Ambac $1 billion subprime lawsuit vs JPMorgan revived

By Jonathan Stempel

NEW YORK | Thu Jul 14, 2011 4:36pm EDT

NEW YORK (Reuters) – A New York state appeals court revived Ambac Financial Group Inc’s $1 billion lawsuit against JPMorgan Chase & Co over an investment vehicle that in 2007 and 2008 suffered heavy losses from toxic subprime debt.

The court said Ambac “has sufficiently alleged gross negligence” by JPMorgan, whose Chief Executive Jamie Dimon was said to have concluded as early as October 2006 that subprime mortgages “could go up in smoke.”

Ambac accused JPMorgan of breach of contract over losses that its Ambac Assurance unit suffered on notes it guaranteed for Ballantyne, a special purpose vehicle established to reinsure term life insurance policies.

Thursday’s decision by a New York state appeals court in Manhattan reversed a March 2010 ruling by Supreme Court Justice Barbara Kapnick, restoring Ambac’s lawsuit “in its entirety.” Ambac had also sought punitive damages.

Kapnick is the same judge who will consider whether to approve Bank of America Corp’s $8.5 billion settlement with investors who said they were misled before investing in what proved to be sour mortgage-backed securities.