By Karen Freifeld
NEW YORK Jan 30 A New York state appeals court
on Thursday refused to dismiss a $1.07 billion lawsuit accusing
Goldman Sachs Group Inc of selling securities as the
financial crisis began that it expected to lose value.
The lawsuit, brought by Australian hedge fund Basis Yield
Alpha Fund, says Goldman made misleading statements and
omissions about collateralized debt obligations known as
Timberlake and Point Pleasant. It claims Goldman sold the
securities as a way to offload subprime mortgages it knew were
toxic and also sought to profit by shorting the securities.
In its ruling, a five-judge appeals panel said a lower court
rightly declined to dismiss the fraud claims, rejecting
Goldman's view that they should be thrown out because of
disclosures and risk disclaimers in its offering circulars.
If the fund's allegations are true, "there is a 'vast gap'
between the speculative picture Goldman presented to investors
and the events Goldman knew had already occurred," Justice
Dianne Renwick wrote in the decision on behalf of four judges on
the court. A fifth judge concurred with different reasoning.
The court dismissed negligent misrepresentation, unjust
enrichment and rescission claims against Goldman. But it also
refused to order the case into arbitration, as the bank had
"This is an excellent decision affirming that sellers of
securities have to speak honestly and cannot use the fine print
to avoid responsibility," said Eric Lewis, a lawyer who
represents Basis Yield. "Goldman knew they had fixed the race.
The securities were designed to fail."
Goldman has said the losses were caused by the collapse of
the housing market, not misrepresentations.
"We are confident that we will ultimately prevail on the
remaining claim by Basis, which was one of the world's most
sophisticated investors in mortgage products," said Goldman
spokesman Michael DuVally.
Basis Yield Alpha Fund brought the lawsuit in 2011 seeking
to recoup $67 million in losses that contributed to the fund's
insolvency. The lawsuit also seeks $1 billion in punitive
Timberwolf was cited in a scathing 2011 U.S. Senate panel
report that faulted Goldman and other banks for pushing debt
they expected to perform poorly.
The report said Goldman kept marketing Timberwolf even after
Thomas Montag, an executive who is now Bank of America Corp's
co-chief operating officer, called Timberwolf "one shitty deal"
in an email to a colleague.
Goldman's CDO practices also have drawn regulatory scrutiny.
In April 2010, it agreed to pay $550 million to settle U.S.
Securities and Exchange Commission charges it sold the risky
Abacus CDO while letting hedge fund billionaire John Paulson bet
against it. The bank did not admit wrongdoing.
The bank also was sued in London's High Court last week for
allegedly exploiting a lack of financial knowledge at Libya's
sovereign wealth fund, which became a Goldman client in 2007.
In court documents seen by Reuters on Thursday, the Libyan
Investment Authority claims Goldman took advantage of the fund's
"financially illiterate staff" when it encouraged investment in
more than $1 billion in trades that ended up worthless. Goldman
has said the claims are without merit.
In its complaint, the Basis Yield fund said it entered $80.8
million of credit default swaps related to "triple-A" and
"double-A" rated Timberwolf debt. It said it bought $12.3
million of "triple-B" rated debt tied to subprime residential
mortgages in a CDO known as Point Pleasant 2007-1.
Within weeks, the transactions began to lose value, and
Basis Yield began to liquidate within two months. It said it
lost $56.3 million on Timberwolf in under six weeks, and $10.8
million on Point Pleasant in less than three months.
Basis Yield was managed by Sydney-based Basis Capital Funds
The case is Basis Yield Alpha Fund v. Goldman Sachs Group,
Inc et al, New York State Supreme Court, New York County, No.