| NEW YORK, April 24
NEW YORK, April 24 Goldman Sachs Group Inc
must defend fraud claims brought by a bond insurance
company over its notorious Abacus mortgage product deal, a New
York state judge ruled, but she decided that the investment bank
did not unjustly enrich itself.
In a lawsuit last year, ACA Financial Guaranty Corp accused
Wall Street's most influential investment bank of financially
inducing it to provide insurance for Abacus 2007-ACI - a
synthetic collateralized debt obligation (CDO). Goldman settled
with the top U.S. market regulator in 2010 over the same CDO
transaction for $550 million without admitting wrongdoing.
New York State Supreme Court Justice Barbara Kapnick said in
a written decision made public on Tuesday: "that portion of
Goldman Sachs's motion seeking to dismiss the first two causes
of action for fraudulent inducement and fraudulent concealment
ACA's "third cause of action for unjust enrichment is
dismissed" the judge said in her ruling dated April 23.
A spokesman for Goldman Sachs, Michael DuVally, declined to
comment on the decision. ACA is no longer writing new insurance
policies. It is collecting premiums and paying claims on
existing policies until they expire.
Two years ago, the U.S. Securities and Exchange Commission
sued Goldman and a vice president of the firm, Fabrice Tourre,
over the Abacus CDO, accusing them of failing to tell investors
the Paulson & Co hedge fund helped choose and bet against the
subprime residential mortgage backed securities underlying
The SEC cases against Tourre is continuing in Manhattan
federal court. The regulator accuses him of misleading ACA
Management LLC, a third party with experience in analyzing
credit risk in residential mortgage-backed securities, that
Paulson's hedge fund was an equity investor.
ACA Financial Guaranty said in its lawsuit that the CDO was
designed to fail so that Paulson could reap "huge profits" and
Goldman Sachs could reap "huge fees."
It said Goldman deceived ACA into believing that Paulson was
to be the long investor in the product when the bank knew he
would take a short position.
Kapnick wrote that ACA Financial Guaranty Corp's complaint
"certainly contains a 'rational basis' to infer that Goldman
Sachs intentionally misled ACA from its silence in the face of
ACA's manifest detrimental reliance on its mistaken belief that
Paulson was on the same side of the transaction as it was."
The judge decided that ACA failed to show that Goldman
unjustly enriched itself. "Goldman Sachs argues that far from
being enriched, it conveyed its short position, and more, to
Paulson, and lost a substantial sum of money" in the Abacus
Kapnick gave Goldman 30 days to answer to the fraud claims
she allowed. She scheduled a conference on June 6 for the
parties to discuss pre-trial procedure for the lawsuit.
The case is ACA Financial Guaranty v Goldman Sachs in New
York State Supreme Court, New York County No. 650027/2011