After the allegations, he kept his head down. He testified succinctly before Congress, left his job to enroll in a doctoral program, and popped up in Africa doing charity work. This is the Fabrice Tourre who will walk into U.S. District Court in Manhattan on July 15. But it will be his old notorious self—the French-accented Goldman Sachs (GS) banker who sent a series of gleeful e-mails as the financial products he helped create were imploding—who goes on trial for civil claims of securities fraud.
“The whole building is about to collapse anytime now,” Tourre, then 28 and a midlevel bank employee, wrote in January 2007, as the subprime mortgage market was beginning its meltdown. “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 [sic]!!!” In later messages, Tourre called the derivatives he was selling “a product of pure intellectual masturbation” and likened a collateralized debt obligation, or CDO, to a “little Frankenstein turning against his own inventor.”
On one particular synthetic CDO, known as Abacus 2007-AC1, investors betting on mortgage bonds lost more than $1 billion. In 2010, the Securities and Exchange Commission sued Goldman Sachs and Tourre for fraud for concealing the role of Paulson & Co., the hedge fund run by John Paulson, in selecting the assets inside the Abacus portfolio—assets Paulson wanted to fail. Goldman paid a then-record $550 million fine to settle the allegations.
Tourre chose to fight, even with long odds. U.S. District Judge Katherine Forrest, who will oversee the trial, summed up the SEC’s case like this: “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 faces fines and a possible ban from the securities industry.
In court papers, Tourre claims those who lost money on Abacus were sophisticated institutions that guessed wrong on the direction of the home mortgage market. He says he never misled investors and claims the SEC has failed to put forward enough evidence to allow a jury to find him liable. And he asserts it was well-known at the time that Paulson was betting against securities backed by subprime mortgages. Paulson wasn’t accused of wrongdoing.
Tourre’s trial has taken on larger symbolic importance because he’s one of the few bankers ever to appear in court over alleged wrongdoing tied to the financial crisis. When the SEC announced its allegations in 2010, the Tourre case seemed to crystallize the public perception that big banks, and Goldman Sachs in particular, were in the business of ripping off their clients and profiting as Americans lost their homes and their jobs. Goldman had just been indelibly tagged by Rolling Stone writer Matt Taibbi as “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.” There was speculation that Chief Executive Officer Lloyd Blankfein would not survive Abacus. His decision to settle the suit in July 2010, for an amount equal to only two weeks of the bank’s 2010 operating profit, stopped the scandal in its tracks—and cleared the way for other banks to feel the public’s wrath.
In 2012, JPMorgan Chase (JPM) proved with its $6 billion London Whale trading debacle that even after the financial crisis the best-regarded banks were still capable of letting their risk management get spectacularly out of hand. Later that year, employees at Barclays (BCS), Royal Bank of Scotland (RBS), UBS (UBS), and other banks were found to be manipulating the London interbank offered rate, or Libor, a key benchmark that affects what individuals and municipalities around the world pay to borrow money.
Tourre’s court date threatens to undo some of the progress Goldman has made in rehabilitating its image. In the lead-up to his trial, the bank and its former employee have exhibited an awkward arm’s-length relationship. Goldman is paying for Tourre’s defense and for the use of a sophisticated public-relations team from Sard Verbinnen, but the bank is limited by the terms of its SEC settlement in what it can say publicly about the Abacus deal. A Goldman spokesman declined to comment for this article. Tourre is also expected to call as witnesses current and former Goldman employees, in an effort to show that he was merely part of a team that constructed and sold mortgage products and does not deserve to be singled out.
On that point, Tourre is drawing some unlikely support. “This is so clearly a case of scapegoating,” says Dennis Kelleher, CEO of Better Markets, an advocacy group that has lobbied for the overhaul of financial regulations. “It’s one of the most egregious misuses of SEC power I’ve ever seen.” Without saying whether Tourre had violated the law on Abacus or not, Kelleher says it’s unfair for him alone to face charges. “Frankly, this trial is Exhibit A demonstrating the complete and gross dereliction of duty of the Department of Justice, the SEC, and every other public official in this country for not holding anyone responsible for the egregious crimes and wrongdoing that brought on the financial crisis,” Kelleher says. A spokesman for the SEC declined to comment.
Tourre’s legal team will be led by Allen & Overy partner Pamela Chepiga, a former chief of the unit that prosecutes federal securities crimes in New York, and John “Sean” Coffey, another former federal prosecutor. Tourre has lost several pretrial motions in recent weeks that may complicate his defense. In rulings last month, Judge 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 the fact that lawyers reviewed the transaction, but he may try to show jurors that he wasn’t the person primarily responsible for it.
While Tourre is expected to call Goldman colleagues and even Paulson to the stand, he will be the star witness. When he’s questioned by the SEC, Tourre will have to contend with those memorable e-mails. Matthew Martens, the lawyer leading the SEC’s case, told Forrest on July 9 that the agency plans to use the messages in its opening statement. “There’s no other way to tell his state of mind, other than what he was writing at the time,” Martens said.
A Tourre victory would allow Goldman to put the financial crisis that much further behind it—and deal a setback to the SEC’s efforts to bring bank employees to account for leading the U.S. economy to the brink of disaster. If Tourre loses, the agency’s trophy will be a small one, according to Jeff Connaughton, who served as chief of staff to former Senator Ted Kaufman (D-Del.) and is the author of The Payoff: Why Wall Street Always Wins. “President Obama let all of Wall Street walk,” he says. “But the Fabulous Fab is the guy who got his foot caught in the door.”