Goldman Sachs' chicancery in advance of the mortgage meltdown has once again convinced a judge to permit one of the bank's (alleged) dupes to proceed with a fraud case. And this time, the ruling specifically holds that Goldman's actions were egregious enough to overcome the high bar for sophisticated investors.

The bond insurer ACA Financial Guaranty and its lawyers at Kasowitz, Benson, Torres & Friedman certainly had some help from the Securities and Exchange Commission and the Senate Permanent Subcommittee on Investigations. ACA was nominally the portfolio selection agent on Goldman's notorious Abacus collateralized debt obligation, the allegedly designed-to-fail instrument for which hedge fund honcho John Paulson helped picked a reference portfolio of ailing mortgage-backed securities so he'd reap huge profits on his short position. (Goldman and Paulson maintain that ACA had the final authority to select the securities in the reference portfolio and actually rejected many proposed by Paulson.) Before ACA ever filed its fraud complaint in New York State Supreme Court in 2010, Goldman had agreed to pay $550 million to resolve the SEC's Abacus claims and the Senate had featured Abacus prominently in its enormous tome on the economy's collapse.

Those preceding investigations gave ACA more of the gritty details of Goldman's campaign to mislead investors than you normally see in a complaint. Thanks to the SEC case against former Goldman vice-president Fabrice Tourre, for instance, ACA could point to a February 2007 meeting in which Goldman, Paulson, and ACA representatives discussed the mortgage-backed securities that would go into the CDO's reference portfolio. Tourre sent an email to a colleague calling the meeting "surreal," because (according to ACA's complaint) Paulson was pretending good faith in proposing notes that he and Goldman knew were doomed.

Like U.S. District Judge Victor Marrero, who last month permitted the hedge fund Dodona to proceed with fraud claims for its investment in Goldman's Hudson CDOs, Justice Barbara Kapnick was swayed by allegations that the bank deliberately set out to mislead ACA, which insured the Abacus CDO. Kapnick's 41-page opinion recounts that ACA specifically asked Goldman at least twice about Paulson's position on the CDO. Goldman repeatedly informed the insurer, according to Kapnick, that Paulson was the equity investor with a long position that aligned his interests with ACA's. Of course, that wasn't true: Through credit default swaps, Paulson was banking on the inevitable failure of the CDO.

That allegedly active deception, according to Kapnick, overcomes Goldman's argument that if ACA really wanted to know Paulson's position it could simply have asked him. "By undertaking to characterize Paulson's economic interest in the transaction, Goldman Sachs assumed a duty to disclose Paulson's true economic interest in Abacus, especially once it was put on notice that ACA was acting on the erroneous belief, based on Goldman Sachs's affirmative misrepresentations, that Paulson had pre-committed to take a long position," the judge wrote.

In other words, Kapnick held, even though ACA is a sophisticated player, Goldman is on the hook for concealing information ACA couldn't have obtained by other means.

To reach that conclusion, Kapnick rejected arguments by Goldman's Sullivan & Cromwell lawyers that have succeeded in two recent appellate rulings involving sophisticated investors -- one of them a 2nd Circuit Court of Appeals dismissal of another Goldman CDO case. The judge in ACA's suit specifically addressed last month's stern warning to sophisticated investors from a New York state appeals court in HSH Nordbank v. UBS. In that case, Kapnick said, UBS legitimately disclaimed responsibility for the riskiness of the investment. Here, she said, the issue was more blatant deception.

ACA's complaint "certainly contains a 'rational basis' to infer that Goldman Sachs intentionally mislead ACA (by) its silence in the face of ACA's manifest detrimental reliance on its mistaken belief that Paulson was on the same side of the transaction as it was," she wrote. Kapnick refused to dismiss ACA's fraudulent inducement and fraudulent concealment claims, although she did toss an unjust enrichment allegation.

ACA counsel Marc Kasowitz sent me an email statement: "ACA is pleased with Justice Kapnick's decision, which makes clear that Goldman Sachs and others that fraudulently promote investments even to sophisticated investors can and should be held liable. This is especially so where, as here, there is active concealment of the material facts. Thus the decision appropriately confirms that New York law does not immunize fraudulent conduct directed at investors, including sophisticated ones."

A Goldman spokesman declined to comment.

(This blog post has been updated to include Paulson's argument that ACA, and not the hedge fund, had final authority to select the securities in the reference portfolio and rejected some of his proposals.)

(Reporting by Alison Frankel)

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