Fabrice Tourre, the ex-Goldman Sachs Group Inc. (GS:US) vice president whose congressional testimony put a face on the complex structured investments that contributed to the 2008 financial crisis, is set to face trial today on allegations he misled investors.
Tourre, dubbed “Fabulous Fab” by a friend, faces fraud claims in a U.S. Securities and Exchange Commission lawsuit over his role in Abacus 2007-AC1, a synthetic collateralized debt obligation tied to home mortgages. The trial comes three years to the day after the SEC announced Goldman Sachs’s agreement to pay a then-record $550 million settlement and admit mistakes in marketing Abacus.
Jurors will want to know whether Tourre intentionally misled customers, said Ernest Badway, a former SEC enforcement attorney with the Philadelphia-based law firm Fox Rothschild LLP. “They’re going to look to see if he said something that he knew to be untrue,” Badway said.
Tourre, now studying for a doctorate in economics at the University of Chicago, spent part of the time waiting for trial working for a relief organization in Kigali, Rwanda. Since Goldman Sachs settled, he has stood alone against the government’s claims that he misled investors by failing to tell them that the hedge fund Paulson & Co. helped select the assets underlying Abacus while betting they would decline in value.
U.S. District Judge Katherine Forrest, who will oversee the trial in Manhattan, summed up the SEC’s allegations this way in a June 4 opinion: “Tourre handed Little Red Riding Hood an invitation to grandmother’s house while concealing the fact that it was written by the Big Bad Wolf.”
Tourre contends those who lost money on Abacus were sophisticated institutions that guessed wrong on the direction of the home mortgage market. He said he never misled investors and claims the SEC has failed to put forward enough evidence to allow a jury to find him liable. He has said it was well known at the time that Paulson was shorting securities backed by subprime mortgages.
Abacus was set up to allow investors to bet on the performance of 90 securities backed by subprime and mid-prime residential mortgages, divided into tranches holding different levels of risk. Long investors bet the reference portfolio would perform well. Short investors bet it wouldn’t. The nature of the investment made it necessary for short investors to balance the bets of long investors in all of the tranches that were sold.
The SEC accuses Tourre of tricking ACA Financial Guaranty Corp. into serving as the portfolio selection agent for Abacus, by falsely claiming that Paulson, which also helped select the portfolio, planned to make a long investment in the equity tranche, rather than betting the other way by taking a short position.
“I’m a little troubled by the case,” Badway said, questioning why the SEC pursued claims against Tourre. “I don’t know how you go after him and not go after some of the people who were above him” at Goldman Sachs,’’ he said in a phone interview.
The star witness in Tourre’s trial will be Tourre himself, known as “Fabulous Fab” after an e-mail in which he quoted a friend’s nickname for him. When he’s questioned by the SEC, Tourre will have to contend with that e-mail and others that SEC lawyers have said provide a window to his thinking.
In a Jan. 23, 2007, e-mail, Tourre forwarded to his girlfriend, Marine Serres, an article warning of a possible bubble in overleveraged credit markets. Alternating between English and French, as well as between financial analysis and pillow talk, Tourre wrote: “More and more leverage in the system, the whole building is about to collapse anytime now ... Only potential survivor, the fabulous Fab ... standing in the middle of all these complex, highly levered, exotic trades he created without necessarily understanding all the implications of those monstruosities!!!”
In a later e-mail, Tourre called the complex derivatives he was selling “a product of pure intellectual masturbation” and likened a CDO to a “little Frankenstein turning against his own inventor.”
“These e-mails were personal e-mails that I deeply regret,” Tourre told a Congressional committee in 2010.
“Obviously, there will be a lot going on at this trial, but it’s Tourre’s own e-mails that will either hang him or free him,” said Anthony Sabino, who teaches law at St. John’s University in New York.
Tourre’s legal team has lost several pretrial motions, complicating his defense.
In rulings last month, Forrest barred one of Tourre’s two expert witnesses from testifying and sharply limited the testimony of the other. She also said Tourre can’t place “undue focus” on lawyers having reviewed the transaction, while ruling he may try to show jurors he wasn’t the person primarily responsible for the transaction.
Forrest rejected Tourre’s request to throw out part of the case on the claim that sales offers made to two European banks, IKB Deutsche Industriebank AG (IKB) and ABN Amro Bank NV, weren’t “domestic” for purposes of U.S. securities law. A different judge in 2011 dismissed part of the SEC’s case against Tourre, throwing out claims relating to foreign sales.
“The issues headed to trial are far simpler and more easily explained to a jury” than before Forrest’s ruling, said Behzad Gohari, a securities lawyer in Bethesda, Maryland, who advises clients on capital markets and financial regulations.
Forrest, nominated to the bench in 2011 by President Barack Obama, is a former antitrust and entertainment litigator who made millions of dollars in private practice representing companies including Time Warner Inc. and United Airlines Inc.
Tourre has told Forrest he will call several current and former Goldman Sachs employees to testify. His witnesses may include John Paulson, Paulson & Co.’s billionaire founder and majority owner.
The SEC said it will call Laura Schwartz, a former ACA executive who worked with Tourre on the deal. Tourre’s lawyers said in court papers this month that whether the jury believes Schwartz’s testimony “may well determine the outcome of this trial.”
According to the SEC, Tourre sent an e-mail to former Goldman Sachs saleswoman Gail Kreitman on Jan. 17, 2007, saying: “Let’s try to close the loop with ACA this morning!” Later, in a recorded call, Kreitman told ACA’s Lucas Westreich that Goldman Sachs was “placing a hundred percent of the equity” in Abacus with Paulson. As a result, according to the SEC, ACA agreed to serve as portfolio selection agent and made a long investment of almost $1 billion in Abacus.
Tourre argues that the SEC can’t hold him responsible for the call, on which he isn’t mentioned.
The SEC claims Tourre and Goldman Sachs marketed Abacus, including in a term sheet, flip book and offering circular, without mentioning Paulson’s role in selecting the portfolio.
Tourre will be defended by a team led by Allen & Overy LLP partner Pamela Chepiga, a former chief of the unit that prosecutes federal securities crimes in New York, and John P. “Sean” Coffey, another former federal prosecutor who spent more than a decade representing investors in securities-fraud suits against companies.
The SEC team includes the SEC’s chief litigator, Matthew Martens, as well as Richard Simpson, who represented the SEC against Sam Antar in the Crazy Eddie Inc. fraud case, and Christian Schultz, a former partner with the firm Kirkland & Ellis LLP.
In another case that grew out of the financial crisis, the SEC lost a New York trial last year against Brian Stoker, Citigroup Inc. (C:US)’s former director of its collateralized debt obligation structuring group, after the bank agreed to a $285 million settlement. The SEC had accused Stoker of violating securities law in assembling the assets underlying a $1 billion CDO-squared, or a CDO made up of CDOs.
The SEC claimed Citigroup structured and sold the CDO in 2007 without telling investors that it helped pick about half the underlying assets and was betting they would decline in value by taking a short position.
The jury found the SEC hadn’t proved its case, sending back an unusual message with its decision. “This verdict should not deter the SEC from continuing to investigate the financial industry, to review current regulations, and modify existing regulations as necessary,” the jurors wrote.
The SEC has sued 157 companies and individuals in connection with the financial crisis, including 66 senior corporate officers, according to its website. The SEC said it had recovered $2.7 billion in financial crisis cases, as of June 15.
The case is SEC v. Tourre, 10-03229, U.S. District Court, Southern District of New York (Manhattan).
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