Savvy Players And Inventive Lawyers

 The New York Court of Appeals has reversed the dismissal of claims brought against Goldman Sachs 

Plaintiff ACA Financial Guaranty Corp. commenced this action against defendant Goldman, Sachs & Co., alleging that defendant fraudulently induced plaintiff to provide financial guaranty for a synthetic collateralized debt obligation (CDO), known as ABACUS. In its complaint, plaintiff alleges that defendant fraudulently concealed the fact that its hedge fund client Paulson & Co., which selected most of the portfolio investment securities in ABACUS, planned to take a “short” position in ABACUS, thereby intentionally exposing plaintiff to substantial liability; had plaintiff known this information, it would not have agreed to the guaranty.

The majority

plaintiff has sufficiently pleaded justifiable reliance for the causes of action for fraud in the inducement and fraudulent concealment. Additionally, defendant failed to submit documentary evidence that conclusively established the lack of justifiable reliance.

Justice Read dissented

 Savvy commercial and financial players and inventive lawyers abound in New York. Our venerable rule requiring that the reliance necessary to establish fraud must be justifiable 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” (DDJ Mgt., 15 NY3d at 154 [internal quotation marks omitted]). Because ACA cannot, as a matter of law, establish justifiable reliance on the basis of the facts alleged in its amended complaint, I respectfully dissent.

(Mike Frisch)