Published October 19, 2012
(Note: Language in paragraph 14 may be offensive to some readers)
A judge refused to dismiss a $1.07 billion lawsuit against Goldman Sachs Group that accuses it of selling risky debt that it intended to lose value to an Australian hedge fund, causing the fund to become insolvent.
New York state Supreme Court Justice Shirley Kornreich denied Goldman Sachs' bid to toss claims of fraud, unjust enrichment and negligence, among others, by the Basis Yield Alpha Fund.
The fund accuses Goldman of making false and misleading statements in connection with the sale of securities to offload toxic subprime mortgages from its books.
Goldman has argued the losses were caused by the collapse of the housing market.
The fraud claims survive for the "big picture of fraudulent conduct," not only on the representations in the complaint, Kornreich wrote in her decision, citing a similar case in Manhattan federal court against Goldman by Dodona I, LLC, a hedge fund that invested in another CDO.
Michael DuVally, a spokesman for Goldman Sachs, declined comment Friday.
"We're very pleased the court agrees with us that Goldman needs to answer for its conduct," said Washington, D.C., attorney Bruce Grace, a partner in Lewis Baach, who represents the fund.
Goldman's CDO practices have drawn regulatory scrutiny. In April 2010, Goldman agreed to pay $550 million to settle U.S. Securities and Exchange Commission charges that it sold the risky Abacus 2007-AC1 CDO while letting hedge fund billionaire John Paulson bet against it. The bank did not admit wrongdoing.
Basis Yield Alpha Fund is seeking to recoup $67 million of losses plus $1 billion of punitive damages from transactions known as Timberlake and Point Pleasant. Basis Yield was managed by Sydney-based Basis Capital Funds Management Ltd.
In her decision, made public Friday, the judge also denied Goldman's claim that the New York court was an inconvenient forum, noting that Goldman's headquarters and many witnesses are in New York. She also refused to compel arbitration.
Kornreich did dismiss claims for breach of contract and breach of implied covenant of good faith and fair dealing. Among the fraud claims she left were for fraudulent inducement and fraudulent concealment.
Basis Yield filed the lawsuit in New York state court in October 2011, three months after a U.S. judge dismissed a similar case, saying the fund could not sue in federal court under U.S. securities laws because its investment in the Timberwolf 2007-1 collateralized debt obligation did not qualify as a "domestic" transaction.
Timberwolf was cited in a scathing U.S. Senate panel report in April 2011 that faulted Goldman and others for pushing debt they expected to perform poorly.
The panel report said Goldman kept marketing Timberwolf even after an executive in an email to a colleague called Timberwolf "one shitty deal."
Basis Yield said it lost $56.3 million on Timberwolf in less than six weeks, and $10.8 million on Point Pleasant in less than three months.
The case is Basis Yield Alpha Fund (Master) v. Goldman Sachs Group Inc et al, New York State Supreme Court, New York County, No. 652996/2011.
(Reporting By Karen Freifeld; Editing by Bernard Orr)