Bloomberg News

Ex-Goldman Trader Barred From Using Lawyers’ Advice Evidence (1)

June 19, 2013

Ex-Goldman Sachs Group Inc. (GS:US) trader Fabrice Tourre lost a bid to present evidence that he “reasonably relied’ on the advice of lawyers when working on a transaction at the center of a fraud lawsuit filed by the U.S. Securities and Exchange Commission.

Allowing Tourre to use that defense without meeting legal requirements ‘‘would give the defendant all of the essential benefits of an advice of counsel defense without having to bear the burden of proving any of the elements of the defense,’’ U.S. District Judge Katherine Forrest in Manhattan ruled. Tourre’s trial is scheduled to begin July 15.

The SEC 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 a collateralized debt obligation, or CDO, called Abacus 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 is also pursuing claims that Tourre violated securities laws related to ACA Management LLC’s sale of protection on $909 million of the Abacus notes, which defaulted.

Tourre sought to offer evidence showing that: Paulson’s counsel reviewed or was copied on various documents; counsel for ACA reviewed certain transaction documents; and in-house or outside counsel for Goldman Sachs drafted or reviewed disclosure language, according to Forrest’s ruling issued late yesterday and made public today.

Several Lawyers

The trader also wanted to show that several people part of the process were lawyers, such as David Gerst, a member of the trading desk, who was an attorney at a law firm before joining at Goldman Sachs, Forrest said.

‘‘It would be confusing and unduly prejudicial for Tourre to present extensive evidence on the presence and involvement of lawyers -- who are presumably paid to ensure that any disclosures comply with the relevant legal requirements -- while at the same time professing not to have relied on their advice in preparing or disseminating those disclosures,” Forrest wrote.

Tourre argued he was one of six people on the Goldman Sachs trading desk that worked on the transaction and that internal and external lawyers as well as the company’s compliance department reviewed offering documents for the CDO.

“The fact that lawyers saw and commented on disclosure language could be understood as ‘blessing’ the sufficiency of that disclosure,” the judge said.

‘Primarily Responsible’

Forrest said Tourre could use the words “counsel,” “lawyer” and “attorney” and present evidence “tending to show that he was not the person primarily responsible for the transaction and that the transaction occurred in the context of a sophisticated financial institution.”

Pamela Rogers Chepiga, a lawyer for Tourre, declined to comment through Chris Kittredge, a spokesman for her at Sard Verbinnen & Co. in New York.

John Nester, a spokesman for the SEC, declined to comment on Forrest’s ruling.

The transactions at issue in the case involved IKB Deutsche Industriebank AG (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 the Abacus CDO.

The case is SEC v. Tourre, 10-03229, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Patricia Hurtado in New York at pathurtado@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net


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