ACA Financial Guaranty Corp., Appellant,v.Goldman, Sachs & Co., Respondent, Paulson & Co., Inc. et al., Defendants.

Brief

N.Y.March 26, 2015

To Be Argued By: RICHARD H. KLAPPER Time Requested: 30 Minutes APL-2014-00114 New York County Clerk’s Index No. 650027/11 Court of Appeals STATE OF NEW YORK ACA FINANCIAL GUARANTY CORP., Plaintiff-Appellant, —against— GOLDMAN, SACHS & CO., Defendant-Respondent. BRIEF FOR DEFENDANT-RESPONDENT GOLDMAN, SACHS & CO. d RICHARD H. KLAPPER THEODORE EDELMAN WILLIAM B. MONAHAN JESSICA P. STOKES SULLIVAN & CROMWELL LLP 125 Broad Street New York, New York 10004-2498 Telephone: (212) 558-4000 Facsimile: (212) 558-3588 Attorneys for Defendant-Respondent Goldman, Sachs & Co. August 14, 2014 DISCLOSURE STATEMENT PURSUANT TO 22 NYCRR PART 500.1(f) Pursuant to New York Court of Appeals Rules of Practice § 500.1(f), Defendant-Respondent Goldman, Sachs & Co. states that it is an indirect wholly owned subsidiary of The Goldman Sachs Group, Inc. (“GS Group”), which is a corporation organized under the laws of Delaware and whose shares are publicly traded on the New York Stock Exchange. GS Group has no parent corporation. GS Group lists the following significant subsidiaries, as the term “significant subsidiary” is defined in Rule 1-02(w) of Regulation S-X under the Securities Exchange Act of 1934, as of December 31, 2013. Goldman, Sachs & Co. Goldman Sachs (UK) L.L.C. Goldman Sachs Group UK Limited Goldman Sachs Group Holdings (U.K.) Limited Goldman Sachs International Bank Goldman Sachs Holdings (U.K.) Goldman Sachs International Goldman Sachs Asset Management International Forres L.L.C. Forres Investments Limited KPL Finance Limited Rothesay Life (Cayman) Limited Goldman Sachs Global Holdings L.L.C. GS Asian Venture (Delaware) L.L.C. GS Hony Holdings I Ltd. GS (Asia) L.P. Goldman Sachs (Japan) Ltd. Goldman Sachs Japan Co., Ltd. MLT Investments Ltd. Goldman Sachs Strategic Investments (Asia) L.L.C. J. Aron Holdings, L.P. J. Aron & Company -ii- Goldman Sachs Asset Management, L.P. Goldman Sachs Hedge Fund Strategies LLC Goldman Sachs (Cayman) Holding Company Goldman Sachs (Asia) Corporate Holdings L.P. Goldman Sachs Holdings (Hong Kong) Limited Goldman Sachs (Asia) Finance Goldman Sachs (Asia) L.L.C. Goldman Sachs Foreign Exchange (Singapore) PTE J. Aron & Company (Singapore) PTE GS Mehetia LLC Mehetia Holdings Inc. GS Holdings (Delaware) L.L.C. II GS Lending Partners Holdings LLC Goldman Sachs Lending Partners LLC Goldman Sachs Bank USA Goldman Sachs Mortgage Company Goldman Sachs Credit Partners L.P. Goldman Sachs Execution & Clearing, L.P. GS Financial Services II, LLC GS Funding Europe GS Funding Europe I Ltd. GS Funding Europe II Ltd. GS Investment Strategies, LLC GS Power Holdings LLC Mitsi Holdings LLC Metro International Trade Services LLC MLQ Investors, L.P. AR Holdings (Delaware) L.L.C. AR Holdings GK SH White Flower GK Frangipani GS PIA Holdings GK Crane Holdings Ltd. GS TK Holdings II GK ELQ Holdings (Del) LLC ELQ Holdings (UK) Ltd ELQ Investors II Ltd Goldman Sachs Specialty Lending Holdings, Inc. Goldman Sachs Holdings ANZ Pty Limited GS HLDGS ANZ II Pty Ltd -iii- Goldman Sachs Australia Group Holdings Pty Ltd Goldman Sachs Australia Capital Markets Limited Goldman Sachs Australia Pty Ltd Goldman Sachs Financial Markets Pty Ltd GS Fund Holdings, L.L.C. Shoelane, L.P. Whitehall Street Global Real Estate Employee Master Fund 2007, L.P. GS Financial Services L.P. (Del) JLQ LLC Jupiter Investment Co., Ltd. GS Direct, L.L.C. GSIP Holdco A LLC Special Situations Investing Group II, LLC MTGRP, L.L.C. Archon International, Inc. Archon Capital Bank Deutschland GMBH Archon Group Deutschland GMBH -iv- TABLE OF CONTENTS Page PRELIMINARY STATEMENT ............................................................................. 1 FACTUAL BACKGROUND .................................................................................. 5 A. ACA ..................................................................................................... 5 B. The ABACUS Transaction .................................................................. 6 C. ACA’s Roles in the ABACUS Transaction ........................................ 9 D. The Alleged Misstatements ............................................................... 11 E. The Disclosures and Acknowledgements in the ABACUS Offering Circular ............................................................................... 13 F. The SEC’s Lawsuit Against Goldman Sachs and Fabrice Tourre ..... 15 G. Filing of ACA’s Lawsuit Against Goldman Sachs ........................... 16 H. Proceedings in the Courts Below ...................................................... 17 LEGAL STANDARDS ......................................................................................... 19 ARGUMENT ......................................................................................................... 21 I. ACA FAILED TO CONDITION ITS INVESTMENT ON CONTRACTUAL REPRESENTATIONS CONCERNING PAULSON’S INVESTMENT POSITION ................................................. 22 A. Requiring Sophisticated Parties To Include All Material Terms in a Written Contract Is—And Should Be—the Law ....................... 22 B. ACA Could Have Conditioned Its Investment on Contractual Representations Concerning Paulson’s Investment Position ............ 25 II. ACA DOES NOT DISPUTE THAT IT FAILED TO ASK ANY PAULSON REPRESENTATIVES ABOUT PAULSON’S INVESTMENT POSITION ........................................................................ 28 -v- A. ACA Never Asked Paulson Whether Paulson Intended To Take a Long Position in ABACUS, Despite Numerous Opportunities ..... 28 B. The Final Offering Circular Put ACA On Notice That Its Alleged Belief That Paulson Was Investing In The Equity Might Be Mistaken ............................................................................ 33 III. ACA DISCLAIMED RELIANCE ON ANY REPRESENTATIONS OUTSIDE OF THE OFFERING CIRCULAR ........................................... 36 IV. ACA’S RELIANCE ON THE JURY VERDICT IN SEC V. TOURRE IS MISPLACED .......................................................................................... 41 CONCLUSION ...................................................................................................... 43 -vi- TABLE OF AUTHORITIES Page(s) CASES 101 Fleet Place Assocs. v. N.Y. Tel. Co., 197 A.D.2d 27 (1st Dep’t 1994) ....................................................................... 40 Arfa v. Zamir, 76 A.D.3d 56 (1st Dep’t 2010) ................................................................... 31, 32 Attea v. Attea, 30 A.D.3d 971 (4th Dep’t 2006) ....................................................................... 40 Basis Yield Alpha Fund v. Goldman Sachs Grp., Inc., 115 A.D.3d 128 (1st Dep’t 2014) ..................................................................... 38 Belin v. Weissler, 1998 WL 391114 (S.D.N.Y. July 14, 1998) ..................................................... 33 Centro Empresarial Cempresa S.A. v. America Movil, S.A.B. de C.V., 17 N.Y.3d 269 (2011) ............................................................................... passim Danann Realty Corp. v. Harris, 5 N.Y.2d 317 (1959) ................................................................. 18, 20, 21, 22, 38 DDJ Mgmt. v. Rhone Grp., 15 N.Y.3d 147 (2010) ........................................................................... 20, 21, 23 Fundamental Long Term Care Holdings, LLC v. Cammeby’s Funding LLC, 20 N.Y.3d 438 (2013) ....................................................................................... 23 Global Minerals & Metals Corp. v. Holme, 35 A.D.3d 93 (1st Dep’t 2006) ................................................................. passim Goshen v. Mut. Life Ins. Co. of N.Y., 98 N.Y.2d 314 (2002) ....................................................................................... 20 Graham Packaging Co. v. Owens-Illinois, Inc., 67 A.D.3d 465 (1st Dep’t 2009) ........................................................... 30, 31, 33 Guggenheimer v. Ginzburg, 43 N.Y.2d 268 (1977) ....................................................................................... 20 -vii- TABLE OF AUTHORITIES (continued) Page(s) HSH Nordbank AG v. UBS AG, 95 A.D.3d 185 (1st Dep’t 2012) ..................................................... 22, 36, 37, 38 Jones v. Bill, 10 N.Y.3d 550 (2008) ....................................................................................... 19 Konstantin v. 630 Third Ave. Assocs., 961 N.Y.S.2d 358 (Table) (N.Y. Sup. Ct. N.Y. Cnty. Sept. 20, 2012) ...... 40, 41 MBIA Ins. Corp. v. Royal Indem. Co., 426 F.3d 204 (3d Cir. 2005) ............................................................................. 23 Regina v. Marotta, 67 A.D.3d 766 (2d Dep’t 2009) ........................................................................ 22 SEC v. Tourre, 2014 WL 61864 (S.D.N.Y. Jan. 7, 2014) ................................................... 16, 42 Schron v. Troutman Sanders LLP, 20 N.Y.3d 430 (2013) ....................................................................................... 23 Societe Nationale D’Exploitation Industrielle des Tabacs et Allumettes v. Salomon Bros., 268 A.D.2d 373 (1st Dep’t 2000) ..................................................................... 41 Swersky v. Dreyer & Traub, 219 A.D.2d 321 (1st Dep’t 1996) ..................................................................... 32 Triton Partners LLC v. Prudential Sec. Inc., 301 A.D.2d 411 (1st Dep’t 2003) ..................................................................... 22 Walker ex rel. Velilla v. City of New York, 46 A.D.3d 278 (1st Dep’t 2007) ....................................................................... 19 Weinstein v. Barnett, 219 A.D.2d 77 (1st Dep’t 1996) ....................................................................... 19 -viii- TABLE OF AUTHORITIES (continued) Page(s) Wittenberg v. Robinov, 9 N.Y.2d 261 (1961) ......................................................................................... 36 STATUTES AND REGULATION CPLR 3016(b) ........................................................................................................ 20 CPLR 3211(a)(1) .............................................................................................. 17, 20 CPLR 3211(a)(7) ............................................................................................... 17, 20 CPLR 5526 ............................................................................................................. 19 17 C.F.R. 240.10b-5 ............................................................................................... 16 OTHER AUTHORITIES 14 N.Y. PRAC., NEW YORK LAW OF TORTS ...................................................... 32, 33 2 E. ALLAN FARNSWORTH, FARNSWORTH ON CONTRACTS (2d ed. 1998) .............. 24 28 WILLISTON ON CONTRACTS (4th ed.) ................................................................. 24 Meredith R. Miller, Party Sophistication & Value Pluralism in Contract, 29 TOURO L. REV. 659 (2013) ........................................................................... 24 Debra Pogrund Stark & Jessica M. Choplin, A License To Deceive: Enforcing Contractual Myths Despite Consumer Psychological Realities, 5 N.Y.U. J. L. & BUS. 617 (2009) ..................................................................... 25 QUESTION PRESENTED Whether a sophisticated investor (ACA) intimately involved in structuring a collateralized debt obligation (“CDO”), and having the sole responsibility to select the portfolio of assets backing the CDO, can establish justifiable reliance as a matter of law based on allegedly false statements concerning another party’s (Paulson’s) investment position in the CDO when ACA (a) failed to protect itself by conditioning its investment on contractual representations and warranties concerning Paulson’s investment position; (b) failed to ask Paulson representatives about Paulson’s investment position, despite frequent and direct access to those representatives during the transaction’s evolution; (c) was on notice prior to investing that its belief as to Paulson’s investment position was incorrect; and (d) expressly represented that it was not relying on any representations outside of the CDO’s offering circular, including all of the alleged misrepresentations at issue here? The Appellate Division, First Department correctly answered this question in the negative. Defendant-Respondent Goldman, Sachs & Co. (“Goldman Sachs”) respectfully submits this brief in opposition to Plaintiff-Appellant ACA Financial Guaranty Corp.’s appeal of the May 14, 2013 Decision and Order of the Appellate Division, First Department (the “Decision”), which dismissed its fraudulent inducement and fraudulent concealment claims against Goldman Sachs. PRELIMINARY STATEMENT This action is a transparent attempt by the creditors of ACA Financial Guaranty Corp. (with its affiliates, “ACA”) to shift to Goldman Sachs ACA’s losses on a credit default swap (“CDS”) referencing ABACUS 2007-AC1 (“ABACUS”), a synthetic collateralized debt obligation (“CDO”) for which ACA selected the reference portfolio of residential mortgage-backed securities (“RMBS”). ACA does not deny that the transaction delivered precisely the disclosed economic exposure (to a static portfolio of dozens of lower-rated subprime securities selected by ACA) or that the entire universe of eligible securities was wiped out in the housing market meltdown. Nonetheless, ACA contends that it may shift its resulting losses because Goldman Sachs allegedly misrepresented that the hedge fund Paulson & Co. (“Paulson”), with which ACA communicated directly regarding the composition of the reference portfolio, intended to take a long position in ABACUS, when in fact Paulson took a substantial short position. The First Department, applying long-established New -2- York law, correctly held that ACA cannot establish justifiable reliance as a matter of law because ACA, despite its active role in the transaction and its direct dealings with Paulson representatives, failed to “demand[] either access to the information or assurances as to its accuracy in the form of representations and warranties.” Centro Empresarial Cempresa S.A. v. America Movil, S.A.B. de C.V., 17 N.Y.3d 269, 278-79 (2011); see also R817. ACA’s claims are unlike those of any other investor in ABACUS, other CDOs or RMBS. ACA was not simply a highly sophisticated manager of CDOs and other mortgage products; it had the sole responsibility to select the static portfolio of RMBS backing the ABACUS CDO, dealt directly with Paulson representatives throughout the transaction’s evolution, and received suggestions from Paulson representatives of securities to include in the collateral portfolio. Although ACA now opportunistically contends that it would not have invested in ABACUS had it known that Paulson was taking a short position in the transaction, ACA failed to protect itself in a number of ways, including by failing to condition its investment on contractual representations and warranties concerning Paulson’s investment position (if that was truly significant, since it did not affect the performance of the static portfolio ACA selected). ACA’s supposed decision to rely only on vague “oral and e-mail” statements—which do not say what ACA claims, and on which ACA expressly disclaimed reliance—are not substitutes for -3- contractual representations and warranties. It is undisputed that ACA never sought or obtained such representations and warranties at any time. Had ACA truly cared about Paulson’s investment position, not only should ACA have obtained a contractual representation, it also should have asked Paulson representatives directly about Paulson’s investment objectives. ACA indisputably did not do so. In the course of carrying out its contractual obligation to select a reference portfolio of 90 subprime RMBS that provided the credit support for ABACUS, ACA for months had frequent and direct access to Paulson representatives, including outside of the presence of Goldman Sachs. ACA could have asked them about Paulson’s investment objectives at any time during the almost five months between their first meeting in early January 2007 and the closing of the swap transaction in late May 2007. Although ACA speculates that all of the Paulson representatives would have lied, that cannot excuse ACA’s failure even to ask. Moreover, as ACA well knew, potential investors in a transaction can change their investment objectives as a transaction evolves or after investing; regardless of what ACA may have thought during the early stages of the transaction (when Goldman Sachs allegedly made all of the misrepresentations at issue), it was incumbent on ACA to confirm that belief with Paulson representatives or through contractual representations before investing. That is especially true here because the April 2007 ABACUS Offering Circular, issued -4- months after the e-mails and conversations on which ACA purports to have relied, disclosed the absence of any equity investor. Having failed to allege justifiable reliance, ACA cannot salvage its claims by pointing to Goldman Sachs’s settlement (without any admission) with the U.S. Securities and Exchange Commission (“SEC”) or the SEC’s civil proceeding against a Goldman Sachs employee (Fabrice Tourre) in connection with the ABACUS transaction. In both instances, the SEC did not need to plead or prove justifiable reliance. Further, although ACA now claims that it was the “principal victim” of Goldman Sachs’s alleged fraud (ACA Br. at 1), the most notable aspect of the settlement for these purposes is that the SEC allocated a portion of the settlement funds to other ABACUS investors (who did not have direct access to Paulson and did not select the reference portfolio) but allocated none to ACA. ACA asks this Court to adopt a rule that would dilute the reasonable reliance element applicable to fraud claims under New York law and endorse a sophisticated party’s failure to protect itself. That position should be rejected. This Court should continue to require sophisticated parties such as ACA to include all of the terms of their agreements in a written contract in order to avoid after-the- fact assertions that extracontractual statements supposedly were important at the time of contracting. That is especially the case here, where ACA (unlike other -5- investors in ABACUS) itself chose the reference portfolio that produced its losses and had unfettered, direct access to the source of information (Paulson) and yet refrained from questioning that source. ACA’s failure both to inquire of Paulson and to include a prophylactic provision says far more about its lack of justifiable reliance than its after-the-fact allegations. FACTUAL BACKGROUND A. ACA ACA is a monoline bond insurance company. (R133, R135.) Its wholly owned subsidiary, ACA Management, LLC (“ACAM”), served as the sole Portfolio Selection Agent for ABACUS. (R169.) As Portfolio Selection Agent, ACAM had exclusive authority to select the ABACUS reference portfolio pursuant to the terms of the Portfolio Selection Agreement it entered into with the special purpose vehicle (“SPV”) that acted as the issuer for the transaction. (R169.) ACA was an experienced CDO manager, claiming in its public disclosures to have a “core competency [in] selecting, analyzing, structuring and managing credit risk in a variety of fixed income financial asset classes,” including CDOs referencing portfolios of RMBS. (R188.) ACA “completed [its] first CDO in January 2002 and as of December 31, 2006 . . . had closed 22 CDO transactions and had grown [its] CDO assets under management from $2.4 billion as of year- end 2002 to $15.7 billion as of December 31, 2006.” (R193.) ACA stated that it -6- had “adopted formalized underwriting and risk management policies and procedures” that were “designed to ensure that the risk profile of a given credit [was] consistent with [its] credit standards and that the related transaction afford[ed] [it] adequate profitability.” (R197.) ACA’s investment and management activities relating to mortgage products were so wide-ranging and diverse that its agreements relating to ABACUS contained a multitude of “conflict” disclosures making clear that it might have many other roles as a selection agent, manager or investor in other transactions. (R174-75.) In November 2007, as the subprime mortgage market imploded, ACA posted a third-quarter loss of approximately $1 billion. After a restructuring, ACA Capital Holdings, Inc. (ACA’s former parent company) now operates as a run-off financial guaranty insurance company under the name Manifold Capital. (See R8, R156.) ACA’s creditors are prosecuting this action, seeking to capitalize on regulatory and governmental interest in the ABACUS transaction. B. The ABACUS Transaction ABACUS was a synthetic CDO transaction. Rather than depositing cash RMBS into a trust and using the payments generated by those securities to pay noteholders (as in a cash CDO transaction), ABACUS provided synthetic exposure to an approximately $2 billion portfolio of 90 RMBS that met certain eligibility criteria: subprime RMBS issued in 2006 and early 2007 and rated Baa2 -7- by Moody’s. (R135-36, R142-43, R150, R308.) As Portfolio Selection Agent, ACAM alone selected the 90 RMBS from that universe. (See R143, R169.) The ABACUS reference portfolio was a “static” portfolio: it remained constant for the life of the transaction, without substitution of reference obligations or reinvestment in new reference obligations. In order to create the synthetic exposure, the ABACUS SPV entered into CDS transactions with a Goldman Sachs affiliate, whereby the SPV agreed to pay the “protection buyer” (the Goldman Sachs affiliate) in the event that the referenced securities experienced specified adverse credit events. (See R137-38.) In exchange, the Goldman Sachs affiliate, as the “protection buyer,” agreed to make periodic payments to the SPV, which passed these payments on to holders of the notes it issued (including ACA). (See id.) As in all synthetic CDOs, the noteholders took the view that the securities in the reference portfolio would perform sufficiently well to sustain the periodic payments to them, while the protection buyer—the Goldman Sachs affiliate—stood to realize gains if those securities experienced any of the specified credit events. The ABACUS capital structure was divided into classes of notes known as “tranches.” Payments on the notes were made in order of seniority. In general, periodic payments were made first to the holders of the notes in the most senior tranche (here, the “super senior” tranche), while notes in more junior -8- tranches, including the junior-most “equity” (or “first loss”) tranche, were paid sequentially only after the holders of the senior notes were paid. (R136.) The ABACUS CDO structure did not require that investors buy all of the tranches in the capital structure; instead, tranches could be offered (or not offered) to meet investor demand. The Offering Circular made clear that while Goldman Sachs, as protection buyer, would initially assume the short position in ABACUS, it “may enter into credit derivative or other derivative transactions with other parties pursuant to which it sells or buys credit protection with respect to one or more related . . . Reference Obligations” (R355) and was “not required to have any credit exposure to any Reference Entity or any Reference Obligation” (R333). As these disclosures made clear, Goldman Sachs could hedge some or all of its short position in ABACUS. Goldman Sachs in fact hedged its short position by entering into separate CDS with Paulson, which previously had approached Goldman Sachs and expressed interest in taking a short position on a portfolio of Baa2-rated RMBS. (See R108, R113.)1 1 Because Goldman Sachs purchased protection only on a portion (50-100%) of the super senior tranche, but wrote protection to Paulson on the entire (45-100%) super senior tranche, Goldman Sachs maintained a long position with respect to the transaction and ultimately suffered a loss. -9- C. ACA’s Roles in the ABACUS Transaction Far from being a passive investor, ACA played several active roles in the ABACUS transaction: First, ACA (through ACAM) acted as the Portfolio Selection Agent, drawing on its “[d]eep [e]xpertise” and “extensive capabilities in analyzing credit risk” to select a reference portfolio of Baa2-rated subprime RMBS. (R541-42.) Although ACA alleged in its First Amended Complaint that ACAM was the “pro forma portfolio selection agent,” which merely “agreed to and relied upon a portfolio largely selected by Paulson” (R140), ACAM entered into an Engagement Agreement with Goldman Sachs on February 15, 2007, in which ACAM undertook to “act as Portfolio Selection Agent” and to “select the Reference Portfolio” for ABACUS pursuant to the terms of the Portfolio Selection Agreement (R581), which required ACAM “to determine and select” the reference portfolio (R169). Both the Engagement Agreement with Goldman Sachs and the Portfolio Selection Agreement with the ABACUS SPV included a number of representations and warranties. (R170-72, R589-90.) ACAM also drafted or approved disclosures to -10- investors describing its sophistication and the depth of its analysis and review in selecting the reference portfolio. (See R540, R553, R557.)2 Second, ACA—having selected the reference portfolio—invested in the transaction by (a) purchasing $42 million of class A notes on April 10, 2007 (R121), and (b) selling CDS protection on the super senior portion of the ABACUS capital structure on May 31, 2007, thereby “unconditionally guarantying payment” on the most senior $909 million portion. (R137, R152.) For credit reasons, ACA entered into its CDS with ABN AMRO Bank (“ABN AMRO”), which acted as intermediary between Goldman Sachs and ACA by entering into a corresponding CDS with Goldman Sachs. (See R152.) Although ACA now claims surprise that Paulson assumed the entire short side of ABACUS, Paulson was no stranger to ACA. ACA engaged in e-mail and telephone communications with Paulson representatives throughout the transaction’s evolution and participated in meetings during which Paulson 2 If ACAM truly was merely the “pro forma portfolio selection agent” and “agreed to and relied upon a portfolio largely selected by Paulson,” as ACA alleges (R140), then ACAM abdicated its responsibility to select the reference portfolio, breached its contractual obligations under the Portfolio Selection Agreement and the Engagement Agreement, and materially misrepresented its role in ABACUS to investors. As discussed further below, although ACA selectively (and improperly) seeks to add to the appellate record when it suits its arguments, it conveniently ignores those materials outside of the record that contradict its allegations, including ACA personnel’s testimony that ACAM in fact did select the reference portfolio. If this case were to proceed, ACA’s posturing that ACAM was merely a “pro forma portfolio selection agent” would not only be contradicted by the agreements and evidence, but would be judicially estopped given its employees’ prior testimony. -11- representatives made suggestions regarding the contents of the reference portfolio. (See, e.g., R607 (quoted in First Amended Complaint at R147); R611 (quoted in First Amended Complaint at R150).) At times, ACA and Paulson employees met one-on-one, outside the presence of Goldman Sachs employees, to discuss the contents of the reference portfolio. (See, e.g., R607.) If Paulson recommended RMBS with relatively weaker credit quality, ACA saw those recommendations first hand and had the expertise necessary to judge that credit quality against the credit of other Baa2-rated subprime RMBS eligible for inclusion in the reference portfolio. (See R188.) Regardless of any suggestions made by Paulson (or any other transaction participants), ACA had sole authority and responsibility under the contractual documents to select the reference portfolio. (R169, R581.) The ABACUS transaction ultimately failed due to the collapse of the housing market, which resulted in poor performance of all the 2006/2007 vintage, Baa2-rated subprime RMBS eligible for inclusion in the portfolio. Including purportedly “weaker” RMBS from this universe made no difference to the performance of the ABACUS transaction. ACA’s overall portfolio succumbed to the same macroeconomic meltdown, resulting in ACA’s bankruptcy. D. The Alleged Misstatements The First Amended Complaint alleges that Goldman Sachs misrepresented to ACA that Paulson had “pre-committed” to invest in the “equity” -12- or “first loss” tranche of ABACUS, which ACA allegedly understood to mean that Paulson would be taking a net long position in ABACUS (even though ACA knew, as a sophisticated manager, that investors often took long and short positions in a single transaction and varied their positions over time). ACA claims that had it known that Paulson was not investing in the “equity” but instead “was the sole short investor, ACA would not have agreed to enter into” the back-to-back CDS with ABN AMRO despite taking large exposures to the mortgage market across its overall portfolio. (R152.) The First Amended Complaint’s allegations of misstatements rely entirely on vague oral and e-mail statements made during the transaction’s early stages that say nothing about the overall position Paulson intended to take or keep in ABACUS. First, the complaint relies on a January 10, 2007 e-mail in which Goldman Sachs provided an initial “Transaction Summary” stating that the “compensation structure [for ABACUS] aligns everyone’s incentives: the Transaction Sponsor [Paulson], the Portfolio Selection Agent [ACAM] and Goldman,” and that the 0 to 9 percent “first loss” portion of the capital structure was “pre-committed.” (R145, R730-31 (emphasis added).) Second, the complaint relies on two e-mails from an ACA employee in early January 2007—months before ACA entered into a CDS in May 2007—stating that the ACA employee was unsure how Paulson intended to “participate in the space,” and referring to -13- Paulson’s “equity perspective,” to which Goldman Sachs allegedly did not respond. (R145, R147.) Third, the complaint relies on an e-mail written by a Paulson employee in early February 2007 characterizing certain securities suggested for inclusion in the reference portfolio as “either too seasoned or have some other characteristics that make them too risky from Paulson’s perspective.” (R150.) Finally, the complaint relies on notes written by an ACA employee at least three days after the February 23, 2007 conversation they purport to describe, which say that Paulson was “looking” at the equity tranche in ABACUS. (R148.) Not one of the alleged misstatements included a statement that Paulson would be taking a net long position in ABACUS or foreclosed Paulson from changing its positions over time. All of the alleged misstatements occurred well before (a) the circulation of the ABACUS Offering Circular (on April 26, 2007), which explicitly disclosed—contrary to ACA’s alleged belief at the time— that no one was investing in the “equity” or “first loss” tranche, and (b) ACA’s CDS investment in ABACUS on May 31, 2007. (See R325 (Offering Circular lists $50 million in original principal amount for class A-1 notes, $142 million for class A-2 notes and $0 for “FL” notes).) E. The Disclosures and Acknowledgements in the ABACUS Offering Circular The Offering Circular included a number of express representations and warranties for the benefit of investors, none of which ACA contends were -14- breached, including the roles that various entities would play, the interest rate the noteholders would receive, that Goldman Sachs would make payments to the SPV on specified payment dates, and that the proceeds from the sale of the notes would be used to purchase collateral. (R324-26, R383.) In exchange, each purchaser of securities—whether the purchaser was buying notes “for its own account or the account of another Qualified Purchaser” (R437)—represented and agreed that it was “not relying (for purposes of making any investment decision or otherwise) upon any advice, counsel or representations (whether written or oral) of [Goldman Sachs] . . . other than in the final offering circular for [the transaction] and any representations expressly set forth in a written agreement with such party.” Each purchaser further represented, among other things, that it:  “is a sophisticated investor”;  “has consulted with its own legal, regulatory, tax, business, investment, financial and accounting advisers to the extent it has deemed necessary, and it has made its own investment decisions”;  understood that Goldman Sachs was not “acting as a fiduciary or financial or investment adviser for the purchaser”;  “understands and agrees that an investment in the Notes involves certain risks, including the risk of loss of its entire investment in the Notes under certain circumstances”;  “has had access to such financial and other information concerning the Issuer and the Notes as it deemed necessary or appropriate in order to make an informed investment decision with respect to its purchase of the Notes, including an opportunity to ask questions of, and request information from, the Issuer”; and -15-  “has evaluated the terms and conditions of the purchase and sale of the Notes with a full understanding of all of the risks thereof (economic and otherwise).” (R439.) F. The SEC’s Lawsuit Against Goldman Sachs and Fabrice Tourre On April 16, 2010, the SEC brought a civil enforcement action alleging that Goldman Sachs and one of its employees (Fabrice Tourre) violated the federal securities laws in connection with ABACUS. On July 14, 2010, Goldman Sachs settled the SEC action “[w]ithout admitting or denying” the substantive allegations of the SEC’s complaint. (R783.) Goldman Sachs paid $550 million, and without any admission of wrongdoing acknowledged that it was a “mistake” not to include in the ABACUS marketing materials a reference to Paulson’s economic interest in, and role in selecting, the reference portfolio. (R783-84.) The SEC allocated some of the funds to certain ABACUS investors— but none to ACA. The SEC’s action proceeded against Mr. Tourre. On August 1, 2013 (after issuance of the First Department’s Decision from which ACA now appeals), a jury found him liable on six of the seven counts alleged in the SEC’s complaint based on a “scheme” theory of liability. The trial court allowed the SEC to argue to the jury that it could find Mr. Tourre liable on a “scheme” theory on either of two grounds: first, as ACA has alleged in this action, that Mr. Tourre misled ACA -16- into believing that Paulson was an equity investor, or second, not at issue in this action, that Mr. Tourre misled investors other than ACA into thinking that ACA selected the reference portfolio, without informing them of Paulson’s involvement. The jury found Mr. Tourre not liable on the SEC’s claim under Rule 10b-5(b), 17 C.F.R. 240.10b-5, which was the only claim asserted by the SEC that required the jury to find that Mr. Tourre intentionally made a materially false or misleading statement (as opposed to basing liability on a “scheme” theory). See SEC v. Tourre, 2014 WL 61864, at *1 (S.D.N.Y. Jan. 7, 2014). Mr. Tourre did not appeal. Thus, the SEC’s legal theories—including its theory of materiality based on Paulson’s involvement in the selection of a fully disclosed static portfolio that would have been wiped out regardless of which Baa- rated 2006/2007 subprime securities it included—remain untested at the federal appellate level. G. Filing of ACA’s Lawsuit Against Goldman Sachs ACA commenced this action on January 6, 2011. ACA’s original Complaint asserted claims based on its alleged losses from (a) its April 2007 purchases of $42 million of ABACUS notes, and (b) its May 31, 2007 entry into a CDS with ABN AMRO. (R112, R121.) ACA alleged that Goldman Sachs designed the ABACUS transaction to fail, and then fraudulently induced ACA into -17- taking a long position in ABACUS by misrepresenting Paulson’s “equity” interest in the transaction. (R115-19.) On March 8, 2011, Goldman Sachs moved to compel arbitration or, in the alternative, to dismiss the original Complaint. On April 25, 2011, after having reviewed Goldman Sachs’s motion, ACA filed its First Amended Complaint, which asserted claims for fraudulent inducement, fraudulent concealment and unjust enrichment based solely on alleged damages resulting from its May 31, 2007 CDS with ABN AMRO. (R156-59.) The First Amended Complaint dropped ACA’s claims for alleged damages resulting from its purchases of the ABACUS notes (which was the basis for the arbitral demand). H. Proceedings in the Courts Below Goldman Sachs moved to dismiss the First Amended Complaint pursuant to CPLR 3211(a)(1) and 3211(a)(7). (R160-61.) On April 23, 2012, Justice Kapnick issued a Decision and Order granting in part and denying in part Goldman Sachs’s motion. (R46-47.) The court dismissed ACA’s claim for unjust enrichment, but denied the motion to dismiss the claims for fraudulent concealment and fraudulent inducement. Goldman Sachs timely appealed to the First Department from the portion of the decision denying its motion to dismiss; ACA did not appeal the dismissal of its unjust enrichment claim. -18- The First Department reversed, holding that ACA could not establish the justifiable reliance element of its fraudulent inducement and fraudulent concealment claims as a matter of law. The majority applied the well-established rule that New York law will not protect a sophisticated party that chooses not to take sufficient steps to protect itself prior to investing. The majority stated that ACA could have inquired of Paulson representatives (with whom ACA was in direct contact throughout the transaction’s evolution) as to Paulson’s investment position if ACA believed that information to be important. (R817, R822.) The majority also considered ACA’s failure to take some other action, such as the insertion of a prophylactic provision into a contract, to guard against the possibility of fraud. (R817-21.) In response to points raised by the two-justice dissent, the majority emphasized three additional points: (1) the ABACUS Offering Circular “specifically contradicted” Goldman Sachs’s alleged misrepresentation that the equity was “pre-committed” to Paulson by disclosing that “no such equity position was being taken”; (2) in the Offering Circular, ACA disclaimed reliance on all of Goldman Sachs’s alleged extracontractual misrepresentations; and (3) “sophisticated and well-counseled entit[ies]” must take action to protect themselves, regardless of whether their relationship is “adversarial.” (R819-23 (citing, inter alia, Danann Realty Corp. v. Harris, 5 N.Y.2d 317 (1959)).) -19- The dissent stated that they would have affirmed on the grounds that (a) ACA’s failure to ask Paulson about its investment position was not a failure of due diligence under the facts of this case, and (b) a monoline insurance company such as ACA should not be required to insert a prophylactic provision in a contract with an investment bank because their relationship allegedly is not “adversarial.” (R833-34.)3 The First Department denied ACA’s motion for reargument on December 17, 2013 and granted ACA’s motion for leave to appeal on May 1, 2014. (R815.) LEGAL STANDARDS The Decision is subject to de novo review. See, e.g., Jones v. Bill, 10 N.Y.3d 550, 553 (2008). 3 While ACA’s appeal in the First Department was pending, ACA filed in the Supreme Court a Second Amended Complaint that purported to add Paulson as a defendant and make certain additional allegations. ACA states that it mailed the Second Amended Complaint to the First Department (ACA Br. at 23), but neglects to mention that the First Department refused to docket ACA’s submission because it was not part of the record below and, therefore, not part of the record on appeal. CPLR 5526; see also Weinstein v. Barnett, 219 A.D.2d 77, 81 n.3 (1st Dep’t 1996) (rejecting plaintiff’s motion for “leave to supplement the record with a copy of [a] settlement agreement, which was obviously not before the motion court”). Nonetheless, in its opening brief to this Court, ACA advances a number of arguments based on allegations made only in its Second Amended Complaint. Those arguments should be disregarded, as “[a]ppellate review is limited to the record made on the motion and, absent matters that may be judicially noticed, new facts may not be injected at the appellate level.” Walker ex rel. Velilla v. City of New York, 46 A.D.3d 278, 282 (1st Dep’t 2007). As discussed further below, even if those allegations were properly before this Court, they do not change the conclusion that ACA cannot establish justifiable reliance as a matter of law. -20- A complaint should be dismissed pursuant to CPLR 3211(a)(7) for failure to state a claim if the plaintiff fails to plead factual allegations that, taken together, “manifest any cause of action cognizable at law.” Guggenheimer v. Ginzburg, 43 N.Y.2d 268, 275 (1977). A complaint should be dismissed pursuant to CPLR 3211(a)(1) where documentary evidence “refutes plaintiff’s factual allegations.” Goshen v. Mut. Life Ins. Co. of N.Y., 98 N.Y.2d 314, 326 (2002). “Where a cause of action or defense is based upon misrepresentation, [or] fraud . . . the circumstances constituting the wrong shall be stated in detail.” CPLR 3016(b). To plead claims for fraudulent concealment or fraudulent inducement under New York law, a party must plead facts to support that it justifiably relied on the alleged misrepresentations. Centro Empresarial Cempresa S.A. v. America Movil, S.A.B. de C.V., 17 N.Y.3d 269, 276 (2011). As this Court held in Danann Realty: [I]f the facts represented are not matters peculiarly within the party’s knowledge, and the other party has the means available to him of knowing, by the exercise of ordinary intelligence, the truth or the real quality of the subject of the representation, he must make use of those means, or he will not be heard to complain that he was induced to enter into the transaction by misrepresentations. 5 N.Y.2d at 322. “[T]his rule has been frequently applied in recent years where the plaintiff is a sophisticated business person or entity that claims to have been taken in.” DDJ Mgmt., LLC v. Rhone Grp., 15 N.Y.3d 147, 154 (2010). -21- ARGUMENT This appeal requires the Court to apply and affirm long-established principles of New York law requiring a sophisticated investor to use the means available to it to discern the truth. See, e.g., DDJ, 15 N.Y.3d at 154; Centro Empresarial, 17 N.Y.3d at 278-79; Danann Realty, 5 N.Y.2d at 322. ACA indisputably did not do so. The First Department therefore correctly concluded that ACA could not establish justifiable reliance as a matter of law.4 ACA, a highly sophisticated investor that selected the portfolio for the ABACUS transaction, failed to condition its investment on contractual representations regarding Paulson’s investment objectives (if that was important to ACA at the time). See, e.g., Centro Empresarial, 17 N.Y.3d at 278-79 (no justifiable reliance where plaintiff failed to “demand[] either access to the information or assurances as to its accuracy in the form of representations and warranties”). Despite information and disclosures contradicting its currently avowed belief that Paulson was investing in the “equity,” ACA failed to confirm its belief with Paulson, even though it had unfettered access to Paulson representatives. See Global Minerals & Metals Corp. v. Holme, 35 A.D.3d 93, 4 Because the First Department correctly determined that ACA could not establish justifiable reliance, Goldman Sachs will not burden this Court by addressing the other elements of ACA’s fraud claims, including materiality and scienter. The First Department incorrectly concluded that ACA had pled those other elements, and Goldman Sachs reserves the right to challenge those conclusions in any subsequent proceedings. -22- 100 (1st Dep’t 2006). ACA also specifically disclaimed reliance on any statements outside of the Offering Circular. See Danann Realty, 5 N.Y.2d at 323 (refusing to find reasonable reliance in light of contract disclaimer because to do so would mean “that it is impossible for two businessmen dealing at arm’s length to agree that the buyer is not buying in reliance on any representations of the seller as to a particular fact”). ACA’s failure to take any of these steps to protect itself, especially in light of the record of its overall sophistication and disclaimers, makes this a clear case for affirmance. See Danann Realty, 5 N.Y.2d at 322 (discussing “the fundamental precept that the asserted reliance must be found to be justifiable under all the circumstances before a complaint can be found to state a cause of action in fraud”).5 I. ACA FAILED TO CONDITION ITS INVESTMENT ON CONTRACTUAL REPRESENTATIONS CONCERNING PAULSON’S INVESTMENT POSITION. A. Requiring Sophisticated Parties To Include All Material Terms in a Written Contract Is—And Should Be—the Law. Sophisticated parties such as ACA have the ability—and the duty under New York law—to protect themselves by contract, especially regarding 5 Contrary to ACA’s contention, the reasonableness of reliance can be decided on a motion to dismiss. See, e.g., Centro Empresarial, 17 N.Y.3d at 280; HSH Nordbank AG v. UBS AG, 95 A.D.3d 185, 188 (1st Dep’t 2012); Regina v. Marotta, 67 A.D.3d 766, 766-67 (2d Dep’t 2009); Triton Partners LLC v. Prudential Sec. Inc., 301 A.D.2d 411, 411 (1st Dep’t 2003). -23- matters so allegedly important that they bear on the party’s investment decision. In Centro Empresarial, for example, this Court affirmed a decision dismissing the complaint because plaintiffs chose “to cash out their interests and release defendants from fraud claims without demanding either access to the information [necessary to value those claims] or assurances as to its accuracy in the form of representations and warranties.” 17 N.Y.3d at 279; see also Schron v. Troutman Sanders LLP, 20 N.Y.3d 430, 437 (2013) (“[H]ad these sophisticated business entities, represented by counsel, intended to make the $100 million loan payment a condition to the enforceability of the option, they easily could have included a provision to that effect.”); Fundamental Long Term Care Holdings, LLC v. Cammeby’s Funding LLC, 20 N.Y.3d 438, 445 (2013) (“And if it were, in fact, the case that the parties meant for fair market value to be due upon [defendant’s] exercise of the option, this is not the sort of term these sophisticated, counseled parties would have reasonably left out of the option agreement.”); MBIA Ins. Corp. v. Royal Indem. Co., 426 F.3d 204, 218 (3d Cir. 2005) (“[T]he safer route is to leave parties that can protect themselves to their own devices, enforcing the agreement they actually fashion.”). By contrast, in DDJ, this Court sustained fraud claims at the pleading stage where plaintiffs did take “reasonable steps to protect [themselves] against deception” by insisting, as a condition to closing, that the -24- contract include an express warranty of the accuracy of the underlying financial statements. 15 N.Y.3d at 154, 156. As numerous legal scholars have recognized, encouraging transacting parties—especially sophisticated parties—to reduce all material terms into a writing benefits society and the legal system by avoiding disputes about what was agreed upon and what was material at the time. See 2 E. ALLAN FARNSWORTH, FARNSWORTH ON CONTRACTS § 7.1, at 208-09 (2d ed. 1998) (“It is well to remember that many potential disputes over the law of a contract never arise because the contract is well drafted, and that many actual disputes would not have arisen had the contract been better drafted.”); id. § 7.2, at 209 (reducing terms of agreement into a writing “provide[s] trustworthy evidence of the facts and terms of their agreement and . . . avoid[s] reliance on uncertain memory”); 28 WILLISTON ON CONTRACTS § 70:145 (4th ed.) (“Putting everything in writing tends to avoid misunderstandings, helping to keep such routine transactions out of court, conserving both economic and judicial resources.”); Meredith R. Miller, Party Sophistication & Value Pluralism in Contract, 29 TOURO L. REV. 659, 676-77 (2013) (“Courts state the sophisticated parties can and should be able to privately order their affairs, even if it leads to a ‘bad bargain.’ Sophisticated parties should read closely, investigate thoroughly, and write their bargains carefully. The countervailing contract value for sophisticated parties is autonomy and, with that, -25- minimal judicial interference.” (citing cases)); Debra Pogrund Stark & Jessica M. Choplin, A License To Deceive: Enforcing Contractual Myths Despite Consumer Psychological Realities, 5 N.Y.U. J. L. & BUS. 617, 624-25 (2009) (enforcement of no reliance clauses “promot[es] certainty of contract and prevent[s] false allegations of fraud by placing primacy on the last written word of a document that has been scrutinized and negotiated”). Adopting the rule advocated by ACA would create perverse incentives for sophisticated parties to enter into agreements without including representations and then sue for fraud based on supposed extracontractual representations—whether feigned or genuine. Courts would expend significant resources attempting to divine both the terms of the undocumented agreement and what was material to the parties at the time of contracting. Requiring sophisticated parties to document all material terms in their contracts greatly reduces the likelihood of post hoc disputes over what truly was represented and whether the representation was material. B. ACA Could Have Conditioned Its Investment on Contractual Representations Concerning Paulson’s Investment Position. ACA attempts to justify its decision not to obtain a prophylactic contractual provision by asserting that there “was no written agreement” between ACA and Goldman Sachs in which ACA could have inserted such a provision. (See ACA Br. at 34.) That argument (even if it were true) misses the point: ACA -26- could have conditioned its investment on Goldman Sachs (or Paulson for that matter) entering into an agreement—by amending an existing agreement or entering into a new agreement—containing written representations and covenants as to Paulson’s investment position. Further, contrary to ACA’s contention, a number of written agreements could have included a prophylactic provision. The transaction on which ACA bases its damages claim—the May 2007 back-to-back CDS transaction involving ACA, Goldman Sachs and ABN AMRO—was governed by eight separate agreements. (See R152.) The fact that ABN AMRO intermediated the transaction is of no moment; ACA’s contracts with ABN AMRO, and ABN AMRO’s corresponding contracts with Goldman Sachs, could all have included prophylactic provisions concerning Paulson’s investment position, if that were important to ACA at the time. Those provisions could have allocated the risk of a misrepresentation as to Paulson’s position to any of ABN AMRO, Goldman Sachs or Paulson. Further, the arm of ACA that acted as Portfolio Selection Agent for ABACUS (ACAM) entered into multiple agreements, including an Engagement Agreement with Goldman Sachs, which detailed the parties’ roles, the fee payment structure and the parties’ respective representations and warranties. (See R167-84, R581-99.) None of these contracts so much as mentioned Paulson or its investment objective, let alone made any representations about them. -27- ACA attempts to excuse its failure to obtain a contractual representation by asserting that ACA allegedly received assurances from Goldman Sachs as to Paulson’s intended “equity” position “orally and in emails.” (ACA Br. at 3.) As a threshold matter, all of the alleged statements, including the additional ones referenced in ACA’s Second Amended Complaint, were made during the transaction’s early stages (in January and February 2007), months before ACA entered into the swap transaction (in late May 2007) and before ACA was put on notice (including through the Offering Circular) that its understanding was incorrect. None of the referenced statements says anything about Paulson’s net position (which could have included offsetting positions higher up in the capital structure). As ACA knew from its work on other similar transactions, nothing stopped an investor (including ACA itself) from changing or disposing of its position. If such information was, as ACA now claims, important enough to “cause[] ACA to decline any participation in ABACUS” (ACA Br. at 19), ACA had a duty to protect its interests by inserting a provision in one of the numerous existing agreements or, in the alternative, insisting upon an entirely new agreement. See, e.g., Centro Empresarial, 17 N.Y.3d at 278-79. -28- II. ACA DOES NOT DISPUTE THAT IT FAILED TO ASK ANY PAULSON REPRESENTATIVES ABOUT PAULSON’S INVESTMENT POSITION. A. ACA Never Asked Paulson Whether Paulson Intended To Take a Long Position in ABACUS, Despite Numerous Opportunities. The allegations of the First Amended Complaint demonstrate that ACA could have obtained—indeed was uniquely positioned to obtain—the information it now deems so important. ACA had multiple interactions with Paulson representatives during which it could have asked about Paulson’s intended investment position. As Portfolio Selection Agent, ACA had the final say on the reference portfolio and was obligated to analyze each security it approved for inclusion in the portfolio. Any questions about Paulson’s role could and should have been raised with Paulson during this process, including any questions about whether Paulson was proposing weaker credits for inclusion in the portfolio. Indeed, although ACA claims to have been the “principal victim of Goldman Sachs’s infamous ABACUS fraud” (ACA Br. at 1), it fails to mention that in connection with Goldman Sachs’s $550 million settlement with the SEC, the SEC allocated none of those settlement funds to ACA, recognizing that ACA, as a full participant in the transaction, was uniquely positioned to perform its own diligence as to Paulson, if it truly cared about Paulson’s position. ACA’s argument that it had no duty to ask Paulson about its investment position because Paulson might not have responded truthfully misses -29- the point. (ACA Br. at 39-40.) As a sophisticated investor, ACA cannot justify its indisputable failure to ask a Paulson representative about Paulson’s investment position (or to insert a prophylactic provision) by relying on sheer speculation about what Paulson’s hypothetical answer would have been. ACA had no excuse at the time not to ask Paulson because nothing ACA then knew provided any basis to believe that the Paulson employees might be untruthful.6 ACA’s speculative “what if” argument—if ACA had asked in a hypothetical world, Paulson might have lied—should not be endorsed: if the information was important to ACA, it could and should have asked (and then documented the answer as a contractual representation). ACA’s duty of inquiry is well established by First Department precedent. For example, in Global Minerals, a plaintiff corporation alleged that the defendant fraudulently induced a higher severance payment by (a) misrepresenting that he had merely loaned money to the principal of a competitor when defendant had in fact purchased stock in the competitor, and (b) concealing his usurpation of a corporate business opportunity by using another 6 ACA fails to allege any fact to support its assertion that Paulson would not have been truthful about its intended position. To the contrary, ACA alleges that Paulson was truthful to Bear Stearns and GSC Partners (other potential Portfolio Selection Agents) in informing them that Paulson intended to take a short position in similar proposed transactions. (R141-42, R144.) ACA’s speculation seven years later that Paulson would have lied because it previously had told the truth to Bear Stearns and GSC Partners cannot excuse ACA’s failure to ask at the time. -30- company he had set up. 35 A.D.3d at 93. Regarding the first category of alleged misrepresentations, the First Department held that, as a matter of law, plaintiff “should have” investigated by “contact[ing]” the principal of the competitor and his attorney, and that “[e]ven if they refused to provide further information, [plaintiff] should have sought to condition the [severance amount] on the truth of the representations by or on behalf of” defendant by “the insertion of a prophylactic provision in the . . . agreement.” Id. at 100. Regarding the second category of alleged misrepresentations, the First Department held that plaintiff “failed to exercise due diligence because it made no independent inquiry to check on the status of the [business deal], even though [plaintiff] was in direct contact with [the counterparties],” which rendered “unavailing” plaintiff’s argument that there was an issue of fact as to whether the counterparties “would have made any disclosure to [plaintiff] if they had been asked.” Id. at 101. Similarly, in Graham Packaging Co. v. Owens-Illinois, Inc., the First Department applied the same principle to affirm the dismissal of a counterclaim for fraudulent concealment: “Even if arguendo plaintiff was under a duty to disclose its own valuation of its anticipated claims against defendants, and even if defendants could not have learned of such information by the exercise of reasonable diligence, defendants, sophisticated entities represented by counsel, should have at least inquired about -31- such valuation or inserted a prophylactic provision in the settlement agreement to limit their exposure.” 67 A.D.3d 465, 465 (1st Dep’t 2009). ACA argues that it had no “reason to doubt the veracity of Goldman Sachs’s . . . representations that Paulson was the equity investor in ABACUS.” (See, e.g., ACA Br. at 5, 29-32.) Putting to the side that the record contradicts ACA’s contention that it had no reason to question its understanding as the transaction evolved (see Section II.B, infra), “New York law imposes an affirmative duty on sophisticated investors to protect themselves from misrepresentations.” Global Minerals, 35 A.D.3d at 100; see also Centro Empresarial, 17 N.Y.3d at 279 (even “[w]here a principal and fiduciary are sophisticated parties . . . , the principal cannot blindly trust the fiduciary’s assertions”). Regardless of what Goldman Sachs stated (or thought) about the position a third party intended to take in the transaction, it was incumbent on ACA to ask the other party directly or otherwise confirm that information if it was important—and ACA certainly had ample opportunity to do so. ACA’s opening brief itself cites several cases in which the First Department rejected the proposition that sophisticated plaintiffs without notice of potential misrepresentations were relieved of their duty to “at least inquire[] about [the representations] or insert[] a prophylactic provision . . . to limit their exposure.” Graham Packaging, 67 A.D.3d at 465 (see ACA Br. at 34 n.23); Arfa v. Zamir, 76 -32- A.D.3d 56, 61 (1st Dep’t 2010) (see ACA Br. at 30) (requiring even those in “adversarial” relationships to inquire);7 Global Minerals, 35 A.D.3d at 100-01 (see ACA Br. at 34) (plaintiff “should have sought to condition the [transaction] on the truth of the representations by or on behalf of [the defendants]”).8 More fundamentally, it cannot be the law in New York that a sophisticated party with unfettered access to a source of information can deliberately refrain from inquiring of that source about information it claims is material to its commercial decisions on the presumption that the inquiry would yield no (or false) information. Nor is it the law of New York that a party can ignore the facts readily before it or, to the extent those facts are not clear, rely on its own supposition or interpretation—and then sue for fraud if the transaction is not successful. See 14 N.Y. Prac., New York Law of Torts § 1:73 (“Courts are also disinclined to entertain claims of justifiable reliance in cases in which 7 ACA does not endorse the position taken by the dissent that it was excused from conducting due diligence because “the relationship between plaintiff, a monoline bond insurance company . . . , and defendant, an investment bank, is not an adversarial one.” (R834.) As the majority correctly noted, “nothing in [Centro Empresarial] limited its holding to adverse transacting parties; nor could it, since parties are seldom, if ever, adversaries at the outset of a transaction.” (R820.) Buyers and sellers—and particularly sophisticated parties negotiating the terms of a complex investment—by definition have adverse interests, even in transactions that are not “adversarial.” 8 Swersky v. Dryer & Traub (see ACA Br. at 41 n.28) does not excuse ACA’s failure to ask. In Swersky, the First Department concluded that plaintiff could state a claim for fraud even if he failed to take advantage of his access to the defendant’s agent because it was “unclear . . . how much information regarding the specifics of the [alleged fraud]” that agent possessed. 219 A.D.2d 321, 327 (1st Dep’t 1996). Here, Paulson knew the position it intended to take. Swersky does not excuse ACA’s failure to ask. -33- sophisticated business people, who engage in a major transaction and enjoy access to critical information, fail to take advantage of that access.”); Centro Empresarial, 17 N.Y.3d at 278-79 (where plaintiff did not “demand[] either access to the information or assurances as to its accuracy in the form of representations and warranties,” reliance was unreasonable as a matter of law); Belin v. Weissler, 1998 WL 391114, at *6-7 (S.D.N.Y. July 14, 1998) (applying New York law and finding that where sophisticated investor “had access to the information upon which he purportedly relied [and] he could have asked to see [it],” his reliance was not reasonable because “he should have confirmed” his understanding and not relied on oral representations). B. The Final Offering Circular Put ACA On Notice That Its Alleged Belief That Paulson Was Investing In The Equity Might Be Mistaken. Although ACA argues that the Offering Circular allegedly did not put it on notice that its understanding of Paulson’s investment position was incorrect (ACA Br. at 35-38), ACA misses the broader point that ACA, as a sophisticated party, had an affirmative duty—regardless of whether it was on notice—to inquire of Paulson. Graham Packaging, 67 A.D.3d at 465. Further, contrary to ACA’s argument, the Offering Circular (among other things) did put ACA on notice that its understanding as to Paulson’s “pre-committed” investment in the “equity” was -34- incorrect; thus, the level of due diligence required of ACA was “heightened” under New York law. See Global Minerals, 35 A.D.3d at 100. ACA argues that because Paulson could have invested in the equity through a credit default swap (rather than by purchasing notes), the Offering Circular’s express disclosure that “$0” of the equity tranche was being sold (R325) does not “utterly refute” ACA’s alleged belief that Paulson was investing in the equity. (ACA Br. at 6.) ACA argues that “given that the offering circular showed zero for the super senior tranche—even though ACA took a $909 million long position in that tranche—no reasonable reader, let alone ACA itself, would understand the offering circular to mean that no one was taking the equity tranche.” (Id. at 39.) ACA’s argument is inconsistent with the theory of misrepresentation ACA has advanced throughout this litigation. ACA has claimed (and continues to claim) that its alleged belief that Paulson was investing in the equity was based on a January 10, 2007 e-mail from Goldman Sachs stating that the equity portion of the ABACUS capital structure was “pre-committed.” (R730.) ACA does not— and cannot—explain how the equity tranche could have been “pre-committed” to Paulson (as ACA claims) if Paulson was investing in the equity by credit default swap, instead of by purchasing equity notes. An unlimited number of parties can enter into credit default swaps referencing a portfolio of assets, without any of -35- them purchasing a cash certificate. The certificates representing the equity tranche could not have been “pre-committed” if, as ACA now claims, it believed Paulson was investing in that tranche by credit default swap: they would still have been available for purchase. The inconsistency between the Offering Circular’s disclosure and ACA’s alleged belief from the January 2007 “pre-committed” e- mail should have heightened ACA’s notice that, at a minimum, it needed to make further inquiries. ACA indisputably made no such inquiries. Further, the January 10 e-mail expressly indicates that the only tranche that would be “unfunded” (i.e., certificates would not be issued) was the super senior tranche. It does not indicate that the equity tranche (or any other tranche) was to be “unfunded.” (R730.) As the Appellate Division correctly concluded, if ACA had the misimpression from the January 10 e-mail that Paulson was investing in the “funded” equity tranche, the Offering Circular’s disclosure that the equity tranche was not funded (because no notes were being issued) refuted that misimpression. (R821.) Even if the Offering Circular was ambiguous, as ACA now claims (and it was not), ACA should at least have asked Goldman Sachs or Paulson about Paulson’s position during the month between issuance of the Offering Circular and entry into the swap transaction on May 31, 2007. ACA indisputably did not. -36- III. ACA DISCLAIMED RELIANCE ON ANY REPRESENTATIONS OUTSIDE OF THE OFFERING CIRCULAR. ACA’s failure either to insert a prophylactic provision regarding Paulson’s investment position in any contract or to ask Paulson representatives about Paulson’s investment objectives is fatal to its claims. See, e.g., Centro Empresarial, 17 N.Y.3d at 280. But ACA cannot demonstrate justifiable reliance for an additional reason: ACA affirmatively disclaimed any reliance on representations by Goldman Sachs outside of the Offering Circular. See, e.g., Wittenberg v. Robinov, 9 N.Y.2d 261, 263-64 (1961) (where alleged misrepresentations were disclaimed, it is the same as if those representations never were made); HSH Nordbank, 95 A.D.3d 185 (identical reliance disclaimer as the one in the ABACUS Offering Circular). ACA argues that the disclaimers in the Offering Circular do not bar ACA’s fraud claims because they do not expressly reference Paulson and therefore supposedly do not sufficiently “track[] the particular misrepresentations and omissions alleged by [ACA].” (ACA Br. at 42.) That is incorrect. Where, as here, a disclaimer precludes reliance on any matters outside of the offering materials, the contracting party cannot justifiably rely on any representations not included in the offering materials, regardless of whether the disclaimer expressly enumerates each and every one of the external matters. See, e.g., HSH Nordbank, 95 A.D.3d at 205- 06. -37- In HSH Nordbank, for instance, the plaintiff CDO investor claimed that the investment bank that structured the CDO misrepresented the riskiness of the transaction, including by making extracontractual statements concerning the “alignment of interests” between the parties and concerning defendant’s desire for the CDO “to hold stable assets for the long-term.” Id. at 204. According to plaintiff, defendant instead created conflicts of interest between the parties by substituting reference obligations to “worsen[ ] the overall credit profile of the reference pool” and taking “‘short positions’ against securities in the reference pool.” Id. at 205-06 & n.13. The plaintiff made the same disclaimers as ACA did in connection with ABACUS, including a reliance disclaimer. Id. at 191.9 Relying on those disclaimers, the First Department held that “it was unjustifiable and unreasonable as a matter of law for [plaintiff] to place any reliance on [defendant’s] alleged extracontractual representations concerning a contemplated ‘alignment of interests’ between the two parties, or concerning [defendant’s] 9 The plaintiff in HSH Nordbank disclaimed in the offering circular “rel[iance] (for purposes of making any investment decision or otherwise) upon any advice, counsel or representations (whether written or oral) of [defendant] or any of [its] affiliates” and represented that “it ha[d] consulted with its own legal, regulatory, tax, business, investment, financial, accounting and other advisors to the extent it has deemed necessary and has made its own investment decisions based upon its own judgment and upon any advice from such advisors as it has deemed necessary and not upon any view expressed by [defendant].” 95 A.D.3d at 191. -38- intended ‘trading strategy’ and ‘motive and economic interest in the deal.’” Id. at 205-06.10 Some lower courts have erroneously concluded that an investor could justifiably rely on alleged extracontractual misrepresentations despite disclaimers of reliance on extracontractual statements.11 To provide direction to contracting parties as to how they should draft disclaimers (and to avoid inviting after-the-fact opportunism by the contracting parties about what they relied on years earlier), this Court should set forth a clear rule enforcing reliance disclaimers between 10 ACA points to Danann Realty to support its argument that the disclaimer in the ABACUS Offering Circular was not sufficiently specific. (See ACA Br. at 41-42.) Danann Realty stated that reliance is not justifiable when “plaintiff has in the plainest language announced and stipulated that it is not relying on any representations as to the very matter as to which it now claims it was defrauded.” 5 N.Y.2d at 320. In doing so, the Court was not endorsing the sort of specificity that ACA now claims the disclaimers in the Offering Circular should have had, but rather distinguished between (a) on the one hand, a disclaimer that the parties are not “rely[ing] on specific representations not embodied in the contract,” and (b) on the other hand, a boilerplate merger clause or a disclaimer that did not include a specific disclaimer as to reliance. Id. at 323, 325-26. Because the ABACUS Offering Circular included a disclaimer specifically on the issue of reliance, Danann Realty supports affirmance. 11 For example, in Basis Yield Alpha Fund v. Goldman Sachs Group, Inc., the plaintiff CDO investor alleged a variety of extracontractual misrepresentations, including concerning the quality of the collateral and the manner in which it was selected. 115 A.D.3d 128, 139 (1st Dep’t 2014). The First Department determined that the offering circular’s disclaimers that the plaintiff was not relying on “any advice, counsel or representation whether oral or written of [the sellers] . . . other than in this offering circular” and agreed to “consider and assess for themselves the likely rate of default of the references obligations” were insufficient because they did “not track[] the particular misrepresentations and omissions alleged by plaintiff.” Id. at 137-38. No principled reasoning distinguishes the holdings in HSH Nordbank and Basis. In both, the plaintiffs alleged extracontractual misrepresentations regarding the manner in which the portfolio was selected, and the offering circulars stated, among other things, that plaintiffs were not relying on “any advice, counsel or representation whether oral or written of [the sellers] . . . other than in this offering circular.” Id. at 137. -39- sophisticated parties. A complete disclaimer of reliance means any reliance on an extracontractual statement, and requires no itemization. ACA’s argument, if credited, would render virtually all contractual disclaimers by sophisticated parties effectively meaningless, and would place the burden on parties to guess what their counterparties believe is material and then draft detailed disclaimers addressing those guesses as to material representations. Such a rule would create incentives for sophisticated parties to avoid choosing New York law to govern their contracts because of the potential for endless litigation over the scope of each party’s understanding of the material terms. This should not be the law of New York. In contracts between sophisticated parties, the party relying on a material representation should have the burden of ensuring that what it views as material is written in the contract. The ABACUS Offering Circular, like many others, consisted of approximately 200 pages of detailed disclosures, including about the roles and responsibilities of various parties, the payment structures and the risk factors of investing in the transaction. These are the statements that the parties agreed investors should rely on—and, notably, ACA does not allege that any of those disclosures were incorrect or that any of those representations were breached. New York law does not, and should not, require a 200-page document that sets forth every detail on which one can rely also to specify every detail on which one cannot -40- rely. See 101 Fleet Place Assocs. v. N.Y. Tel. Co., 197 A.D.2d 27, 30 (1st Dep’t 1994) (“[W]e are unwilling to ignore the broad inclusive language of agreements freely entered into by two sophisticated parties. Parties should be able to rely on the terms of an agreement arrived at after arduous negotiations.” (quoting Olin Corp. v. Consolidated Aluminum Corp., 5 F.3d 10, 15-16 (2d Cir. 1993))); Attea v. Attea, 30 A.D.3d 971, 974 (4th Dep’t 2006) (refusing “to rewrite an agreement to include an obligation that was twice specifically disclaimed” because “to do so would render those specific disclaimers meaningless”). As a fallback, ACA argues that it is not bound by the Offering Circular’s disclaimers because ACA itself allegedly did not purchase ABACUS notes. (ACA Br. at 42.) But ACA alleged in its original Complaint in this action that ACA was a “purchaser of ABACUS notes” and that had ACA known that Paulson was taking a short position in ABACUS, “ACA would not have purchased ABACUS notes.” (R120-21.) ACA is judicially estopped from now denying these admissions. See Konstantin v. 630 Third Ave. Assocs., 961 N.Y.S.2d 358 (Table), at *1 n.1 (N.Y. Sup. Ct. N.Y. Cnty. Sept. 20, 2012) (party “judicially estopped from denying [that it formerly did business under another name] based on its own -41- admissions in the . . . complaint”).12 Even if ACA bought the notes for the accounts of CDOs it managed, as ACA now claims (see ACA Br. at 42-43), the disclaimers in the Offering Circular still would preclude ACA from relying on the alleged extracontractual statements upon which ACA’s entire case rests. The Offering Circular states that “the purchaser is purchasing the Notes for its own account or the account of another Qualified Purchaser that is also a Qualified Institutional Buyer.” (R437 (emphasis added).) The Offering Circular does not distinguish between a purchaser holding for its own account or purchasing for the account of others; in either instance, reliance was disclaimed. IV. ACA’S RELIANCE ON THE JURY VERDICT IN SEC V. TOURRE IS MISPLACED. ACA’s reliance on the jury verdict in SEC v. Tourre, to which Goldman Sachs was not a party and which concerned alleged violations of the federal securities laws (not any claims under the New York common law), is misplaced. ACA is not the SEC. Unlike ACA, the SEC did not need to plead or prove ACA’s justifiable reliance on any alleged misrepresentation. Nor was the jury asked to consider the extent of ACA’s due diligence obligations as a 12 Because the note purchase and the subsequent swap transaction related to the same transaction, the disclaimers in the Offering Circular applied to both. See, e.g., Societe Nationale D’Exploitation Industrielle des Tabacs et Allumettes v. Salomon Bros., 268 A.D.2d 373, 375 (1st Dep’t 2000) (disclaimer setting forth “general terms governing the parties’ transactional relationship” governed “subsequent . . . ISDA Agreement and swap confirmation”). -42- sophisticated investor under New York law. The jury verdict thus has no bearing on the pleading deficiencies identified by the First Department. 13 ACA also ignores that the jury found Mr. Tourre not liable on the only claim asserted by the SEC that required the jury to find that Mr. Tourre intentionally made a materially false or misleading statement (as opposed to liability based on a “scheme” theory ). See Tourre, 2014 WL 61864, at *1. The SEC’s theory of materiality—that a reasonable investor would have considered Paulson’s involvement in the portfolio selection process material information when the reference portfolio was fully and accurately disclosed and could be analyzed and reviewed by any potential investor—remains untested at the federal appellate level because Mr. Tourre did not appeal the verdict. Most importantly, that verdict did not turn on justifiable reliance—the only issue on this appeal—or the factors that led the SEC to exclude ACA from sharing in any settlement funds. 13 For example, contrary to ACA’s contention (ACA Br. at 38), the jury was not asked to consider whether the Offering Circular put ACA on notice (prior to its swap investment a month later) that its alleged belief formed during the early stages of the transaction was potentially inaccurate. The jury also did not consider whether ACA unreasonably failed to take any steps after issuance of the Offering Circular to protect itself. CONCLUSION The Court should affirm the Decision. Dated: August 14, 2014 Respectfully submitted, Attorneys for Defendant-Respondent Goldman, Sachs & Co. -43-