The Goldman Sachs Group Inc. employee who ran Fabrice Tourre’s trading desk testified that Tourre failed to tell investors about the role of the Paulson & Co. hedge fund in the deal at the center of the U.S. Securities and Exchange Commission’s fraud case against him.
The SEC sued Tourre and Goldman Sachs in 2010 over the transaction. Paulson, a New-York based hedge fund run by billionaire John Paulson, used the deal to bet against mortgage-backed securities. Investors on the other side of the bet lost more than $1 billion. Goldman Sachs, based in New York, paid a then-record $550 million to settle the case. Paulson and his firm, Goldman clients, were not sued.
Jonathan Egol, now a Goldman Sachs managing director, told jurors in Manhattan federal court yesterday that he is “not aware of any” disclosures to investors that Paulson, which stood to make money from the failure of the transaction -- a synthetic collateralized debt obligation dubbed Abacus 2007-AC1 -- helped select the mortgage-backed assets underlying it.
Egol said Tourre did make sure to tell a superior that Paulson helped pick the portfolio of 90 subprime mortgage-backed securities when Goldman’s money was at risk.
The SEC sued Tourre after dropping a plan to file claims against Egol, according to interviews with SEC enforcement staff conducted by the agency’s inspector general. Egol testified July 17 that Tourre was the “deal captain,” the member of the mortgage desk primarily responsible for the Abacus transaction.
SEC lawyer Matthew Martens showed Egol e-mails and drafts of term sheets and a flip book that Goldman Sachs used in marketing the Abacus CDO. The marketing materials identified ACA Financial Guaranty Corp. as the third-party portfolio selection agent -- the firm that, for a fee, chose the residential mortgage-backed securities that served as the reference portfolio for the CDO. None of them mentioned Paulson.
The SEC claims ACA’s presence in the transaction made the deal more attractive to investors.
“I think some investors would find that an appealing aspect,” Egol testified yesterday.
Martens also introduced an e-mail from Tourre in which he responded to an internal Goldman Sachs question about the deal’s reference portfolio, in which he did identify Paulson’s role.
“100% Baa2 RMBS selected by ACA/Paulson,” Tourre wrote, two weeks after the Abacus deal closed, referring to the credit rating of the subprime residential mortgage-backed securities in the portfolio.
Cross-examining Egol, Tourre lawyer John “Sean” Coffey showed him a memorandum on the transaction that went to Goldman Sachs’s Mortgage Capital Committee, with copies to 19 people at the firm, including people involved in the legal, risk management, credit, operations and other departments. Tourre has argued the transaction was reviewed by many people at Goldman Sachs.
Coffey also introduced news articles reporting that Paulson was predicting a fall in U.S. mortgage markets in late 2006 and early 2007 and was pursuing a strategy of shorting subprime mortgages that would eventually net his hedge fund $15 billion.
Egol, who has been on the stand for more than a day, is expected to conclude his testimony early today. The SEC told U.S. District Judge Katherine Forrest July 17 that after Egol, it plans to call former Goldman Sachs saleswoman Gail Kreitman as a witness and play a Jan. 17, 2007, recorded call between Kreitman and ACA’s Lucas Westreich.
The SEC claims Kreitman told Westreich that Paulson was taking a long, rather than a purely short, position in Abacus, passing along false information she got from Tourre. The agency says ACA, which lost money in a long bet on the transaction, would have refused to serve as portfolio selection agent and wouldn’t have invested in the transaction if it had known that Paulson stood to gain from its failure.
The SEC said it expects Kreitman to testify that she doesn’t recall who told her Paulson was buying the equity tranche in Abacus, but that she generally recalls Tourre was the most likely source of the false information.
The change in the SEC witness list came after Martens spent most of July 17 battling with Paolo Pellegrini, the former senior Paulson executive who played a key role in the firm’s subprime strategy. In his testimony, Pellegrini frequently argued with Martens and claimed the SEC tricked and intimidated him in its investigation into the Abacus transaction.
The case is SEC v. Tourre, 10-cv-03229, U.S. District Court, Southern District of New York (Manhattan).