A federal jury found former Goldman Sachs Group Inc.
trader Fabrice Tourre liable for defrauding investors in a deal that imploded during the financial crisis, delivering a victory for a U.S. regulator out to prove its mettle inside the courtroom.
Case Will ‘Stay With Me Forever’
Tourre, in exclusive interviews before the verdict, said he was resigned to his legacy as the face of the mortgage crisis. Read the article.
The panel of nine jurors found Mr. Tourre liable on six of seven claims that he violated federal securities law by intentionally misleading investors. The jurors also determined he had aided and abetted an alleged fraud by Goldman.
The unambiguous result surprised many lawyers who had watched the proceedings, expecting that the esoteric subject matter and more than two weeks of conflicting testimony would make a clear-cut victory unlikely.
“They got a big win today,” said David Marder, a securities litigator uninvolved in the case and a former assistant director of the Securities and Exchange Commission’s Boston Regional office.
After a string of high-profile defeats in other crisis-related civil cases, the SEC’s reputation as a tough Wall Street watchdog was on the line in Mr. Tourre’s trial, according to lawyers. Thursday marked the SEC’s first victory in front of a jury for a financial-crisis case, five years after the meltdown. The verdict produced “happiness around the halls” of the SEC’s D.C. headquarters, said one person close to the agency.
Mr. Tourre’s loss also delivered a bitter postscript to one of the darkest periods for Goldman. Facing a public backlash for its actions during the crisis, the firm agreed to pay a $550 million fine without admitting or denying wrongdoing back in 2010 when the SEC filed the charges against both Mr. Tourre and the bank.
In his closing arguments, SEC lawyer Matthew Martens told jurors that “documents don’t lie,” alluding to emails and marketing materials that formed the core of the agency’s case.
After the verdict, juror Beth Glover, a 47-year-old Episcopal priest, said: “It was a long, slow process.”
The Case Against Goldman and Fabrice Tourre
See a timeline of key events in the civil-fraud saga against Goldman Sachs and Fabrice Tourre.
Key Players in the Trial
Flanked by his lawyers, Mr. Tourre, 34 years old, sat back in his chair as the judge’s deputy read aloud the decision. Co-counsel John “Sean” Coffey squeezed Mr. Tourre’s shoulder. Mr. Tourre, who once went by the nickname “fabulous Fab,” was expressionless as his lawyers led him out of the courtroom.
“The case is still ongoing,” a spokesman for Mr. Tourre said.
His lawyers will meet with the SEC and Judge Katherine Forrest later this year to discuss Mr. Tourre’s penalty.
He may have to wait weeks to learn what it is. The SEC will ask the judge to impose sanctions, which could include financial penalties and a ban from the financial-services industry, an SEC spokesman said.
Goldman said in a statement: “As a firm, we remain focused on being more transparent, more accountable, and more responsive to the needs of our clients.”
“We’re obviously gratified with the jury’s verdict and we appreciate their hard work,” said Mr. Martens, the SEC lawyer.
The verdict has important ramifications for the SEC and the firms it polices, legal experts said, adding weight to SEC Chairman Mary Jo White‘s pledge before she took office in April to be a “bold and unrelenting” Wall Street cop. It adds credibility to a new policy Ms. White announced in June of forcing companies and individuals to admit wrongdoing to settle certain cases or face being taken to trial, according to lawyers.
Critics have faulted the agency for pursuing fairly junior employees, such as Mr. Tourre, one of many at Goldman who had a vice president title. After this verdict, critics are still likely to “question why the SEC never goes after the high-level employees and seems to focus on the lower-level actors,” said Mr. Marder, the securities litigator.
The civil trial, which began July 15, led jurors through a dense fog of industry jargon, to a time on Wall Street when one era was drawing to a close and the dark clouds of another loomed. The SEC’s case centered on a complex mortgage-linked deal between sophisticated investors, and whether Mr. Tourre misled them on the role that New York hedge fund Paulson & Co. would play in that instrument.
In April 2010, the SEC sued Mr. Tourre and Goldman for securities fraud, alleging they misled investors in an investment called Abacus 2007-AC1, known in Wall Street jargon as a synthetic collateralized debt obligation. The action stunned the industry, drew Goldman into a public spat and shattered the once-promising career of Mr. Tourre.
The SEC offered Mr. Tourre a settlement, giving him a day to accept a fine and a lifetime securities-industry ban but with the right to reapply in two years, people familiar with the matter said. Unlike Goldman, he declined to settle.
Abacus’s origins traced to 2006, when Paulson & Co. went to Goldman with a trading idea to bet against subprime mortgages. Mr. Tourre suggested creating a deal that would allow investors to place opposing bets on a basket of mortgage bonds.
Goldman set out to enlist a company to select those bonds, giving investors confidence that mortgages in the basket were neither too good nor too risky. By January, ACA Financial Guaranty Corp., a bond insurer that was one of Goldman’s biggest CDO clients, appeared eager to take on the assignment, emails and court testimony showed.
The SEC unearthed emails, phone calls and meetings it argued showed that Mr. Tourre led ACA executives to believe Paulson would be making a long investment in Abacus, betting on it to rise. The SEC said Abacus’s misunderstanding about that was never corrected by anyone at Goldman.
It also accused Mr. Tourre of hiding the hedge fund’s role in helping select the mortgage bonds from investors that would eventually bet on the deal. Paulson wasn’t accused of any wrongdoing.
Several emails from Mr. Tourre to his girlfriend at the time, a Goldman saleswoman at the firm’s London office, revealed that Mr. Tourre shared some pessimism about the market.
At his trial, Mr. Tourre translated what he wrote, partly in French, to her: “The entire building is at risk of collapse at any moment. Only potential survivor, the fabulous Fab (as Mitch would kindly call me, even though there is nothing fabulous about me…) standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all the implications of these monstrosities.”
Mr. Tourre called the note a “silly romantic email to my girlfriend.”
The SEC’s victory is unlikely to spark a surge of look-alike SEC cases. The agency has already taken action against more than 150 firms and individuals in relation to the financial crisis and has relatively few still in the pipeline.
A five-year statute of limitations is putting an increasing amount of conduct in the run-up to the crisis out of the SEC’s reach.
Full Coverage: The Tourre Trial
Jury Begins Deliberations
(July 31, 2013)
Jurors Hear Closing Arguments
(July 30, 2013)
Judge Sets the Pace in Tourre Trial
(July 29, 2013)
Trial Heads Closer to Finish
(July 29, 2013)
Tourre Says Others Voiced No Qualms
(July 26, 2013)
Emails Focus of Tourre Testimony
(July 25, 2013)
Tourre Takes the Stand
(July 24, 2013)
Witness Says She Was Misled About Deal
(July 23, 2013)
Defense Zeroes In on Key Witness
(July 22, 2013)
Trial Sees Ex-Goldman Saleswoman Bolster SEC’s Case
(July 19, 2013)
SEC Strikes at Tourre Defense
(July 18, 2013)
Witness Says He Thought SEC Tried to ‘Trick’ Him
(July 17, 2013)
Goldman’s Presence Will Be Felt at Tourre Trial
(July 11, 2013)
Judge Allows ‘Fabulous Fab,’ Other Emails Into SEC Trial
(July 11, 2013)
Judge Won’t Block Use of Recorded Call in Trial
(April 26, 2013)
Ex-Trader Alters Legal Team
(May 13, 2013)
From ‘Fabulous Fab’ to Grad Student
(April 25, 2013)
Goldman Settles Its Battle With SEC
(July 15, 2010)
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