ACA Memorandum of Law in Opposition to Goldman's Motion to Dismiss -July 2011
Transcript of ACA Memorandum of Law in Opposition to Goldman's Motion to Dismiss -July 2011
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SUPREME COURT OF THE STATE OF NEW YORKCOUNTY OF NEW YORK-------------------------------------------------------------------xACA FINANCIAL GUARANTY CORP., :
: Index No.
Plaintiff, : 650027/2011:- against - : Hon. Barbara R. Kapnick
:: (E-file Case)
GOLDMAN, SACHS & CO., ::
Defendant. ::
-------------------------------------------------------------------x
PLAINTIFFS MEMORANDUM OF LAW
IN OPPOSITION TO DEFENDANTS MOTION TO DISMISS
Marc E. KasowitzHarold G. LevisonAndrew K. GlennTrevor J. WelchHenry B. BrownsteinKasowitz, Benson, Torres & Friedman LLP1633 BroadwayNew York, New York 10019Telephone: (212) 506-1700Facsimile: (212) 506-1800
Attorneys for Plaintiff ACA Financial
Guaranty Corp.
July 7, 2011
ILED: NEW YORK COUNTY CLERK 07/07/2011 INDEX NO. 650027/
YSCEF DOC. NO. 26 RECEIVED NYSCEF: 07/07/
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TABLE OF CONTENTS
Page
PRELIMINARY STATEMENT .................................................................................................... 1
FACTS ............................................................................................................................................ 3
A. Nature Of Collateralized Debt Obligations................................................. 3
B. Goldman Sachs Agreed To Orchestrate ABACUS For Paulson ................ 3
C. Goldman Sachs Could Not Enlist A Portfolio Selection AgentOr Insurer If They Knew Paulson Intended To Short ABACUS................ 4
D. Goldman Sachs Fraudulently Induced ACA To Act As Portfolio SectionAgent And Insurer By Misrepresenting That Paulson Was The Equity
Investor ....................................................................................................... 4
ARGUMENT.................................................................................................................................. 7
I. Goldman Sachss Motion To Dismiss ACAs Fraud Claims Should Be Denied... 7
A. The Complaint Properly Pleads An AffirmativeMisrepresentation........................................................................................ 8
B. The Complaint Properly Pleads Fraudulent Concealment.......................... 9
C. The Complaint Properly Pleads Materiality ............................................. 11
D. The Complaint Properly Pleads Scienter.................................................. 12
E. The Complaint Properly Pleads Reasonable Reliance.............................. 15
1. The Offering Circular Does Not Even Suggest, Much LessEstablish, That There Was No Equity Investor In ABACUS ............ 16
2. The Disclaimers In The Offering Circular Are Inapplicable AndIneffective........................................................................................... 17
3. ACAs Sophistication Does Not Preclude Reasonable Reliance ... 19
4. ACAs Access To Paulson Does Not Preclude ReasonableReliance.............................................................................................. 20
F. The Complaint Properly Pleads Proximate Causation.............................. 21
II. ACAs Unjust Enrichment Claim Is Well Plead................................................... 24
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CONCLUSION............................................................................................................................. 25
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TABLE OF AUTHORITIES
Page(s)
CASES
Adelaide Prods., Inc. v. BKN Intl. AG,834 N.Y.S.2d 3 (1st Dept 2007) ...............................................................................................8
AMBAC Assur. Corp. v. EMC Mortg. Corp.,2011 U.S. Dist. LEXIS 14111 (S.D.N.Y. Feb. 8, 2011)..........................................................18
ATSI Commcns, Inc. v. Shaar Fund, Ltd.,493 F.3d 87 (2d Cir. 2007).......................................................................................................21
Bank Hapoalim (Switzerland) Ltd. v. Banca Intesa S.p.A.,22 Misc. 3d 1104A, 2008 NY Slip Op 52596U (Sup. Ct. N.Y. Co. Dec. 23, 2008) ...............15
Bank of New York v. Irwin Intl Imports,197 A.D.2d 462 (1st Dept 1993) ............................................................................................25
Brunetti v. Musallam,11 A.D.3d 280 (1st Dept 2004) ..............................................................................................12
Byung Chul An v. Dyche,2011 NY Slip Op 30945U (Sup. Ct. N.Y. Co. Apr. 5, 2011) ..................................................20
Cailoa v. Citibank, N.A., New York,295 F.3d 312 (2d Cir. 2002)...............................................................................................10, 18
Citi Mgt. Group, Ltd. v. Highbridge House Ogden, LLC,45 A.D.3d 487 (1st Dept 2007) ..............................................................................................11
Clark-Fitzpatrick, Inc. v. Long Island R.R. Co.,70 N.Y.2d 382 (1987) ..............................................................................................................25
Computer Possibilities Unlimited, Inc. v. Mobil Oil Corp.,301 A.D.2d 70 (1st Dept 2002) ................................................................................................9
Currie v. Glover,2010 NY Slip Op 32044U (Sup. Ct. N.Y. Co. July 30, 2010)...................................................7
Danann Realty Corp. v. Harris,5 N.Y.2d 317 (1959) ..........................................................................................................19, 20
DDJ Mgt., LLC v. Rhone Group L.L.C.,15 N.Y.3d 147 (2010) ........................................................................................................16, 19
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Derdiarian v. Felix Contractor Corp.,51 N.Y.2d 308 (1980) ..............................................................................................................22
Dwyer v. First Unum Life Ins. Co.,41 A.D.3d 115 (1st Dept 2007) ..............................................................................................12
E*Trade Fin. Corp. v. Deutsche Bank AG,420 F. Supp. 2d 273 (S.D.N.Y. 2006)......................................................................................15
EBC I, Inc. v. Goldman Sachs & Co.,7 A.D.3d 418 (1st Dept), affd, 5 N.Y.3d 11 (2005) ........................................................21, 22
Eckstein v. Balcor Film Investors,8 F.3d 1121 (7th Cir. 1993) .....................................................................................................17
Fontanetta v. John Doe 1,73 A.D.3d 78 (2d Dept 2010).................................................................................................24
Goshen v. Mut. Life Ins. Co.,98 N.Y.2d 314 (2002) ....................................................................................................7, 17, 24
Harbinger Capital Partners Master Fund I, Ltd. v. Wachovia Capital Mkts., LLC,27 Misc. 3d 1236A, 2010 NY Slip Op 51046U (Sup. Ct. N.Y. Co. May 10, 2010) ....... passim
Houbigant, Inc. v. Deloitte & Touche LLP,303 A.D.2d 92 (1st Dept 2003) ..............................................................................................13
In re Hyperion Secs. Litig.,1995 U.S. Dist. LEXIS 13032 (S.D.N.Y. Sept. 6, 1995).........................................................17
In re Merrill Lynch Auction Rate Sec. Litig.,758 F. Supp. 2d 264 (S.D.N.Y. 2010)......................................................................................21
Johnson v. Spence,286 A.D.2d 481 (2d Dept 2001)...............................................................................................7
Junius Const. Co. v. Cohen,
257 N.Y. 393 (1931) ................................................................................................................10
King County v. IKB Deutsche Industriebank AG,
708 F. Supp. 2d 334 (S.D.N.Y. 2010)......................................................................................24
Laub v. Faessel,297 A.D.2d 28 (1st Dept 2002) ..................................................................................21, 22, 23
Lentell v. Merrill Lynch & Co., Inc.,
396 F.3d 161 (2d Cir. 2005)...............................................................................................21, 24
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Lynch v. Bay Ridge Obstetrical & Gynecological Assoc., P.C.,72 N.Y.2d 632 (1988) ..............................................................................................................23
Mandel, Resnik & Kaiser, P.C. v. E.I. Electronics, Inc.,41 A.D.3d 386 (1st Dept 2007) ..............................................................................................25
MBIA Ins. Corp. v. Countrywide Home Loans, Inc.,
2011 NY Slip Op 5640 (1st Dept June 30, 2011).......................................................21, 23, 24
MBIA Ins. Co. v. Countrywide Home Loans, Inc.,2009 NY Slip Op 31527U, at *13 (Sup. Ct. N.Y. Co. July 8, 2009).......................................21
MBIA Ins. Co. v. GMAC Mtge. LLC,30 Misc. 3d 856 (Sup. Ct. N.Y. Co. 2010) ..................................................................16, 20, 21
MBIA Ins. Corp. v. Merrill Lynch,27 Misc. 3d 1233A, 2010 NY Slip Op 51027U (Sup. Ct. N.Y. Co.),
affd, 81 A.D.3d 419 (1st Dept 2011).....................................................................................19
MBIA Ins. Corp. v. Royal Bank of Can.,28 Misc. 3d 1225A, 2010 NY Slip Op 51490U (Sup. Ct. Westchester Co. Aug. 19,2010) ........................................................................................................................................18
Merrill Lynch & Co. v. Allegheny Energy, Inc.,500 F.3d 171 (2d Cir. 2007).....................................................................................................21
Morris v. Lenox Hill Hosp.,232 A.D.2d 184 (1st Dept), affd, 90 N.Y.2d 953 (1997) ......................................................23
National Union Fire Ins. Co. v. Robert Christopher Assocs.,257 A.D.2d 1 (1st Dept 1999) ................................................................................................18
Oster v. Kirschner,77 A.D.3d 51 (1st Dept 2010) ................................................................................................13
Payton v. Aetna/Us Healthcare,2000 N.Y. Misc. LEXIS 91 (Sup. Ct. N.Y. Co. Mar. 22, 2000)..............................................14
People v. Swart,273 A.D.2d 503 (3d Dept 2000).............................................................................................17
Pludeman v. Northern Leasing Sys., Inc.,10 N.Y.3d 486 (2008) ................................................................................................................7
P.T. Bank Cent. Asia v. ABN AMRO Bank N.V.,301 A.D.2d 373 (1st Dept 2003) .................................................................................... passim
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Reis v. Volvo Cars of North American, Inc.,2009 NY Slip Op 30467U (Sup. Ct. N.Y. Co. Mar. 3, 2009)..................................................23
Rovello v. Orofino Realty Co.,40 N.Y.2d 633 (1976) ................................................................................................................7
Sachs v. Adeli,2006 N.Y. Misc. LEXIS 2615 (Sup. Ct. N.Y. Co. Aug., 26, 2006) ........................................20
Sargiss v. Magarelli,12 N.Y.3d 527 (2009) ................................................................................................................7
Seaview Mezzanine Fund, LP v. Ramson,77 A.D.3d 567 (1st Dept 2010) ..............................................................................................13
Sebring v. Fidelity-Phenix Fire Ins. Co.,255 N.Y. 382 (1931) ..........................................................................................................12, 13
SEC v. Goldman, Sachs & Co.,2010 U.S. Dist. LEXIS 119802 (S.D.N.Y. July 20, 2010) ........................................................2
SEC v. Goldman, Sachs & Co.,2011 U.S. Dist. LEXIS 62457 (S.D.N.Y. Jun. 10, 2011) ................................................ passim
Shisgal v. Brown,21 A.D.3d 845 (1st Dept 2005) ..............................................................................................13
Silver Oak Capital L.L.C. v. UBS AG,82 A.D.3d 666 (1st Dept 2011) ..................................................................................18, 21, 23
Skrine v. Staiman,30 A.D.2d 707 (2d Dept 1968), affd, 23 N.Y.2d 946 (1969)................................................14
Spirit Locker, Inc. v. EVO Direct, LLC,696 F. Supp. 2d 296 (E.D.N.Y. 2010) ...............................................................................24, 25
Steinhardt Group, Inc. v. Citicorp,272 A.D.2d 255 (1st Dept 2000) ......................................................................................18, 19
Sterling Natl. Bank v. Ernst & Young, LLP,
9 Misc. 3d 1129A, 2005 NY Slip Op 51850U (Sup. Ct. N.Y. Co. 2005)....................21, 22, 23
Stevenson Equipment, Inc. v. Chemig Constr. Corp.,170 AD2d 769 (3rd Dept), affd, 79 N.Y.2d 989 (1992)........................................................10
Swersky v. Dreyer & Traub,219 A.D.2d 321 (1st Dept 1996) ................................................................................10, 12, 20
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Tahini Invest., Ltd. v. Bobrowsky,99 A.D.2d 489 (2d Dept 1984)...............................................................................................19
UST Private Equity Investors Fund, Inc. v. Salomon Smith Barney,288 A.D.2d 87 (1st Dept 2001) ..............................................................................................20
Veras Inv. Partners v. Akin Gump Strauss Hauer & Feld LLP,17 Misc. 3d 1103A, 2007 NY Slip Op 51820U (Sup. Ct. N.Y. Co. Sept. 27, 2007) ................9
Weil, Gotshal & Manges, LLP v. Fashion Boutique of Short Hills, Inc.,10 A.D.3d 267 (1st Dept 2004) ..............................................................................................24
STATUTES
CPLR 3016.......................................................................................................................................7
CPLR 3211...........................................................................................................................7, 23, 24
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Plaintiff ACA Financial Guaranty Corp. (ACA) respectfully submits this memorandum
of law in opposition to the motion of defendant Goldman Sachs & Co. (Goldman Sachs) to
dismiss ACAs First Amended Complaint (Complaint or Compl.).1
PRELIMINARY STATEMENT
This fraud action arises from the egregious conduct of Goldman Sachs in conceiving and
marketing a structured finance product, based on a portfolio of investment securities selected
largely by its hedge fund client, Paulson & Co. (Paulson), which was designed to fail so that
Paulson could reap huge profits by shorting the portfolio and Goldman Sachs could reap
huge fees. As ACA alleges, Goldman Sachs fraudulently induced ACA, a monoline bond
insurance company now operating in run off, to enter into a financial guaranty insurance policy
(the Financial Guarantee) for that structured financial product, a synthetic collateralized debt
obligation Goldman Sachs called ABACUS 2007-AC1 (ABACUS). Goldman Sachs did so by
deceiving ACA into believing that Paulson was to be the equity investor -- i.e., a long investor
-- in ABACUS, thereby inducing ACA to permit Paulson to play an integral role in the selection
of the reference portfolio. In fact, as Goldman Sachs knew, Paulson intended to and would take
an enormous short position in ABACUS, thereby taking an economic position in the transaction
precisely contrary to ACAs position as insurer. Compl. 1.
These allegations clearly state a cause of action for fraud. Indeed, claims based on
precisely the same operative facts already have been upheld as sufficiently alleging, under
federal law, a material misrepresentation by Goldman Sachs to ACA (namely, that Paulson was
an equity investor), a duty on Goldman Sachss part to disclose the truth to ACA (namely, that
1 Submitted herewith in opposition to the motion is the affirmation of Trevor J. Welch, datedJuly 7, 2011 (Welch Aff.). As used herein, Def. Mem. refers to Goldman Sachssmemorandum of law in support of its motion to dismiss the Complaint, and Dunne Decl. refersto the declaration of Christopher J. Dunne, dated June 3, 2011, also submitted in support of themotion.
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Paulson in fact was taking a short position) and scienter. See SEC v. Goldman Sachs & Co.,
2011 U.S. Dist. LEXIS 62487, at *39-40 (S.D.N.Y. June 10, 2011) (upholding the SECs federal
securities fraud claims).2
Applicable New York law mandates the same conclusion with respect
to ACAs claims here.
Thus, under New York law -- and as the court found in SEC v. Goldman, Sachs & Co. --
the misrepresentations that induced ACA to participate in ABACUS clearly were material;
Goldman Sachs had a duty of disclosure to ACA because it chose to speak and had superior
knowledge concerning Paulsons true role, particularly because it knew that ACA was acting
based on a mistaken belief; and the facts here give rise to a strong inference that Goldman Sachs
acted with scienter -- indeed, other parties whom Goldman Sachs approached concerning
ABACUS but who knew the truth told Goldman Sachs that what it was doing was wrong. The
other issues Goldman Sachs raises -- reasonable reliance and proximate causation -- also are
properly pled in the Complaint and, in any event, issues not capable of resolution on a motion to
dismiss.
Goldman Sachss motion to dismiss is premised not only on a misreading of New York
law but also on its own concocted version of the facts, not the allegations of ACAs Complaint.
Thus, Goldman Sachs argues, for example, that ACA does not contend that it misunderstood the
fundamental nature or risks of the transaction. Def. Mem. 1. But that is precisely what ACA
has alleged -- namely, that because Goldman Sachs deceived ACA as to Paulsons true economic
interest in ABACUS, ACA was misled as to -- and misunderstood -- the fundamental nature and
risk of the transaction. Goldman Sachss fact-intensive arguments at most identify disputed
issues of fact, and none of the documents submitted by Goldman Sachs comes close to utterly
2Goldman Sachs settled the civil claims brought against it by the SEC, agreeing to pay a $550
million fine. SEC v. Goldman, Sachs & Co., 2010 U.S. Dist. LEXIS 119802, at *3-5 (S.D.N.Y.July 20, 2010). That case remains pending against Fabrice Tourre, a Goldman Sachs employee,who made the unsuccessful motion to dismiss the SECs claims.
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refuting ACAs claims, as they must to justify dismissal. Rather, the allegations in the
Complaint must be accepted as true, and Goldman Sachss motion denied.
FACTS
A. Nature Of Collateralized Debt Obligations
ABACUS was a synthetic collateralized debt obligation (CDO), which is a structured
finance product through which investors take indirect economic exposure to the financial
performance of a portfolio of asset-backed securities (the reference portfolio). Compl. 17;
see also id. 11-19. In a synthetic CDO, so-called protection sellers take the long position --
i.e., they profit if the reference portfolio performs well -- and protection buyers take the short
position -- i.e., they profit if the reference portfolio performs poorly. Id. 19. The transaction
sponsor proposes a reference portfolio with specific characteristics and pre-commits to invest in
the CDO, customarily by investing in the equity. Id. 21. Because the equity suffers the first
loss in the event the reference portfolio performs poorly, the transaction sponsor has the
strongest economic incentive of any participant in the CDO to have a high quality reference
portfolio. Id. 13. The portfolio selection agent typically selects the collateral to be included in
the reference portfolio within the parameters established by the transaction sponsor. Id. 22.
The financial guaranty insurer wraps the CDO, that is, issues a financial guaranty policy
effectively insuring the performance of the reference portfolio with specified conditions and
limitations. Id. 14. The investment bank orchestrates the overall transaction and markets the
CDO to investors. Id. 20.
B. Goldman Sachs Agreed To Orchestrate ABACUS For Paulson
In late 2006, Paulson approached Goldman Sachs seeking a way to take a massive short
position on subprime residential mortgage backed securities (RMBS). Id. 10. Paulson did
not want to take the short position in just any portfolio of RMBS but in a portfolio of RMBS that
it had selected and believed was most likely to default. Id. 28. Goldman Sachs enabled
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Paulson to do precisely that. At least one other investment bank, Bear Stearns, declined to
structure such a transaction out of concern for its reputation, comparing Paulson to a bettor
asking a football owner to bench a star quarterback to improve the odds of his wager against the
team. Id. 30. Although Goldman Sachs likewise understood that acting as the investment
bank for the transaction Paulson proposed entailed what Goldman Sachs itself acknowledged
was a reputational risk (id. 32), Goldman Sachs agreed to do so, believing that it would
position Goldman Sachs to compete more aggressively in the growing market for synthetics
written on structured products, which was a huge and enormously profitable market ( id. 34).
C. Goldman Sachs Could Not Enlist A Portfolio Selection Agent
Or Insurer If They Knew Paulson Intended To Short ABACUS
Goldman Sachs soon learned it could not find a portfolio selection agent for ABACUS --
much less a financial guaranty insurer to wrap the CDO -- if Goldman Sachs disclosed that
Paulson, the purported transaction sponsor proposing the reference portfolio, in fact intended to
take an enormous short position against that portfolio. Id. 36. Indeed, GSC Partners (GSC),
an institutional investment manager, declined to act as the portfolio selection agent for that very
reason, later admonishing Goldman Sachs: I do not have to say how bad it is that you guys are
pushing this thing. Id. 37. So, when Goldman Sachs subsequently approached ACA about
acting as the portfolio selection agent for a CDO proposed by Paulson, Goldman Sachs
affirmatively misrepresented that Paulson had pre-committed to take a substantial long position
in ABACUS when in fact -- as Goldman Sachs knew and concealed from ACA -- Paulson was to
be the sole short investor in ABACUS. Id. 25; see also id. 49, 82.
D. Goldman Sachs Fraudulently Induced ACA To Act As Portfolio SectionAgent And Insurer By Misrepresenting That Paulson Was The Equity Investor
In a January 8, 2007 email, ACA asked Goldman Sachs to get us some feedback about
how Paulson intended to participate in ABACUS. Id. 40. Two days later, Goldman Sachs
responded in a January 10, 2007 email purporting to provide a Transaction Summary, and
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misrepresented to ACA that, among other things, Paulson was the Transaction Sponsor. Id.
41; Welch Aff., Ex. B (the January 10 email). The transaction sponsor pre-commits to invest
in the CDO, customarily by taking a long position in the equity tranche. Compl. 21. Indeed, in
summarizing the capital structure, Goldman Sachs described the 0-9% tranche -- i.e., the equity
tranche -- as pre-committed. Id. 43. Goldman Sachs thus misrepresented to ACA that
Paulson had pre-committed to take a long position in ABACUS. Id. 25. Goldman Sachs also
affirmatively misrepresented to ACA in the January 10 email that the economic interests of
Paulson and ACA in ABACUS were align[ed]. Id. 41, 43. Goldman Sachs subsequently
confirmed to ACA in a telephone conversation memorialized in an ACA employees
contemporaneous, hand-written notes that Paulson intended to invest in the equity of ABACUS.
Id. 47. Relying on Goldman Sachss misrepresentations, ACA agreed to act as the portfolio
selection agent for ABACUS and -- as was customary in the financial industry -- permitted
Paulson, as the purported transaction sponsor, to play an influential role in selecting the reference
portfolio. Id. 63; see also id. 4, 50-56, 68, 76.
Paulson manipulated the portfolio selection process to the detriment of every long
position in ABACUS, including the Financial Guaranty. Id. 56. While ACA believed that
Paulson shared its economic incentive to select reference obligations that would perform,
Paulson in fact had an economic incentive to select reference obligations that would default. Id.
25. Indeed, as a representative of Paulson has since testified, ACAs and Paulsons incentives
in the portfolio selection process were exactly opposite. Id. 41. Goldman Sachs was acutely
aware of this perverse dynamic. While observing Paulson and ACA negotiate the reference
portfolio, a Goldman Sachs employee sent an email to a colleague, stating, I am at this ACA
Paulson meeting, this is surreal. Id. 53.3 Ultimately, more than half of the RMBS in the final
3 Goldman Sachss total disregard for the damage inflicted on ACA and others by its misconductis illustrated in other contemporaneous emails as well. Id. 69-72.
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reference portfolio were originally proposed by Paulson, and all of the RMBS in the final
reference portfolio met criteria specified by Paulson, which was more than enough to ensure that
Paulson (as the ultimate and undisclosed protection buyer) would receive enormous contingent
payments under any financial guaranty policy referencing the super senior tranche of ABACUS.
Id. 56.
Unaware that the sole short investor in ABACUS had played an influential role in the
portfolio selection process, and relying on Goldman Sachss misrepresentations, ACA also
agreed to enter into the Financial Guarantee. Id. 49, 59, 62; see also id. 1, 2, 27, 45, 48,
57-58. Knowledge of Paulsons true economic interests would have raised a red flag and caused
senior ACA personnel to decline to approve any participation in ABACUS. Id. 63. This is no
surprise. As a former managing director of Moodys Investors Services, Inc., the rating agency
that rated ABACUS notes, testified before the United States Senate: [i]t just changes the whole
dynamic of the structure where the person who is putting [the transaction] together, choosing
[the reference portfolio], wants it to blow up. Id. 42. ACA brings this action to recover over
$30 million in compensatory damages proximately caused by Goldman Sachss misconduct and
$90 million in punitive damages. Id. 5.
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ARGUMENT
The scope of a courts inquiry on a motion to dismiss under CPLR 3211 is narrowly
circumscribed. P.T. Bank Cent. Asia v. ABN AMRO Bank N.V., 301 A.D.2d 373, 375 (1st Dept
2003). The court must afford the pleadings a liberal construction, take the allegations of the
complaint as true and give the plaintiff the benefit of every possible inference. Id. The court is
not authorized to assess the merits of the complaint or any of its factual allegations, but only to
determine if, assuming the truth of the facts alleged, the complaint states the elements of a
legally cognizable cause of action. Id. at 376. Although CPLR 3016(b) requires fraud claims to
be pled with particularity, that requirement is satisfied when the facts are sufficient to permit a
reasonable inference of the alleged conduct. Pludeman v. Northern Leasing Sys., Inc., 10
N.Y.3d 486, 492 (2008).
Dismissal pursuant to CPLR 3211(a)(1) based on documentary evidence is
appropriately granted only where [such evidence] utterly refutes plaintiffs factual allegations,
conclusively establishing a defense as a matter of law. Goshen v. Mut. Life Ins. Co., 98 N.Y.2d
314, 326 (2002). Documents submitted by a defendant ordinarily merely raise factual issues not
properly decided on a motion to dismiss. Sargiss v. Magarelli, 12 N.Y.3d 527, 531 (2009).
Moreover, documentary evidence submitted by the defendant will seldom if ever warrant
dismissal. Rovello v. Orofino Realty Co., 40 N.Y.2d 633, 636 (1976); see also Johnson v.
Spence, 286 A.D.2d 481, 483 (2d Dept 2001).
I. Goldman Sachss Motion To Dismiss ACAs Fraud Claims Should Be Denied
To properly plead a common-law fraud claim, a plaintiff must allege a misrepresentation
of a material fact, falsity of the misrepresentation, scienter, plaintiffs reasonable reliance on the
alleged misrepresentation, and injury resulting from the reliance. Currie v. Glover, 2010 NY
Slip Op 32044U, at *11 (Sup. Ct. N.Y. Co. July 30, 2010) (Kapnick, J.S.C.). To state a claim for
fraudulent concealment, a plaintiff must allege that the defendant had a duty to disclose material
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information and that it failed to do so. P.T. Bank Cent. Asia, 301 A.D.2d at 376. As set forth
below, the Complaint satisfies each of these elements.
A. The Complaint Properly Pleads An Affirmative Misrepresentation
In its January 10 email, which purported to provide a Transaction Summary to ACA,
Goldman Sachs affirmatively misrepresented to ACA that Paulson was the Transaction
Sponsor, that Paulson had pre-committed to invest in the equity and that, for those reasons,
among others, Paulson and ACA shared a common economic interest in ABACUS. Compl.
41, 43; Welch Aff., Ex. B. Goldman Sachss contention that this email does not contain an
actionable misrepresentation (Def. Mem. 12-14) was correctly rejected in SEC v. Goldman Sachs
& Co., supra. There, the court denied a motion to dismiss filed by Fabrice Tourre -- the
Goldman Sachs employee who, among other things, authored the January 10 email -- holding
that:
[Goldman Sachss] January 10 email to ACA, which included aTransaction Summary describing Paulson as the TransactionSponsor with a pre-committed position in ABACUSs equitytranche, sufficiently alleges a material misrepresentationregarding Paulsons investment interest.
2011 U.S. Dist. LEXIS 62487, at *39-40 (S.D.N.Y. Jun. 10, 2011) (emphasis supplied). There is
no reason to reach a different conclusion here.4
The Complaint also alleges that Goldman Sachs affirmatively misrepresented to ACA
that Paulson and ACA shared a common economic interest in ABACUS and misrepresented to
ACA in its January 10 email that the economic interests of Paulson and ACA in ABACUS were
4 Goldman Sachss contention (Def. Mem. 14) that extreme and unwarranted inferences arerequired to construe the January 10 email as an affirmative misrepresentation is thus patentlyfrivolous. Adelaide Prods., Inc. v. BKN Intl. AG, 834 N.Y.S.2d 3, 6 (1st Dept 2007) isinapposite because, there, the fraud claim was dismissed as premised on vague oralrepresentations, whereas, here, Goldman Sachss misrepresentations to ACA were specific andin writing.
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align[ed]. Compl. 41; Welch Aff., Ex. B. In fact, as Goldman Sachs knew, the economic
interests of Paulson and ACA in ABACUS were in direct and irreconcilable conflict. Compl.
39. This misrepresentation too is actionable. See, e.g., Veras Inv. Partners v. Akin Gump
Strauss Hauer & Feld LLP, 17 Misc. 3d 1103A, 2007 NY Slip Op 51820U, at *2-3 (Sup. Ct.
N.Y. Co. Sept. 27, 2007) (denying motion to dismiss fraud claim premised on misrepresentation
that defendants interests were aligned with plaintiffs).5
B. The Complaint Properly Pleads Fraudulent Concealment
The Complaint alleges that Goldman Sachs concealed from ACA a credit default swap
between Goldman Sachs and Paulson that made Paulson the ultimate and undisclosed protection
buyer (i.e., the short investor) in ABACUS. Compl. 25, 33; see also id. 82. Goldman Sachs
acknowledges (Def. Mem. 20) that where the defendant has a duty to disclose, a fraud cause of
action may be predicated on concealment. Goldman Sachs argues, however, that ACA has
failed to plead the existence of a duty to disclose. Id. Goldman Sachs is wrong.
First, ACA has sufficiently pleaded that, by undertaking to characterize Paulsons
economic interest in ABACUS at all, Goldman Sachs assumed a duty of complete and accurate
disclosure. As the court held in SEC v. Goldman Sachs & Co., based on the same facts, Goldman
Sachs:
5Goldman Sachs argues (Def. Mem. at 13, n. 8) that it only meant to represent that the
economic interests of ACA and Paulson were aligned in some narrow sense related to earningfees if the notes were distributed. But Goldman Sachss January 10 email was in response toACAs broad inquiry as to how Paulson intended to participate in ABACUS. And, asGoldman Sachs knew, the fundamental economic interests of ACA and Paulson in ABACUSwere diametrically opposed. Compl. 42. In that context, Goldman Sachss representation thatthe economic interests of ACA and Paulson were aligned in any sense was, at best, misleadingand actionable. Computer Possibilities Unlimited, Inc. v. Mobil Oil Corp., 301 A.D.2d 70, 82(1st Dept 2002) (by responding to [plaintiff]s reasonable inquiry with, at best, a half-truth,[defendant] arguably made a fraudulent misrepresentation of fact.).
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having allegedly affirmatively represented Paulson had a particularinvestment interest in ABACUS -- that it was long -- in order tobe both accurate and complete[,] . . . had a duty to disclosePaulson had a different investment interest -- that it was short.
2011 U.S. Dist. LEXIS 63487, at *41 (quoting Cailoa v. Citibank, N.A., New York, 295 F.3d
312, 331 (2d Cir. 2002) (once defendant chose to discuss its hedging strategy, it had a duty to
be both accurate and complete)); see also Junius Const. Co. v. Cohen, 257 N.Y. 393, 400
(1931) (having undertaken or professed to mention them, he could not fairly stop half way,
listing those that were unimportant and keeping silent as to the other).
Second, ACA has also sufficiently pleaded that Goldman Sachs had a duty to disclose
under the special facts doctrine, under which a duty to disclose arises where one partys
superior knowledge of essential facts renders a transaction without disclosure inherently unfair.
Harbinger Capital Partners Master Fund I, Ltd. v. Wachovia Capital Mkts., LLC, 27 Misc. 3d
1236A, 2010 NY Slip Op 51046U, at *9 (Sup. Ct. N.Y. Co. 2010) (Kapnick, J.S.C.)
(Harbinger) (quoting P.T. Bank Cent., 301 A.D.2d at 378)). Thus, where one party
possesses superior knowledge, not readily available to the other, and knows that the other is
acting on the basis of mistaken knowledge, there is a duty to disclose that information.
Stevenson Equipment, Inc. v. Chemig Constr. Corp., 170 AD2d 769, 771 (3d Dept), affd, 79
N.Y.2d 989 (1992).
Here, the Complaint alleges that: Goldman Sachs had superior knowledge that Paulson
was the sole short investor in ABACUS who had played an influential role in selecting the
reference portfolio (Compl. 63; see also id. 4, 50-56); Goldman Sachs knew that ACA was
acting on the mistaken belief that Paulson had a long position in ABACUS (id. 44, 86); and
knowledge of Paulsons true economic interest in ABACUS was not readily available to ACA
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(see infra Section I.E.4).6
Goldman Sachss failure to disclose the truth rendered the transaction
inherently unfair because ACA believed that Paulson had an economic incentive to select
reference obligations that would perform, when in fact -- as Goldman Sachs knew and concealed
from ACA -- Paulson had an economic incentive to select reference obligations that would
default. Compl. 25. At a minimum, whether Goldman Sachs had a duty to disclose in these
circumstances turns on questions of fact that are inappropriate to determine on a motion to
dismiss. Harbinger, 2010 NY Slip Op 51046U, at *9 (quoting P.T. Bank Cent. Asia, 301 A.D.2d
at 378); see also Citi Mgt. Group, Ltd. v. Highbridge House Ogden, LLC, 45 A.D.3d 487, 487-
488 (1st Dept 2007) (given the potential application of the special facts doctrine, defendant has
stated a cause of action [] for fraudulent concealment).
C. The Complaint Properly Pleads Materiality
Contrary to Goldman Sachss argument (Def. Mem. 15-16), the court in SEC v. Goldman,
Sachs & Co. held -- again, on the same facts -- that Goldman Sachss misrepresentation of
Paulsons economic interest was material. 2011 U.S. Dist. LEXIS 62487, at *39-40 (Tourres
January 10 email to ACA . . . sufficiently alleges a material misrepresentation regarding
Paulsons investment interest).
The Complaint here likewise pleads (Compl. 30, 36, 37, 42, 49, 63) that Paulsons
economic interest in ABACUS was material to ACAs decision to enter into the Financial
Guaranty. Thus, the Complaint alleges, among other things, that knowledge of Paulsons true
economic interests would have raised a red flag and caused senior ACA personnel to decline to
6 Goldman Sachss assertion (Def. Mem. 21) that there was no information imbalance betweenGoldman Sachs and ACA is nothing more than a denial of ACAs allegations, which is not aproper basis for dismissal. Swersky v. Dreyer & Traub, 219 A.D.2d 321, 328 (1st Dept 1996)(reversing dismissal due to outstanding issues as to whether the disparity in the level ofinformation . . . places this case within the ambit of the special facts doctrine).
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approve any participation in [ABACUS]. Compl. 63; see also id. 55, 59.7
Indeed, two
potential participants in ABACUS, the investment bank Bear Stearns and the collateral manager
GSC -- who, unlike ACA, were candidly advised that Paulson intended to short the reference
portfolio -- declined to participate in ABACUS for that very reason. Compl. 30, 37. This is
more than enough to conclude that knowledge of Paulsons true economic interest in ABACUS
was, as the court in SEC v. Goldman, Sachs & Co. found, material in that it would have
influence[d] ACAs decision to enter into the Financial Guarantee. Sebring v. Fidelity-Phenix
Fire Ins. Co., 255 N.Y. 382, 385 (1931). A fact may not be dismissed as immaterial unless it is
so obviously unimportant that reasonable minds could not differ on the question of [its]
importance. Swersky, 219 A.D.2d at 328 (citation, internal quotations and ellipses omitted).
Ordinarily, the question of materiality of [a] misrepresentation is a question of fact for the jury.
Dwyer v. First Unum Life Ins. Co., 41 A.D.3d 115, 116 (1st Dept 2007) (citation omitted). 8
D. The Complaint Properly Pleads Scienter
Again contrary to Goldman Sachss argument (Def. Mem. 19-20), the court in SEC v.
Goldman, Sachs & Co. held that the circumstances here give rise to an inference ofscienter.
2011 U.S. Dist. LEXIS 62487, at *42 (SEC adequately alleges Tourre made the material
misrepresentations and omissions . . . with scienter).
Here, the Complaint alleges that Goldman Sachs knew that it was effectively working an
order for Paulson to short the reference portfolio. Compl. 33. Indeed, Goldman Sachs was
7 Goldman Sachss challenge to the good faith of ACA witnesses whose testimony in othervenues supports this allegation (Def. Mem. 16 n.10) is baseless and, in any event, only confirmsthat materiality is not subject to summary disposition in this action. Brunetti v. Musallam, 11A.D.3d 280, 281 (1st Dept 2004).
8 Goldman Sachs contention that Paulsons short position in ABACUS could not have beenmaterial because someone had to take the short position misses the point completely. Def.Mem. 15 (emphasis in original). Paulson was not just any short investor; Paulson was thepurported transaction sponsor and, as such, played an influential role in selecting the referenceportfolio. Compl. 63, 76.
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the counterparty to the credit default swap that made Paulson the ultimate and undisclosed short
investor in ABACUS. Id. 25. As Goldman Sachs soon discovered, however, no one would
agree to act as the portfolio selection agent, or otherwise participate in ABACUS, if Goldman
Sachs candidly disclosed Paulsons intent to short the reference portfolio. Id. 36; see also id.
30, 37. These circumstances powerfully support the inference that Goldman Sachs knowingly
misrepresented Paulsons economic interest in ABACUS in order to induce ACA to participate
in the transaction. Id. 38. Moreover, a partys state of mind is a quintessential question of fact
and fraudulent intent is rarely amenable to adjudication on a motion to dismiss. See, e.g., Shisgal
v. Brown, 21 A.D.3d 845, 847 (1st Dept 2005) (fraudulent intent is ordinarily a question of
fact which cannot be resolved on a motion [to dismiss].). And, inasmuch as [p]articipants in a
fraud do not affirmatively declare to the world that they are engaged in the perpetration of a
fraud, the intent to commit fraud is to be divined from surrounding circumstances. Oster v.
Kirschner, 77 A.D.3d 51, 55-56 (1st Dept 2010). Accordingly, all that New York law requires
is that the complaint contains some rational basis for inferring that the alleged misrepresentation
was knowingly made. Houbigant, Inc. v. Deloitte & Touche LLP, 303 A.D.2d 92, 98 (1st Dept
2003) (reversing dismissal); see also Seaview Mezzanine Fund, LP v. Ramson, 77 A.D.567, 568
(1st Dept 2010) (Plaintiff also properly pled scienter by alleging that defendants knowingly
made false representations); Harbinger, 2010 NY Slip Op 51046U, at *14 (denying motion to
dismiss because reasonable to infer knowing misrepresentation).
An internal Goldman Sachs communication conclusively confirms that Goldman Sachs
intended to mislead ACA. While observing Paulson and ACA negotiate the reference portfolio,
Tourre sent an email to a Goldman Sachss colleague, stating, I am at this ACA Paulson
meeting, this is surreal. Id. 53. What Tourre meant by surreal was that, at the meeting,
Paulson proposed RMBS, ostensibly in a good faith effort to select those that it considered least
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likely to default, when in fact -- as Goldman Sachs was acutely aware and ACA did not know --
Paulson proposed RMBS that it considered mostlikely to default. Id. 53. It is more than
reasonable to infer that Goldman Sachs intentionally mislead ACA from Goldman Sachss
silence in the face of ACAs manifest detrimental reliance on its mistaken belief that Paulson
was on the same side of the transaction. Harbinger, 2010 NY Slip Op 51046U, at *14.9
Goldman Sachs nonetheless argues that, if it had an intent to commit fraud, it would have
kept the short position for itself and avoided any long position. Def. Mem. 20; see also id. 3.
That is not so. First, as Tourre testified before the United States Senate, Goldman Sachs never
had any intention of retaining a long position in ABACUS. 10 Second, Goldman Sachs had ample
opportunity through other transactions to satisfy any appetite it had for shorting RMBS.11 In any
event, as the Complaint alleges, far from being commercially irrational (Def. Mem. 19),
Goldman Sachss agreement to help Paulson short the reference portfolio (Compl. 32) was part
of a carefully considered strategy to position [Goldman Sachs] to compete more aggressively in
the growing market for similar structured products, which was a huge and enormously
profitable market (id. 65). Indeed, in the three years leading up to ABACUS, Goldman Sachs
structured 47 synthetic CDOs with an aggregate face value of $66 billion -- all of which
generated underwriting fees and other profits for Goldman Sachs. Id. 65.
9 Although Goldman Sachs was more than simply reckless, allegations supporting an inferenceof reckless indifference to error also satisfy the element of scienter. Skrine v. Staiman, 30A.D.2d 707 (2d Dept 1968), affd, 23 N.Y.2d 946 (1969); see, e.g., Payton v. Aetna/Us
Healthcare, 2000 N.Y. Misc. LEXIS 91, at *14-15 (Sup. Ct. N.Y. Co. Mar. 22, 2000) (denyingmotion to dismiss).10
See Report of the United States Senate Permanent Subcommittee on Investigations, WallStreet & The Financial Crisis: Anatomy of a Financial Collapse, dated April 13, 2011, at 572,n.2552, available at,http://hsgac.senate.gov/public/_files/Financial_Crisis/FinancialCrisisReport.pdf11
Goldman Sachs is charged with structuring at least one other CDO to fail so that GoldmanSachs itself could profit by shorting the reference portfolio. See Heungkuk Life Insurance Co.,et. al, v. The Goldman Sachs Group, Inc., et. al, Sup. Ct. N.Y. Co., Index No. 650978/2011(Complaint, at 3; 71).
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E. The Complaint Properly Pleads Reasonable Reliance
The Complaint properly pleads that ACA reasonably relied on Goldman Sachss written
representations concerning Paulsons economic interests in ABACUS. Id. 40, 41, 43, 47,
48.12 The Complaint alleges that, in response to ACAs inquiry as to how Paulson intended to
participate in ABACUS, Goldman Sachs represented to ACA, in a detailed email purporting to
provide a Transaction Summary, that Paulson was the Transaction Sponsor, that Paulson had
pre-committed to invest in the equity and that Paulsons and ACAs economic interests in the
transaction were aligned. Compl. 40, 41, 43. See Bank Hapoalim (Switzerland) Ltd. v.
Banca Intesa S.p.A., 22 Misc. 3d 1104A, 2008 NY Slip Op 52596U, at *4 (Sup. Ct. N.Y. Co.
Dec. 23, 2008) (A party may be found to have reasonably relied on another partys written
representations, if the documents would not, on their face, have alerted the party to potential
fraud.) (citing E*Trade Fin. Corp. v. Deutsche Bank AG, 420 F. Supp. 2d 273, 288 (S.D.N.Y.
2006) (No authority holds reliance to be unreasonable unless plaintiff saw red flags or other
circumstances existed that made reliance unquestionably unreasonable.).
There was nothing on the face of the January 10 email or anywhere else that alerted ACA
to potential fraud. To the contrary, consistent with Goldman Sachss misrepresentations, it was
customary in the financial industry for the transaction sponsor to invest in the equity of the
transaction. Compl. 21. Moreover, Goldman Sachs orally confirmed that Paulson intended to
invest in the equity. Id. 47. Indeed, as Goldman Sachs knew, Paulson reinforced the false
impression that it shared ACAs long economic interest in the transaction by objecting to certain
RMBS on the purported basis that they were too risky. Id. 55. Conversely, Paulsons
undisclosed short position was a stark departure from the basic assumption in the financial
industry that the people putting deals together [] want the deal to succeed. Id. 42. And,
12 Reliance, damages, and causation were not at issue on the motion to dismiss in SEC v.Goldman, Sachs & Co. See id., 2011 U.S. Dist. LEXIS 62487, at *39.
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Paulsons short position in ABACUS was not discoverable through any publicly available
source of information. Id. 25.
In short, ACAs reliance on Goldman Sachss written misrepresentations was reasonable
in the circumstances. Goldman Sachss fact-based arguments to the contrary do nothing more
than identify disputed issues of fact that are inappropriate to determine . . . as a matter of law.
P.T. Bank Cent. Asia, 301 A.D.2d at 378. The question of what constitutes reasonable reliance
is always nettlesome because it is so fact-intensive. DDJ Mgt., LLC v. Rhone Group L.L.C., 15
N.Y.3d 147, 155 (2010) (citation and quotation omitted). No two cases are alike in all relevant
ways. Id. Accordingly, whether a plaintiff was justified in relying on a defendants
misrepresentations is ordinarily a question to be resolved by the trier of fact. Id. at 156; see
also MBIA Ins. Co. v. GMAC Mtge. LLC, 30 Misc. 3d 856, 863 (Sup. Ct. N.Y. Co. 2010)
(inappropriate as a matter of law during the pleadings stage to determine whether plaintiff was
justified in relying on [defendants] misrepresentations.) (quoting P.T. Bank Cent. Asia, 301
A.D.2d at 378).
1. The Offering Circular Does Not Even Suggest, Much Less Establish,
That There Was No Equity Investor In ABACUS
Goldman Sachs asserts that ACA should have known that Paulson was not the equity
investor in ABACUS based on offering and other transaction materials that it claims show that
there was no equity investor in the transaction. Def. Mem. 2 (emphasis in original); see also
id. at 9, 15. However, Goldman Sachs has already admitted -- in connection with its $550
million settlement with the SEC -- that these materials contained incomplete information and,
in particular, failed to disclose that Paulsons economic interests were adverse to CDO
investors. Welch Aff., Ex. A 3.13 Not surprisingly, given Goldman Sachss admissions, the
13Goldman Sachss attempt to deflect the impact of these damaging statements by
mischaracterizing them as mere allegations or statements made by the SEC fails. Def. Mem.2, n.2 (emphasis supplied). These statements are admissions made by Goldman Sachs in its own
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materials it submits now in no way show that there was no equity investor.14
At most, they
suggest that ABACUS did not issue equity notes. It does not follow, as Goldman Sachs contends,
that no one was investing in the first loss tranche. Def. Mem. 9 (emphasis in the original). As
Goldman Sachs knows, long investors can participate in the capital structure of a synthetic CDO
such as ABACUS either by purchasing notes or by selling protection on a specified tranche of
the capital structure. Compl. 18. In fact, ACA understood that Paulson intended to take a
long position in the equity tranche of ABACUS through a [credit default swap], not by
purchasing notes. Compl. 60.15 Thus, far from utterly refut[ing] ACAs allegations, the
documents submitted by Goldman Sachs do not even support its contentions. Goshen, 98
N.Y.2d at 326.16
2. The Disclaimers In The Offering Circular Are Inapplicable And Ineffective
Goldman Sachs argues (Def. Mem. 17-18) that disclaimers in the Offering Circular for
ABACUS notes preclude, as a matter of law, reasonable reliance on Goldman Sachss
words. People v. Swart, 273 A.D.2d 503, 505 (3d Dept 2000) (A partys admissions of any
inculpatory material fact are always competent evidence against him or her).14 Those materials are: (i) the Offering Circular for certain ABACUS notes (Dunne Decl., Ex.D); (ii) the Preliminary Terms of certain ABACUS notes (id, Ex. O); and (iii) ACAs quarterlystatement for the second quarter of 2007 (id., Ex. K), which, Goldman points out, refers tocertain ABACUS notes but not to unrated first loss notes (Def. Mem. 15).
15 Goldman Sachss interpretation of the Offering Circular (Def. Mem. 9-10) is also contradictedby the circular itself. If a notation of $0 in the table at issue necessarily meant that there wasno investor in the specified tranche, then the table as construed by Goldman Sachs would meanthat there was no investor in the SS (super senior) tranche. In fact, as Goldman Sachsacknowledges (Def. Mem. 8), ACA took $909 million in long exposure to the super seniortranche of ABACUS. Compl. 62.16
Goldman Sachss reliance on In re Hyperion Secs. Litig. and Eckstein is misplaced. Def.Mem. 14-15. Here, in contrast to Hyperion, the undisclosed risks of participating in ABACUSwere never truthfully communicated and fully revealed by Goldman Sachs in the transactiondocuments or anywhere else. In re Hyperion Secs. Litig., 1995 U.S. Dist. LEXIS 13032, at *1(S.D.N.Y. Sept. 6, 1995); see also Eckstein v. Balcor Film Investors, 8 F.3d 1121, 1131 (7th Cir.1993) (partial disclosures in sales literature not actionable where prospectus contained fulldisclosure).
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misrepresentation of Paulsons economic interest in ABACUS. That is not so. First,
disclaimers have no impact . . . on the sufficiency of [] fraud allegations against [] non-parties
[to the contract]. MBIA Ins. Corp. v. Royal Bank of Can., 28 Misc. 3d 1225A, 2010 NY Slip
Op 51490U, at *35, n.15 (Sup. Ct. Westchester Co. Aug. 19, 2010) (citations omitted); see id. at
*35 (disclaimer defense only applies to the counterparty to the [] CDS contracts). Here, as
Goldman Sachs ignores or attempts to obfuscate, ACA does not have and does not assert any
note-based claims.17 Instead, ACA claims that it was fraudulently induced to enter into the
Financial Guaranty (Compl. 62), which is a distinct obligation. National Union Fire Ins. Co.
v. Robert Christopher Assocs., 257 A.D.2d 1, 6 (1st Dept 1999). Consequently, the disclaimers
in the Offering Circular -- which pertain solely to the notes -- are inapplicable to ACAs claims,
which do not arise from the notes. Steinhardt Group, Inc. v. Citicorp, 272 A.D.2d 255, 257 (1st
Dept 2000) (non-party not bound by disclaimer in agreement, even though it held pervasive
control over the entities that did sign the [] agreement.).
In any event, for a disclaimer to be effective, it must be specifically applicable to the
alleged misrepresentation at issue. Silver Oak Capital L.L.C. v. UBS AG, 82 A.D.3d 666, 667
(1st Dept 2011) (general disclaimers contained in the private placement memorandum
ineffective); see also Cailoa, 295 F.3d at 330 (disclaimer is generally enforceable only if it
tracks the substance of the alleged misrepresentation) (collecting cases). Here, the boilerplate
disclaimers in the Offering Circular -- i.e., that note purchasers were not relying on Goldman
17 Goldman Sachss notes (Def. Mem. at 11, n.7) that ACA amended its original complaint toomit note-based claims. Goldman Sachs fails to mention, however, that account statements itproffered in support of its moot motion to dismiss ACAs original complaint (Dunne Decl., Ex.G) established that ACA Management LLC purchased ABACUS notes -- not on behalf of ACA -- but on behalf of three CDOs that it managed. As a financial guarantor, ACA does not havestanding to assert securities fraud claims arising from the purchase or sale of the securitiesguaranteed. AMBAC Assur. Corp. v. EMC Mortg. Corp., 2011 U.S. Dist. LEXIS 14111, at *8(S.D.N.Y. Feb. 8, 2011) (Ambac does not obtain standing [to pursue securities law claims] byvirtue of its status as a guarantor of an asset-backed note).
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Sachs for investment advice in purchasing notes -- do not even come close to specifically
disclaiming Goldman Sachss misrepresentations concerning Paulsons economic interest in
ABACUS.18
Moreover, even assuming arguendo that the disclaimers were sufficiently specific,
a disclaimer cannot preclude reliance on misrepresentations of facts peculiarly within the
[defendant]s knowledge, notwithstanding the execution of a specific disclaimer. Steinhardt
Group, Inc., 272 AD. 2d at 257 (citing Tahini Invest., Ltd. v. Bobrowsky, 99 A.D.2d 489, 490 (2d
Dept 1984)). Accordingly, even if the disclaimers in the Offering Circular were applicable,
which they are not, they would be ineffective.
3. ACAs Sophistication Does Not Preclude Reasonable Reliance
Goldman Sachs asserts (Def. Mem. 18) that New York courts are particularly
disinclined to find that a sophisticated plaintiff reasonably relied on fraudulent
misrepresentations. As the Court of Appeals has recently emphasized, however, even a
sophisticated plaintiff can be the victim of fraud. DDJ Mgt., LLC, 15 N.Y.3d at 156 (reversing
dismissal of fraud claims asserted by sophisticated plaintiff). Where a sophisticated plaintiff has
taken reasonable steps to protect itself against deception, it should not be denied recovery
merely because hindsight suggests that it might have been possible to detect the fraud when it
occurred. Id. at 154 (discussing, inter alia, Danann Realty Corp. v. Harris, 5 N.Y.2d 317, 322
(1959)). Here, ACA specifically asked Goldman Sachs -- the investment bank that orchestrated
the transaction and approached ACA about acting as the portfolio selection agent -- how Paulson
intended to participate in ABACUS. Compl. 40. In response, Goldman Sachs made detailed
written representations about Paulsons economic interest in the transaction that were false and
18MBIA Ins. Corp. v. Merrill Lynch (Def. Mem. 17) is distinguishable because, unlike the
plaintiff in that case, ACA did not specifically disclaim[] reliance on the very information-- i.e., that the sole short investor played an influential role in the portfolio selection process(Compl. 63) -- which [ACA] now claims caused it to be misled. 27 Misc. 3d 1233A, 2010NY Slip Op 51027U, at *5 (Sup. Ct. N.Y. Co.), affd, 81 A.D.3d 419 (1st Dept 2011).
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misleading yet consistent with the customary role of a transaction sponsor. Id. 21, 41, 43.
Whether ACA should have taken further measures to investigate in the specific circumstances
of this case is an issue of fact that precludes dismissal. Byung Chul An v. Dyche, 2011 NY Slip
Op 30945U, at *34-35 (Sup. Ct. N.Y. Co. Apr. 5, 2011).19
4. ACAs Access To Paulson Does Not Preclude Reasonable Reliance
Goldman Sachss contention (Def. Mem. 2, 16, 18) that ACA should have asked Paulson
about its position in the transaction, instead of asking Goldman Sachs, is unavailing. Because
the economic interests of ACA and Paulson in the transaction were, contrary to Goldman Sachss
misrepresentations, exactly opposite (Compl. 41), it is at best entirely speculative to conclude
that Paulson would have been any more candid with ACA than was Goldman Sachs. Swersky,
219 A.D.2d at 327 (reversing dismissal). At the very least, the value of [ACAs] access to
Paulson is questionable, and, therefore, whether ACA had the means available to [it] of
knowing, by the exercise of ordinary intelligence, the truth, is an issue of fact which precludes
dismissal. Id. (quoting Danann Realty Corp., 5 N.Y.2d at 322); see also Sachs v. Adeli, 2006
N.Y. Misc. LEXIS 2615, at *51 (Sup. Ct. N.Y. Co. Aug., 26, 2006) (denying summary judgment
where unclear . . . how candid [defendant] would have been . . . [e]ven if plaintiff had
[asked].). This Court thus has repeatedly denied motions to dismiss fraud claims where further
inquiries may have proven futile. See, e.g., Harbinger, 2010 NY Slip Op 51046U, at *9
(denying motion to dismiss because not apparent at this early stage of the litigation that the true
nature of the situation would have been revealed even upon inspection); GMAC Mtge. LLC, 30
19UST Private Equity Investors Fund, Inc. v. Salomon Smith Barney, 288 A.D.2d 87 (1st Dept
2001) (Def. Mem. 19) is distinguishable. In that case, plaintiff alleged that its representative hadbeen provided with a list identifying the very documents that ultimately alerted him to thealleged fraud, which he could have reviewed but chose not to review. 288 A.D.2d at 88. Here,by contrast, ACA alleges that Goldman Sachs affirmatively concealed the credit default swapthat made Paulson the ultimate and undisclosed protection buyer in ABACUS, which was notdiscoverable through any publicly available source of information. Compl. 25.
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NY Slip Op 51850U, at *6 (Sup. Ct. N.Y. Co. 2005) (denying motion to dismiss because
foreseeable that [plaintiff] would suffer losses once it was induced by defendants
representations into the transaction)). Given the unique nature of the inquiry in each case, it is
for the finder of fact to determine [proximate] cause, once the court has been satisfied that a
prima facie case has been established. Derdiarian v. Felix Contractor Corp., 51 N.Y.2d 308,
315 (1980); see also EBC I, Inc. v. Goldman Sachs & Co., 7 A.D.3d 418, 421 (1st Dept), affd,
5 N.Y.3d 11, 18 (2005) (reversing dismissal because proximate cause of the damages claimed is
an issue of fact inappropriate for determination at this juncture) (citing Laub).
Here, the Complaint alleges that ACAs losses were a foreseeable result of Goldman
Sachss misrepresentation and concealment of Paulsons economic interest in ABACUS. By
misrepresenting Paulson to be the transaction sponsor, Goldman Sachs enabled Paulson to play
an influential role in the portfolio selection process. Compl. 50-56, 76. Playing the
customary role of a purported transaction sponsor, Paulson specified the parameters of the
collateral to be included in the reference portfolio; specified the RMBS to be included in the
initial reference portfolio; proposed additional RMBS to be included in the final reference
portfolio; and vetoed specific RMBS that ACA proposed be included in the final reference
portfolio. Id. 24.21
As Goldman Sachs and Paulson intended from the outset (id. 28, 32,
33), Paulsons influential role in selecting the reference portfolio had a direct and adverse impact
on the performance of every long position in ABACUS, including the Financial Guaranty. Id.
21Goldman Sachss attempt to minimize Paulsons role in the portfolio selection process is
disingenuous. Def. Mem. 6-8, 15, 16. Although a defendant generally neither admits nordenies liability in a settlement (Def. Mem. 2 n. 2), in this instance, Goldman Sachs admitted ina Consent Order with the SEC that it was a mistake for the Goldman marketing material to statethat the reference portfolio was selected by ACA Management LLC without disclosing the roleof Paulson & Co., Inc. in the portfolio selection process . . . . Welch Aff., Ex. A 3 (emphasissupplied).
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23
56; see also id. 73-75.22
It was, therefore, foreseeable that [ACA] would suffer losses once
it was induced by [Goldman Sachss] representations to insure the performance of the reference
portfolio. Sterling Natl. Bank, 2005 NY Slip Op 51850U at *6. That is sufficient to plead loss
causation under New York common law. MBIA Ins. Corp., 2011 NY Slip Op 5640 at *6; Silver
Oak Capital, LLC, 82 A.D.3d at 667.
Goldman Sachs predictably seeks to blame the financial crisis for causing ACAs
injuries (Def. Mem. 22-23) -- a crisis in which Goldman Sachs itself played a major, causative
role (Compl. 4, 66-68). But Goldman Sachss assertion that a superseding cause is
responsible for ACAs alleged injuries -- not its own misconduct -- is not a proper basis for
dismissal. As the Court of Appeals has cautioned, whether a purported superseding cause
relieves a defendant of liability for its misconduct almost invariably raises issues for the fact
finder to resolve. Lynch v. Bay Ridge Obstetrical & Gynecological Assoc., P.C., 72 N.Y.2d
632, 636-637 (1988); see also Morris v. Lenox Hill Hosp., 232 A.D.2d 184, 185 (1st Dept),
affd, 90 N.Y.2d 953 (1997) (reversing summary judgment because superseding causation
theory requires the resolution of factual inferences in favor of defendants); Reis v. Volvo Cars
of North American, Inc., 2009 NY Slip Op 30467U, at *14 (Sup. Ct. N.Y. Co. Mar. 3, 2009)
(denying summary judgment because jury should be permitted to decide whether [third partys]
conduct was sufficient to break the chain of causation).
Goldman Sachs submits a one-page chart of undisclosed provenance that its counsel
apparently printed off the internet purporting to show that all RMBS of a specified rating and
22The outcome in Laub is distinguishable. In Laub, the plaintiff did not even allege how the
defendants misrepresentations about his competencies as an investment advisor did affect orcould have affected the performance of the publicly traded stocks that he recommended. Laub,297 A.D.2d at 31. Here, by contrast, the Complaint alleges that Goldman Sachssmisrepresentations enabled Paulson to manipulate the portfolio selection process to the detrimentof every long economic position in ABACUS. Compl. 41-63. That is the nexus that wasabsent in Laub. Id., 297 A.D.2d at 32.
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24
vintage (year of origination) suffered similarly during the financial crisis. Def. Mem. 22;
Dunne Decl., Ex. R. This chart does not even qualify as documentary evidence under CPLR
3211(a)(1) and, therefore, is not a proper basis for dismissal. Weil, Gotshal & Manges, LLP v.
Fashion Boutique of Short Hills, Inc., 10 A.D.3d 267, 271 (1st Dept 2004) (reversing dismissal
premised on documents that did not qualify as documentary evidence).23 Even if the chart
were properly before the Court, it does not come close to conclusively establishing a defense as
a matter of law. Goshen, 98 N.Y.2d at 326.24 Accordingly, as the First Department recently
held in another case alleging misconduct in the context of the financial crisis, [i]t cannot be
said, on this pre-answer motion to dismiss, that [the alleged] losses were caused, as a matter of
law, by the 2007 housing and credit crisis. MBIA Ins. Corp., 2011 NY Slip Op 5640 at *7.25
II. ACAs Unjust Enrichment Claim Is Well Pled
Goldman Sachss contention -- that an unjust enrichment claim is never cognizable
where a valid contract exists between the parties -- is too broadly stated. Spirit Locker, Inc. v.
EVO Direct, LLC, 696 F. Supp. 2d 296, 305 (E.D.N.Y. 2010); see Def. Mem. 23-24. A party
may not bring an unjust enrichment suit only where it could instead bring a claim for breach of
23To qualify as documentary evidence for the purposes of CPLR 3211(a)(1), a document must
be unambiguous and essentially undeniable, such as judicial records or documentsmemorializing out-of-court transactions. Fontanetta v. John Doe 1, 73 A.D.3d 78, 84 (2d Dept2010) (discussing history and purpose of CPLR 3211(a)(1)).24
Goldman Sachs ignores, among other things, that Paulson specified the rating and vintage ofthe RMBS to be included in the reference portfolio (Compl. 24) and assumes, without basis,that the price movement of the ABX index was a proxy for the performance of the referenceportfolio and ACAs liability under the Financial Guaranty.25
See also Lentell, 396 F.3d at 174 ([i]f the loss was caused by an intervening event, like ageneral fall in the price of Internet stocks, the chain of causation . . . is a matter of proof at trialand not to be decided on a [] motion to dismiss.); King County v. IKB Deutsche Industriebank
AG, 708 F. Supp. 2d 334, 343 (S.D.N.Y. 2010) (fact that credit crisis occurredcontemporaneously with [plaintiff]s collapse would place too much weight on one single factorand would permit [defendants] to blame the asset-backed securities industry when their allegedconduct plausibly caused at least some proportion of plaintiffs losses.).
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contract covering the same subject-matter. Id. (citing Clark-Fitzpatrick, Inc. v. Long Island R.R.
Co., 70 N.Y.2d 382, 389-90 (1987)). Here, there is no contract between Goldman Sachs and
ACA providing agreed-upon compensation for the enrichment, and, therefore, there is no bar
to ACAs unjust enrichment claim. Id. Goldman Sachs argues in the alternative -- based
exclusively on a self-serving press release -- that it was not enriched. Def. Mem. 24. Even
assuming arguendo that Goldman Sachs lost money on some aspect of the transaction, whether
and how Goldman Sachs was enriched by its participation in ABACUS is an issue of fact that is
not amenable to adjudication on the pleadings. Bank of New York v. Irwin Intl Imports, 197
A.D.2d 462, 462 (1st Dept 1993) (denying summary judgment because issue of fact whether
defendant was indeed enriched.).
CONCLUSION
For the reasons set forth above, Goldman Sachss motion to dismiss the Complaint
should be denied in its entirety.26
Dated: New York, New YorkJuly 7, 2011
KASOWITZ, BENSON, TORRES
& FRIEDMAN LLP
By: /s/ Trevor J. WelchMarc E. KasowitzHarold G. LevisonAndrew K. GlennTrevor J. WelchHenry B. Brownstein1633 BroadwayNew York, New York 10019(212) 506-1700
Attorneys for Plaintiff ACA FinancialGuaranty Corp.
26In the event the Court grants any aspect of Goldman Sachss motion to dismiss, ACA
respectfully requests leave to amend the Complaint. Mandel, Resnik & Kaiser, P.C. v. E.I.Electronics, Inc., 41 A.D.3d 386, 388 (1st Dept 2007) (leave to amend the pleadings is freelygranted, absent prejudice).