MADISON, Wis. (9/2/10)--Ambac Financial Group Inc., a bond insurer for mortgage-backed securities (MBS) whose losses have contributed to losses at several corporate credit unions, has been sued by a group of hedge funds trying to block transfers of funds from its bond-insurance unit to the holding company. The funds filed the motion to enjoin Monday in a Circuit Court of Dane County, Madison, Wis. Plaintiffs include King Street Capital, Aurelius Capital Management, Fir Tree, Monarch Alternative Capital and Stonehill Capital Management. The suit claims they own more than $1 billion of residential MBSs and other debt insured by Ambac Assurance Corp. (AAC). They are trying to ensure that Ambac, the holding company, doesn't siphon off money and assets from AAC. AAC holds insurance policies on billions of dollars of bonds held by the corporates, who have recorded impairment charges related to Ambac-insured securities. Several monoline insurers, including Ambac, FGIC, MBIA, and Syncora Guarantee, have experienced problems that resulted in other-than-temporary impairment (OTTI) charges on the bonds. The motion filed seeks to clarify that the funds had a right to sue to stop Ambac Financial from receiving cash dividends and other transfers from Ambac Assurance while policyholders have claims on Ambac-insured securities haven't been paid in full (The Wall Street Journal and Enhanced Online News Aug. 30). The funds also alleged in court papers that about $230 million in past dividend payments from AAC to its parent in 2008 and 2009 were "fraudulent" transfers because they took place at a time when the bond insurer's financial condition was rapidly deteriorating. They are seeking to recover that money for all policyholders. Earlier this year, Wisconsin's Office of the Commissioner of Insurance, which regulates AAC, took over Ambac's insured portfolio of more than $50 billion in toxic mortgage securities and other structured-finance debt. The regulator separated that debt from Ambac's financial guarantees on municipal bonds, most of which are still performing (MarketWatch Aug. 31). At the time, the regulator expected these policyholders to recover a fraction of what they were owed in cash. AAC also was expected to give them interest-bearing surplus notes. Earlier this month, the parent company said in financials filed it was preparing to file for bankruptcy to restructure its outstanding debt.