Bond Insurer Sues Goldman Sachs Over Abacus Deal

By | January 7, 2011

Bond insurer ACA Financial Guaranty Corp. sued Goldman Sachs Group Inc. on Thursday, alleging it was deceived into insuring a transaction designed to fail and for which Goldman ultimately paid a $550 million civil penalty.

Goldman Sachs paid the settlement last July to end civil fraud charges over the deal, known as Abacus.

The U.S. Securities and Exchange Commission had accused Goldman of creating and marketing a product linked to subprime mortgage bonds, without telling investors that hedge fund Paulson & Co helped picked the bonds and was planning to bet against the transaction.

In the years leading up to the Abacus deal, ACA had a reputation on Wall Street for its willingness to insure deals that other so-called monolines would not, leading some to accuse it of a lack of sophistication.

But in the suit filed Thursday, ACA painted a picture of what it claimed was an outright deception. ACA alleges that when Goldman hired it to be the agent selecting the portfolio of bonds for the deal — bonds suggested by Paulson — Goldman’s representatives concealed Paulson’s intentions.

“Knowledge of Paulson’s true economic interests would have raised a red flag and caused senior ACA personnel to decline to approve any participation in the transaction,” the suit said.

In addition to ACA ultimately insuring parts of the Abacus transaction, the ACA unit that acted as the selector of bonds for the portfolio also bought millions of dollars in notes issued by Abacus, according to the suit.

A Goldman Sachs spokesman was not immediately available for comment.

Maryland regulators took control of ACA’s bond insurance business in late 2007, and in August 2008 the company and counterparties reached a settlement that left the company in run-off. Insurers in run-off do not write new business and exist solely to maintain their outstanding book of policies.

The suit seeks $30 million in compensatory damages and $90 million in punitive damages.

The suit is ACA Financial Guaranty Corp. vs. Goldman, Sachs & Co., Supreme Court of the State of New York, Index No. 650027/11.

(Reporting by Ben Berkowitz; Editing by Steve Orlofsky, Gary Hill)

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