Goldman Says High Court Case Bars Basis Capital Suit

Goldman Sachs Group Inc. asked a New York judge to dismiss a $1 billion lawsuit by Australian hedge fund Basis Capital, arguing that a June U.S. Supreme Court decision bars the claim.

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 argued that the suit is barred by the Supreme Court’s June 24 ruling in Morrison v. National Australia Bank. In that case, the high court held that U.S. securities laws don’t apply to the claims of foreign buyers of non-U.S. securities on foreign exchanges.

“This litigation presents a contract dispute between two foreign entities, executed abroad and governed by English law, and Morrison makes clear that it does not belong in this court,” New York-based Goldman said in a filing dated Aug. 2.

Eric Lewis, a lawyer for Basis, said “there are significant arguments to be made” that Morrison doesn’t bar the Basis claim.

The credit-default swaps in the transaction were derivatives of U.S. securities, Lewis 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, he said.

In the complaint, Basis alleged that 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.”

Basis, which invested $78 million in Timberwolf, is seeking compensatory and punitive damages from Goldman.

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

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