Goldman Must Defend Bond Insurer’s Fraud Claims

April 25, 2012

Goldman Sachs Group Inc. must defend fraud claims brought by a bond insurance company over its notorious Abacus mortgage product deal, a New York state judge ruled, but she decided that the investment bank did not unjustly enrich itself.

In a lawsuit last year, ACA Financial Guaranty Corp. accused Wall Street’s most influential investment bank of financially inducing it to provide insurance for Abacus 2007-ACI – a synthetic collateralized debt obligation (CDO). Goldman settled with the top U.S. market regulator in 2010 over the same CDO transaction for $550 million without admitting wrongdoing.

New York State Supreme Court Justice Barbara Kapnick said in a written decision made public on Tuesday: “that portion of Goldman Sachs’s motion seeking to dismiss the first two causes of action for fraudulent inducement and fraudulent concealment are denied.”

ACA’s “third cause of action for unjust enrichment is dismissed” the judge said in her ruling dated April 23.

A spokesman for Goldman Sachs, Michael DuVally, declined to comment on the decision. ACA is no longer writing new insurance policies. It is collecting premiums and paying claims on existing policies until they expire.

Two years ago, the U.S. Securities and Exchange Commission sued Goldman and a vice president of the firm, Fabrice Tourre, over the Abacus CDO, accusing them of failing to tell investors the Paulson & Co. hedge fund helped choose and bet against the subprime residential mortgage backed securities underlying Abacus.

The SEC cases against Tourre is continuing in Manhattan federal court. The regulator accuses him of misleading ACA Management LLC, a third party with experience in analyzing credit risk in residential mortgage-backed securities, that Paulson’s hedge fund was an equity investor.

ACA Financial Guaranty said in its lawsuit that the CDO was designed to fail so that Paulson could reap “huge profits” and Goldman Sachs could reap “huge fees.”

It said Goldman deceived ACA into believing that Paulson was to be the long investor in the product when the bank knew he would take a short position.

Kapnick wrote that ACA Financial Guaranty Corp.’s complaint “certainly contains a ‘rational basis’ to infer that Goldman Sachs intentionally misled ACA from its silence in the face of ACA’s manifest detrimental reliance on its mistaken belief that Paulson was on the same side of the transaction as it was.”

The judge decided that ACA failed to show that Goldman unjustly enriched itself. “Goldman Sachs argues that far from being enriched, it conveyed its short position, and more, to Paulson, and lost a substantial sum of money” in the Abacus transaction.

Kapnick gave Goldman 30 days to answer to the fraud claims she allowed. She scheduled a conference on June 6 for the parties to discuss pre-trial procedure for the lawsuit.

The case is ACA Financial Guaranty v Goldman Sachs in New York State Supreme Court, New York County No. 650027/2011

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