Basis Capital Urges New York Judge to Allow Lawsuit Against Goldman Sachs

Basis Capital, an Australian hedge fund, urged a New York judge to allow its $1 billion lawsuit over the marketing of credit default swaps by Goldman Sachs Group Inc. to proceed, calling Goldman’s request for a dismissal a “distraction.”

The lawsuit by Basis Capital’s Basis Yield Alpha Fund focuses on Goldman Sachs’s sale of the “Timberwolf” collateralized debt obligation. The complaint, filed June 9 in Manhattan federal court, says the fund was forced into insolvency after buying mortgage-linked securities created by Goldman Sachs, in what one of its own executives described internally as a “shi**y deal.”

Goldman Sachs, based in New York, urged District Judge Barbara Jones to throw out the suit in an Aug. 2 filing, citing a June U.S. Supreme Court ruling that said U.S. securities laws don’t apply to the claims of foreign buyers of non-U.S. securities on foreign exchanges.

“Goldman’s thesis, if adopted, would render the U.S. securities laws a nullity any time a U.S. seller engages in fraud in effecting the sale of a security to a foreign purchaser,” Basis said in papers filed yesterday. Goldman Sachs is trying to shift the focus and it’s an “improper distraction,” Basis said.

In the complaint, Basis alleged Goldman falsely claimed in June 2007 that the market for investments such as Timberwolf had stabilized. Basis claims it closed on its deal with Goldman to buy credit default swaps tied to Timberwolf at the same time Thomas Montag, Goldman’s former head of sales and trading for the Americas, sent the e-mail calling the Timberwolf CDO “one shi**y deal.”

The credit-default swaps in the transaction were derivatives of U.S. securities, Basis said. The location of the transaction was really New York, and Goldman Sachs International was acting as an agent of New York-based Goldman Sachs Group Inc. in the transaction, the company said.

The sale “was a New York sales transaction from start to finish,” Basis said.

The case is Basis Yield v. Goldman Sachs, 1:10-cv-04537, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Joe Schneider in Toronto at jschneider5@bloomberg.net

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