Bloomberg News

Goldman Sued Again for ‘Timberwolf’ Sale by Basis Capital

October 28, 2011

(Updates with excerpt from complaint in second paragraph.)

Oct. 28 (Bloomberg) -- Basis Capital Funds Management Ltd., an Australian hedge fund, filed a new lawsuit against Goldman Sachs Group Inc. over the sale of securities known as Timberwolf and Point Pleasant after a similar complaint was dismissed.

The suit, filed yesterday in New York State Supreme Court in Manhattan by Basis Capital’s Basis Yield Alpha Fund, accuses New York-based Goldman Sachs of “knowingly making materially false and misleading statements and omissions” in connection with the securities.

“Within weeks after BYAFM entered into these transactions, they precipitously declined in value, as defendants knew and intended they would,” Basis Capital said in the complaint. “As a result, BYAFM lost more than $67 million plus consequential damages.”

A June 2010 lawsuit by Basis Capital over the securities was dismissed this year by U.S. District Judge Barbara Jones in Manhattan, who ruled the Australian fund couldn’t use U.S. securities laws to pursue its claims against Goldman Sachs.

Jones’s ruling followed a decision by the U.S. Supreme Court last year in Morrison v. National Australia Bank. In that decision, the high court said U.S. securities laws don’t apply to the claims of foreign buyers of non-U.S. securities on foreign exchanges.

Not Misled

Edward Naylor, a Hong Kong-based spokesman for Goldman Sachs, said the U.S. bank acted appropriately and Basis Capital wasn’t misled.

“Basis and Goldman Sachs relied on the same data on the underlying mortgages and both were well aware of the prevailing global market conditions,” Naylor said in a phone interview today. “Goldman Sachs was also an investor in Timberwolf securities and lost several hundred million dollars.”

The suit filed yesterday relates to Point Pleasant, a collateralized debt obligation based on subprime residential home mortgages, and two credit default swaps that referenced securities from a similar CDO known as Timberwolf, Basis Capital said in the lawsuit.

Basis accuses Goldman Sachs of marketing new CDO investments in early 2007, after the company had already determined that the value of securities in that market “would likely go into sharp decline in the near future,” and used the new CDOs as a vehicle to short the market, the lawsuit says.

Basis Capital said Goldman was formalizing its Timberwolf deal with the fund during the same week that a Goldman Sachs executive sent an e-mail describing the Timberwolf investment as “one shi--y deal.”

‘Key Part’

“The Point Pleasant and Timberwolf offerings were a key part of this Goldman strategy, and provided a vehicle for Goldman to unload its toxic inventory and to profit from the decline in value of the very securities it was recommending that its clients purchase.”

Basis Capital is seeking to recover the $67 million and $1 billion in punitive damages, according to the lawsuit.

The case is Basis Yield Alpha Fund (Master), 652996/2011, New York State Supreme Court (Manhattan).

--With assistance from Sanat Vallikappen in Singapore. Editors: Douglas Wong, Andrew Dunn

To contact the reporter on this story: Chris Dolmetsch in New York at cdolmetsch@bloomberg.net.

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net.


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