Posted on 21 January 2011.
Suit Seeks $30 Million in Compensatory and $90 Million in Punitive Damages from Goldman
Sachs Over Its Role in Developing and Marketing the Synthetic CDO “ABACUS”
New York, NY — January 6, 2011 — ACA Financial Guaranty Corporation (ACA), a monoline
bond insurance company now operating in run off, filed suit today against Goldman Sachs & Co.
(Goldman Sachs) for fraud and unjust enrichment in connection with a synthetic collateralized
debt obligation (CDO) called ABACUS 2007-AC1 (ABACUS), which Goldman Sachs
developed and sold on behalf of its hedge fund client Paulson & Co. Inc. (Paulson) in 2007.
ACA was misled by Goldman’s fraudulent activities and is seeking $30 million in compensatory
and $90 million in punitive damages.
According to the complaint, filed in the Commercial Division of the Supreme Court of the State
of New York, New York County, this fraud action arises from the egregious conduct of Goldman
Sachs in developing and marketing ABACUS based on a portfolio of investment securities
selected largely by its hedge fund client, Paulson. Goldman Sachs’s scheme was to design
ABACUS to fail, so that Paulson could reap huge profits by shorting the portfolio and Goldman
Sachs could reap huge investment banking fees. Goldman Sachs fraudulently induced ACA to
take a long position in and provide guaranty insurance for ABACUS. Goldman Sachs did so by
deceiving ACA into believing that Paulson also was to be a long investor in ABACUS. In fact,
as Goldman Sachs knew, Paulson intended instead to take an enormous short position in
ABACUS, reaping nearly $1 billion when the portfolio failed.
As the complaint alleges: “ABACUS was worthless at the time Goldman Sachs marketed it to
ACA. Had Paulson’s true role as a short investor selecting the portfolio been known, neither
ACA nor anyone else would have taken a long position in it. Because of Goldman Sachs’s
deceit — which led ACA to reasonably believe that ABACUS was a valuable product selected by
the equity investor with identical objectives — ACA invested in what was in fact a worthless
product. Goldman Sachs engaged in this egregious misconduct notwithstanding that it expressly
acknowledged that its participation presented ‘reputational risk’ and after at least one other major
investment bank declined to participate for that very reason.” Goldman Sachs has since settled
SEC civil charges arising out of this fraudulent conduct, agreeing to pay a $550 million fine.
ACA is represented by Marc E. Kasowitz of Kasowitz, Benson, Torres & Friedman LLP.
About ACA Financial Guaranty Corporation
Founded in 1997, ACA Financial Guaranty Corporation is a monoline bond insurance company
licensed in 50 states and 5 territories and regulated by the Maryland Insurance Administration.
On August 8, 2008, the Company and counterparties to its structured finance products reached an
agreement on a restructuring plan for ACA. The plan, approved by the Maryland Insurance
Administration, provided for settlement of the structured finance obligations and protection for
ACA’s municipal policyholders. ACA will operate as a runoff insurance company and focus on
actively monitoring its remaining insured municipal obligations. ACA’s portfolio consists of
approximately 700 policies guarantying timely payment of principal and interest on more than $7
billion of generally high yield municipal bonds.
Read Complaint Below…
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