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Goldman ‘Timberwolf’ Suit Can’t Proceed, U.S. Judge Says

A judge dismissed a suit by Basis Capital, an Australian hedge fund suing Goldman Sachs Group Inc. for losses related to credit default swaps, ruling that the complaint failed to show any purchase of securities in the U.S.

U.S. District Judge Barbara Jones said in a decision made public today that Basis can’t use U.S. securities laws to pursue its claims against Goldman Sachs. She gave the hedge fund 30 days to file a new complaint, alleging the sale of securities occurred in the U.S.

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 in June 2010, says the fund was forced into insolvency after buying mortgage-linked securities created by Goldman Sachs, in what one Goldman Sachs executive described internally as a “shi--y deal.”

“We are confident the sale of Timberwolf took place in New York,” Eric Lewis, Basis’s lawyer, said in an e-mailed statement. Making that claim in a new complaint is one step for Basis to “being able to bring Goldman to account for its fraudulent sale,” he said.

Jones’s ruling follows a decision by the U.S. Supreme Court last year in the Morrison v. National Australia Bank case. In that decision the Supreme Court said that U.S. securities laws don’t apply to the claims of foreign buyers of non-U.S. securities on foreign exchanges.

“Plaintiff fails to provide sufficient facts that allow the court to draw the reasonable inference that the purchase or sale was made in the United States,” Jones said in the ruling. “As a result, plaintiff fails to state a claim” that Goldman Sachs violated the antifraud provisions of the Securities Exchange Act of 1934.

False Claims

In its complaint, Basis alleges that Goldman Sachs falsely claimed in June 2007 that the market for investments such as Timberwolf had stabilized. Basis said it closed the Timberwolf transaction with Goldman Sachs at the same time as Thomas Montag, Goldman Sachs’s former head of sales and trading for the Americas, sent the e-mail calling the Timberwolf CDO “one shi--y deal.”

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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