Fabrice Tourre previewed his defense against civil fraud claims over a failed $1 billion investment, telling jurors about his former life as a 28-year-old Goldman Sachs Group Inc. (GS:US) vice president, working until midnight, six days a week on a vast trading floor, supervising no one.
“I would say there were thousands of vice presidents at Goldman,” Tourre, now 34, testified late yesterday in Manhattan federal court.
The U.S. Securities and Exchange Commission claims Tourre intentionally misled participants in a 2007 deal known as Abacus about the role played by Paulson & Co., the hedge fund run by John Paulson. The SEC claims Tourre hid that Paulson helped choose the portfolio of subprime mortgage-backed securities underlying Abacus, then made a billion-dollar bet it would fail.
Tourre’s lead lawyer, Pamela Chepiga, began questioning her client yesterday afternoon, seeking to minimize Tourre’s responsibility for the transaction by showing it was reviewed by dozens of people at Goldman Sachs. Tourre’s testimony continues today.
Abacus, which closed in April 2007, turned worthless when the housing market crashed, losing $1 billion for investors who bet the subprime mortgage bond portfolio would perform well.
Answering Chepiga’s questions yesterday, Tourre denied misleading anyone about Paulson’s role in Abacus and said he thought ACA knew the hedge fund was shorting the deal.
“Was that reference portfolio designed to fail?” Chepiga asked Tourre.
“Of course not,” he replied.
Chepiga’s turn with Tourre came after an SEC lawyer spent about six hours questioning him over the past two days. Matthew Martens, who leads the SEC’s trial team against Tourre, yesterday introduced e-mails Tourre sent to a former girlfriend in 2007 as proof that he intentionally committed fraud in putting together the Abacus transaction.
Under questioning by Martens, Tourre was compelled to read to jurors the Jan. 23, 2007, e-mail in which he quoted a friend’s nickname for him: Fabulous Fab. Tourre referred to the “complex, highly levered, exotic trades” he created as “monstruosities” in the message.
“This is a silly, romantic e-mail I sent late at night at a moment of market stress,” Tourre said today.
Asked by Martens what “monstrosities” he was talking about, Tourre said “I didn’t create any monstrosities.”
Tourre is testifying near the end of two weeks of evidence against him presented by the SEC.
Martens asked Tourre about a parody of a French song he’d created, which featured credit-linked notes and empty profit-and-loss statements.
Martens alternated between Tourre’s personal e-mails and messages he sent at the same time related to his work on the transaction.
On a day when Tourre said he was working on marketing materials for Abacus, a deal backed by subprime residential mortgage bonds, he sent the former girlfriend a link to the website www.mortgageimplode.com, and wrote, “I love this website ;)”
In opening statements at the start of the trial, lawyers for the SEC and Tourre addressed the “Fabulous Fab” e-mail, which Tourre sent late at night to his then-girlfriend, Marine Serre, a Goldman Sachs saleswoman in London.
SEC lawyer Martens said the e-mail shows Tourre knew what he was doing in the deal was wrong. Chepiga called it “an old-fashioned love letter” that has nothing to do with the issues in the case. She said the e-mails made him “an easy mark, a scapegoat” for the SEC.
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!!!”
Later in the e-mail, Tourre said: “Anyway, not feeling too guilty about this, the real purpose of my job is to make capital markets more efficient and ultimately provide the U.S. consumer with more efficient ways to leverage and finance himself, so there is a humble, noble and ethical reason for my job ;)"
After Tourre read the full e-mail and translated the French passages for jurors, Martens asked him if he’d left out something.
“A smiley face,” Tourre said.
“Is that a smiley face or a wink?” Martens asked.
“I guess it’s a wink,” Tourre replied.
“After you say there’s an ethical reason for your job, you include a wink, is that correct?” Martens asked.
“Yes,” Tourre said.
A day after he sent an e-mail about a “surreal” meeting with executives from Paulson and ACA Management LLC on Feb. 2, 2007, Tourre sent Serre a parody he wrote of a popular French song, “La Boheme,” made famous by singer Charles Aznavour. Translated into English, Tourre’s version ends: “And when a few clients/Took a credit-linked note/In exchange for a good fresh P&L/We narrated verses/Gathered around the stove/Forgetting about the crisis.”
Tourre called the e-mail “a silly late-night poem I was writing to my girlfriend, adapting a French song.”
In Tourre’s first day on the stand, he said that a draft term sheet for the Abacus deal showing that the equity tranche was “pre-committed” to Paulson “wasn’t accurate.”
The term sheet helped convince ACA Management LLC, the company that was hired to select mortgage bonds for Abacus, that Paulson was going to invest in it, rather than sell it short, according to testimony by Laura Schwartz, an ACA executive involved in the deal.
The SEC claims Tourre failed to correct Schwartz when she referred to “Paulson’s equity perspective” in an e-mail that was forwarded to him.
“I would receive hundreds of e-mails, hundreds,” Tourre testified yesterday.
Martens also questioned Tourre about e-mails in which he sent Abacus marketing materials to clients and members of Goldman Sachs’s sales staff. The SEC claims he broke the law by offering investments in Abacus without disclosing Paulson’s role in selecting the portfolio.
Tourre has kept a low profile since enduring the questions of a U.S. Senate subcommittee in April 2010 alongside other Goldman Sachs executives. The firm, which is paying Tourre’s legal fees, settled SEC allegations for $550 million, a record at the time. Tourre has spent part of the time since then volunteering in Rwanda and working on a doctorate in economics at the University of Chicago.
The case is SEC v. Tourre, 10-cv-03229, U.S. District Court, Southern District of New York (Manhattan).
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