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New York (


) -- A U.S. district judge recently denied motions to dismiss a securities class action lawsuit against



, a struggling bond insurer and its officers.

The volatile stock was down in midday action Wednesday, losing 6% to 68 cents on volume of 5.5 million, but that level is still roughly flat with its recent trading range.

The lawsuit contained seven separate allegations. In an 82-page ruling issued Monday, Judge Naomi Reice Buchwald held that the plaintiffs had sufficiently alleged securities fraud because it knew that mortgage originators had lowered their lending standards. Additionally Ambac is accused of approving CDO (collateralized debt obligations) deals that did not meet Ambac's underwriting standards because of the underlying RMBS (residential mortgage-backed securities) collateral.

Other allegations concern reduced underwriting requirements for RMBS deals, knowledge of the deterioration of the CDO portfolio, false reporting of Ambac's financial position and misrepresentations in public offerings.

The plaintiffs include several teacher and public employee retirement funds. According to

SNL Financial

, additional defendants include the underwriters of the Ambac securities offerings including

Bank of America

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The judge did not agree with Ambac's claim that its financial woes were caused by the global economic collapse. Buchwald wrote that there was a "vast gap" between the public face and alleged internal level of risk tolerance; "The conduct that plaintiffs allege, if true, would make Ambac an active participant in the collapse of their own business, and of the financial markets in general, rather than merely a passive victim."

Much criticism appeared to be leveled at Sean Leonard, the company's former chief financial officer, when the judge wrote "it strains credulity that he could remain ignorant of the company's lowered underwriting standards..." She also wrote that there was evidence to suggest that Leonard had acted recklessly regards the deterioration in the CDO portfolio.

Ambac itself has filed suits against Citigroup, Credit Suisse and JP Morgan making similar allegations about the quality of RMBS and CDO transactions. It appears that, according to court documents, in these cases the defendants will say that Ambac knew about the quality of the investments. If this is accepted by a court then, depending on timing, one court case could influence another.

On a positive note for Ambac, Judge Buckwald held that there was no case to answer regards a 2008 securities offering because the misstatements were held to be insignificant.

Ambac can well do without this distraction, but as has previously been noted, lawsuits are part of the daily business of being an insurer. It is extremely unlikely that this case will conclude in the immediate future, so the focus of the current management can be on survival. Whether re-structuring or reverse swaps to prevent de-listing are involved will become clear in the next three months, probably sooner.

Ambac announced late Wednesday that it plans to release its fiscal 2009 fourth-quarter and full-year results on March 16. This will mark the second consecutive quarter that the bond insurer will have filed its subsidiary financial statements late with the Wisconsin insurance regulator. Last quarter, the delay allowed for the inclusion of a $5 billion commutation of collateralized default obligations, resulting in a cash payment of $520 million.

Reported by Gavin Magor in Jupiter, Fla.

Gavin Magor is the senior analyst responsible for assigning financial-strength ratings to insurance companies. He conducts industry analysis and supports consumer products. Magor has more than 22 years of international experience in operations and credit-risk management, commercial lending and analysis. His experience includes international assignments in Sweden, Mexico, Brazil and the U.S. He holds a master's degree in business administration from The Open University in the U.K.