Jury in ex-Goldman trader trial hear closing arguments

PUBLISHED : Wednesday, 31 July, 2013, 10:48am
UPDATED : Wednesday, 31 July, 2013, 10:48am

Jurors on Tuesday heard closing arguments in the US government’s case against Fabrice Tourre, the ex-Goldman Sachs trader nicknamed “Fabulous Fab” who is charged with defrauding investors.

Tourre is charged with fraud in connection with mortgage bonds that lost investors some US$1 billion (HK$7.76 billion) when the market for subprime, or risky, loans burst in 2008.

The US Securities and Exchange Commission accuses the Frenchman of selling the bonds -- so-called synthetic collateralized debt obligations (CDOs) -- to investors even though he knew they were likely to fail.

Tourre, 34, looked relaxed and confident as he appeared in court wearing a black suit and purple tie.

At Goldman Sachs in early 2007, Tourre designed the complex “Abacus” CDO investment, which packaged higher-risk mortgage-backed securities.

He is accused of failing to warn investors that a hedge fund headed by John Paulson was involved in creating Abacus, and that Paulson was taking a huge bet against it even as it was being sold to investors expecting positive returns.

A conviction could redeem the US agency, which was criticized for failing to prevent the financial crisis and for its mediocre record on judicial cases in its aftermath.

If found guilty, Tourre could face a large fine and potentially be barred from the securities business.

The two-week trial was dominated by testimony from Tourre and other witnesses, much of it turning on email communications and painstaking detail on the opaque world of “synthetic collateralized debt obligations” and other financial instruments.

SEC attorney Matthew Martens depicted Tourre as a slick operator who misled financial group ACA, which invested in Abacus.

“This was a US$1 billion transaction that served Wall Street’s greed,” Martens told the jury in winding up the prosecution’s case.

“If the financial products in question in this case were complex, the fraud was very simple,” said Martens, who at one point referred to Tourre as “Mr. Fraud.”

Tourre misled ACA with “half-truths” and made no effort to correct ACA’s misimpression of the role of Paulson & Co. in Abacus, he said.

The government argues that Tourre led ACA to believe Paulson was betting the value of Abacus would rise when in fact the fund was betting the investment would crater.

The SEC sought to show that Tourre’s management of the investment created a conflict of interest in that Paulson -- which already had many bets that the subprime market would tumble -- was positioned to help choose the investments in Abacus. ACA was left in the dark on these details, Martens said.

Tourre misled ACA and its director of investments Laura Schwartz on Paulson’s role, prompting ACA to make an ill-formed and ill-fated bet on Abacus.

While Paulson made US$1 billion on the deal and Goldman Sachs garnered US$15 million in commissions, other investors lost hundreds of millions due to Tourre’s “negligence” and “fraud,” Martens said.

Defence attorneys, however, argued that sophisticated investors like ACA and Dutch banking giant ABN-Amro and its German cousin IKB knew exactly where Paulson stood on subprimes because of prominent press coverage given at the time to the well-known Paulson.

“It is ridiculous” to pretend that ACA ignored the position of Paulson, said Tourre defence attorney Sean Coffey.

Coffey pointed to testimony from former Paulson fund official Paolo Pellegrini, who said under oath that he had told Schwartz that Paulson had bet that subprime investments would fall.

Coffey also pointed to testimony from Schwartz that ACA planned to continue selecting assets the same way for Abacus regardless of Paulson’s stance.

Coffey described Abacus investors like IKB as “super sophisticated” and a “big consumer of” complex derivatives after having done its own analysis of Abacus.

The trial had shown that Tourre “never misled any investors,” Coffey said.

Coffey told AFP that he thought the closing arguments went well.

“I think we’ve been able to lay out the evidence that Fabrice did nothing wrong, after three years of negative and unfair press,” he said.