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ACA Financial sues Goldman Sachs for CDO fraud
January 6, 2011
Bond insurer ACA Financial Guaranty filed suit Thursday against Goldman Sachs. The suit alleges fraud and seeks $30 million in compensatory and $90 million in punitive damages stemming from the role the investment bank played in the marketing of the synthetic collateralized debt obligation named ABACUS. Goldman Sachs developed ABACUS and sold it to investors on behalf of its hedge fund client Paulson & Co. in 2007. "Goldman Sachs’ 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," alleges the complaint. ACA invested long in the position and provided insurance against CDO default. ACA now says it only took that position because the firm was under the impression Goldman held a similar position, thus holding skin in the game. "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," the complaint claims. Goldman Sachs has since settled civil charges arising out of this fraudulent conduct, agreeing to pay nearly $600 million in fines. Of that, $550 million is from the Securities and Exchange Commission, and the rest is split among the U.K.'s Financial services Authority ($27 million) and Financial Industry Regulatory Authority ($650,000). ACA is represented by Marc E. Kasowitz of Kasowitz, Benson, Torres & Friedman. Jacob Gaffney is the editor of HousingWire. Follow him on Twitter @JacobGaffney. Write to him.