The U.S. Securities and Exchange Commission’s courtroom victory over ex-Goldman Sachs Group Inc. employee Fabrice Tourre is helping the agency turn the page on years of criticism that it isn’t holding Wall Street to account.
The win adds weight to pledges by SEC Chairman Mary Jo White to reinvigorate the regulator, seeking more onerous settlements in some cases and, if necessary, taking them to trial. It also could bolster support for a 27 percent budget increase for the agency that Congress is considering.
“To take on cases that are low-hanging fruit and pound its chest in front of Congress is not the same as winning a high-profile trial,” said Jacob Frenkel, a former SEC lawyer and now partner at Shulman Rogers Gandal Pordy & Ecker PA in Potomac, Maryland. “It’s a tremendous shot in the arm for an agency that has come under criticism for its enforcement program.”
The SEC has struggled to repair its image after a decade of debacles that began with accounting fraud at Enron Corp. and ended with an unprecedented taxpayer bailout of Wall Street amid a credit crisis. The intervening years included analyst and mutual-fund scandals unearthed by New York’s attorney general, and Bernard Madoff’s multibillion-dollar ponzi scheme, which the SEC missed despite repeated warnings.
Judges and lawmakers criticized the regulator’s policing of Wall Street after 2008’s market meltdown, saying investigators reached expedient settlements with firms that hurt shareholders and didn’t hold senior executives accountable for wrongdoing. The agency never brought claims tied to the collapse of Lehman Brothers Holdings Inc. or the events that led to the bailout of American International Group Inc.
While the trial could be a bellwether for a more aggressive SEC, the agency is still struggling to build a stronger bench of litigators to strengthen its hand in settlement negotiations. White, who became the regulator’s chairman in April, told lawmakers last week that she’s seeking additional resources to hire trial attorneys.
“We can’t judge at this point how many additional trials we’re going to have, but we already don’t have enough,” White said in a July 30 hearing before the Senate Banking Committee. “We have to be prepared to go to trial.”
The case against Tourre, 34, stemmed from one of the SEC’s highest-profile fights related to the crisis. In 2010, the agency sued New York-based Goldman Sachs, alleging it misled investors in a 2007 deal known as Abacus about the role played by John Paulson’s hedge fund, Paulson & Co. The SEC claimed Tourre, then a Goldman Sachs vice president, hid that Paulson helped choose the portfolio of subprime mortgage-backed securities underlying Abacus while betting it would fail.
Goldman Sachs agreed to pay a record $550 million to resolve the case three months later, setting the stage for claims against JPMorgan Chase & Co., Citigroup Inc., Mizuho Financial Group Inc. and Wells Fargo & Co. over investment products tied to mortgages.
As the SEC lost fights against people involved in Citigroup and JPMorgan deals, the contest against Tourre became a referendum on the agency’s settlement with Goldman Sachs and its work on financial-crisis cases.
“The SEC needed at least one scalp from the financial crisis, or they were going to face a lot of heat from Congress,” said Adam Pritchard, a University of Michigan law professor who previously worked as a lawyer for the regulator.
The trial required the SEC to teach jurors how to parse disclosures on synthetic collateralized debt obligations. As jargon-filled testimony rolled on, pundits including Joe Nocera, an op-ed columnist for the New York Times, predicted the government’s defeat. Tourre’s lawyers, funded by Goldman Sachs, didn’t call anyone to the stand, relying instead on SEC witnesses including Tourre to mount their defense.
The jury found him liable Aug. 1 on six of seven of the SEC’s claims.
“I need to eat some crow,” Nocera said Aug. 2 on radio station WNYC. “After the government’s rocky start in the trial, I said ‘Oh, this thing’s a slam dunk for Fabrice, he’s going to be off the hook.’ And I was dead wrong.”
Andrew Ceresney, co-chief of the SEC’s enforcement division, said the agency was “gratified” by the verdict and that it will bring others to trial whenever needed.
“The verdict against Tourre validates the Goldman settlement,” Pritchard said. “It was questioned at the time, and now the jury has said that there was something there.”
The SEC’s victory isn’t enough to overshadow the agency’s other shortcomings, said Dennis Kelleher, president of nonprofit Better Markets.
“While this individual may be liable, may have broken the law and may have gotten what he deserved, this one case should fool no one: the SEC has an embarrassing record of non-enforcement on Wall Street,” Kelleher said in a statement following the verdict. “No one should be allowed to break the law, but the SEC must stop chasing minnows while letting the whales of Wall Street go free.”
Tourre claimed that ACA Management LLC, which was selecting the Abacus securities, knew about the role of Paulson’s fund in the transaction. Tourre faces penalties that will be determined later, including fines and a possible bar from the securities industry.
In recent years, the SEC has sought to bolster its courtroom gravitas through recruitment. Robert Khuzami, a former prosecutor of terrorists and white-collar criminals, was appointed the agency’s enforcement chief a month after President Barack Obama took office in 2009. White, the former U.S. attorney for the Southern District of New York from 1993 to 2002, won the convictions of four followers of Osama bin Laden for the bombings of two U.S. embassies in Africa.
“You don’t want to mess with Mary Jo,” Obama said in January as he introduced her at the White House.
Keeping a full staff may be a challenge. Matthew Martens, the SEC’s lead lawyer in the Tourre trial, is planning to leave the agency, according to a person with direct knowledge of the matter, requesting anonymity because the information isn’t public. Khuzami, 57, departed earlier this year and was replaced by Ceresney and George Canellos, 48, who both had worked for White as federal prosecutors in Manhattan.
White, 65, still has work to do to convince defense attorneys that they will face a formidable opponent if they go to trial, according to Frenkel.
“There’s nothing about this verdict that would cause me as a trial lawyer to be any less willing or desirous of trying a case against the SEC,” Frenkel said.
The case is SEC v. Tourre, 10-cv-03229, U.S. District Court, Southern District of New York (Manhattan).