Fab's Fine Line Between Illegal and Idiotic

Photographer: Peter Foley/Bloomberg.

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Photographer: Peter Foley/Bloomberg.

The picture you get from reading about the testimony in the Fabrice “Fabulous Fab” Tourre case is of a bunch of people behaving like idiots. Tourre appears willing to say anything to potential buyers to close the deal. The people buying his mortgage bonds don’t inquire as to whether hedge-funder John Paulson’s “equity perspective” is equivalent to an “equity investment”; they just assume it is, and give Fab Tourre a bunch of money.

But was all this illegal? My impression from watching coverage of the case was that the Securities and Exchange Commission’s case against Tourre was pretty weak. That’s why his lawyers rested without calling any witnesses. And these defenders aren’t arrogant idiots; one securities lawyer I know says they’re “top notch.”

So why did the jury find against him? It’s not exactly clear. “At the end of the day, he probably could have done the right thing," one, a 61-year-old school principal, said. "But he chose to play the game."

It’s never really clear how jurors decide securities cases. Long ago, in the shadow of a 2001 accounting scandals, a securities litigator told me that these cases are monstrous to take to trial, because there is no possibility that the jury will actually understand how the deal worked, or what normal practice is in the industry. It’s just too complicated. Often, the lawyers aren’t really entirely clear about the finer details. And if you actually try to make the jurors understand, they will hate you for boring and confusing them, which is likely to weigh against your clients.

“So how do jurors decide these cases?” I asked her. She shrugged.

“No one really knows.”

The juror’s comments raise the specter that Tourre was not convicted of fraud against the large institutional investors who bought his products, but of being in “the game.” That his biggest crime may have been writing that moronic e-mail to his girlfriend:

“Darling, you should take a look at this article . . . Very insightful . . . More and more leverage in the system, l’edifice entier risque de s’effondrer à tout moment . . . Seul survivant potential, the fabulous Fab (as Mitch would kindly call me, even though there is nothing fabulous abt me, just kindness, altruism and deep love for some gorgeous and super smart French girl in London), standing in the middle of all these complex, highly levered, exotic trades he created without necessarily understanding all the implications of those monstruousities!!! Anyway, not feeling too guilty about this, the real purpose of my job is to make capital markets more efficient and ultimately provide the US consumer with more efficient ways to leverage and finance himself, so there is a humble, noble and ethical reason for my job ... amazing how good I am in convincing myself !!!”

That’s certainly true of the court of public opinion, where about all anyone knows about the Fabulous Fab is that highlighted passage, which the SEC excerpted to make it look as if he was bragging about his role in destroying the system, rather than engaging in a bit of (not very deep) soul searching about whether he and people like him had been creating monsters they didn’t understand.

One hears it over and over, in writing about the financial crisis: “Why isn’t someone in jail?” Fab Tourre is someone. To be sure, he isn’t a very important someone. And he’s not actually going to jail, because this was a civil trial. But we can’t indict “the game.” Fab Tourre may have been the closest substitute we could find.

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