Fabrice Tourre, the former Goldman Sachs banker who became a symbol of the financial crisis, will have his day in court when his civil trial begins on Monday on allegations he defrauded investors in a complex mortgage product known as Abacus.
It’s a high-stakes case for the government and Mr Tourre, who could face fines and be barred from the securities industry if he is found liable. The Securities and Exchange Commission, which has to prove the case by a preponderance of the evidence, has had a mixed record on financial crisis cases with two recent courtroom setbacks.
“The SEC has had a bumpy road in many arenas starting with the financial crisis. This is a high-profile case . . . The gains of winning are not nearly as substantial as the losses [the SEC] suffers from losing in terms of reputation,” said James Cox, a securities law professor at Duke University.
Mr Tourre, who is 34 and a doctorate student, has vowed to fight. He no longer works for Goldman, but the bank is paying his legal fees. Goldman has paid $550m and admitted it made a “mistake” in its offering documents to settle the case.
The SEC alleges Mr Tourre misled investors in the collateralised debt obligation known as Abacus 2007-AC1 by failing to disclose that Paulson & Co, a hedge fund run by billionaire John Paulson, had helped select a portfolio of residential home mortgage securities referenced in the security and shorted it, essentially betting it would fail.
Mr Tourre, who was named vice-president just days before he started working on the Abacus CDO, has maintained that he never deceived anyone. His lawyers are likely to suggest he is a scapegoat, the investors were sophisticated, and ACA Management, the selection agent on the deal, knew that Paulson was short on the housing market. Mr Tourre is expected to testify at the trial.
The SEC’s case hinges on an email Mr Tourre sent to Laura Schwartz, a senior ACA executive. The SEC alleges the email implied that Paulson was investing in the CDO as a long-term investor – not betting it would fail – and Mr Tourre never corrected ACA’s impression. Ms Schwartz, who was facing civil charges until they were dropped last week, is expected to be a key witness for the SEC.
Judge Katherine Forrest, who will oversee the trial, ruled that the SEC can play an audio recording of a Goldman salesperson telling Lucas Westreich, an ACA employee, that Paulson would be “taking 100 per cent of the equity”, which the SEC says supports its theory that ACA did not know Paulson was betting against the CDO.
Mr Tourre’s defence team are expected to seize upon a different phone call, this one between Mr Westreich and a bond trader at Morgan Stanley, made before ACA made a $900m investment in Abacus.
“These guys, the hedge fund, they are shorting this stuff right now, huh?” Mr Westreich asks. The trader replies that the fund is preparing for a “doomsday scenario” and has “been one of the biggest shorts to market” in recent months.
Mr Tourre lost a key ruling when the judge said she would allow the SEC to argue that Mr Tourre was part of a “scheme”, which means the government can use evidence by other schemers – who are as yet unnamed – against Mr Tourre.