[ by Howard Haykin ] 

You're probably not going to believe this, but a new Paulson hedge fund conspired with Goldman in Abacus - lawsuit.

The Goldman Sachs collateralized debt obligation ("CDO") known as Abacus - the one that embroiled Goldman Sachs with the SEC because the portfolio of underlying securities were hand-picked by John Paulson, who then went short the investment, is back in the news with a new lawsuit. 

Bond insurer ACA Financial on Thursday filed an amended complaint naming Paulson & Co and its hedge fund Paulson Credit Opportunities Master II Ltd as defendants in a $120 million lawsuit it brought against Goldman in 2011.

Basis of the Lawsuit.   The lawsuit centers on the Abacus CDO, which ACA claimed was designed to fail so that Paulson could reap "huge profits" and Goldman "huge fees."  John Paulson's hedge fund will have to defend claims that his firm conspired with Goldman Sachs Group Inc to fraudulently induce a bond insurer to guarantee payments on risky debt, court papers show.  Thursday's amended complaint contains new allegations that Goldman and Paulson deceived ACA into believing Paulson was investing in the CDO, when they knew he would instead bet against it by taking a short position.

The suit further alleges that:

• Goldman misrepresented that Paulson's and ACA's financial interests in Abacus were "aligned,"
• Paulson fraudulently played the role of the "equity investor."  
• During a 1/17/07 telephone conversation, a Goldman managing director said that Paulson's interest in the "capital structure" of Abacus was "all, 100 percent equity." 
• Goldman and Paulson secretly agreed in what they called a "side letter agreement" to structure the deal in a way that concealed Paulson's short interest.

Statements from Defendants.   A spokesperson for Paulson said ACA's case against Paulson is "completely without merit."  Paulson's spokesperson further noted this about the SEC investigation:

"As the SEC said back in 2010, Paulson was not the subject of the SEC's ABACUS investigation, made no misrepresentations, and was not the subject of any charges," Leslie said in an email.

Goldman spokesman Michael DuVally declined to comment on the amended complaint.  For its part, Goldman Sachs settled with the SEC in 2010 over claims it misled investors in Abacus.   Without admitting wrongdoing, Goldman, if I recall correctly, paid $550 million in fines.  The SEC also claimed that Goldman and VP Fabrice Tourre failed to tell investors Paulson & Co helped choose and bet against the subprime residential mortgage backed securities underlying Abacus. 

The case is ACA Financial Guaranty Corp v Goldman Sachs & Co, 650027/2011, New York state Supreme Court (New York County).  Representation in the case is, as follows:

• For ACA: Marc E. Kasowitz, Kasowitz, Benson, Torres & Friedman.
• For Goldman: Richard Klapper, Sullivan & Cromwell
• For Paulson: Unclear

For further details, go to:   [Reuters, 1/31/13].