown said, "Like the other challenges to MBIA's transformation, we believe that this lawsuit is without merit and intend to vigorously defend it.")

In fact, CQS's allegations are so similar to those raised by Aurelius that the CQS MBS funds first tried to intervene in Aurelius's case, presumably to benefit from the discovery Aurelius's lawyers at Simpson Thacher & Bartlett already obtained. The docket in that case indicates that on July 11 -- three months after Aurelius and MBIA settled and Aurelius dismissed its suit -- CQS wrote to the judge overseeing the case, U.S. District Judge Richard Sullivan, to request a conference on its contemplated motion. Sullivan held the hearing on July 26, and, according to the hearing transcript, made it abundantly clear that he didn't think much of CQS's proposed intervention.

"You're basically looking to bootstrap claims you could have brought earlier as an individual and didn't for whatever reason," he said. "That is not a good enough reason for me to allow you to intervene." According to its complaint, CQS decided after the hearing to file its own suit instead, though it did indicate in the filing that its case is related to Aurelius's.

There was another interesting issue that arose at the hearing before Sullivan. According to the transcript, CQS's law firm, White & Case, has represented MBIA as recently as last year, when MBIA and an overseas private investment corporation made a deal, with White & Case as their counsel, to insure securities issued by a foreign bank. At the hearing before Sullivan, MBIA's lawyer, Marc Kasowitz of Kasowitz Benson Torres & Friedman, told the judge that White & Case has represented MBIA on a series of other deals over several years, and White & Case partners have allegedly sat on the board of MBIA's Mexico affiliate. Kasowitz even said that the firm advised MBIA entities on the 2009 restructuring that's at the heart of CQS's allegations. (I left a message for CQS counsel Christopher Shore of White & Case but didn't hear back.)

The alleged White & Case conflict may help MBIA fend off CQS, but it won't prevent other policyholders from filing suits in the hope of forcing MBIA to cough up an Aurelius-like settlement. New York, after all, has a six-year statute of limitations, so there's plenty of time for potential claimants to pop up like moles in an arcade game. The o nly sure way for MBIA to squelch such follow-on suits would be to win a ruling that its transformation was legitimate. Just another reason for the bond insurer to hope Kapnick rules soon -- and rules its way.

(Reporting by Alison Frankel)

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