NEW YORK (Reuters) — A New York state
appeals court on Thursday refused to dismiss a $1.07 billion lawsuit
accusing Goldman Sachs Group Inc <GS.N> of selling securities as the
financial crisis began that it expected to lose value.
The lawsuit, brought by Australian hedge fund Basis Yield Alpha
Fund, says Goldman made misleading statements and omissions about
collateralized debt obligations known as Timberlake and Point
Pleasant. It claims Goldman sold the securities as a way to offload
subprime mortgages it knew were toxic and also sought to profit by
shorting the securities.
In its ruling, a five-judge appeals panel said a lower court rightly
declined to dismiss the fraud claims, rejecting Goldman's view that
they should be thrown out because of disclosures and risk
disclaimers in its offering circulars.
If the fund's allegations are true, "there is a 'vast gap' between
the speculative picture Goldman presented to investors and the
events Goldman knew had already occurred," Justice Dianne Renwick
wrote in the decision on behalf of four judges on the court. A fifth
judge concurred with different reasoning.
The court dismissed negligent misrepresentation, unjust enrichment
and rescission claims against Goldman. But it also refused to order
the case into arbitration, as the bank had sought.
"This is an excellent decision affirming that sellers of securities
have to speak honestly and cannot use the fine print to avoid
responsibility," said Eric Lewis, a lawyer who represents Basis
Yield. "Goldman knew they had fixed the race. The securities were
designed to fail."
Goldman has said the losses were caused by the collapse of the
housing market, not misrepresentations.
"We are confident that we will ultimately prevail on the remaining
claim by Basis, which was one of the world's most sophisticated
investors in mortgage products," said Goldman spokesman Michael
DuVally.
Basis Yield Alpha Fund brought the lawsuit in 2011 seeking to recoup
$67 million in losses that contributed to the fund's insolvency. The
lawsuit also seeks $1 billion in punitive damages.
Timberwolf was cited in a scathing 2011 U.S. Senate panel report
that faulted Goldman and other banks for pushing debt they expected
to perform poorly.
The report said Goldman kept marketing Timberwolf even after Thomas
Montag, an executive who is now Bank of America Corp's co-chief
operating officer, called Timberwolf "one shitty deal" in an email
to a colleague.
Goldman's CDO practices also have drawn regulatory scrutiny. In
April 2010, it agreed to pay $550 million to settle U.S. Securities
and Exchange Commission charges it sold the risky Abacus CDO while
letting hedge fund billionaire John Paulson bet against it. The bank
did not admit wrongdoing.
LIBYA CASE
The bank also was sued in London's High Court last week for
allegedly exploiting a lack of financial knowledge at Libya's
sovereign wealth fund, which became a Goldman client in 2007.
In court documents seen by Reuters on Thursday, the Libyan
Investment Authority claims Goldman took advantage of the fund's
"financially illiterate staff" when it encouraged investment in more
than $1 billion in trades that ended up worthless. Goldman has said
the claims are without merit.
In its complaint, the Basis Yield fund said it entered $80.8 million
of credit default swaps related to "triple-A" and "double-A" rated
Timberwolf debt. It said it bought $12.3 million of "triple-B" rated
debt tied to subprime residential mortgages in a CDO known as Point
Pleasant 2007-1.
Within weeks, the transactions began to lose value, and Basis Yield
began to liquidate within two months. It said it lost $56.3 million
on Timberwolf in under six weeks, and $10.8 million on Point
Pleasant in less than three months.
Basis Yield was managed by Sydney-based Basis Capital Funds
Management Ltd.
The case is Basis Yield Alpha Fund v. Goldman Sachs Group, Inc et
al, New York State Supreme Court, New York County, No. 652996/2011.
(Reporting by Karen Freifeld; editing by
Cynthia Osterman)
