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Court Upholds Fraud Claims Based on Allegations of Opinions Expressed by Bank to Induce Plaintiff to Purchase Toxic Securities in Order to Avoid Losses: Basis Yield Alpha Fund (Master) v Goldman Sachs Group, Inc.

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In an October 18, 2012, decision by Justice Kornreich, the court granted in part and denied in part defendant’s motions to compel arbitration and to dismiss the complaint.  Plaintiff-mutual fund sued defendant-investment bank in connection with the purchase of a certain mortgage-backed securities.  Plaintiff alleged that it was induced to purchase the products through false and misleading statements by defendant.  The court denied defendant’s motion to compel arbitration, rejecting the argument that an email exchange of an unsigned agreement to arbitrate constituted an intent by the parties to arbitrate because “an attachment in a single email” or a “mere exchange of forms, without any substantive discussions over their terms” did not amount to “an exchange of letters or telegrams” as prescribed by law.  The court denied defendant’s motion to dismiss plaintiff’s fraud-based claims, finding that plaintiff had pleaded the requisite elements in sufficient detail, including defendant’s intent to defraud “for the purpose of avoiding a loss on securities that [defendant] believed to be toxic.”  Relatedly, the court denied defendant’s motion to dismiss plaintiff’s claims for unjust enrichment and rescission, finding that a plaintiff may maintain such causes of action “where, as here, there is a viable claim for fraudulent inducement.”  The court also denied defendant’s motion to dismiss plaintiff’s negligent misrepresentation claim, finding that there were questions of fact regarding what plaintiff knew or should have known because material information regarding the alleged misrepresentations was exclusively in defendant’s control.  The court, however, granted defendant’s motion to dismiss plaintiff’s contract-based claims, finding that defendant fulfilled its obligation to provide plaintiff with a specific rating of the securities in question and because under English law, which governed the parties’ agreement, the claim of implied covenant of good faith and fair dealing does not exist.  Finally, with respect to defendant’s motion to dismiss for lack of personal jurisdiction, the court found that plaintiff had made a “sufficient start” toward establishing that defendant does business in New York and ordered the parties to engage in limited jurisdictional discovery.   

Basis Yield Alpha Fund (Master) v Goldman Sachs Group, Inc., Sup Ct, NY County, October 18, 2012, Kornreich, J., Index No. 652996/11


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