(Updates with Frenkel’s comment in the seventh paragraph.)
Sept. 1 (Bloomberg) -- Goldman Sachs Group Inc. trader Fabrice Tourre, accused of misleading investors in a collateralized debt obligation, said in a court filing that IKB Deutsche Industriebank AG’s alleged $150 million investment was actually made by two Jersey-based companies.
Tourre wants to take testimony of witnesses at Loreley Financing (Jersey) No. 29 Ltd. and Loreley Financing (Jersey) No. 30 Ltd., according to the filing yesterday in federal court in Manhattan. The U.S. Securities and Exchange Commission has said Duesseldorf, Germany-based IKB made the investment in the CDO, Abacus 2007-AC1.
“Discovery in this matter thus far has shown, however, that IKB’s alleged $150 million investment was, in fact, made by” the Jersey-based companies, Tourre’s lawyers wrote in the filing.
On June 10, U.S. District Judge Barbara Jones in Manhattan declined to dismiss the case against Tourre. The judge said the SEC had met its burden for pursuing a claim that Tourre violated a securities law designed to prevent fraudulent sales of securities and should stand trial.
John Nester, an SEC spokesman; Jorg Chittka, an IKB spokesman; and David Esseks, a lawyer for Tourre at Allen & Overy LLP in New York, declined to comment on the filing. Pamela Rogers Chepiga, another lawyer representing Tourre, didn’t immediately return a call and e-mail yesterday after business hours inquiring about the Jersey-based companies’ investments.
IKB advised Loreley on the investment, according to Tourre’s filing.
“I think what they’re trying to establish here is they have sophistication piled on top of sophistication to show that this was a well-reasoned investment by, yet again, a sophisticated institution,” Jacob S. Frenkel, a former Securities and Exchange Commission lawyer now in private practice in Potomac, Maryland, said in a phone interview today.
“They also could be trying to establish that whatever representations may have been made to the German bank ultimately could have been irrelevant to the investor,” Frenkel said.
The SEC initially sued the London-based trader in April 2010, saying he defrauded investors by not disclosing that hedge fund Paulson & Co. had helped pick the underlying securities for the CDO and planned to bet against them. After reaching a $550 million settlement with New York-based Goldman Sachs, the SEC filed a new claim against Tourre, saying he gave the company “substantial assistance” as it misled investors.
The SEC said IKB wouldn’t have invested if it had known of Paulson’s involvement in the portfolio selection, according to yesterday’s filing.
“IKB’s role was apparently limited to that of investment adviser to the Loreley companies, in which capacity IKB could only recommend to the directors of the Loreley companies that they enter into securities transactions,” according to the filing.
Yet the “factual record” in the case contains almost no evidence of the Loreley companies, according to the filing.
Citing last year’s U.S. Supreme Court ruling in Morrison v. National Australia Bank, Jones, in June, threw out some claims involving IKB, which allegedly lost almost all of its $150 million investment, and ABN Amro Bank NV, which assumed the credit risk associated with a portion of Abacus.
Sale of Securities
In Morrison, the high court ruled that U.S. securities laws don’t protect foreign investors who buy stocks on overseas exchanges.
Jones let the case proceed on a claim against Tourre that he “knowingly, recklessly or negligently” made misrepresentations in the sale of securities to ACA Management LLC, IKB and ABN Amro.
Jersey, the largest of the Channel Islands, is a dependency of the U.K. with its own legislative assembly and is known as a tax haven.
CDOs are pools of assets such as mortgage bonds packaged into new securities. Interest payments on the underlying bonds or loans are used to pay investors. The Abacus entity was a synthetic CDO, meaning its cash flow came from derivatives that referenced mortgage-backed securities.
The case is SEC v. Tourre, 10-03229, U.S. District Court, Southern District of New York (Manhattan).
--With assistance from Joel Rosenblatt in San Francisco. Editors: Mary Romano, Peter Blumberg
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