FILED: NEW YORK COUNTY CLERK 07/07/2011

NYSCEF DOC. NO. 26

INDEX NO. 650027/2011 RECEIVED NYSCEF: 07/07/2011

SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK -------------------------------------------------------------------x ACA FINANCIAL GUARANTY CORP., : : Plaintiff, : : - against : : : GOLDMAN, SACHS & CO., : : Defendant. : : -------------------------------------------------------------------x

Index No. 650027/2011 Hon. Barbara R. Kapnick (E-file Case)

PLAINTIFF’S MEMORANDUM OF LAW IN OPPOSITION TO DEFENDANT’S MOTION TO DISMISS

Marc E. Kasowitz Harold G. Levison Andrew K. Glenn Trevor J. Welch Henry B. Brownstein Kasowitz, Benson, Torres & Friedman LLP 1633 Broadway New York, New York 10019 Telephone: (212) 506-1700 Facsimile: (212) 506-1800 Attorneys for Plaintiff ACA Financial Guaranty Corp. July 7, 2011

TABLE OF CONTENTS Page PRELIMINARY STATEMENT .................................................................................................... 1 FACTS ............................................................................................................................................ 3 A. B. C. D. Nature Of Collateralized Debt Obligations................................................. 3 Goldman Sachs Agreed To Orchestrate ABACUS For Paulson ................ 3 Goldman Sachs Could Not Enlist A Portfolio Selection Agent Or Insurer If They Knew Paulson Intended To Short ABACUS................ 4 Goldman Sachs Fraudulently Induced ACA To Act As Portfolio Section Agent And Insurer By Misrepresenting That Paulson Was The Equity Investor ....................................................................................................... 4

ARGUMENT.................................................................................................................................. 7 I. Goldman Sachs’s Motion To Dismiss ACA’s Fraud Claims Should Be Denied ... 7 A. B. C. D. E. The Complaint Properly Pleads An Affirmative Misrepresentation........................................................................................ 8 The Complaint Properly Pleads Fraudulent Concealment.......................... 9 The Complaint Properly Pleads Materiality ............................................. 11 The Complaint Properly Pleads Scienter .................................................. 12 The Complaint Properly Pleads Reasonable Reliance.............................. 15 1. The Offering Circular Does Not Even Suggest, Much Less Establish, That There Was No Equity Investor In ABACUS ............ 16 2. The Disclaimers In The Offering Circular Are Inapplicable And Ineffective........................................................................................... 17 3. ACA’s “Sophistication” Does Not Preclude Reasonable Reliance ... 19 4. ACA’s “Access” To Paulson Does Not Preclude Reasonable Reliance.............................................................................................. 20 F. II. The Complaint Properly Pleads Proximate Causation.............................. 21

ACA’s Unjust Enrichment Claim Is Well Plead................................................... 24

i

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 Dep’t 2007) ...............................................................................................8 AMBAC Assur. Corp. v. EMC Mortg. Corp., 2011 U.S. Dist. LEXIS 14111 (S.D.N.Y. Feb. 8, 2011)..........................................................18 ATSI Commc’ns, 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 Int’l Imports, 197 A.D.2d 462 (1st Dep’t 1993) ............................................................................................25 Brunetti v. Musallam, 11 A.D.3d 280 (1st Dep’t 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 Dep’t 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 Dep’t 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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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 Dep’t 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 Dep’t), aff’d, 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 Dep’t 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 Dep’t 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 Dep’t 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 Dep’t 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 Dep’t 2007) ..............................................................................................25 MBIA Ins. Corp. v. Countrywide Home Loans, Inc., 2011 NY Slip Op 5640 (1st Dep’t 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.), aff’d, 81 A.D.3d 419 (1st Dep’t 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 Dep’t), aff’d, 90 N.Y.2d 953 (1997) ......................................................23 National Union Fire Ins. Co. v. Robert Christopher Assocs., 257 A.D.2d 1 (1st Dep’t 1999) ................................................................................................18 Oster v. Kirschner, 77 A.D.3d 51 (1st Dep’t 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 Dep’t 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 Dep’t 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 Dep’t 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 Dep’t 2005) ..............................................................................................13 Silver Oak Capital L.L.C. v. UBS AG, 82 A.D.3d 666 (1st Dep’t 2011) ..................................................................................18, 21, 23 Skrine v. Staiman, 30 A.D.2d 707 (2d Dep’t 1968), aff’d, 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 Dep’t 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 Dep’t), aff’d, 79 N.Y.2d 989 (1992)........................................................10 Swersky v. Dreyer & Traub, 219 A.D.2d 321 (1st Dep’t 1996) ................................................................................10, 12, 20

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Tahini Invest., Ltd. v. Bobrowsky, 99 A.D.2d 489 (2d Dep’t 1984) ...............................................................................................19 UST Private Equity Investors Fund, Inc. v. Salomon Smith Barney, 288 A.D.2d 87 (1st Dep’t 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 Dep’t 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 ACA’s 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 ACA’s 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 Sachs’s part to disclose the truth to ACA (namely, that
1

Submitted herewith in opposition to the motion is the affirmation of Trevor J. Welch, dated July 7, 2011 (“Welch Aff.”). As used herein, “Def. Mem.” refers to Goldman Sachs’s memorandum of law in support of its motion to dismiss the Complaint, and “Dunne Decl.” refers to the declaration of Christopher J. Dunne, dated June 3, 2011, also submitted in support of the motion.

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 SEC’s federal securities fraud claims).2 Applicable New York law mandates the same conclusion with respect to ACA’s 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 Paulson’s 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 Sachs’s 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 ACA’s 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 Paulson’s true economic interest in ABACUS, ACA was misled as to -- and misunderstood -- the fundamental nature and risk of the transaction. Goldman Sachs’s fact-intensive arguments at most identify disputed issues of fact, and none of the documents submitted by Goldman Sachs comes close to “utterly
2

Goldman 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 SEC’s claims. 2

refuting” ACA’s claims, as they must to justify dismissal. Rather, the allegations in the Complaint must be accepted as true, and Goldman Sachs’s 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 3

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 Section Agent 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 4

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 employee’s contemporaneous, hand-written notes that Paulson intended to invest in the equity of ABACUS. Id. ¶ 47. Relying on Goldman Sachs’s 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, ACA’s and Paulson’s 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 Sachs’s total disregard for the damage inflicted on ACA and others by its misconduct is illustrated in other contemporaneous emails as well. Id. ¶¶ 69-72. 5

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 Sachs’s 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 Paulson’s 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 Moody’s 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 Sachs’s misconduct and $90 million in punitive damages. Id. ¶ 5.

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ARGUMENT “The scope of a court’s 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 Dep’t 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 plaintiff’s 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 Dep’t 2001). I. Goldman Sachs’s Motion To Dismiss ACA’s 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, plaintiff’s 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 7

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 Sachs’s 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 Sachs’s] January 10 email to ACA, which included a ‘Transaction Summary’ describing Paulson as the ‘Transaction Sponsor’ with a pre-committed position in ABACUS’s equity tranche, sufficiently alleges a material misrepresentation regarding Paulson’s 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 Sachs’s contention (Def. Mem. 14) that “extreme and unwarranted inferences” are required to construe the January 10 email as an “affirmative” misrepresentation is thus patently frivolous. Adelaide Prods., Inc. v. BKN Intl. AG, 834 N.Y.S.2d 3, 6 (1st Dep’t 2007) is inapposite because, there, the fraud claim was dismissed as premised on “vague oral representations,” whereas, here, Goldman Sachs’s misrepresentations to ACA were specific and in writing. 8

“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 defendant’s “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 Paulson’s 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:

5

Goldman 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 earning fees if the notes were distributed. But Goldman Sachs’s January 10 email was in response to ACA’s broad inquiry as to how Paulson intended to “participate” in ABACUS. And, as Goldman Sachs knew, the fundamental economic interests of ACA and Paulson in ABACUS were diametrically opposed. Compl. ¶ 42. In that context, Goldman Sachs’s representation that the economic interests of ACA and Paulson were “aligned” in any sense was, at best, misleading and actionable. Computer Possibilities Unlimited, Inc. v. Mobil Oil Corp., 301 A.D.2d 70, 82 (1st Dep’t 2002) (by “responding to [plaintiff]’s reasonable inquiry with, at best, a half-truth, [defendant] arguably made a fraudulent misrepresentation of fact.”).

9

having allegedly affirmatively represented Paulson had a particular investment interest in ABACUS -- that it was long -- in order “to be both accurate and complete[,]” . . . had a duty to disclose Paulson 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 party’s 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 Dep’t), aff’d, 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 Paulson’s true economic interest in ABACUS was not “readily available” to ACA

10

(see infra Section I.E.4).6 Goldman Sachs’s 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, 487488 (1st Dep’t 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 Sachs’s argument (Def. Mem. 15-16), the court in SEC v. Goldman, Sachs & Co. held -- again, on the same facts -- that Goldman Sachs’s misrepresentation of Paulson’s economic interest was material. 2011 U.S. Dist. LEXIS 62487, at *39-40 (“Tourre’s January 10 email to ACA . . . sufficiently alleges a material misrepresentation regarding Paulson’s investment interest”). The Complaint here likewise pleads (Compl. ¶¶ 30, 36, 37, 42, 49, 63) that Paulson’s economic interest in ABACUS was material to ACA’s decision to enter into the Financial Guaranty. Thus, the Complaint alleges, among other things, that “knowledge of Paulson’s true economic interests would have raised a red flag and caused senior ACA personnel to decline to

6

Goldman Sachs’s assertion (Def. Mem. 21) that there was “no information imbalance between Goldman Sachs and ACA” is nothing more than a denial of ACA’s allegations, which is not a proper basis for dismissal. Swersky v. Dreyer & Traub, 219 A.D.2d 321, 328 (1st Dep’t 1996) (reversing dismissal due to “outstanding issues as to whether the disparity in the level of information . . . places this case within the ambit of the ‘special facts’ doctrine”). 11

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 Paulson’s true economic interest in ABACUS was, as the court in SEC v. Goldman, Sachs & Co. found, material in that it would have “influence[d]” ACA’s 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 Dep’t 2007) (citation omitted).8 D. The Complaint Properly Pleads Scienter Again contrary to Goldman Sachs’s argument (Def. Mem. 19-20), the court in SEC v. Goldman, Sachs & Co. held that the circumstances here give rise to an inference of scienter. 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 Sachs’s challenge to the “good faith” of ACA witnesses whose testimony in other venues supports this allegation (Def. Mem. 16 n.10) is baseless and, in any event, only confirms that materiality is “not subject to summary disposition” in this action. Brunetti v. Musallam, 11 A.D.3d 280, 281 (1st Dep’t 2004).
8

Goldman Sachs’ contention that Paulson’s short position in ABACUS could not have been material 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 the purported transaction sponsor and, as such, played an influential role in selecting the reference portfolio. Compl. ¶¶ 63, 76. 12

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 Paulson’s intent to short the reference portfolio. Id. ¶ 36; see also id. ¶¶ 30, 37. These circumstances powerfully support the inference that Goldman Sachs knowingly misrepresented Paulson’s economic interest in ABACUS in order to induce ACA to participate in the transaction. Id. ¶ 38. Moreover, a party’s 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 Dep’t 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 Dep’t 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 Dep’t 2003) (reversing dismissal); see also Seaview Mezzanine Fund, LP v. Ramson, 77 A.D.567, 568 (1st Dep’t 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 Sachs’s 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

13

likely to default, when in fact -- as Goldman Sachs was acutely aware and ACA did not know -Paulson proposed RMBS that it considered most likely to default. Id. ¶ 53. It is more than “reasonable to infer” that Goldman Sachs intentionally mislead ACA from Goldman Sachs’s silence in the face of ACA’s 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 Sachs’s 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 inference of “reckless indifference to error” also satisfy the element of scienter. Skrine v. Staiman, 30 A.D.2d 707 (2d Dep’t 1968), aff’d, 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) (denying motion to dismiss).
10

See Report of the United States Senate Permanent Subcommittee on Investigations, Wall Street & 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.pdf
11

Goldman Sachs is charged with structuring at least one other CDO to fail so that Goldman Sachs 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). 14

E.

The Complaint Properly Pleads Reasonable Reliance The Complaint properly pleads that ACA reasonably relied on Goldman Sachs’s written

representations concerning Paulson’s economic interests in ABACUS. Id. ¶¶ 40, 41, 43, 47, 48.12 The Complaint alleges that, in response to ACA’s 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 Paulson’s and ACA’s 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 party’s 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 Sachs’s 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 ACA’s long economic interest in the transaction by objecting to certain RMBS on the purported basis that they were “too risky.” Id. ¶ 55. Conversely, Paulson’s 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. 15

Paulson’s short position in ABACUS was “not discoverable through any publicly available source of information.” Id. ¶ 25. In short, ACA’s reliance on Goldman Sachs’s written misrepresentations was reasonable in the circumstances. Goldman Sachs’s 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 defendant’s 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 [defendant’s] 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 “Paulson’s economic interests were adverse to CDO investors.” Welch Aff., Ex. A ¶ 3.13 Not surprisingly, given Goldman Sachs’s admissions, the
13

Goldman Sachs’s 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 16

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]” ACA’s 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 Sachs’s

words. People v. Swart, 273 A.D.2d 503, 505 (3d Dep’t 2000) (“A party’s 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) ACA’s quarterly statement for the second quarter of 2007 (id., Ex. K), which, Goldman points out, refers to certain ABACUS notes but not to “unrated ‘first loss’ notes” (Def. Mem. 15).
15

Goldman Sachs’s interpretation of the Offering Circular (Def. Mem. 9-10) is also contradicted by the circular itself. If a notation of “$0” in the table at issue necessarily meant that there was “no investor” in the specified tranche, then the table as construed by Goldman Sachs would mean that there was no investor in the “SS” (super senior) tranche. In fact, as Goldman Sachs acknowledges (Def. Mem. 8), ACA took $909 million in long exposure to the super senior tranche of ABACUS. Compl. ¶ 62.
16

Goldman Sachs’s 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 ABACUS were never “truthfully communicated and fully revealed” by Goldman Sachs in the transaction documents 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 “full disclosure”). 17

misrepresentation of Paulson’s 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 Dep’t 1999). Consequently, the disclaimers in the Offering Circular -- which pertain solely to the notes -- are inapplicable to ACA’s claims, which do not arise from the notes. Steinhardt Group, Inc. v. Citicorp, 272 A.D.2d 255, 257 (1st Dep’t 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 Dep’t 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 Sachs’s notes (Def. Mem. at 11, n.7) that ACA amended its original complaint to omit note-based claims. Goldman Sachs fails to mention, however, that account statements it proffered in support of its moot motion to dismiss ACA’s 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 have standing to assert securities fraud claims arising from the purchase or sale of the securities guaranteed. 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] by virtue of its status as a guarantor of an asset-backed note”). 18

Sachs for “investment advice” in purchasing notes -- do not even come close to specifically disclaiming Goldman Sachs’s misrepresentations concerning Paulson’s 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 Dep’t 1984)). Accordingly, even if the disclaimers in the Offering Circular were applicable, which they are not, they would be ineffective. 3. ACA’s “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 Paulson’s economic interest in the transaction that were false and

18

MBIA 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, 2010 NY Slip Op 51027U, at *5 (Sup. Ct. N.Y. Co.), aff’d, 81 A.D.3d 419 (1st Dep’t 2011). 19

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. ACA’s “Access” To Paulson Does Not Preclude Reasonable Reliance

Goldman Sachs’s 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 Sachs’s 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 [ACA’s] 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

19

UST Private Equity Investors Fund, Inc. v. Salomon Smith Barney, 288 A.D.2d 87 (1st Dep’t 2001) (Def. Mem. 19) is distinguishable. In that case, plaintiff alleged that its representative had been provided with a list identifying the “very documents that ultimately alerted him” to the alleged 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 swap that made Paulson the ultimate and undisclosed protection buyer in ABACUS, which was “not discoverable through any publicly available source of information.” Compl. ¶ 25. 20

Misc. 3d at 863 (denying motion to dismiss where “possible that an investigation [] would have been futile”); MBIA Ins. Co. v. Countrywide Home Loans, Inc., 2009 NY Slip Op 31527U, at *13 (Sup. Ct. N.Y. Co. July 8, 2009) (“Even assuming MBIA conducted a full inquiry under the circumstances in relation to the bidding process, it is not conclusive that MBIA could have discovered the alleged fraud”). F. The Complaint Properly Pleads Proximate Causation Goldman Sachs’s argument (Def. Mem. 21-23) that the Complaint does not adequately allege “loss causation” misstates the applicable legal standard, ignores ACA’s allegations, and raises questions of fact that cannot be resolved as a matter of law. As the First Department has made clear, “loss causation” -- as that phrase is used in New York common law -- is just another way of saying proximate causation, which requires no more than “some reasonable connection between the act or omission of the defendant and the damage which the plaintiff has suffered.” Laub v. Faessel, 297 A.D.2d 28, 31 (1st Dep’t 2002) (“Laub”) (citations and quotations omitted) (“Loss causation is the fundamental core of the common-law concept of proximate cause.”).20 As the First Department has recently held, a plaintiff sufficiently alleges “loss causation [if] it was foreseeable that [it] would suffer losses as a result of relying on defendant’s alleged misrepresentations . . . .” MBIA Ins. Corp. v. Countrywide Home Loans, Inc., 2011 NY Slip Op 5640, at *6 (1st Dep’t June 30, 2011) (citing, inter alia, Laub and Silver Oak Capital L.L.C., 82 A.D.3d at 667); see also Sterling Natl. Bank v. Ernst & Young, LLP, 9 Misc. 3d 1129A, a2005

20

The Second Circuit has expressly held that “loss causation,” as that term of art is used by federal courts in the securities context, “does not govern” New York common law fraud claims. Merrill Lynch & Co. v. Allegheny Energy, Inc., 500 F.3d 171, 183 (2d Cir. 2007); see also In re Merrill Lynch Auction Rate Sec. Litig., 758 F. Supp. 2d 264 (S.D.N.Y. 2010) (“loss causation is a specialized federal securities law concept”); cf., Laub, 297 A.D.2d at 31-32 (distinguishing Marbury as “federal decision construing federal securities laws”). For that reason, ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87 (2d Cir. 2007), Lentell v. Merrill Lynch & Co., Inc., 396 F.3d 161 (2d Cir. 2005), as well as the other federal securities fraud cases Goldman Sachs cites (Def. Mem. 22-23, 23 n.12), are distinguishable. 21

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 Dep’t), aff’d, 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 ACA’s losses were a foreseeable result of Goldman Sachs’s misrepresentation and concealment of Paulson’s 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), Paulson’s 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. ¶

21

Goldman Sachs’s attempt to minimize Paulson’s role in the portfolio selection process is disingenuous. Def. Mem. 6-8, 15, 16. Although a defendant generally “‘neither admits nor denies liability’” in a settlement (Def. Mem. 2 n. 2), in this instance, Goldman Sachs admitted in a Consent Order with the SEC that “it was a mistake for the Goldman marketing material to state that the reference portfolio was ‘selected by’ ACA Management LLC without disclosing the role of Paulson & Co., Inc. in the portfolio selection process . . . .” Welch Aff., Ex. A ¶ 3 (emphasis supplied). 22

56; see also id. ¶¶ 73-75.22 It was, therefore, “foreseeable that [ACA] would suffer losses once it was induced by [Goldman Sachs’s] 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 ACA’s injuries (Def. Mem. 22-23) -- a crisis in which Goldman Sachs itself played a major, causative role (Compl. ¶¶ 4, 66-68). But Goldman Sachs’s assertion that a superseding cause is responsible for ACA’s 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 Dep’t), aff’d, 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 party’s] 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
22

The outcome in Laub is distinguishable. In Laub, the plaintiff did not even allege how the defendant’s misrepresentations about his “competencies” as an investment advisor did affect or could 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 Sachs’s misrepresentations enabled Paulson to manipulate the portfolio selection process to the detriment of every long economic position in ABACUS. Compl. ¶¶ 41-63. That is the “nexus” that was absent in Laub. Id., 297 A.D.2d at 32. 23

“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 Dep’t 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. ACA’s Unjust Enrichment Claim Is Well Pled Goldman Sachs’s “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

23

To 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 documents memorializing out-of-court transactions. Fontanetta v. John Doe 1, 73 A.D.3d 78, 84 (2d Dep’t 2010) (discussing history and purpose of CPLR 3211(a)(1)).
24

Goldman Sachs ignores, among other things, that Paulson specified the rating and vintage of the 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 reference portfolio and ACA’s 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 a general fall in the price of Internet stocks, the chain of causation . . . is a matter of proof at trial and 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 occurred contemporaneously with [plaintiff]’s collapse would place too much weight on one single factor and would permit [defendants] to blame the asset-backed securities industry when their alleged conduct plausibly caused at least some proportion of plaintiffs’ losses.”). 24

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 ACA’s 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 Int’l Imports, 197 A.D.2d 462, 462 (1st Dep’t 1993) (denying summary judgment because “issue of fact whether defendant was indeed enriched.”). CONCLUSION For the reasons set forth above, Goldman Sachs’s motion to dismiss the Complaint should be denied in its entirety.26 Dated: New York, New York July 7, 2011 KASOWITZ, BENSON, TORRES & FRIEDMAN LLP By: /s/ Trevor J. Welch Marc E. Kasowitz Harold G. Levison Andrew K. Glenn Trevor J. Welch Henry B. Brownstein 1633 Broadway New York, New York 10019 (212) 506-1700 Attorneys for Plaintiff ACA Financial Guaranty Corp.
26

In the event the Court grants any aspect of Goldman Sachs’s 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 Dep’t 2007) (“leave to amend the pleadings is freely granted, absent prejudice”). 25

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