Paulson Witness in Tourre Trial Claims SEC Intimidation

A former top Paulson & Co. executive claimed the U.S. Securities and Exchange Commission intimidated and tricked him when it took his testimony in 2008 as part of its investigation into the transaction at the heart of its civil fraud case against Fabrice Tourre.

“I thought that you were trying to trick me in some way,” said Paulo Pellegrini, 56, a witness called by the SEC who quarreled with the agency’s lawyer throughout more than five hours of testimony. “Yeah, I was scared.”

The SEC sued Tourre and his then-employer, Goldman Sachs Group Inc., in 2010 over Abacus 2007-AC1, a synthetic collateralized debt obligation that Paulson, the hedge fund run by billionaire John Paulson, used to bet against mortgage-backed securities. Long investors lost more than $1 billion. Goldman Sachs, based in New York, paid a then-record $550 million to settle the case.

The SEC is trying to convince jurors that Pellegrini and Tourre, dubbed “Fabulous Fab” by a friend, misled the company that helped select mortgage-backed securities for the deal into thinking Paulson planned to take an equity stake in Abacus. Instead, the hedge fund, which made $15 billion betting subprime mortgages would fail, planned to short the deal. Pellegrini and Paulson aren’t defendants.

SEC lawyer Matthew Martens asked Pellegrini about his 2008 testimony that he didn’t have any specific memory of telling Laura Schwartz, a former ACA Financial Guaranty Corp. executive in charge of its CDO business, that Paulson was making a purely short bet on Abacus.

‘Under Pressure’

“I remember that those are the words I used under pressure from the SEC,” Pellegrini said.

“Weren’t you just asked questions?” Martens responded.

“Hostile questions, yes, intimidating questions,” Pellegrini said. He claimed he’d been “tricked” in his SEC testimony.

“I was not trying to trick you in any proceeding,” Martens told the witness.

“They were,” Pellegrini responded, appearing to refer to other SEC lawyers.

‘Utter Nonsense’

Later, with the jury and the witness outside the courtroom, Martens told Forrest that Pellegrini’s claims were “garbage” and “utter nonsense.”

The SEC claims Tourre misled ACA, which lost money on an investment in Abacus, into believing Paulson was taking an equity stake in the CDO. Evidence presented by the SEC shows ACA and Paulson both participated in selecting the 90 mortgage-backed securities behind Abacus. The agency alleges Paulson selected assets that were doomed to fail and Tourre hid that information from investors.

Forrest, who already had ruled that Martens could treat Pellegrini as a hostile witness, allowing him to ask leading questions, said he could cut Pellegrini off if his answers continued to be long and unresponsive.

Shortly after calling Pellegrini to the stand yesterday, Martens asked him: “What does CDO stand for?”

“I’m not sure,” the former Paulson executive said.

“Sir, your testimony is you don’t know what CDO stands for, is that correct?” Martens asked.

“It may stand for collateralized debt obligations, but I’m not sure,” he replied.

For a third day, some of the nine jurors struggled with the testimony about complicated financial transactions.

“We’re losing some of the jurors here who are trying -- valiantly, I think -- both to follow and to stay awake,” Forrest told the lawyers. She suggested they try to shorten and focus the testimony, particularly an upcoming stretch of videotaped deposition testimony.

“I have considered giving people popcorn,” Forrest joked.

After Pellegrini leaves the stand, the SEC will call two Goldman Sachs employees, Jonathan Egol, the senior member of Tourre’s former trading desk, and David Gerst, a member of the Abacus deal team.

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 rvanvoris@bloomberg.net

To contact the editor responsible for this story: Andrew Dunn at adunn8@bloomberg.net

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.