There are two things that stand out about New York Supreme Court Justice Barbara Kapnick’s ruling Monday allowing ACA Financial Guaranty Corp. to move forward with its fraud suit against Goldman Sachs over the notorious ABACUS CDO. First, the ruling bucks the recent trend of courts dismissing suits by sophisticated parties involved in the CDO market. Second, Goldman is tripped up by its admissions in its $550 million settlement with the Securities and Exchange Commission over the ABACUS deal.
Just last Friday we warned that big sophisticated investors faced an uphill battle if they claimed they were duped into putting money into complex securities deals, based on recent court rulings. Both the Second Circuit U.S. Court of Appeals and a New York appellate court had tossed claims by big institutions that were burned by CDO investments, finding that the plaintiffs should have understood the risk. (Our article about the Second Circuit ruling last week is here, and the article on the New York appellate court case is here.)
But Kapnick apparently didn’t get the memo. On Monday, she refused to dismiss ACA Financial’s claims that it been deceived into providing financial guaranty insurance for the doomed CDO. You can read her ruling here.
What makes this case particularly interesting–and ironic–is that ACA Management, a subsidiary of the plaintiff, was involved in structuring this deal and had an up-close view of how it was put together. ACA Management was the nominal selection agent for the CDO, and was supposedly in charge of choosing the “reference obligations” that went into the CDO. Behind the scenes, however, Goldman hedge fund client Paulson & Co. was selecting assets for the CDO. And although ACA Management knew Paulson was choosing assets, it claims it didn’t know that the hedge fund was shorting those assets.
ACA Financial–represented by Marc Kasowitz of Kasowitz, Benson, Torres & Friedman–had argued in this amended complaint that Goldman should be liable for fraudulent inducement and fraudulent concealment. Goldman–represented by Richard Klapper of Sullivan & Cromwell–countered in this motion to dismiss that ACA could have simply asked Paulson what type of investment position it was taking in the securities, but never did.
Judge Kapnick distinguished the other recent cases dealing with sophisticated investors, explaining that in this case Goldman Sachs allegedly concealed material information about Paulson’s role. And she noted that when Goldman settled with the SEC, the bank conceded that it had made a mistake in failing to disclose Paulson’s role. Goldman had also argued that that ACA Financial had failed to plead scienter, stressing that Goldman itself took a substantial long position in the CDO and lost more than $90 million. Once again, Kapnick pointed to the bank’s admissions in the SEC settlement as evidence of scienter.
Goldman did score one minor victory when Kapnick dismissed ACA Financial’s claims for unjust enrichment, noting how it lost money on this deal. Our affiliate, the New York Law Journal, also has coverage of this ruling here.
“ACA is pleased with Justice Kapnick’s decision, which makes clear that Goldman Sachs and others that fraudulently promote investments even to sophisticated investors can and should be held liable,” said Kasowitz in a statement. “This is especially so where, as here, there is active concealment of the material facts. Thus the decision appropriately confirms that New York law does not immunize fraudulent conduct directed at investors, including sophisticated ones.”
S&C’s Klapper declined to comment, as did a spokesman for Goldman Sachs.
