An Australian hedge-fund manager filed a lawsuit seeking more than $1 billion in damages from Goldman Sachs Group Inc., accusing the Wall Street firm of fraudulently selling a "now notorious" financial instrument called Timberwolf.

The collateralized debt obligation collapsed when housing prices tumbled in 2007, resulting in steep losses to the $78 million invested by Basis Capital, the hedge-fund manager. The lawsuit, filed Wednesday in U.S. District Court for the Southern District of New York, seeks at least $56 million in damages related to Goldman's alleged "false representations" and more than $1 billion in punitive damages.

"Goldman was pressuring investors to take the risk of toxic securities off its books with knowingly false sales pitches," said Eric L. Lewis, a partner at law firm Baach Robinson & Lewis who is representing Basis. The hedge fund that bought pieces of Timberwolf had to be liquidated in late 2007 after its heavy losses from bets on the subprime-mortgage market.

Michael DuVally, a Goldman spokesman, said the suit "is a misguided attempt by Basis, a hedge fund that was one of the world's most experienced CDO investors, to shift its investment losses to Goldman Sachs." The hedge-fund firm "made its investment at market levels—levels that it deemed attractive," Mr. DuVally added.

In addition to the suit, the Securities and Exchange Commission is probing a number of mortgage-related deals created by Goldman, Morgan Stanley and other major Wall Street firms.