The Manhattan judge hearing the Fabrice Tourre securities-fraud trial urged lawyers to “have a heart” and not assume jurors speak Wall Street.
The U.S. Securities and Exchange Commission sued Tourre and Goldman Sachs Group Inc. in 2010 over Abacus 2007-AC1, a synthetic collateralized debt obligation, in which investors betting on mortgage bonds lost more than $1 billion. The agency claims Tourre concealed the role of Paulson & Co., the hedge fund run by John Paulson, in selecting the assets in the Abacus portfolio -- assets Paulson was betting would fail. Goldman Sachs paid a then-record $550 million fine to settle the claims.
CDOs were one thing the judge in charge of the case had in mind in making her keep-it-simple request to lawyers.
“A synthetic CDO is gibberish unless you explain it,” U.S. District Judge Katherine Forrest told the lawyers for both sides before the trial started yesterday morning. “Mere mortals don’t know what a trading desk is.”
Both sides appeared to try to simplify their cases in their opening statements, with SEC lawyer Matthew Martens likening Abacus to a basket of rotten apples and Pamela Chepiga, a lawyer for Tourre, comparing it to a fantasy baseball team.
The nine-member jury selected yesterday -- five women and four men -- includes an Episcopal priest, a dean at a free online academy, a retired special education teacher and the principal of a New York public school. They’ll determine whether Tourre, a former Goldman Sachs vice president who was given the nickname “Fabulous Fab” by a friend, broke U.S. securities laws in structuring and marketing Abacus.
“This case is about lies, deception and Wall Street greed,” Martens told jurors. “This case is about holding Fabrice Tourre, the so-called ‘Fabulous Fab,’ accountable.”
Martens frequently repeated the phrase “Wall Street greed.” Tourre structured an investment “secretly designed to maximize the likelihood that it would fail, then sold it to investors,” Martens argued.
Chepiga told jurors that Tourre didn’t lie to investors or to bond insurer ACA Financial Guaranty Corp., which selected the Abacus portfolio with Paulson and later took a long position in it.
Besides CDOs, Forrest suggested other terms the jurors won’t be familiar with: security, securitization, collateral, asset-backed (“Be gentle,” Forrest advised), short and long investors, portfolio, pool of assets, swap and offering memorandum.
The panel might even be confused about “what investment banks do,” she said. “Some of them may have some knowledge in this area,” Forrest said. “Others may not.”
“The heart of any jury trial is breaking down complex facts and legal theories into concepts a juror can readily understand, whether the juror is a Ph.D. or a high school grad,” Anthony Sabino, who teaches law at St. John’s University in New York, said in an e-mail yesterday. “The side that fails to do so will lose. And if both sides fail to drop the financial mumbo-jumbo, beware a wacky and unjust result.”
The trial began three years to the day after the SEC announced the settlement with New York-based Goldman Sachs. Forrest yesterday told jurors not to speculate why the firm is no longer in the case.
Both sides addressed a January 2007 e-mail from Tourre to his girlfriend, which included the “Fabulous” nickname that’s stuck to him since it became public. Martens said the e-mail shows Tourre knew what he was doing was wrong. Chepiga called it “an old-fashioned love letter” that has nothing to do with the issues in the case.
“What this e-mail expresses is the self-doubt of a young man, about whom there is nothing fabulous, struggling in a financial world that is uncertain and going through uncertain times,” Chepiga told the jurors.
In the e-mail, Tourre alternated between English and French, writing: “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!!!”
Tourre’s e-mails made him “an easy mark, a scapegoat” for the SEC, Chepiga argued.
“Fabrice Tourre has come to you and has chosen to fight to clear his name,” she said.
Earlier yesterday, Forrest asked questions of the potential jurors to screen them for the case.
A man with gray hair in a yellow shirt and short pants was the first dismissed after volunteering: “I have to admit I have a very jaundiced view of Wall Street.”
The SEC and the defendant each elected to dismiss two potential jurors, including a mortgage underwriter and a civil engineering professor.
The nine-member panel also includes a production manager at the International Aids Vaccine Initiative, a graphic designer, a recent medical school graduate studying for her licensing exams, a technical director for an animation company and a man who said he works in advertising.
Forrest told the lawyers and spectators that they may drink water or coffee during the trial if they wish, though a court security officer told a spectator to put away his book.
“Please don’t ruin our carpet, because with sequestration we have no ability to replace it,” Forrest said.
Forrest told the jurors the trial may last three weeks. Both sides said they plan to call Tourre as a witness.
The case is SEC v. Tourre, 10-cv-03229, U.S. District Court, Southern District of New York (Manhattan).
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