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MBIA units file suit against banks over conduct in Puerto Rico muni bond market

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MBIA units file suit against banks over conduct in Puerto Rico muni bond market

MBIA Inc. subsidiaries National Public Finance Guarantee Corp. and MBIA Insurance Corp. have sued a number of major Wall Street banks for their alleged inequitable conduct in Puerto Rico's municipal market.

The defendants are UBS Financial Services Inc., UBS Securities LLC, Citigroup Global Markets Inc., Goldman Sachs & Co. LLC, J.P. Morgan Securities LLC, Morgan Stanley & Co. LLC, Merrill Lynch Pierce Fenner & Smith Inc., RBC Capital Markets LLC and Santander Securities LLC. Each of those companies underwrote one or more bonds issued by the commonwealth's government, the Puerto Rico Electric Power Authority, the Puerto Rico Highways and Transportation Authority and/or the Puerto Rico Sales Tax Financing Corp.

MBIA's lawsuit argues that the banks convinced Puerto Rico and its agencies to issue massive amounts of municipal debt for more than a decade. This allowed the banks to profit from the underwriting and selling of the bonds and from related interest-rate swap, refinancing and other transactions. The claim also alleges that the banks did not conduct appropriate due diligence, which resulted in materially false or misleading key disclosures.

"This time of turmoil should be the occasion for rebuilding," MBIA CEO Bill Fallon said. "The future of Puerto Rico and the integrity and transparency of the capital markets demand that the underwriters be held accountable," he added.

J.P. Morgan and Morgan Stanley declined to comment on the matter, while RBC and Merrill Lynch parent Bank of America said they not have any comment. The other banks did not immediately respond to S&P Global Market Intelligence's requests for comment.