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New York Appeals Court Revives CDO Fraud Suit Against Goldman Sachs

gavel-three [1]The New York State Court of Appeals [2] revived a lawsuit accusing Goldman Sachs Group [3] of fraud regarding the selling of subprime mortgage-backed securities prior to the crisis, according to multiple media reports [4].

The 5-2 vote from the highest court in New York reinstated a $120 million fraud claim [5] first brought against Goldman Sachs by ACA Financial Guaranty Corp. in early 2013.

ACA Financial alleged in the suit that Goldman induced the bond insurer to back a pool of subprime mortgages known as Abacus 2007-ACI, a collateralized-debt obligation (CDO) deal, when Goldman knew that hedge fund Paulson & Co. was a long investor and was betting on the mortgages in the CDO to fail. Reports said that ACA Financial claims it lost about $900 million in the subsequent collapse of the mortgage market as a result of the deal while Paulson made substantial profits.

According to reports, a fraud case can only continue under state law if the plaintiff can show that it "justifiably relied" on the defendant's representations. The suit was dismissed [6] by the Appellate Division of the New York Supreme Court in May 2013 on the grounds that ACA Financial, as a "highly sophisticated commercial entity" should have done its research on the securities before purchasing, including asking Paulson about the role it played in investing in Abacus CDO, according to reports. An amendment to the lawsuit in 2013 named Paulson as a co-defendant.

Goldman Sachs spokesman Michal DuVally called ACA's claims "contrived" and said he was "confident" they would fail, while Steven Berkowitz, CEO of ACA Financial, said he was pleased with the decision, according to reports.

Goldman agreed to a settlement worth $550 million in 2010 with the U.S. Securities and Exchange Commission over claims of defrauding Abacus investors. As part of the settlement, Goldman did not admit any wrongdoing.