The Goldman Sachs Group Inc. (GS:US) employee who ran the firm’s mortgage correlation trading desk testified that Fabrice Tourre failed to tell investors about the role of Paulson & Co. in the deal at the center of the U.S. Securities and Exchange Commission’s fraud case against him.
Jonathan Egol, now a Goldman Sachs managing director, told jurors in Manhattan federal court today that he is “not aware of any” disclosures to investors that Paulson, the New York hedge fund that stood to make money from the failure of Abacus 2007-AC1, a synthetic collateralized debt obligation, helped select the mortgage-backed assets underlying it.
Egol said Tourre did make sure to tell a superior that Paulson helped pick the portfolio of 90 subprime mortgage-backed securities when Goldman’s money was at risk.
The SEC sued Tourre and Goldman Sachs in 2010 over the Abacus transaction. Paulson, run by billionaire John Paulson, used the deal to bet against mortgage-backed securities. Investors on the other side of the bet lost more than $1 billion. Goldman Sachs, based in New York, paid a then-record $550 million to settle the case.
The SEC sued Tourre after dropping a plan to file claims against Egol, according to interviews with SEC enforcement staff conducted by the agency’s inspector general, which were made available to Bloomberg News through a Freedom of Information Act request. Egol testified yesterday that Tourre was the Goldman Sachs employee primarily responsible for the Abacus transaction.
Egol testified for about four hours, yesterday and today, under questioning from SEC lawyer Matthew Martens. He’s being questioned by Tourre’s lawyers this afternoon. The SEC told U.S. District Judge Katherine Forrest yesterday that after Egol, it plans to call former Goldman Sachs saleswoman Gail Kreitman as a witness and play a Jan. 17, 2007, recorded call between Kreitman and ACA Financial Guaranty Corp.’s Lucas Westreich.
The SEC claims Kreitman told Westreich that Paulson was taking a long, rather than a purely short, position in Abacus, passing along false information she got from Tourre. The agency says ACA, which lost money in a long bet on the transaction, would have refused to serve as portfolio selection agent and wouldn’t have invested in the transaction if it had known that Paulson stood to gain from its failure.
The SEC said it expects Kreitman to testify that she doesn’t recall who told her Paulson was buying the equity tranche in Abacus, but that she generally recalls Tourre was the most likely source of the false information.
The SEC had planned to call David Gerst, another one of Tourre’s former Goldman Sachs colleagues, after Egol. SEC lawyers told Forrest they moved up Kreitman as part of an effort to streamline their case.
The change in the SEC witness list came after Martens spent most of yesterday battling with Paolo Pellegrini, the former Paulson executive who helped Paulson’s fund make more than $15 billion shorting subprime mortgages.
Pellegrini frequently argued with Martens and claimed the SEC tricked and intimidated him in its investigation into the Abacus transaction.
The case is SEC v. Tourre, 10-cv-03229, U.S. District Court, Southern District of New York (Manhattan).
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