Tourre Joins SEC in Resting Case in $1 Billion CDO Trial
Fabrice Tourre, the former Goldman Sachs Group Inc. (GS) vice president facing civil fraud claims for his role in a failed $1 billion investment tied to the housing collapse, rested his defense without calling any witnesses, shortly after the Securities and Exchange Commission wrapped up its case against him.
The SEC rested this morning after presenting video testimony from a former Goldman Sachs salesman in London, the last of 11 witnesses the agency presented over the past two weeks. Tourre, who had raised the possibility of calling additional witnesses, including hedge fund billionaire John Paulson, decided over the weekend not to do so.
U.S. District Judge Katherine Forrest sent the nine jurors in the case home early, telling them to return for five hours of closing arguments tomorrow morning in Manhattan federal court. They’re scheduled to begin considering the case July 31. Forrest denied Tourre’s motion to dismiss the case against him today, ruling that the SEC has presented enough evidence for the case to go to the jury.
“At the end of the day, this was a tremendous build-up for what amounts to a minor case involving a midlevel player whose personality essentially became the case,” said Jacob Frenkel, a former SEC lawyer not involved the case. Frenkel is a partner in the firm Shulman Rogers Gandal Pordy & Ecker PA in Potomac, Maryland. “What we’re seeing so far is that the government’s best shot at Goldman was a low-level figure.”
The SEC claims Tourre intentionally misled participants in a 2007 deal known as Abacus about the role played by Paulson’s hedge fund, Paulson & Co. The SEC claims Tourre hid that Paulson helped choose the portfolio of subprime mortgage-backed securities underlying Abacus, then made a billion-dollar bet it would fail.
Eight of the SEC witnesses who testified were identified as potential defense witnesses by Tourre, including Tourre himself. His lawyers questioned all of them during the SEC’s case. No senior Goldman Sachs officials testified in the trial.
Paulson wasn’t charged with any wrongdoing.
The decision not to call any additional witnesses “highlights the level of confidence the defense has in its case,” Frenkel said.
A win by the SEC may demonstrate the agency has the will and resources to win cases at trial, strengthening its hand in future negotiations with Wall Street institutions and their employees.
A loss, following a defeat last year in a trial against Brian Stoker, the former head of Citigroup Inc.’s CDO structuring group, would be the second high-profile trial loss in cases tied to the 2008 financial meltdown, in the Manhattan federal courthouse just blocks from Wall Street.
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. Tourre has spent part of the time since then volunteering in Rwanda and working on a doctorate in economics at the University of Chicago.
Tourre faces unspecified money penalties and a possible ban from the securities industry. Goldman Sachs, which settled the allegations against it, faces little additional risk from a finding of wrongdoing against Tourre.
Among the witnesses called by the SEC were Paolo Pellegrini, a former top Paulson aide behind the hedge fund’s strategy of making massive short bets against the U.S. housing market, winning $15 billion for Paulson at a time when other investors were losing money. Pellegrini often sparred with lead SEC lawyer Matthew Martens, at one point repudiating earlier testimony that he claimed was the product of SEC trickery and intimidation.
Jurors also heard from Laura Schwartz, a former executive of ACA Management LLC, 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, who testified she was misled into believing Paulson was investing in Abacus rather than shorting it, wasn’t able to recall any specific misleading communications from Tourre. The SEC has introduced an e-mail from Schwartz, which was forwarded to Tourre, mistakenly referring to Paulson’s “equity perspective” on Abacus. Tourre said he doesn’t remember reading the e-mail.
During Tourre’s own testimony he admitted a draft term sheet 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.
After hearing closing arguments tomorrow, the four men and five women on the jury will hear instructions from Judge Forrest the following morning. They’ll then begin deliberations in the case. If any jurors need to be discharged, because of sickness or other reason, a unanimous verdict can be delivered by as few as six jurors.
Throughout the trial, some of the jurors have appeared distracted or drowsy as witnesses were questioned about esoteric financial matters including the structure 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.
The case is SEC v. Tourre, 10-cv-03229, U.S. District Court, Southern District of New York (Manhattan).
To contact the reporter on this story: Bob Van Voris in New York at firstname.lastname@example.org