By Joel Stashenko, From New York Law Journal
ALBANY – The Court of Appeals Thursday reinstated a fraud action against Goldman Sachs & Co. for allegedly inducing an insurer to cover a mortgage-backed security that was designed to fail.
The 5-2 majority reversed a finding by the Appellate Division, First Department, which found in 2013 that ACA Financial Guaranty Corp. failed to establish that it justifiably relied on misrepresentations by Goldman to sustain causes of action for fraud in the inducement and for fraudulent concealment.
The Court of Appeals also issued rulings Thursday on whether judges can compel prosecutors to call witnesses or take other actions within their discretion under threat of contempt and whether a nolo contendre plea in another state is equivalent to a guilty plea in New York.
Concerning the ACA fraud action, the court said that when weighing a justifiable reliance allegation, a plaintiff should consider if it had the means to gauge whether representations were reliable and whether the plaintiff had hints of its falsity.
Using that standard, ACA had adequately alleged justifiable reliance at the pleading stage of the case, the court said in an unsigned memorandum decision in ACA Financial Guaranty Corp. v. Goldman Sachs & Co., 49.
Alternately, the court found that Goldman Sachs and its co-defendant, Paulson & Co., did not produce evidence to conclusively show ACA Financial’s lack of justifiable reliance, as required by CPLR 3211[a][1].
The court also noted that issues about whether justifiable or reasonable reliance was present are “not generally a question to be resolved as a matter of law on a motion to dismiss,” citing DDJ Mgt., LLC v. Rhone Group LLC, 15 NY3d 147 (2010).
Chief Judge Jonathan Lippman and Judges Eugene Pigott Jr., Jenny Rivera, Leslie Stein and Eugene Fahey were in the majority.
Judge Susan Phillips Read, in a dissent joined by Judge Sheila Abdus-Salaam, said ACA did not comply with a well-established principle of fraud jurisprudence that was articulated by the Court of Appeals in a seminal 1892 ruling.
In Schumaker v. Mather, 133 NY 590, the court said a party could not claim it was induced to enter a transaction by misrepresentation if it had the “means available to him of knowing, by the exercise of ordinary intelligence, the truth or the real quality of the subject of the representation.”
Here, the dissenters said, “ACA manifestly took no step” to safeguard its interests, thereby negating its justifiable reliance claim.
“Savvy commercial and financial players and inventive lawyers abound in New York,” Read wrote. “Our venerable rule … is designed to make sure that the courts ‘reject the claims of plaintiffs who have been so lax in protecting themselves that they cannot fairly ask for the law’s protection’ and ‘may truly be said to have willingly assumed the business risk that the facts may not be as represented’ [quoting DDJ Mgt.].”
The ACA-Goldman dispute dates back to 2007, when hedge fund Paulson & Co. asked Goldman to package residential mortgages into a security known as a collateralized debt obligation. The obligation was called ABACUS.
ACA agreed to insure ABACUS but said it did not know that Paulson intended to take a “short” position on the obligation, thereby exposing the insurer to substantial liability that ACA said it never would have assumed had it known the true intentions behind ABACUS’ creation.
ABACUS investors lost nearly all their money amid the collapse of the mortgage-backed securities market in the late 2000s, while Paulson made about $1 billion by shorting ABACUS.
In 2010, Goldman agreed to pay the U.S. Securities and Exchange Commission $515 million to settle a complaint over ABACUS. Goldman acknowledged as part of the settlement that it was a “mistake” to have marketed ABACUS to investors without disclosing that Paulson had helped create it and was taking a short position on it.
The dissenters Thursday said ACA failed to take an “obvious and easy step” to avoiding what it claims was fraud by simply asking Paulson what its investment position was in ABACUS.
The majority decision reversed the First Department’s 3-2 ruling dismissing the fraud action against Goldman and Paulson (NYLJ, May 15, 2013).
Sullivan & Cromwell partner Richard Klapper argued for Goldman.
Marc Kasowitz, a partner at Kasowitz Benson Torres & Friedman, represented ACA. He called Thursday’s ruling “correct and well-grounded” and said the complaint seeks $120 million due to the alleged fraud.
“ACA looks forward to proceeding in the case against Goldman Sachs and Paulson & Co.,” he said.
Compelling Prosecution
Also Thursday, the Court of Appeals sided with Albany County District Attorney P. David Soares in what became a protracted dispute with Albany City Court Judge William Carter over the disorderly conduct prosecutions of Occupy Albany demonstrators in 2012.
The 6-0 court said judges may not compel prosecutors to call witnesses or take other actions within the district attorneys’ discretion under threat of the court’s power of contempt.
“Any attempt by the judge here to compel prosecution through the use of his contempt power exceeded his jurisdictional authority,” the court said in an unsigned memorandum ruling in Matter of Soares v. Carter, 70. “It is within the sole discretion of each district attorney’s executive power to orchestrate the prosecution of those who violate the criminal laws of this state.”
Soares, who said he agreed with the economic equality goals of the protesters, declined to prosecute four demonstrators while Carter said their sentences should include a community service component. The two sides went to court after the prosecutions of the demonstrators stalled in late 2012 and early 2013.
Lippman, Read, Pigott, Rivera, Abdus-Salaam and Fahey joined in the decision. Stein, who was on the Third Department panel that also backed Soares’ authority to prosecute the cases as he saw fit (NYLJ, Jan. 24, 2014), took no part.
Christopher Horn, a special prosecutor to Soares, argued for the district attorney. James Knox of the E. Stewart Jones Hacker Murphy firm in Troy represented Carter after Attorney General Eric Schneiderman’s office recused itself, citing a conflict of interest.
Mark Mishler of Albany represented the Occupy Albany protesters.
Nolo Contendre Pleas
In another ruling, the court unanimously found in Matter of Kasckarow v. Board of Examiners of Sex Offenders of State of New York, 56, that the entry of a nolo contendere plea in another jurisdiction is a prior conviction for purposes of New York state sentencing statutes and mandatory listing on the state’s sex offender registry.
Daniel Kasckarow had disputed his inclusion on the registry when he moved to New York, arguing that his plea in Florida to sexual battery on a child under 16 was not the equivalent of a conviction qualifying him for the sex offender list. Kasckarow entered the nolo contendere plea in response to a charge that he had consensual sex with a minor in 1997 in Florida when he was 18 and the girl was 15 (NYLJ, Nov. 1, 2011).
The court said it decided as early as People v. Daiboch, 265 NY 125 (1934), that nolo contendere pleas, while not recognized in New York state, may be seen as the equivalent of a criminal conviction when made in other states.
Lippman, Read, Pigott, Rivera, Abdus-Salaam, Stein and Fahey joined in the decision.
Assistant Solicitor General Claude Platton argued for the state. Anna Pervukhin of Appellate Advocates represented Kasckarow.
For more on this story go to: http://www.newyorklawjournal.com/id=1202725816347/Fraud-Action-Reinstated-Against-Goldman-Sachs#ixzz3ZYkYKLHz