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Current Developments in the Commercial Divisions of the
New York State Courts
Posted: August 21, 2015

Failure to Disclose Stark Departure from Basic Assumption in Industry States Fraud Claim

On August 18, 2015, the First Department issued a decision in ACA Financial Guaranty Corp. v. Goldman, Sachs & Co., 2015 NY Slip Op. 06562, holding that allegations of a failure to disclose a “stark departure” from industry standards was a misrepresentation sufficient to state a claim for fraud.

In ACA Financial Guaranty Corp., the First Department addressed, on “remittitur from the Court of Appeals,” whether a trial court had properly refused to dismiss a claim that the “defendant, Goldman, Sachs & Co. [had] fraudulently induced plaintiff to issue a financial guaranty for a synthetic collateralized debt obligation while concealing the fact that its hedge fund client Paulson & Co., which selected most of the portfolio investment securities, planned to take a ‘short’ position.” The First Department affirmed the trial court, explaining:

To make a prima facie claim of fraud, the complaint must allege misrepresentation or concealment of a material fact, falsity, scienter on the part of the wrongdoer, justifiable reliance and resulting injury. . . . [T]he motion court properly determined that plaintiff pleaded a material misrepresentation. Plaintiff provided allegations that defendant misrepresented Paulson’s economic interest in ABACUS. Further, the complaint alleges that two other entities refused to assist Paulson upon learning of its true role in the transaction, and Paulson’s position was described as a “stark departure” from the basic assumption in the industry that sponsors of a deal want it to succeed. These allegations all supported plaintiff’s claim that the alleged misrepresentation/concealment of Paulson’s conflict of interest was material and it would not have provided the financial guaranty had it known the truth.

(Internal quotations and citations omitted).

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