The Goldman Sachs Group, Inc.
) 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
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A N.Y. state appeals court in Manhattan dismissed the case
against Goldman, in the process, overturning the ruling of a
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
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
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,
JPMorgan Chase & Co.
M&T Bank Corp.
) 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).