The Goldman Sachs Group, Inc. (GS) won the dismissal of a lawsuit filed by ACA Financial Guaranty related to Abacus – a collateralized debt obligation (CDO). The plaintiffs had accused the company of colluding with Paulson & Co. to obtain guaranteed payments from bond insurers on risky investments.
A N.Y. state appeals court in Manhattan dismissed the case against Goldman, in the process, overturning the ruling of a lower-court.
In 2011, ACA Financial filed a $120 million lawsuit against the company and later in January, added Paulson & Co along with its hedge fund unit – Paulson Credit Opportunities Master II Ltd as the accused. The modified lawsuit claimed that Goldman and Paulson tricked ACA Financial into believing that Paulson was investing in the CDO. However, Paulson had taken a short position on it.
The Abacus CDO has long plagued Goldman and embroiled the banking major in a legal mess. Among the 4 transactions involved in the lawsuit, the first one was the Securities and Exchange Commission’s (SEC) charges against the company, accusing it of misleading investors by misrepresenting facts in its mortgage-backed securities of over $1 billion. The SEC's complaint accused the investment bank of creating a CDO called Abacus 2007-AC1, which constituted mortgage-backed securities.
Goldman was also charged by the SEC in the U.S. of misrepresenting facts and selling bad quality subprime investments to its customers in 2006, without disclosing the risk factors and the vital role of Paulson & Co., a prime hedge fund, in the portfolio selection process. Consequently, the company reached a settlement of $550 million in Jul 2010 with the SEC.
The other 3 transactions included the Hudson CDO in 2006, the Anderson CDO in 2007 and Timberwolf I hybrid CDO-squared transaction in 2007. In all these cases, Goldman was accused of incurring billions by selling poor quality assets to clients, while short-selling those securities.
In Jul 2012, a federal judge in N.Y. revoked Goldman’s plea of dismissing the lawsuit filed on it, accusing it of selling risky debts through misleading statements. The U.S. District Judge, Paul Crotty, ordered the plaintiffs to proceed with their claims against the bank.
The dismissal of the lawsuit bodes well for Goldman as it will reinstate investors’ confidence in the company. Over the years, the bank has been troubled by mounting litigation problems over fraudulent conduct, which has been a persistent overhang on its expenses. The aforementioned dismissal will therefore bring some relief to the company.
Among other banks, Citigroup Inc. (C), JPMorgan Chase & Co. (JPM) and M&T Bank Corp. (MTB) had also been legally accused of providing misleading information and documents related to mortgage-backed securities and other losses in 2011.
Goldman currently carries a Zacks Rank #2 (Buy).
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