Ex-Goldman exec Tourre liable for duping investors

Beleaguered SEC emerges from mortgage fraud trial with a big win

The Washington Post

A federal jury found former Goldman Sachs executive Fabrice Tourre liable on 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 for his nickname, “Fabulous Fab” — was liable for six of the seven charges 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 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 with lackluster results. The victory this time around is a boon 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 midlevel 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 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 email to staffers sent moments after the verdict, SEC Chairman Mary Jo White said that the decision reinforced that the agency “can get the job done.” Since joining the SEC in April, the former federal prosecutor has aimed to recast the agency’s image and embraced a “get tough on Wall Street” approach.

U.S. District Court 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 cutback 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 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 the 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 do the same. Tourre left Goldman after being put on unpaid leave. He is now a doctoral student in economics at the University of Chicago.