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Goldman Sachs Says SEC Case Hinges on Actions of One Employee

Pedestrians pass the offices of Goldman Sachs Group Inc. at 120 Fleet Street in London, on April 16, 2010. Photographer: Frantzesco Kangaris/Bloomberg
Pedestrians pass the offices of Goldman Sachs Group Inc. at 120 Fleet Street in London, on April 16, 2010. Photographer: Frantzesco Kangaris/Bloomberg

Goldman Sachs Group Inc. said the U.S. fraud case against the firm hinges on the actions of the employee it placed on paid leave this week.

Fabrice Tourre, the 31-year-old Goldman Sachs executive director who was accused of misleading investors about a mortgage-linked investment in 2007, will also be de-registered from the Financial Services Authority, a spokeswoman at the firm in London said yesterday.

“It’s all going to be a factual dispute about what he remembers and what the other folks remember on the other side,” Greg Palm, Goldman Sachs’s co-general counsel, said in a call with reporters yesterday, without naming Tourre. “If we had evidence that someone here was trying to mislead someone, that’s not something we’d condone at all and we’d be the first one to take action.”

By characterizing the case as a dispute involving a single employee, Goldman Sachs may be taking its first steps to publically distance itself from Tourre in the case, some lawyers said. That could reduce bad publicity and ultimately make it easier for the company to settle the case.

Goldman Sachs may also want to separate itself from Tourre if it’s concerned he will cooperate with the SEC or implicate more senior employees, said Onnig Dombalagian, a professor at Tulane University Law School in New Orleans and former attorney fellow at the SEC.

‘Vicarious Liability’

“If Tourre says, ‘Goldman’s board knew what we were doing,’ you can imagine Goldman will want to portray him as disgruntled,” or willing to lie to avoid punishment, the professor said. That may not help the firm itself, he added. “Under theories of vicarious liability, if you can find Tourre liable, it’s going to be hard for Goldman to escape.”

Pamela Chepiga, a lawyer for Tourre at Allen & Overy LLP in New York, didn’t return a call seeking comment. The New York-based bank has previously denied wrongdoing and said it will fight the SEC’s case because it is “completely unfounded in law and fact.”

The SEC sued Goldman Sachs and Tourre for misleading two investors in a collateralized debt obligation about the role played by hedge fund Paulson & Co. ACA Management LLC, which served as the CDO’s selection agent, didn’t realize that Paulson planned to bet against the deal even though the fund was advising ACA on the portfolio, the SEC alleged. IKB Deutsche Industriebank AG, an investor in the CDO, didn’t know about Paulson’s role at all, the SEC said.

‘He Said-She said’

The SEC complaint “clearly revolves a little bit around ‘he said-she said,’ ” Palm said, and hinges on whether Tourre misled ACA into believing that Paulson was investing in the deal instead of betting against it.

Byron Georgiou, a member of a U.S. panel that’s investigating the financial crisis, said he doubts Goldman Sachs could make a convincing case that Tourre acted alone and without the full support of his superiors.

“It’s hard to imagine that there wasn’t some supervision of a 27-year-old, at that time, trader structuring a billion-dollar transaction on which Goldman made a $15 million fee,” Georgiou, who serves on the Financial Crisis Inquiry Commission, said in a Bloomberg Television interview.

Palm said Tourre “believes that he indicated” to ACA that Paulson was interested in taking a “short” position on the deal, meaning he was betting against it, Palm said. “Our employee certainly knows that he did not represent to ACA or indicate in any way that Paulson was going to be an equity investor in this transaction.”

Goldman Sachs, which vowed on April 16 that it would “vigorously contest” the SEC’s suit, isn’t ruling out a potential settlement, Palm said.

“You go to trial, which is what we’re doing, and you always have the option of, if there is an agreeable settlement to both sides, of settling at any point in time,” he said.

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