Jury finds Goldman executive liable for misleading investors

August 1, 2013

A federal jury found former Goldman Sachs executive Fabrice Tourre liable Thursday for duping investors about a shoddy mortgage deal on the eve of the housing market’s crash, the first major court victory for the Securities and Exchange Commission in its quest to hold Wall Street accountable for the 2008 financial crisis.

After two days of deliberation, the jury decided Tourre — best known by his “Fabulous Fab” nickname — was liable for six of the seven claims pursued by the SEC. The agency had accused the 34-year-old Frenchman of defrauding investors out of $1 billion by selling them a financial product that was secretly designed to fail.

The trial was one of the few to emerge from the financial crisis, and it cast Tourre as a symbol of Wall Street greed. Only twice before has the SEC brought individuals to trial in cases related to the crisis, and each time ended with lackluster results. The victory this time around is a boon for the agency, which is often criticized as a risk-averse regulator that shies away from court battles in favor of slap-on-the-wrist settlements.

Tourre was only a mid-level executive at Goldman — not a marquee Wall Street figure, some legal experts noted. Still, the morale boost is likely to build momentum inside the agency as it pursues one of its most prominent targets yet: hedge-fund billionaire Steven A. Cohen. Last month, the agency charged Cohen with failing to properly supervise two employees who engaged in insider trading, a case that could potentially end the industry tycoon’s storied career.

“This was a must-win,” said Thomas Gorman, a lawyer at Dorsey & Whitney who has worked for the SEC’s enforcement division. “They just have not done well in market-crisis trials, and in this case, they really put it all on the line.”

Tourre and his attorneys declined to comment, but the SEC hailed the decision as gratifying. In an e-mail to staffers moments after the verdict, SEC Chairman Mary Jo White said the decision reinforced that the agency “knows how to get the job done.” Since joining the SEC in April, the former federal prosecutor has aimed to recast the agency’s image and embolden it to get tough on Wall Street.

U.S. District Judge Katherine Forrest, who oversaw the trial in Manhattan, will decide on an appropriate remedy in the Tourre case. In a civil case like this one, the toughest outcomes would include fining Tourre or barring him from the financial services industry for life.

The verdict ended a three-week trial that centered on a deal so tangled that some jurors dozed off as each side tried to explain it, prompting Forrest to repeatedly urge the attorneys to keep the case moving and cut back on the jargon.

At issue was the role of Paulson & Co., a prominent hedge fund that hired Goldman to create a product that Paulson could use to bet against the housing market — a popular strategy at large investment banks as the housing boom tapered off.

At age 28, Tourre was the “deal captain” charged with structuring the product and preparing marketing materials about it for potential investors. The product, also known as a synthetic collateralized debt obligation, was designed to include “long” investors who would profit if the product’s value rose and “short” investors who would profit only if it dropped.

The SEC did not take issue with that arrangement. Rather, it went after Tourre for allegedly scheming to keep certain investors in the dark about Paulson’s strategy.

It accused Tourre of failing to reveal to key players in the deal that Paulson was betting against the securities in the product, in effect duping some investors into believing that their financial interests were aligned with those of the hedge fund. Tourre also failed to properly disclose that Paulson helped select those underlying securities, the SEC said.

“Investors got half the story, half the truth,” Matthew Martens, the lead SEC attorney, told the jury earlier this week. “Half the truth is a fraud.”

Goldman was charged alongside Tourre in 2010. But it settled the case for $550 million without admitting wrongdoing and covered Tourre’s legal fees when he refused to strike a deal with regulators. Tourre left Goldman after being put on unpaid leave. He is now a doctoral student in economics at the University of Chicago.

Some of the agency’s critics said the SEC shouldn’t brag about taking down a minion at Goldman without nabbing his bosses or any other high-level Wall Street executives.

“You would think the SEC convicted the Al Capone of Wall Street today when all it did was scapegoat a single mid-level Goldman Sachs’ trader who bragged in emails to his girlfriend,” Dennis Kelleher, chief executive of a nonprofit group called Better Markets, said in a statement.

John C. Coffee Jr., a professor at Columbia Law School, said a question still remains: “Why didn’t they go after someone important and not this sacrificial lamb?”

Tourre’s attorneys argued a similar point. They said Tourre stumbled upon a job at Goldman when the bank came to recruit potential employees at Stanford University, where Tourre was a graduate student in engineering and math.

During three days on the stand, Tourre said he had never heard of Goldman until then and that he was one of thousands of vice presidents at the bank when he worked on the mortgage deal. With a heavy French accent, Tourre said that he never meant to confuse anyone and that his superiors expressed no concerns with the materials he prepared.

But the government cast Tourre as a greedy Wall Street villain who earned $1.7 million in the year he devised the deal. Goldman raked in $15 million in fees for the transaction. Paulson, which was not accused of wrongdoing, made $1 billion off the deal.

The SEC seized on a series of personal and professional e-mails to make its point.

The most widely quoted was an e-mail Tourre sent in 2007 to his then-girlfriend about the deteriorating housing market. “The only potential survivor, the fabulous Fab (as Mitch would kindly call me, even though there is nothing fabulous abt me . . .), standing in the middle of all these complex, highly levered, exotic trades he created without necessarily understanding all of the implications of those monstruosities!!!” the e-mail said.

During his testimony, Tourre dismissed the note as a “silly, romantic e-mail” written during a time of great market volatility.

While the jury agreed with nearly all of the SEC’s charges, it did not find Tourre responsible for statements made in certain materials circulated to investors.

Jacob Frenkel, a former SEC enforcement lawyer and former federal prosecutor, said the SEC’s victory came just in time. The five-year statute of limitations is running out on cases from the time of the financial crisis.

“It would be naive to suggest that this verdict somehow means that the SEC will now bring countless cases,” Frenkel said. “You’ve got the statute of limitations, and there’s a little thing called ‘facts’ that sometimes stand in the way of the agency bringing a case.”

Dina ElBoghdady covers housing policy for The Washington Post.
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