ACA Memorandum of Law in Opposition to Goldman's Motion to Dismiss -July 2011

8/6/2019 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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iv

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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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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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.).


33/33

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).