Former Goldman Sachs Group Inc. (GS:US) executive Fabrice Tourre denied he misled ACA Management LLC into backing a mortgage bond deal that later made Paulson & Co. $1 billion as part of a massive bet against the housing market.
Testifying yesterday in his own defense in a federal civil fraud trial in Manhattan, Tourre said an e-mail of his sent to an ACA executive in the 2007 transaction at the center of the case against him “was not accurate.”
Laura Schwartz, the ACA executive who’s a key witness in the case brought by the U.S. Securities and Exchange Commission, testified that the e-mail helped persuade her that Paulson was going to invest in the equity of the deal, a collateralized debt obligation known as Abacus, rather than sell it short.
“The statement was false?” SEC lawyer Matthew Martens asked Tourre just after he took the witness stand.
“It was not accurate,” said Tourre, 34, who’s now studying for a doctorate in economics at the University of Chicago. “It was not an attempt to try to confuse anyone, it was not accurate at that time.”
Martens questioned Tourre for almost two hours, trying to prove that he was the source of the misinformation about Paulson, a Goldman client that initiated the deal, helped choose the portfolio of 90 residential mortgage-backed securities underlying it, and then made a huge profit when Abacus failed.
Martens asked Tourre about the Jan. 10, 2007, e-mail that was forwarded to ACA, the portfolio selection agent, showing the planned capital structure of the deal, including a “precommitted first loss” or equity tranche.
Tourre, dressed in a black suit, white shirt and purple tie, testified in French-accented English. Early in his testimony, he knocked a closed water carafe off the witness box, and grinned with embarrassment after it crashed to the floor. Martens walked over to retrieve it, unsmiling.
Anthony Sabino, who teaches law at St. John’s University in New York, said Tourre’s statement that he sent an inaccurate e-mail may alienate jurors.
“It seems evasive,” said Sabino. “When a jury of regular New Yorkers hears a highly educated, highly compensated Wall Street figure say something is ‘inaccurate,’ they normally interpret that in the worst possible way.”
Goldman Sachs, which is covering the fees for Tourre’s lawyers and public relations team, agreed to pay $550 million in 2010 to settle SEC claims stemming from the transaction.
Paulson, run by billionaire John Paulson, made $15 billion on short bets against the residential mortgage market in 2006 and 2007. Paulson hasn’t been charged with any wrongdoing in connection with the Abacus deal.
Good, Not Too Good
Tourre frequently disagreed with how Martens characterized aspects of the transaction. He said that ACA, in selecting mortgage-backed securities for the Abacus portfolio, wanted securities that were good, but not too good. Abacus had to attract short investors to balance the investors who were betting the assets would perform well, he said.
“If the portfolio is just too good, then there’s no transaction,” Tourre said.
Tourre, who graduated from an elite engineering school in his native France, came to the U.S. to earn a master’s degree from Stanford University. He spent time before the trial volunteering in Rwanda and is now a student at Chicago.
At one point in today’s testimony, Tourre explained the abbreviation “i.e.,” which he used in an e-mail: “It stands for ‘id est’ in Latin.”
Tourre followed Schwartz to the witness stand and will continue tomorrow.
Schwartz, who headed ACA’s asset management business in early 2007, testified she didn’t know Paulson was taking a short-only position in Abacus. The misimpression led ACA to lend its prestige to the deal and to make a disastrous bet that the portfolio would perform well, the SEC says.
Goldman Sachs and Paulson never corrected ACA’s misimpression through e-mails, phone conversations and meetings, including a chance encounter between Schwartz and a top Paulson executive in a Jackson Hole, Wyoming, hotel bar, Schwartz said.
Under questioning today by Tourre’s lawyer, John “Sean” Coffey, Schwartz said she can’t recall any specific conversation or meetings in which she was told that Paulson was investing in the equity of Abacus.
“There’s been no direct evidence tying Fabrice Tourre to any fraud against ACA,” said Michael Santoro, a lawyer and professor at Rutgers Business School who’s been attending the trial. “At the moment, we have only the slenderest reed to even believe he misled ACA that Paulson was long.”
Schwartz said that Tourre failed to correct an e-mail she sent referring to “Paulson’s equity perspective” on the deal. Tourre testified today that he can’t remember reading the e-mail.
Schwartz testified she is sure she was never told that Paulson planned to make a short-only bet on Abacus.
“A pure short was a bet against something that was designed to fail,” Schwartz testified. “It would have been a shock if I had learned that they were only short in the AC1-Abacus transaction.”
The case is SEC v. Tourre, 10-cv-03229, U.S. District Court, Southern District of New York (Manhattan).
To contact the reporter on this story: Bob Van Voris in Manhattan federal court at firstname.lastname@example.org.
To contact the editor responsible for this story: Andrew Dunn at email@example.com.