Fabrice Tourre, the former Goldman Sachs Group Inc. vice president found liable for his role in a failed $1 billion investment, may have lost his case because jurors rejected his defense that as a junior employee he wasn’t primarily responsible for the transaction.
“Being 28 years old and one of several employees of Goldman Sachs isn’t a defense,” Tom Gorman, a former lawyer with the Securities and Exchange Commission’s Enforcement Division, who is now in private practice, said in an interview.
Tourre was a highly paid specialist working in a particular area who asked people to invest billions of dollars in a product he created, Gorman said. Tourre’s lawyers portrayed him as a young employee who was one of many Goldman Sachs employees who worked on the 2007 deal known as Abacus that had subprime mortgage-backed securities underlying the transaction.
The SEC accused Tourre, now 34, of intentionally misleading participants in Abacus about the role played by Paulson & Co., the hedge fund of billionaire John Paulson, which helped choose the portfolio of securities, then made a billion-dollar bet it would fail. Tourre was found liable by a jury in Manhattan yesterday on six of seven claims.
Jurors in the case determined that Tourre couldn’t hide behind his age and relative lack of stature within Goldman Sachs to avoid responsibility.
“Someone in his post should have known” that ACA Management LLC, which agreed to serve as portfolio selection agent on Abacus, wasn’t told about the true purpose of the deal, said Beverly Rhett, who was Juror No. 2 in the trial.
As she left court, juror Beth Glover, 47, an Episcopal priest from the Riverdale section in the Bronx, said “It was a long, slow process.”
Another juror, Reece Pate, 37, a graphic designer from Rockland County, New York, said “It’s been a long day.”
“Here is a man who was in charge of the deal, a highly-paid specialist working in a highly specialized area, asking people to invest billions of dollars in a product he created,” Gorman said. “In those circumstances, it’s not a defense to say, ‘I’m only 28 years old and that’s why I didn’t tell these people the truth.’”
The verdict is a victory for the government in one of the most high-profile trials to come out of the financial crisis of 2007-2008. The jury’s finding of wrongdoing may help Goldman Sachs customers in lawsuits against the bank over losses tied to the transaction. Tourre faces unspecified money penalties and a possible ban from the securities industry.
“We are obviously gratified by the jury’s verdict and appreciate their hard work,” Matthew Martens, the lead SEC lawyer, said.
At trial, the SEC presented testimony from 11 witnesses over two weeks. Tourre didn’t call anyone to the stand, relying instead on the SEC’s witnesses, which included Tourre himself.
“As a firm, we remain focused on being more transparent, more accountable, and more responsive to the needs of our clients,” Michael DuVally, a Goldman Sachs spokesman, said in a statement.
“We’re declining comment as the case is still ongoing,” Chris Kittredge, a spokesman for Tourre at Sard Verbinnen & Co. in New York, said in a statement.
After the jurors were excused, U.S. District Judge Katherine Forrest told Tourre and lawyers for both sides that she will consider possible penalties, disgorgement and other measures Tourre could face as a result of being found liable.
“We should talk about the next phase of this matter, which requires some scheduling,” she said, telling lawyers that she expects to see court papers filed by Aug. 23.
Tourre was found liable on three claims of intending to defraud, two claims of negligence and one count of aiding and abetting. He was found not liable on a claim of misrepresentations and omissions.
Jurors didn’t buy Tourre’s claim that ACA should have known about Paulson’s role in the transaction, said juror Rhett, who said they found the former trader “a bit shady.”
“Credibility of a witness’s testimony is always a critical issue to the jury,” Gorman said. “The jury is watching this story unfold and what they us look for is a person they can believe. The verdict suggests that the jury didn’t believe Tourre.”
The case against Tourre was one of the government’s last efforts to fix responsibility for the housing market crash, which helped precipitate the worst economic downturn since the 1930s. Critics have faulted the SEC for not doing more to police the abuses that helped lead to the crisis or afterward to pursue top financial executives they say are responsible.
Tourre testified about the Abacus deal before a U.S. Senate subcommittee in April 2010 alongside other Goldman Sachs executives. The firm, which is paying Tourre’s legal fees, settled SEC allegations for $550 million in July 2010, a record at the time. In the settlement, Goldman Sachs acknowledged that marketing materials for Abacus contained “incomplete information.”
No senior Goldman Sachs executives were questioned in the trial. Defense lawyers decided not to call Paulson, the billionaire who runs Paulson & Co., to the stand after saying they planned to do so.
“I, like most of the public, wanted to hear from more Wall Street bigwigs to justify what happened with Abacus,” Anthony Sabino, who teaches law at St. John’s University in New York, said in an e-mail.
Some activists said they would like to see the SEC go after higher-level executives.
“You would think the SEC convicted the Al Capone of Wall Street when all it did was scapegoat a single mid-level Goldman Sachs trader,” said Jake Leon, a spokesman for Better Markets, a group that has lobbied for the overhaul of financial regulations. “The SEC must stop chasing minnows while letting the whales of Wall Street go free. That only rewards and incentivizes more crime.”
“This was one of the transactions that was building massive risk into the system,” said Michael Santoro, a lawyer and professor at Rutgers University’s business school who attended the trial and wrote a blog about it. “While I think the public is unhappy about not getting a big fish, it’s important the message that young people entering Wall Street get. Working on Wall Street comes with legal and ethical responsibilities.”
The allegations against Goldman Sachs over Abacus helped spur Congress in 2010 to enact the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was intended to help stabilize the financial system and avert future crises.
In addition to the settlement with Goldman Sachs, the SEC claims it has recovered about $2.7 billion from companies and individuals in cases tied to the financial crisis. These include a $285 million settlement with Citigroup Inc., which is being appealed.
The SEC suffered a trial defeat last year against Brian Stoker, the former head of Citigroup’s CDO structuring group, in the same Manhattan federal courthouse where Tourre was tried, just blocks from Wall Street.
“This was a must-win for the agency after having stumbled in the trial of earlier market crisis cases,” said Gorman, a partner at Dorsey & Whitney LLP. “The verdict can be expected to embolden an agency that has been trying to adopt a new ‘get tough’ policy.”
“We will continue to vigorously seek to hold accountable, and bring to trial when necessary, those who commit fraud on Wall Street,” Andrew Ceresney, co-director of the SEC’s Division of Enforcement, said in a statement after the verdict.
“As shown by this verdict, we proved that Mr. Tourre, as a Goldman Sachs vice president, put together a complicated financial product that was secretly designed to maximize the likelihood that it would fail, and marketed and sold it to investors without appropriate disclosure,” Ceresney said.
Tourre has spent part of the time since he was sued by the SEC volunteering in Rwanda and working on a doctorate in economics at the University of Chicago. John “Sean” Coffey, one of Tourre’s lawyers, told jurors in closing arguments that Tourre plans to teach.
During the 11-day trial, jurors heard testimony from Laura Schwartz, a former executive of ACA, which was chosen to select the 90 subprime residential mortgage-backed securities that served as the reference portfolio for Abacus, a synthetic collateralized debt obligation.
Schwartz testified she was misled into believing Paulson was investing in Abacus rather than shorting it. She wasn’t able to recall any instances in which Tourre falsely said that Paulson was investing in the equity of Abacus rather than shorting it.
The SEC introduced an e-mail from Schwartz, which was forwarded to Tourre, incorrectly referring to Paulson’s “equity perspective” on Abacus. Tourre, who responded to the e-mail and forwarded it internally, said he didn’t remember reading it. And he testified that he doesn’t recall correcting Schwartz’s misimpression about Paulson’s “equity perspective.”
Also called by the SEC was Paolo Pellegrini, a former top Paulson aide behind the hedge fund’s strategy of making massive short bets against the U.S. housing market, which won $15 billion for Paulson at a time when other investors were losing money. Pellegrini sparred with lead SEC lawyer Martens, at one point repudiating earlier testimony that he claimed was the product of SEC trickery and intimidation.
Tourre said during his own testimony that an e-mail containing draft deal terms that was forwarded to Schwartz “was not accurate” in showing that the equity of the Abacus deal was “pre-committed.” Tourre testified it wasn’t planned that the equity, or “first-loss,” tranche of the Abacus deal would be sold.
Tourre was compelled by SEC lawyer Martens to read aloud to the jury e-mails he sent his then-girlfriend in which he expressed his affection while musing over the structured investments he assembled and sold. In one, Tourre, who is French, quoted a friend’s nickname for him: “Fabulous Fab.” In another, Tourre referred to the investments he was constructing as “monstruousities.” In another e-mail, he joked about selling investments in Abacus to widows and orphans.
Coffey told jurors that Tourre’s “Fabulous Fab” e-mail was little more than “a book report,” closely tracking the language of the article he was forwarding rather than expressing his own thoughts. Remove those elements and, “You’re left with a love note,” Coffey said.
“This is evidence of fraud? This is evidence of an evil state of mind? How pathetic,” he told jurors.
Martens, the SEC’s lead lawyer, said in his closing argument that despite the complicated nature of the financial products Tourre worked with, his fraud was a simple one.
“It was a $1 billion fraud to feed Wall Street greed,” Martens said.
As Martens addressed the jury in his summation, a slide was projected behind him, bearing the word “surreal” and its definition: “imaginary, unreal, dreamlike.” It echoed an e-mail in which Tourre referred to a meeting about the investment with ACA and a representative of Paulson & Co. as surreal.
“His story is surreal,” Martens said.
The SEC claimed Pellegrini, who wasn’t sued by the SEC, worked with Tourre to mislead ACA about Paulson’s role. The agency claimed that the presence of a third-party portfolio selection agent on the deal was necessary to sell it to investors. Tourre and Pellegrini tricked ACA into serving in that capacity, according to the agency.
“If he didn’t hide the truth, the deal wouldn’t have gone forward,” the SEC lawyer said of Tourre.
Coffey told jurors that Tourre is “a remarkable young man” and argued that mortgage bonds selected for Abacus investment constituted “a darn fine portfolio.”
“We’re here because Fabrice Tourre knows he did nothing wrong,” Coffey told jurors at the start of his closing argument.
Tourre claimed he never intended to mislead anyone in the Abacus deal. And Coffey attacked the government for failing to show that any claimed misrepresentations by Tourre made a difference to ACA or to investors in the deal. He argued that ACA knew Paulson planned to short Abacus and wasn’t misled. ACA would have applied the same standards to selecting a portfolio regardless of whether Paulson had a short position, he said.
“This was one of the strongest portfolios that ACA had ever constructed,” Coffey said, not one that was “designed to fail,” as the SEC repeatedly claimed. Coffey said the Abacus portfolio went “off the cliff” after July 2007 as a result of a change in rating company standards, along with every other CDO based on subprime home mortgages.
Coffey argued that ACA had worked on other deals with hedge funds that pursued a long-short strategy, going long on part of a deal’s capital structure while making short bets against other tranches. The evidence belied the testimony of former ACA Chief Executive Officer Alan Roseman, who told jurors that his belief that Paulson was taking a long position in Abacus was “critical” to ACA’s participation.
Throughout the trial, some of the jurors appeared distracted or drowsy as witnesses were questioned about esoteric financial matters including the workings of CDOs and credit default swaps.
They appeared more engaged when the testimony turned to Tourre’s late-night e-mails to his then-girlfriend and the difference between smiling and winking emoticons.
Martens sought to address the less-than-thrilling nature of much of the testimony during his closing argument.
“Admittedly,” the SEC lawyer told jurors, “the proof might not have been that exciting.”
The case is SEC v. Tourre, 10-cv-03229, U.S. District Court, Southern District of New York (Manhattan).