Goldman faces suit over sale of risky debt

(Reuters): Goldman Sachs Group Inc has been hit with a new $1.07 billion lawsuit for having allegedly sold risky debt that it expected would tumble in value to an Australian hedge fund, causing that fund to become insolvent. The lawsuit by the Basis Yield Alpha Fund alleges fraud, breach of contract and negligence, and seeks to recoup $67 million of losses plus $1 billion of punitive damages. It was filed on Thursday with a New York state court in Manhattan. Basis Yield was managed by Sydney-based Basis Capital Funds Management Ltd.

Basis Yield sued three months after a U.S. judge dismissed a similar case, saying the fund could not sue in federal court under U.S. securities laws because its investment in the Timberwolf 2007-1 collateralized debt obligation did not qualify as a "domestic" transaction.

Timberwolf was cited in a scathing U.S. Senate panel report in April that faulted Goldman, Deutsche Bank AG and others for hawking debt they expected to perform poorly.

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