Court Dismisses Bond Insurer Fraud Claims Against Goldman Over Abacus CDO; Appeal Planned

May 15, 2013 by Karen Freifeld

Goldman Sachs Group Inc. won dismissal on Tuesday of fraud claims brought by a bond insurer over a CDO tied to subprime mortgage securities called Abacus.

In a 3-2 decision, a New York state appeals court dismissed a complaint by ACA Financial Guaranty Corp. accusing Goldman of fraudulently inducing the company to insure the CDO, or collateralized debt obligation.

ACA is a “highly sophisticated commercial entity” whose claims of being misled were contradicted by the offering disclosure and other evidence, according to decision by the Appellate Division, First Department in Manhattan.

ACA Financial claimed Goldman deceived it into believing Paulson & Co., a hedge fund, was a long investor in the Abacus CDO, when it knew Paulson would take a short position.

In its ruling, the appeals court said ACA could have asked Paulson & Co. what position it intended to take.

In 2010, Goldman, without admitting wrongdoing, settled with the U.S. Securities and Exchange Commission for $550 million over claims it misled investors in Abacus.

Attorney Marc Kasowitz, who represents ACA Financial, said the insurer would appeal the court’s decision and might ask the divided appellate panel to reconsider.

Kasowitz also said there is a “live” amended complaint filed in January that named Paulson & Co. as a defendant in the case.

That complaint also said that Goldman engaged in fraudulent inducement and fraudulent concealment, the two causes of action the appeals court dismissed.

ACA brought claims against Paulson for fraud, like those against Goldman, and added a claim for aiding and abetting fraud.

A motion by Paulson to dismiss that complaint is pending. A spokesman for the firm had no immediate comment on the appeals court decision.

“We are pleased with the court’s decision to dismiss ACA’s claim against Goldman Sachs,” said Tiffany Galvin, a spokeswoman for Goldman. She declined further comment.

In the SEC case, the government claimed Goldman and Vice President Fabrice Tourre failed to tell investors that Paulson helped choose and bet against the mortgage securities underlying Abacus. While Goldman settled, Tourre’s trial is set to begin on July 15.

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