Paulson, Goldman Had Deal To Keep CDO Shorting Secret, Complaint Alleges

Feb 1 2013 | 2:39pm ET

Paulson & Co. conspired with Goldman Sachs to conceal its short position against a controversial collateralized debt obligation, according to a revised lawsuit against the bank and the hedge fund.

A New York State judge yesterday granted ACA Financial Guaranty's motion to amend its complaint against Goldman to add Paulson as a defendant. In that new complaint, ACA, which insured the Abacus-2007-AC1 CDO, accuses Paulson of misleading it, playing the role of an "equity investor" while actually betting against the CDO.

ACA also alleges that Goldman and Paulson has a "side letter agreement" to structure the CDO to hide Paulson's short, allowing Paulson to earn "huge profits" and Goldman "huge fees," while saddling ACA with huge losses.

"This is a very significant event," ACA's lawyer, Marc Kasowitz, told Reuters. "It's the first time Paulson has been fronted for having a share of the responsibility in Abacus."

"We firmly believe that the amendment by ACA to include Paulson as a defendant is completely without merit," Paulson spokesman Armel Leslie said. "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. As there is no basis in law or fact for the amendment, Paulson will defend itself against this baseless action."

ACA filed its suit against Goldman two years ago, accusing the bank of misleading it about Paulson's role in selecting the securities that went into the CDO. According to the new lawsuit, Paulson spoke with three other banks about shorting mortgage CDOs. Two, Bear Stearns and Morgan Stanley, would have none of it, the latter reportedly after the collateral manager expressed concern. Deutsche Bank, however, had the hedge fund talk to potential collateral managers, but allegedly instructed it to "play the role" of a long investor and "stick to the script."


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