The trial of former Goldman Sachs bond trader Fabrice Tourre was about “Wall Street greed,” a lawyer for the US Securities and Exchange Commission said as the trial began on Monday.
The SEC accuses Tourre of misleading investors in a mortgage investment called Abacus 2007-AC1 by not telling them that a hedge fund was involved in selecting the underlying assets and betting against it.
Matthew Martens, a lawyer for the SEC, told the jury the deal Tourre put together was “secretly designed to maximize the potential it would fail” to the benefit of the hedge fund, which made about US$1 billion (HK$7.76 billion).
“In the end, Wall Street greed drove Mr. Tourre to lie and deceive,” Martens said.
But Pamela Chepiga, a lawyer for Tourre, countered that the SEC was trying to turn her client into a “scapegoat.”
“This is not a case about whether you approve or disapprove of Wall Street,” she said.
The trial, scheduled to last three weeks, stems from a lawsuit the SEC filed against Goldman Sachs and Tourre in 2010.
Tourre, who is no longer with Goldman and is earning a doctorate in economics at the University of Chicago, is on trial alone after Goldman agreed to pay a US$550 million settlement in July 2010.
Tourre, wearing a black suit and orange tie, sat with his counsel as the lawyers made their opening arguments. He did not speak during Monday’s proceedings, although he is expected to testify later in the trial.
The SEC contends Tourre, at the time a vice president at Goldman, failed to disclose that Paulson & Co, the hedge fund run by billionaire John Paulson, was involved in picking mortgage securities tied to the Abacus investment and that it was also shorting, or betting against, it.
Martens said Tourre, the principal Goldman employee involved in the Abacus deal, had a duty to be truthful with investors. Instead, he hid “critical information” in order to get them to buy in.
Tourre also misled ACA Capital Holdings, a third-party firm ostensibly brought in to select the securities included in the CDO, into believing that Paulson was an equity investor in Abacus rather than taking a short position, Martens said.
The SEC contends ACA would not have participated had it known Paulson was betting against the investment. A different firm decided not to participate as ACA’s portfolio selection agent when Tourre told it Paulson was going short, Martens said.
“His solution was trickery and half-truths,” he said. “His solution was securities fraud.”
Martens also displayed a much-cited email sent on Jan. 23, 2007, by Tourre to his girlfriend at the time, saying of the financial markets that the “whole building is about to collapse anytime now.”
“Only potential survivor, the fabulous Fab ... standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstruosities!!!” the email said.
Investors lost more than US$1 billion after almost all the securities tied to the transaction were downgraded, the SEC says. Paulson earned about the same amount thanks to his bet, the SEC says.
Goldman made US$15 million in fees on the deal, Martens said.
Chepiga, Tourre’s lawyer, countered in her own opening arguments that her client had not misled investors or ACA.
She said ACA knew at the time that Paulson was widely reported to be engaged in an aggressive bet against the US housing market after setting up two funds to short subprime investments in 2006.
“ACA knew Paulson took the opposite view,” she said.
ACA, not Paulson, picked the securities tied to Abacus, she said, adding that ACA rejected dozens of securities that Paulson wanted included and ran a sophisticated computer analysis before signing off on them.
It was standard for a firm such as ACA to take input from investors in selecting securities for a CDO, Chepiga said. In the case of a deal such as Abacus, known as a synthetic collateralized debt obligation, it would be usual to consult both long and short investors, which by design have both long and short investors involved.
“The decision here was made by ACA,” she said. “The selection here was made by ACA.”
As for Tourre’s email to his girlfriend, Chepiga said it was irrelevant, calling it “an old fashioned love letter” and noting it was referencing a Financial Times article, which he attached.
“I know two to three weeks from now you will find he did nothing wrong,” Chepiga said.
Earlier on Monday, the court picked five women and four men as jurors out of a pool of 48 people. They include a retired special education teacher, a former retail broker now teaching art history, a recent medical school graduate and an Episcopal priest.
US District Judge Katherine Forrest excused some potential jurors after they said they had views about Wall Street or the role of banks in the financial crisis. The first juror to be excused said he had “a fairly jaundiced view of Wall Street.”
Forrest also quizzed jurors on whether they had ever heard of Abacus, Tourre or his nickname, “Fabulous Fab.”
At the start of the trial, Forrest warned the lawyers on both sides to “have a heart” and be mindful many jurors would not know the financial jargon expected to be used at trial.
Among the words or phrases she singled out were “asset-backed,” “short,” “security,” “flip book” and “swap.” She also cited the term “trading desk,” saying “mere mortals don’t know what a trading desk is.”
“Do not assume people know what investment bankers do,” Forrest added.