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July 24, 2013 11:36 pm
Fabrice Tourre, the former Goldman Sachs banker accused of defrauding investors in a complex mortgage bond known as Abacus, on Wednesday took to the witness stand to defend himself for the first time in court.
Mr Tourre pushed back against arguments from the US Securities and Exchange Commission’s lawyers that he helped Paulson & Co build a synthetic “collateralised mortgage obligation” that was designed to fail, and also hid from the deal’s investors that the hedge fund was betting against the bond.
Matthew Martens, the lead SEC attorney, argued in front of the jury of five women and four men that Mr Tourre had attempted to find a portfolio selection agent that would be willing to select mortgage bonds most likely to fail.
Mr Tourre responded that the agent had to walk a fine line between selecting high-quality bonds and those that would generate returns for investors.
“You understand the tricky balance between picking a good portfolio and not too good a portfolio?” Mr Tourre asked Mr Martens. “If they were following your logic they would just pick US Treasury securities.”
The trial is a high-profile case for the government, which has had a mixed record in court cases stemming from bankers’ alleged misdeeds in the run-up to the financial crisis.
Mr Tourre, whose flamboyant emails referring to himself as “Fabulous Fab” became a centrepiece in the SEC’s Abacus allegations, faces fines and a ban from the securities industry if he is found liable.
Mr Tourre’s lawyers, led by Sean Coffey, have argued that the former Goldman employee is a scapegoat for mistakes made by the wider financial industry before the crisis.
Goldman paid $550m to settle the SEC’s fraud allegations in 2010, without admitting or denying guilt. The bank is paying for Mr Tourre’s lawyers.
In his testimony, which will continue on Thursday, Mr Tourre apologised for his thick French accent and paused to explain the Latin abbreviations he used in his emails to colleagues.
The judge in the case urged lawyers to keep their use of financial jargon to a minimum.
Mr Tourre’s testimony came after the cross-examination of Laura Schwartz, a former ACA Management employee who has emerged as the SEC’s star witness.
ACA was the selection agent on the Abacus bond and Ms Schwartz has previously testified that she was misled into believing Paulson was the “equity”, or long investor, in the transaction.
Mr Coffey implied in questioning Ms Schwartz that she had worked on previous synthetic CDOs which involved hedge funds betting against – or taking “short” positions.
He also suggested that Ms Schwartz should have known that Paulson were, at the time of the Abacus deal, pursuing a broad strategy to short the US housing market.
He referred to articles written about Paulson in 2007 by The New York Times, the Financial Times and Bloomberg News.
He also alleged that Ms Schwartz had begun referring to Paulson as the “long” equity investor in Abacus in her emails, before she first communicated with Mr Tourre. Mr Martens argued that the former Goldman employee never attempted to correct Ms Schwartz’s misperception.
“I am sure that I was never told that Paulson was going only short,” Ms Schwartz said. “A pure short was a bet against something that was designed to fail.”
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