During a confidential restructuring of a billion dollar company, its lawyers should keep the CEO from personally trading in the company’s stock. At MBIA, one of the largest bond insurers, however, the CEO may have done just that:
MBIA, which insured both municipal bonds and structured finance products, “transformed” itself in late 2008, splitting into two companies. The deal had characteristics of a “good bank - bad bank” arrangement where low liability exposure (here municipal bond insurance) is put into one entity, and high liability exposure (here insurance of structured finance products) is put into another entity. One entity does well; the other does not. Somehow this arrangement was approved by the New York Insurance Department (NYID). It was good for MBIA’s stock, which shot up when the deal was announced. It was bad for policyholders who insured structured finance products with MBIA.
When the structured finance half of the newly “transformed” MBIA ran into trouble, these policy holders sued, claiming among other things that MBIA never would have been allowed to split into two companies if it had not misrepresented facts about the transformation to the NYID.
Now the plaintiffs allege also that MBIA’s CEO Jay Brown traded in MBIA stock while planning the MBIA transformation, and that he personally profited when the transaction benefited stockholders at the structured finance policyholders’ expense. The alleged factual sequence is as follows:
Brown resumed his employment with MBIA in early 2008 and Brown bought only the MBIA stock that he was contractually required to buy pursuant to his employment agreement. These required purchases ended on June 5, 2008 and he made no further purchases until November.
For most of 2008 the NYID had publicly opposed the transformation plan for MBIA.
In October 2008 the NYID changed its mind and top NYID officials told top MBIA officials that they were considering the transformation plan.
On October 30, 2008 MBIA officials met with the NYID. After the meeting Brown sent an email saying that the NYID was for the first time focusing on “getting it done versus being against it”.
On November 13, 2008 Brown allegedly purchased 100,000 shares of MBIA stock. The public was apparently not aware of the NYID’s change of course and that MBIA would shortly submit a nonpublic application for approval of the transformation.
On December 1, 2008 Brown established a SEC Rule 10b-5-1 trading plan, pursuant to which he bought another 125,000 shares of MBIA stock between December 30, 2008 and January 23, 2009.
On December 4, 2008, MBIA submitted its transformation application to the NYID
On February 18, 2009 MBIA’s “transformation” was publicly announced and its stock shot up approximately 30%.
Whether or not Brown possessed nonpublic information about the transformation when he bought MBIA stock, the alleged facts don’t look good. It is unclear whether he consulted with MBIA lawyers before purchasing the 100,000 shares in November, but the 10b-5-1 plan must have involved company counsel. It is shocking that MBIA lawyers would approve purchases by an officer of the company in the midst of negotiations with the NYID over a transformation plan that would likely have a dramatic effect on stock price.
The day the transformation was announced, February 18, 2009, MBIA’s stock price jumped 30%. That same day Brown apparently sent an email to a colleague saying “need somebody to push the wheelbarrow across the bank vault.” Whether or not MBIA lawyers pushed the wheelbarrow, somebody in the MBIA counsel’s office was apparently snoozing while the boss was trading.