Goldman Sachs Wins Dismissal of Abacus CDO Suit on Appeal

Goldman Sachs Group Inc. defeated bond insurer ACA Financial Guaranty Corp.’s fraud lawsuit over a collateralized debt obligation known as Abacus that led to a $550 million settlement with regulators.

A New York state appeals court in Manhattan today ordered the complaint against the bank dismissed, overturning a lower-court ruling that allowed the case to proceed.

ACA claimed that New York-based Goldman Sachs and hedge-fund firm Paulson & Co. conspired to induce ACA to provide financial guaranty insurance for a product “doomed to fail.” ACA said it was deceived into believing Paulson was a long investor when in fact it was taking a short position.

The appeals court said ACA could have uncovered Paulson’s actual position “but apparently chose not to.”

“Plaintiff should have questioned defendant or the nonparty hedge fund,” the court said in a 3-2 decision. “Such an inquiry would have likely informed plaintiff that the nonparty hedge fund was taking a short rather than a long equity position.”

ACA, which is seeking $120 million in damages in the lawsuit, added New York-based Paulson as a defendant in the lawsuit this year. A court has yet to rule on the hedge fund’s motion to dismiss.

Marc Kasowitz, an attorney for New York-based ACA, said his client may ask the divided appellate panel to reconsider the decision and would pursue an appeal to the state’s highest court in Albany.

Dissenting Judge

In a dissenting opinion, Justice Darcel Clark said the case shouldn’t be dismissed because Goldman Sachs concealed information that wasn’t publicly available and ACA fulfilled its responsibility to perform due diligence.

“As the two-judge dissent makes clear, the three-judge majority’s line of reasoning neither comports with the factual record nor the law on this issue,” Kasowitz said.

A Goldman Sachs spokeswoman,, Tiffany Galvin, said the company was pleased with the appeals court ruling.

Goldman Sachs in July 2010 won court approval of a $550 million settlement with the U.S. Securities and Exchange Commission over claims that it misled investors in the Abacus CDO. Goldman Sachs failed to disclose Paulson’s role in selecting underlying securities or that Paulson had taken a short position against the CDO, according to the SEC.

The bank didn’t admit or deny wrongdoing in the SEC settlement. It acknowledged that it made a “mistake” and that marketing materials for the instruments had “incomplete information,” the agency said at the time.

The case is ACA Financial Guaranty Corp. v. Goldman Sachs & Co., 650027-2011, New York State Supreme Court (Manhattan).

(Updates with dissenting judge in eighth paragraph, Goldman Sachs comment in 10th paragraph.)
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