ACA Financial Guaranty Corp. urged New York’s top court to reinstate a suit accusing Goldman Sachs Group Inc. of conspiring to force it to insure an investment that led to a $550 million settlement with regulators.
Goldman failed to disclose the “essential fact” that billionaire John Paulson and his hedge fund were short sellers of the securities in the collateralized debt obligation known as Abacus, while telling the bond insurer they were betting the portfolio would succeed, Mark Kasowitz, a lawyer representing ACA, told the state Court of Appeals Thursday in Albany.
“This was all part of a plan by Paulson in order to cash in to the tune of a billion dollars on its view that the subprime market was going south,” Kasowitz said.
Goldman Sachs in July 2010 won court approval of a $550 million settlement with the U.S. Securities and Exchange Commission over claims that it misled investors in the Abacus CDO. According to the SEC, Goldman Sachs failed to disclose Paulson’s role in selecting underlying securities or that the Paulson & Co. founder had taken a short position against the CDO.
New York-based ACA sued Goldman Sachs in 2011, saying the bank made representations that Paulson & Co. was taking a long position in Abacus while the firm was in fact a short seller that would profit if the investment performed poorly. The insurer, which is seeking $120 million in damages in the suit, added Paulson as a defendant in 2013.
A state judge in Manhattan in April 2012 denied a bid by Goldman Sachs to dismiss ACA’s fraud claims, rejecting the argument that ACA had failed to show that it relied on statements made by the bank about Paulson’s role in Abacus and the investment position the fund intended to take.
An appeals court in Manhattan reversed that ruling in May 2013, saying that ACA didn’t show it had exercised due diligence by asking about Paulson’s role before insuring the investment.
While Goldman Sachs acknowledged in the SEC settlement that it had made a “mistake” and that marketing materials for the investment had incomplete information, Richard H. Klapper, an attorney for the bank, told the court Thursday that ACA hasn’t shown that it depended on the bank’s representations in deciding whether to insurer Abacus.
“They did not reasonably rely on anything Goldman Sachs told them,” Klapper said.
The lower-court case is ACA Financial Guaranty Corp. v. Goldman Sachs & Co., 650027-2011, New York State Supreme Court (Manhattan).
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