FILED: NEW YORK COUNTY CLERK 08/08/2011

NYSCEF DOC. NO. 30

INDEX NO. 650027/2011 RECEIVED NYSCEF: 08/08/2011

SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x ACA FINANCIAL GUARANTY : CORP., : : Plaintiff, : v. : : GOLDMAN, SACHS & CO., : : Defendant. : : - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

Index No. 650027/2011 Hon. Barbara R. Kapnick

REPLY MEMORANDUM OF LAW IN FURTHER SUPPORT OF DEFENDANTS MOTION TO DISMISS THE AMENDED COMPLAINT

Richard H. Klapper Theodore Edelman Christopher J. Dunne Jessica P. Stokes Jacob E. Cohen SULLIVAN & CROMWELL LLP 125 Broad Street New York, New York 10004-2498 Telephone: (212) 558-4000 Facsimile: (212) 558-3588

Attorneys for Defendant Goldman, Sachs & Co.

August 8, 2011

TABLE OF CONTENTS Page PRELIMINARY STATEMENT .....................................................................................................1 I. PAULSONS INVESTMENT STRATEGY WAS NOT A MATERIAL FACT. ..............4 A. B. C. II. III. IV. V. ACANot PaulsonSelected the Reference Portfolio..........................................4 ABACUS Was Not Designed to Fail. ..................................................................6 Goldman Sachs Made No Representations About Paulsons Strategy. ...................7

ACAS ALLEGED BLIND RELIANCE ON UNWARRANTED INFERENCES ABOUT PAULSONS POSITION WAS NOT JUSTIFIABLE. ...............9 ACAS SCIENTER ALLEGATIONS DEFY ECONOMIC REASON. .......................12 ACA HAS NOT PLED LOSS CAUSATION. ..................................................................12 ACA FAILS TO STATE A CLAIM FOR UNJUST ENRICHMENT..............................14

CONCLUSION ..............................................................................................................................15

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TABLE OF AUTHORITIES Page(s) CASES Adelaide Prods., Inc. v. BKN Intl AG, 38 A.D.3d 221 (1st Dept 2007) ............................................................................................8, 9 Ashland, Inc. v. Morgan Stanley & Co., __ F.3d __, 2011 WL 3190448 (2d Cir. July 28, 2011).....................................................11, 14 Atl. Gypsum Co. v. Lloyds Intl Corp., 753 F. Supp. 505 (S.D.N.Y. 1990).......................................................................................3, 12 Colasacco v. Robert E. Lawrence Real Estate, 68 A.D.3d 706 (2d Dept 2009) ...............................................................................................10 Dallas Aerospace, Inc. v. CIS Air Corp., 352 F.3d 775 (2d Cir. 2003).....................................................................................................11 Guberman v. Rudder, 85 A.D.3d 683 (1st Dept 2011) ..............................................................................................12 Hirsch v. du Pont, 553 F.2d 750 (2d Cir. 1977).......................................................................................................5 Jacobs v. Lewis, 261 A.D.2d 127 (1st Dept 1999) ............................................................................................10 Jana L. v. West 129th Street Realty Corp., 22 A.D.3d 274 (1st Dept 2005) ................................................................................................9 King County v. IKB Deutsche Industriebank AG, 708 F. Supp. 2d 334 (S.D.N.Y. 2010)......................................................................................14 Laub v. Faessel, 297 A.D.2d 28 (1st Dept 2002) ..............................................................................................13 Lentell v. Merrill Lynch & Co., Inc., 396 F.3d 161 (2d Cir. 2005)...............................................................................................13, 14 Mandarin Trading Ltd. v. Wildenstein, 16 N.Y.3d 173 (2011) .............................................................................................................14

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MBIA Ins. Corp. v. Countrywide Home Loans, Inc., __ N.Y.S.2d __, 2011 WL 2567772 (1st Dept 2011) .............................................................14 Megaris Furs, Inc. v. Gimbel Bros., Inc., 172 A.D.2d 209 (1st Dept 1991) ............................................................................................13 Merrill Lynch & Co. v. Allegheny Energy, Inc., 500 F.3d 171 (2d Cir. 2007).....................................................................................................13 Philip v. First Unum Life Ins. Co., 41 A.D.3d 115 (1st Dept 2007) ................................................................................................5 Pludeman v. N. Leasing Sys., Inc., 10 N.Y.3d 486 (2008) ................................................................................................................8 SEC v. Goldman, Sachs & Co. and Fabrice Tourre, __ F. Supp. 2d __, 2011 WL 2305988 (S.D.N.Y. 2011) ................................................. passim Societe Nationale DExploitation v. Salomon Bros. Intl, Ltd., 268 A.D.2d 373 (1st Dept. 2000) ...............................................................................................6 Stuart Lipsky, P.C. v. Price, 215 A.D.2d 102 (1st Dept 1995) ............................................................................................10 UST Private Equity Investors Fund, Inc. v. Salomon Smith Barney, 288 A.D.2d 87 (1st Dept 2001) ........................................................................................10, 11 STATUTES CPLR 3016(b) ..................................................................................................................................8 OTHER AUTHORITIES RESTATEMENT (SECOND) OF TORTS 548A ..................................................................................13 Serena Ng and Carrick Mollenkamp, A Fund Behind Astronomical Losses, THE WALL ST. JOURNAL (Jan. 14, 2008) ....................................................................................8

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PRELIMINARY STATEMENT ACAs Opposition1 attempts to defend its theory that it never would have invested in ABACUS if it had known that Paulson would be holding the short side of the transaction, was selecting the Reference Portfolio, and wanted it to blow up. (Pl. Opp. at 6.) The problem is that ACAs own allegations and the transaction documents contradict that theory and with it, critical elements of ACAs causes of action. First, the Opposition confirms that no one at Goldman Sachs told ACA that Paulson was investing in ABACUS equity. The most the Opposition (like the Amended Complaint) can contend is that ACA inferred Paulsons strategy from a cryptic e-mail sent by a Goldman Sachs employee, Fabrice Tourre, on January 10, 2007months before ACA invested. The Opposition does not deny that ACA never asked Paulson about its strategy despite dealing with Paulson representatives in constructing the portfolio, nor questioned Goldman Sachs about whether it would be transferring the short position it was initially assuming. ACA apparently did not care enough to ask, presumably because its investment was in a static portfolio that it had selected and analyzed, whose performance did not depend in any way on who held the short exposure or who expressed views on the Reference Portfolios composition. Nonetheless, the Opposition persists with its theory that Paulsons interest was an important factor to ACA. Second, the transaction documents contradict the Oppositions insistence that Paulson selected the Reference Portfolio. As set forth in ACAs contracts and the offering materials, ACA had the sole authority to select the Reference Portfolio, and Paulson could not and did notselect even a single security in it. ACA does not dispute that prospective investors often expressed their views during the portfolio selection process, and that if Paulson had
Defined terms used in this memorandum have the same meanings as those used in the Goldman Sachs opening brief.
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recommended unsuitable securities, ACA was contractually obligated to reject them (and did so numerous times). Nonetheless, the Opposition still maintains that Paulson selected the portfolio. Third, ABACUS was not designed to fail, as the Opposition contends. It was designed to provide exposure to a static Reference Portfolio, and that is precisely what it did. No one could predict the future of the economy or housing markets. ACA, with its deep analytical resources, was as well situated as anyone to assess the Reference Portfolio that it selected and decide whether it also wished to invest, in addition to earning fees for picking the Reference Portfolio. The portfolio ultimately failed not because of who selected it or any unique characteristics of the particular securities eligible for inclusion, but because the entire market sector collapsed. Nonetheless, the Opposition contends that the portfolio was designed to fail, even though ACA designed it and any comparable portfolio would have failed. These distortions of incontrovertible fact not only raise significant issues as to the good faith of ACA (or whoever now controls ACA following its collapse), but also expose fatal deficiencies in its claims. New York law does not premise fraud on inferences drawn from cryptic e-mails. Rather, it imposes on sophisticated parties in complex commercial transactions a duty to inquire; and that duty is not excused by the Oppositions post hoc rationalization that any inquiry would have been futile because Paulson would have lied about its strategy. New York law also requires a viable theory of loss causation, despite ACAs protestations. Tellingly, although ACA contends that ABACUS was designed to fail, it cannot point to even a single security that Paulson recommended that has performed differently than one ACA purportedly would have chosen without Paulsons involvement, let alone explain how the portfolio as a whole performed worse than similar portfolios of BBB-rated subprime RMBS during the global economic collapse.

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Beyond these gross liberties with the facts, ACAs Opposition also fails to explain why its scienter allegations do not def[y] economic reason. Atl. Gypsum Co. v. Lloyds Intl Corp., 753 F. Supp. 505, 514 (S.D.N.Y. 1990). If Goldman Sachs believed that the portfolio was designed to fail, it would have acted irrationally by ceding to Paulson a highly lucrative short position in exchange for a small structuring fee. In response, ACA merely speculates that Goldman Sachs had already made enough profits from shorting mortgage-related products and was not interested in another supposedly risk-free billion dollars. ACA cannot cure one set of economically irrational motive allegations by hypothesizing an equally irrational theory. ACA attempts to overcome the absurdity of its designed to fail theory by relying heavily on the recent decision by the United States District Court for the Southern District of New York denying in part the motion to dismiss the SECs enforcement action against Fabrice Tourre arising from the same transaction. See SEC v. Goldman, Sachs & Co. and Fabrice Tourre, __ F. Supp. 2d __, 2011 WL 2305988 (S.D.N.Y. 2011) (the SEC Action). (See Pl. Oppn at 11-12.) That decision, however, did not address the crucial elements of reliance and loss causation, which ACA has failed to allege here, because those are not elements of the SECs federal securities law claim. See SEC Action, 2011 WL 2305988, at *12. Further, neither ACA nor Goldman Sachs was a party to the SEC Action when the motion was briefed and decided, and the District Court was not directed to the critical deficiencies in ACAs state law complaint outlined in this motion, including ACAs contractual obligations to select the Reference Portfolio or statements to investors that it had scrutinized rigorously all potential reference obligations. The partial denial of the dismissal motion in the SEC Action does not control here and, for the reasons discussed in Goldman Sachs opening brief, the Court should dismiss ACAs Complaint on the merits and with prejudice.

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I.

PAULSONS INVESTMENT STRATEGY WAS NOT A MATERIAL FACT. ACA contends that it was deceived into believing that Paulson would be a long

equity investor in ABACUS, and that it never would have invested had it known Paulsons true economic interests because [i]t just changes the whole dynamic of the structure where the person who is . . . choosing [the reference portfolio] wants it to blow up. (Pl. Oppn at 6.) But ACAs newly constructed theory of materiality cannot overcome the undeniable documentary record establishing that ACA selected the portfolio, the transaction was not designed to fail, and no one at Goldman Sachs represented to ACA anything about Paulsons strategy. A. ACANot PaulsonSelected the Reference Portfolio.

The central premise underlying ACAs claimsthat Paulson selected the Reference Portfoliois demonstrably false. Although ACA now depicts itself as a pawn in a scheme designed to allow Paulson to short assets that it had hand-picked to fail (Pl. Oppn at 5 6), ACA does not deny that it was contractually obligated to determine and select the Reference Portfolio, exercis[ing] that degree of skill and care consistent with industry standards . . . and that which the Portfolio Selection Agent customarily exercises with respect to such investments . . . and, in any event, to act in a commercially reasonable manner in discharging its duties under this Agreement (the Standard of Care). (Dunne Decl., Ex. A, at 1.) (See also id., Ex., F (Engagement Agreement).) ACA cannot have it both ways. Either ACA met its contractual obligations in selecting the Reference Portfolioin which case Paulsons recommendations were merely suggestions that ACA could (and did) approve or reject in the exercise of its contractual obligationsor ACA abdicated its responsibility under the agreements and misrepresented its

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role to Goldman Sachs and investors.2 Indeed, ACAs failure to ask Paulson about its investment position or intention during its months of discussing the Reference Portfolio directly with Paulson underscores that ACA did not view Paulsons position as material, and its inference as to that position did not influence ACAs investment decision.3 (Pl. Oppn at 12.) See Hirsch v. du Pont, 553 F.2d 750, 762-63 (2d Cir. 1977) ([plaintiffs] failure to pursue this line of investigation suggests either that, despite appearances, the knowledge he would have discovered was immaterial, or that [plaintiffs] failed to exercise due diligence to obtain important information.) (citations omitted). Despite ACAs reliance on the District Courts decision in the SEC Action (see Pl. Oppn at 1112), that decision contained only a single sentence addressing materiality and did not discuss ACAs contractual obligations as selection agent or the related disclosures ACA blessed in the offering materials. See SEC Action, 2011 WL 2305988, at *13. Neither Mr. Tourre nor the SEC directed the District Court to the agreements establishing ACAs obligations as Portfolio Selection Agent, although it is undisputed that ACA had sole authority to select the Reference Portfolio, and was contractually obligated to exercise that degree of skill and care consistent with industry standards in doing so. (Dunne Decl., Ex. A, at 1.) These contractual provisions refute ACAs contention that Paulson selected anything (Pl. Oppn at 1), and conclusively establish that ACA was not only able, but required, to assess the risks of

As set forth in a letter to counsel for ACA dated March 1, 2011, to the extent that ACA contends that it did not fulfill its duty to select the Reference Portfolio in a professional manner and instead acted as a pro forma selection agent, that contention conflicts with the representations ACA made in the ABACUS Marketing Book. Goldman Sachs accordingly reserves all applicable rights and claims, including as to indemnification under Annex A of the Letter Agreement between ACA Management, LLC and Goldman, Sachs & Co. dated February 15, 2007 (see Dunne Decl., Ex. F), and damages for any breach of ACAs contractual representations. Although ACA contends that the question of materiality cannot be resolved on a motion to dismiss, where the evidence concerning the materiality [of an alleged misstatement] is clear and substantially uncontradicted, the matter is one of law for the court to determine. Philip v. First Unum Life Ins. Co., 41 A.D.3d 115, 116 (1st Dept 2007) (quotation omitted).
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each Reference Obligation and approve or reject its inclusion in the Reference Portfolio. ACA also represented to ABACUS investors that it would rely on its deep expertise and its own proprietary models to analyze the credit fundamentals of every potential Reference Obligation. (Dunne Decl., Ex. E, at 2627.) ACA did not need to know Paulsons investment objectives to do its job properly, and apparently did not care enough to ask Paulson. See Societe Nationale DExploitation v. Salomon Bros. Intl, Ltd., 268 A.D.2d 373, 37475 (1st Dept. 2000) (dismissing claims alleging selective disclosure and partial withholding of information relevant to assessing the risks of the subject transactions because Plaintiff was a sophisticated institutional investor, and able to acquire the information needed independently to assess the risks and benefits of the transactions at issue). B. ABACUS Was Not Designed to Fail.

The Opposition contends that ABACUS was designed to fail so that Paulson could reap huge profits by shorting the portfolio. (Pl. Oppn at 1.) But contrary to ACAs hindsight and wholly unsupported mantra, no one knew at the time of the transaction where markets were headed or that the short position would be profitable. Indeed, ACA does not contest that ABACUS was designed toand didprovide synthetic exposure to a portfolio of 90 BBB-rated subprime RMBS issued in 2006 and 2007. Like all synthetic CDOs, the long exposure in ABACUS could not exist unless someone took the offsetting short exposure. ACA therefore knew from the outset that someone (initially Goldman Sachs) would stand to profit if the reference portfolio perform[ed] poorly. (Id. at 3.) ACAs entire financial guarantee business was based on this type of transaction, yet ACA apparently does not contend that every synthetic deal it structured was designed to fail. And although ACA alleges that Paulson manipulated the portfolio selection process to the detriment of every long position in ABACUS (Pl. Oppn 5), it does not allege how the transaction would have performed differently if the -6-

components of the Reference Portfolio had been different BBB-rated subprime securities, or why ACAone of the most astute players in the mortgage marketdid not notice the supposed manipulation. Nor does ACA allege that the Reference Portfolio performed any differently than expected under the market conditions of 2007 and 2008. Moreover, even if, as ACA argues, all of the RMBS in the final reference portfolio met criteria specified by Paulson (Pl. Oppn at 6), that would not demonstrate that Paulson must have manipulated the portfolio selection process. (Pl. Oppn at 5.) ACA itself acknowledges that it was market practice for a portfolio selection agent to select[] the collateral to be included in the reference portfolio within the parameters established by the transaction sponsor. (Pl. Oppn at 3 (emphasis added).) Further, the composition of the Reference Portfolio was disclosed and could not change during the life of the transaction, and the terms of investors rights to payment were fully disclosed in the offering documents. ACA does not contend that either was misstated. Of course, ACA did not need the offering documents (which it helped draft) to evaluate the transaction. It already had conducted extensive analyses of the Reference Obligations and similar securities in selecting the portfolio. Thus, to the extent that the prospect of a decline in the portfolios value were at all predictable from the components of the CDOs reference portfolio (as ACA seems to suggest), ACA had all the information necessary and available to make that determinationindeed, ACA alone had exclusive control over the composition of that portfolio. C. Goldman Sachs Made No Representations About Paulsons Strategy.

ACAs Opposition continues to argue that Goldman Sachs . . . misrepresented to ACA that Paulson had pre-committed to take a long position in ABACUS (Pl. Oppn at 5), but neither the Amended Complaint nor the Opposition alleges that Goldman Sachs affirmatively told ACA that Paulson would be an equity investor in ABACUS. ACA continues to rely instead -7-

on vague statements in a single e-mail from Mr. Tourre to an ACA employee months before ACA entered into the swap transaction. But that e-mail does not disclose Paulsons position or strategy. The e-mail says only that the capital structure included a [0] [9] % pre-committed first loss tranche and that Paulson was the transaction sponsor. Based on this alone, ACA allegedly inferred that Paulson had pre-committed to acquire the first loss portion of the capital structure, but never asked Paulson or Goldman Sachs to confirm that inference. ACAs failure to identify any specific misstatement by Goldman Sachs regarding Paulsons investment position fails to satisfy CPLR 3016(b)s requirement that a plaintiff plead facts that are sufficient to permit a reasonable inference of the alleged conduct. Pludeman v. N. Leasing Sys., Inc., 10 N.Y.3d 486, 492 (2008). Moreover, a sophisticated party may not predicate a fraud claim on vague oral representations that it made no effort to verify. Adelaide Prods., Inc. v. BKN Intl AG, 38 A.D.3d 221, 224 (1st Dept 2007).4 Moreover, even if Goldman Sachs had created a basis for ACAs inference, that would not have provided a justifiable basis for ACA to conclude that Paulson intended to take a net long position in ABACUS. Indeed, as ACA knew from its work on other transactions, even an explicit representation (clearly lacking here) that Paulson was initially investing in equity in the ABACUS offering would provide no insight into Paulsons overall position, exposure, or commitment to retain any particular interest.5 Nor did Goldman Sachs have a duty to tell ACA what Paulsons position was based on the special facts doctrine. (Pl. Oppn at 10.) ACAs Opposition fails to mention that
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ACA cannot distinguish Adelaide by noting that it involved verbal communications (as opposed to e-mail). (Pl. Oppn at 8, n.4.)

The Amended Complaint fails to allege any basis on which ACA reasonably could have assumed that Paulson did not also have a short position referencing other portions of the transaction as investors had done in other transactions involving ACA. For example, ACA served as the manager on a CDO called ACA Aquarius 2006-1 that was sponsored by a hedge fund called Magnetar Capital, which was known for purchasing the equity positions on its CDOs and simultaneously taking short positions on other tranches of its CDOs. (See Affirmation of Jacob E. Cohen, sworn to August 8, 2011 (the Cohen Aff.), Ex. A (Serena Ng and Carrick Mollenkamp, A Fund Behind Astronomical Losses, THE WALL ST. JOURNAL (Jan. 14, 2008)).)

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this doctrine does not apply where the allegedly-defrauded party could have discovered the truth independently through the exercise of ordinary intelligence. Jana L. v. West 129th Street Realty Corp., 22 A.D.3d 274, 278 (1st Dept 2005) (quotation omitted). ACA does not allege that it even asked what Paulsons position was despite having every opportunity to do so in its direct dealings. ACA had, at the very least, a duty to inquire. . . . It is insufficient for [ACA] to simply make the conclusory statement that the information [about Paulsons position] could not have been obtained [by it] through the exercise of ordinary intelligence. Id. ACA cannot overcome the deficiencies in its misrepresentation allegations by relying on the District Courts partial denial of Mr. Tourres motion. That decision incorrectly asserts that Mr. Tourres January 10, 2007 e-mail stated that Paulson was an investor in the equity, when it plainly does not. Even this inferential leap, however, could not support a conclusion that Mr. Tourre represented that Paulson had invested only in the equity, and required an assumption that the transaction sponsor was not simultaneously taking a short position in some other portion of the transaction or changing its strategy as the transaction evolved. The District Court also did not address the fact that New York law imposes a duty on sophisticated parties to clarify vague and ambiguous communications (particularly where, as here, ACA had extensive dealings directly with Paulson). See Adelaide, 38 A.D.3d at 224. II. ACAS ALLEGED BLIND RELIANCE ON UNWARRANTED INFERENCES ABOUT PAULSONS POSITION WAS NOT JUSTIFIABLE. The Opposition does not dispute that the sole basis for ACAs supposed view that Paulson was taking a long position in ABACUS was an inference that ACA drew after reading Mr. Tourres ambiguous January 10, 2007 e-mail. On the basis of that inference, ACA contends that it stopped doing its job as portfolio selection agent and abdicated to Paulson the responsibility to pick the Reference Portfolio. (See Pl. Oppn at 15.) Between January 10, 2007 -9-

and May 31, 2007 (the day that ACA executed the swap at issue here), ACA did not once ask Paulson about its investment position in the transaction, despite concededly having numerous discussions with Paulson during that period. Instead, based solely on its inference, ACA supposedly proceeded to invest nearly $1 billion in the face of disclaimers specifically warning that each purchaser . . . will be deemed to have represented and agreed that the purchaser . . . has made its own investment decisions . . . based upon its own judgment . . . and not upon any view expressed by [Goldman Sachs].6 (Dunne Decl., Ex. D, at 117.) New York courts routinely evaluate allegations of reasonable reliance at the pleading stage.7 They also routinely hold that disclaimers such as those quoted above preclude claims of justifiable reliance, even where the investor was not a highly sophisticated financial institution that was paid to: (1) conduct its own due diligence; (2) exercise sole authority to pick the assets in which it was investing; and (3) represent that it approved the transaction. (See Defs. Opening Br. at 17-19.) ACA cannot now complain that it relied on its mistaken impression that Paulson was an equity investor, because nothing about Paulsons role in the transaction excused ACAs obligation to analyze every asset that it selected for the Reference Portfolio. See Jacobs v. Lewis, 261 A.D.2d 127, 128 (1st Dept 1999) (after personally investigating work of the contractor, plaintiff could not contend that it relied to [its] detriment upon [the contractors]

ACA contends that it is not bound by the disclosures in the Offering Circular because it is suing Goldman Sachs based solely on its swap investment. (Pl. Oppn at 18.) But as the Opposition acknowledges, ACAs initial complaint brought claims for ACAs purchase of $42 million in ABACUS notes, as to which ACA indisputably was held to the disclaimers about making its own investment decision. (Pl. Oppn at 18 n.17; Initial Complaint 58.) Having represented that it made its own investment decisions and disclaimed reliance on Goldman Sachs, ACA cannot now disavow those disclaimers any more than it can disavow the allegations of its initial complaint. Moreover, the Schedule to the International Swaps and Derivatives Association Master Agreement, which governs ACAs swap transaction (see AC 62), contains nearly identical disclaimers, and specifically requires the seller of protection to accept the terms of the underlying transaction. See, e.g., Colasacco v. Robert E. Lawrence Real Estate, 68 A.D.3d 706, 708 (2d Dept 2009) ([I]t is clear from the face of the complaint that plaintiffs supposed reliance on [defendants] alleged misrepresentations . . . was unreasonable as a matter of law.); UST Private Equity Investors Fund, Inc. v. Salomon Smith Barney, 288 A.D.2d 87, 88 (1st Dept 2001) (same); Stuart Lipsky, P.C. v. Price, 215 A.D.2d 102, 103 (1st Dept 1995) (same).
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representations as to [its] expertise.). ACAs alleged blind reliance is further unjustified given that it had unfettered access to the source of the information that supposedly was concealed, and could have obtained the information it sought through minimal effort simply by asking Paulson. Dallas Aerospace, Inc. v. CIS Air Corp., 352 F.3d 775, 786 (2d Cir. 2003) (applying New York law); see also Ashland, Inc. v. Morgan Stanley & Co., __ F.3d __, 2011 WL 3190448, at *3 (2d Cir. July 28, 2011) (An investor may not justifiably rely on a misrepresentation if, through minimal diligence, the investor should have discovered the truth.) (quoting Brown v. E.F. Hutton Grp., Inc., 991 F.2d 1020, 1032 (2d Cir. 1993)). ACA tries to excuse its failure to ask Paulson about its position by contending that any inquiry would have been useless because Paulson would have lied, since the economic interests of ACA and Paulson in the transaction were . . . exactly opposite. (See Pl. Oppn at 20.) The law contains no presumption that counterparties will lie to each other and does not excuse a lack of reasonable inquiry on that basis. Even limiting ACAs expectation of fraud theory to counterparties to synthetic transactionswhose positions by definition are exactly oppositewould unjustifiably relieve ACA of any duty of inquiry for the entirety of its financial guarantee business, which was based on taking synthetic long exposures through credit default swaps. (See Dunne Decl., Ex. K, at 7, 19.) ACAs reliance on this theory makes no sense and conflicts with bedrock principles of New York law. To the contrary, [a]s a matter of law, a sophisticated plaintiff cannot establish that it entered into an arms length transaction in justifiable reliance on alleged misrepresentations if that plaintiff failed to make use of the means of verification that were available to it . . . . UST Private Equity Investors Fund, Inc. v. Salomon Smith Barney, 288 A.D.2d 87, 88 (1st Dept 2001); see also Ashland, 2011 WL 3190448, at *34. And the District Court decision in the SEC Action cannot rescue ACAs

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pleading deficiencies on the issue of reliance, because the SEC was not required to plead or prove reliance, and the District Court did not address that issue. See 2011 WL 2305988, at *12. III. ACAS SCIENTER ALLEGATIONS DEFY ECONOMIC REASON. The Opposition clings to ACAs theory that Goldman Sachs designed a transaction that it knew would fail, but then conveyed to Paulson for a $15 million fee a vastly more valuable short interestall so that Goldman Sachs could further its carefully considered strategy to position [itself] to compete more aggressively in the growing market for similar structured products, which was a huge and enormously profitable market. (Pl. Oppn at 14.) Put differently, ACA illogically alleges that Goldman Sachs knowingly created a doomed investment to encourage other investors to hire it to structure future defective transactions. ACAs Opposition adds another layer of economic irrationality by speculating that, although Goldman Sachs foresaw the coming economic collapse, it decided to give up the short side of the supposedly-doomed transaction, which would have made Goldman Sachs hundreds of millions of dollars in risk-free profits, because Goldman Sachs already had satisf[ied] any appetite it had for shorting RMBS. (Id.) Allegations that, like these, def[y] economic reason . . . [do] not yield a reasonable inference of fraudulent intent.8 Atl. Gypsum, 753 F. Supp. at 514.9 IV. ACA HAS NOT PLED LOSS CAUSATION. Despite ACAs protestations (Pl. Oppn. at 21), loss causation is an element of

ACA also seeks to infer fraudulent intent from an enigmatic one-sentence e-mail that ACA asserts conclusively confirms that Goldman Sachs intended to mislead ACA. (Pl. Oppn 1314.) The e-mail, from Fabrice Tourre to another Goldman Sachs employee, states in full: I am at the ACA Paulson meeting, this is surreal. (Id.) Neither the text of the e-mail nor its context reveals what the e-mail meant, and it certainly does not reveal any intent to deceive [ACA]. Guberman v. Rudder, 85 A.D.3d 683, 683 (1st Dept 2011). The District Courts decision provides neither enlightenment nor support for ACA here. That decisions entire reference to the scienter element consists of the following statement: the Court finds the SEC adequately alleges Tourre made the material misrepresentations and omissions discussed above with scienter and in connection with the purchase or sale of a security. SEC Action, 2011 WL 2305988, at *13 (emphasis added).
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its fraud claims.10 See Laub v. Faessel, 297 A.D.2d 28, 31 (1st Dept 2002) (requiring proof that the misrepresentations directly caused the loss about which plaintiff complains (loss causation)). According to ACA, it suffered damages because Paulson had an influential role in selecting the portfolio, thereby direct[ly] and adverse[ly] impact[ing] . . . the performance of every long position in ABACUS. (Pl. Oppn at 22.) ACA therefore seeks to address causation merely with the hindsight allegation that ABACUS performed poorly, as Paulson wanted. But the Amended Complaint does not explain how (if at all) Paulsons recommendations caused the Reference Portfolio to perform poorly, especially given that ACA had sole authority to choose every security. Nor does ACA identify any security proposed by Paulson that performed worse than ones that ACA would have picked without Paulsons recommendation. See Megaris Furs, Inc. v. Gimbel Bros., Inc., 172 A.D.2d 209, 213 (1st Dept 1991) (dismissing claims where Plaintiffs pleadings [were] devoid of any attempt to demonstrate the requisite nexus between the misrepresentation . . . and the injury said to have been sustained).11 Even if ACA had abandoned its obligations as Portfolio Selection Agent, its loss coincided with the market-wide meltdown of the mortgage industry, and the Amended

The Second Circuits decision in Merrill Lynch & Co. v. Allegheny Energy, Inc., 500 F.3d 171 (2d Cir. 2007), did not eliminate loss causation as an element of common law fraud. It held only that it was improper to apply the tailored securities law concept of loss causation to a case that had nothing to do with securities, but instead involved the sale of a business. Id. at 182-83. The court explained that, although overpayment alone cannot prove loss causation in a securities case, a claim based on sale of a business is different. Id. at 183. In that context, the element of causation on a common law fraud claim requires proof only that plaintiff acquired an asset at a price that exceeded its true value. Id. Allegheny Energy does not eliminate the requirement of proving loss causation in fraud cases involving securities. See Laub, 297 A.D.2d at 31. Although ACA correctly notes that foreseeability of the loss is the touchstone to proximate cause (see Pl Oppn at 2122), to establish proximate cause in the securities context, a plaintiff must allege . . . that the subject of the fraudulent statement or omission was the cause of the actual loss suffered . . . [o]therwise, the loss in question was not foreseeable. Lentell v. Merrill Lynch & Co., Inc., 396 F.3d 161, 173 (2d Cir. 2005) (quotation omitted); accord RESTATEMENT (SECOND) OF TORTS 548A, Comment b.
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Although ACA argues that loss causation should not be decided on a motion to dismiss, in several recent decisions, federal courts have rejected similar conclusory allegations as insufficient to plead the requisite causal connection between the alleged misrepresentation and the claimed loss. (See Def. Opening Br. at 23 n.12.)

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Complaint is devoid of any allegation that ABACUS performed differently than other similar securities during the financial crisis. [W]hen the plaintiffs loss coincides with a marketwide phenomenon causing comparable losses to other investors . . . a plaintiffs claim fails when it has not adequately ple[]d facts which, if proven, would show that its loss was caused by the alleged misstatements as opposed to intervening events. Lentell, 396 F.3d at 174 (internal quotations omitted; alterations in original).12 V. ACA FAILS TO STATE A CLAIM FOR UNJUST ENRICHMENT. ACAs Opposition confirms that it cannot establish the essential elements of an unjust enrichment claim. Nowhere does ACA explain how Goldman Sachs was enriched by ACAs swap transaction. Indeed, while the Amended Complaint contends that ABN Amro unwound the swap by paying Goldman Sachs $840,909,090, it concedes that most of that money was passed on to Paulson. (AC 7374.) In its Opposition, ACA backpedals, arguing that whether (if at all) and how Goldman Sachs was enriched is an issue of fact that is not amenable to adjudication on the pleadings. (Pl Oppn at 25.) But to satisfy its pleading burden, ACA must allege facts sufficient to show that Goldman Sachs was actually enriched, not mere amorphous speculation that Goldman Sachs might have been enriched, possibly at ACAs expense. See Mandarin Trading Ltd. v. Wildenstein, 16 N.Y.3d 173, 183 (2011) (Without sufficient facts, conclusory allegations that fail to establish that a defendant was unjustly enriched at the expense of a plaintiff warrant dismissal.); see also Ashland, 2011 WL 3190448, at *5.
The decisions on which ACA relies are not to the contrary. See MBIA Ins. Corp. v. Countrywide Home Loans, Inc., __ N.Y.S.2d __, 2011 WL 2567772, at *4 (1st Dept 2011) (misrepresentation that loan originators followed their underwriting guidelines was the proximate cause of plaintiffs loss because a review conducted by MBIA revealed that 91% of the defaulted or delinquent loans showed material discrepancies from underwriting guidelines); King County v. IKB Deutsche Industriebank AG, 708 F. Supp. 2d 334, 345 (S.D.N.Y. 2010) (precipitous decline [in the price for three-month Treasury Bills] occurred in August 2007, not October 2007 when [the fund] collapsed (emphasis in original)).
12

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CONCLUSION For the foregoing reasons, and those stated in Goldman Sachs opening brief, Goldman Sachs respectfully requests that the Court dismiss Plaintiffs Amended Complaint in its entirety, with prejudice, and grant to Goldman Sachs such other and further relief as the Court deems just and proper. Dated: New York, New York August 8, 2011 Respectfully submitted, /s/ Richard H. Klapper Richard H. Klapper (klapperr@sullcrom.com) Theodore Edelman (edelmant@sullcrom.com) Christopher J. Dunne (dunnec@sullcrom.com) Jessica P. Stokes (stokesj@sullcrom.com) Jacob E. Cohen (cohenja@sullcrom.com) SULLIVAN & CROMWELL LLP 125 Broad Street New York, New York 10004-2498 Telephone: (212) 558-4000 Facsimile: (212) 558-3588 Attorneys for Defendant Goldman, Sachs & Co.

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