ACA Asks NY Court to Reinstate Abacus Fraud Case

Mar 27 2015 | 12:16pm ET

ACA Financial Guaranty Corp. is asking New York's top court to reinstate a $120 million lawsuit against Goldman Sachs related to the bank’s infamous Abacus subprime CDO product.

At issue is whether the insurer was duped into backing Abacus, which was at the center of a $500 million settlement with the SEC, because Goldman Sachs did not disclose that billionaire John Paulson and his hedge fund had not only taken short positions in the securities that comprised the CDO, but also played a role in selecting which bonds would be included in it. 

According to ACA, Goldman knew about Paulson’s short stance against the CDO, yet didn’t tell the bond insurance company about it. In fact, ACA alleges, Goldman led ACA to believe Paulson was actually long the CDO’s securities.

Goldman settled with the SEC in July 2010 over claims it had misled investors in the CDO, with documents filed with regulators specifically citing the lack of disclosure surrounding Paulson’s involvement. A Goldman trader involved in Abacus, Fabrice Tourre, was later found liable on six of seven counts in federal civil court of defrauding investors and forced to pay an $825,000 fine. 

As the insurer, ACA sued Goldman for fraud in 2011, claiming it had relied on Goldman’s representations regarding Paulson and seeking $120 million in damages. Paulson was later added to the suit. 

The trial court denied a Goldman motion to dismiss ACA’s claim, saying Goldman had not adequately made the case that ACA failed to show reliance on the bank’s statements regarding Paulson when deciding whether or not to insure the CDO. An appeals court later reversed that decision, saying ACA had indeed failed to demonstrate that it’s due diligence process included investigating Paulson’s role.

In the SEC settlement, in which Goldman did not admit any wrongdoing, the bank acknowledged that information in marketing materials for Abacus was "incomplete". 


In Depth

Q&A: Portfolio Advisors' Brian Murphy On The Advantages of A Private Markets Platform

Jan 2 2018 | 11:05am ET

Most private markets firms reference their platforms as a source of competitive...

Lifestyle

CFA Institute To Add Computer Science To Exam Curriculum

May 24 2017 | 9:25pm ET

Starting in 2019, financial industry executives sitting for the coveted Chartered...

Guest Contributor

Steinbrugge: The Top Hedge Fund Industry Trends for 2018

Jan 2 2018 | 12:22pm ET

Each year, Don Steinbrugge’s Agecroft Partners compiles the insights gained...

 

FINalternatives Trending

From the current issue of