Goldman Sachs Group Inc. defeated bond insurer ACA Financial Guaranty Corp.'s fraud lawsuit over a complex security known as Abacus; that security had previously led Goldman to pay a $550-million settlement with regulators.

A New York State appeals court in Manhattan Tuesday ordered ACA's complaint against the bank dismissed, overturning a lower-court ruling that allowed the case to proceed.

ACA said New York-based Goldman Sachs and hedge-fund firm Paulson & Co. conspired to induce ACA to provide financial guaranty insurance for a product "doomed to fail." ACA said it was deceived into believing Paulson was a long investor when, in fact, the hedge fund was betting that the securities in Abacus would decline.

The appeals court said ACA could have uncovered Paulson's actual position "but apparently chose not to."

"Plaintiff should have questioned defendant or the nonparty hedge fund," the court said in a 3-2 decision. "Such an inquiry would have likely informed plaintiff that the nonparty hedge fund was taking a short rather than a long equity position."

ACA, which is seeking $120 million in damages in the lawsuit, added Manhattan-based Paulson as a defendant in the lawsuit this year. A court has yet to rule on the hedge fund's motion to dismiss.

Marc Kasowitz, an attorney for Manhattan-based ACA, said his client may ask the divided appellate panel to reconsider the decision and would pursue an appeal to the state's highest court in Albany.

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A Goldman Sachs spokeswoman, Tiffany Galvin, said the company was pleased with the appeals court ruling.

Goldman Sachs in 2010 paid $550 million to settle U.S. Securities and Exchange Commission claims that it misled investors in Abacus. The bank didn't admit or deny wrongdoing. It acknowledged that it made a "mistake" and that marketing materials for the instruments had "incomplete information," the agency said at the time.