Goldman Sachs Can't Escape CDO Fraud Case
An appeals court has allowed a defunct Australian hedge fund, Basis Yield Alpha Fund, to proceed with a $1 billion fraud case against Goldman Sachs & Co. The ruling is a win for the small litigation boutique Lewis Baach, whose founder told us he wants to hold Goldman accountable for pushing toxic collateralized debt obligations on investors.
Affirming a trial judge, the New York Supreme Court Appellate Division, First Department, refused on Thursday to dismiss BYAF's claims that it was duped into investing in two now-notorious Goldman CDOs, known as Point Pleasant and Timberwolf. Goldman's lawyers at Boies Schiller & Flexner argued that the hedge fund failed to present evidence of fraud. But the court disagreed, writing that "if plaintiff's allegations are accepted as true, there is a 'vast gap' between the speculative picture Goldman presented to investors and the events Goldman knew had already occurred."
"The court effectively said it's a very detailed complaint," said Lewis Baach partner Eric Lewis, who represents BYAF.
The ruling wasn't a total win for BYAF, though. While the crucial fraud claim is still in the case, the First Department dismissed claims for unjust enrichment and negligent misrepresentation.
Goldman pitched Timberwolf and Point Pleasant to select investors in 2006 and 2007. The CDOs tanked in value during the financial crisis, and BYAF alleges that it shuttered its door after sustaining about $67 million in losses.
According to BYAF's complaint, filed in October 2011, Goldman knew the CDOs would perform poorly and tried to dump them on unsuspecting buyers. BYAF cited a now-public email in which a Goldman employee referred to Timberwolf as "one shitty deal." The fund seeks $1 billion in punitive damages on top of $67 million to compensate for its alleged losses.
Goldman has argued that its disclosures were adequate and that BYAF understood the riskiness of the deals. The case is pending before New York Supreme Court Justice Shirley Werner Kornreich, who denied Goldman's motion to dismiss in October 2012.
Lewis told us that documents produced during discovery contradict Goldman's defense that BYAF was a "sophisticated investor" that knew what it was getting into. According to Lewis, the bank's international communications reveal that it viewed BYAF's leaders as people who could be taken advantage of. "They may have known a lot. But they weren't insiders," Lewis said. "It's clear that Goldman was doing anything it could to get this off the books, including selling it to people outside the close circle of investors."
"No one is going to be individually prosecuted over the financial crisis, so civil litigation is the crucible through which individual accountability will be decided," Lewis told us. "I think is going to be a leading case. … It presents the facts very starkly."
Boies Schiller name partner Jonathan Schiller, who represents Goldman, declined to comment. Goldman said in a statement that it is confident that it will prevail on BYAF's remaining claims.