Rolling Stone’s Matt Taibbi described Goldman Sachs as “a great vampire squid wrapped around the face of humanity,” a phrase that, while defamatory of a uniquely adapted cephalopod minding its own business 3,000 feet under the sea, rang true. Yesterday, the intermediate appellate court for New York state agreed: Goldman Sachs is so obviously dishonest that you cannot sue them for fraud unless you get them to specifically agree that they aren’t lying to you.
First, the facts. In essence, Goldman Sachs brought in a hedge fund (Paulson & Co.) to put together a group of horrible investments (called “Abacus”) that they expected to fail — and even bet against — and then set about finding rubes to invest in it, thereby helping Goldman and Paulson make a tidy profit off the investor’s losses. One other banker who passed on the deal described it as “like a bettor asking a football owner to bench a star quarterback to improve the odds of his wager against the team.” (He’s quoted in the dissent.)
ACA Financial Guaranty Corporation was one of the rubes Goldman Sachs found. As Reuters reported, ACA’s lawsuit against Goldman Sachs “alleged that Goldman misrepresented the role of the hedge fund Paulson & Co, which supposedly selected underlying mortgage-backed securities that doomed the [collateralized debt obligation] to fail, thereby assuring Paulson of big profits on its undisclosed Abacus short.” The scam was so blatant the Securities and Exchange Commission brought its own case against Goldman Sachs, which settled for $550 million.
Sounds simple enough; as James Surowiecki wrote about the scandal three years ago, echoing the thoughts of many financial journalists, there was ample reason to believe that ACA was both a “dupe” hoodwinked by Goldman and a “dope” that failed to perform adequate due diligence on a complicated investment. Being a “dope” is a problem, but one would assume that a duped dope would be allowed to present evidence to a jury arguing that the fraud was a bigger problem than the lack of due diligence.
Except that the New York courts won’t let ACA get to a jury.