NEW YORK Jan 31 (Reuters) - John Paulson's hedge fund will have to defend claims that his firm conspired with Goldman Sachs Group Inc to fraudulently induce a bond insurer to guarantee payments on risky debt, court papers show.
Bond insurer ACA Financial on Thursday filed an amended complaint naming Paulson & Co and its hedge fund Paulson Credit Opportunities Master II Ltd as defendants in a $120 million lawsuit it brought against Goldman in 2011.
The lawsuit centers on a collateralized debt obligation known as Abacus, which ACA claimed was designed to fail so that Paulson could reap "huge profits" and Goldman "huge fees."
Armel Leslie, a spokesman for Paulson, said ACA's case against Paulson is "completely without merit."
Thursday's amended complaint contains new allegations that Goldman and Paulson deceived ACA into believing Paulson was investing in the CDO, when they knew he would instead bet against it by taking a short position.
It alleges that Goldman misrepresented that Paulson's and ACA's financial interests in Abacus were "aligned," and that Paulson fraudulently played the role of the "equity investor."
The complaint quotes a Jan. 17, 2007, telephone conversation in which a Goldman managing director said that Paulson's interest in the "capital structure" of Abacus was "all, 100 percent equity."
Goldman and Paulson also secretly agreed in what they called a "side letter agreement" to structure the deal in a way that concealed Paulson's short interest, the new complaint said.
Michael DuVally, a spokesman for Goldman, declined to comment on the amended complaint.
Goldman Sachs settled with the U.S. Securities and Exchange Commission in 2010 over claims it misled investors in Abacus, without admitting wrongdoing.
The SEC claimed Goldman and vice president Fabrice Tourre failed to tell investors Paulson & Co helped choose and bet against the subprime residential mortgage backed securities underlying Abacus.
Leslie, Paulson's spokesman, on Thursday noted the SEC investigation.
"As the SEC said back in 2010, Paulson was not the subject of the SEC's ABACUS investigation, made no misrepresentations, and was not the subject of any charges," Leslie said in an email.
The case is ACA Financial Guaranty Corp v Goldman Sachs & Co, 650027/2011, New York state Supreme Court (New York County).