ACA Sues Goldman Sachs Over Abacus Deal

The Goldman Sachs booth on the floor of the New York Stock Exchange
Getty Images
The Goldman Sachs booth on the floor of the New York Stock Exchange

ACA Financial Guaranty Corporation is suing Goldman Sachs over the deal that gave rise to fraud charges from the Securities and Exchange Commission last year.

ACA, a once high flying monoline bond insurance company, filed a law suit in New York today, claiming that Goldman had committed fraud and unjustly enriched itself in connection with the sythetic collateralized debt obligation called Abacus. ACA is seeking $120 million in compensatory and punitive damages.

ACA served as the “portfolio selection agent” and collateral manager in the Abacus deal, although the securities in the transaction were primarily selected hedge fund manager John Paulson.

“Goldman Sachs’s 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,” ACA said in a statement it released today.

Through Goldman, Paulson submitted the names of 123 mortgage-backed securities that he believed were in danger of defaulting. ACA combed through them, ultimately accepting just 55 of the securities. Its representatives even met with people from Paulson & Co and Goldman Sachs vice president Fabrice Tourre in January of 2007.

But ACA says it wasn’t aware that Paulson was intending to take a short position on the CDO. In fact, according the last year’s SEC complaint, ACA believed Paulson was taking a long position in the riskiest slice on the CDO.

ACA Goldman Vice President Fabrice Tourre met with representatives of Paulson and ACA on Jan. 8, 2007, to discuss the transaction. There followed a number of correspondences, with Goldman sharing with ACA a number of bonds that Paulson had asked to be considered for the inclusion in the CDO.

“ABACUS was worthless at the time Goldman Sachs marketed it to ACA. Had Paulson’s true role as a short investor selecting the portfolio been known, neither ACA nor anyone else would have taken a long position in it. Because of Goldman Sachs’s deceit — which led ACA to reasonably believe that ABACUS was a valuable product selected by the equity investor with identical objectives — ACA invested in what was in fact a worthless product,” ACA claims in the complaint.

ACA was a sophisticated and well-known player in the CDO market. By the time of the Abacus deal, it had had closed on 22 CDOs with $15.7 billion of underlying assets.

The mortgage meltdown brought down ACA. In August of 2008, it reached an agreement with Maryland state insurance regulators to unwind around $69 billion of credit default swaps. ACA now operates as a runoff insurance company, monitoring approximately 700 policies on more than $7 billion of generally high yield municipal bonds.

(Read the entire complaint here)


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