A jury found former Goldman Sachs vice-president Fabrice Tourre liable for fraud for his role in a failed mortgage deal that cost investors US$1 billion, in a big victory for the US Securities and Exchange Commission.
Tourre was found liable on six of seven counts by a Manhattan federal jury in the SEC's highest-profile trial to spill out of its investigations into causes of the 2008 global financial crisis.
"We are gratified by the jury's verdict," said Andrew Ceresney, co-director of the regulator's enforcement division. "We will continue to vigorously seek to hold accountable, and bring to trial when necessary, those who commit fraud on Wall Street."
After the jury was dismissed, Tourre raised his eyebrows to one of his lawyers. He and his lawyers left court without commenting on whether he planned to appeal, walking through drizzling rain followed by reporters and camera crews.
US District Judge Katherine Forrest will now determine whether to order Tourre to pay financial penalties or disgorge any illegal profits as a result of his misconduct. Tourre testified he earned US$1.7 million in 2007. He could also be banned from the securities industry for life.
Forrest asked both sides to submit proposals by August 23 for what she termed "next steps".
The SEC accused Tourre in a civil lawsuit of misleading investors in a product known as Abacus 2007-AC1 by failing to disclose that hedge fund billionaire John Paulson helped choose, and intended to bet against, mortgage securities underlying the 2007 deal.
It also alleged that Tourre misled ACA Capital, a company also involved in selecting assets for Abacus, into believing Paulson & Co would be an equity investor in the synthetic collateralised debt obligation.
In a 2007 e-mail that was shown to jurors, Tourre told his girlfriend at the time that the "whole building is about to collapse anytime now", referring to financial markets.
"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 monstrosities!!!"
Paulson went on to make billions of dollars in 2007 betting against the housing market in the United States.
The SEC said Paulson & Co made about US$1 billion from his short position on Abacus, while investors including ACA and IKB Deutsche Industriebank lost about the same amount.
Tourre is pursuing a doctorate in economics at the University of Chicago after formally parting ways with Goldman at the end of last year. Goldman is continuing to pay for his legal defence, however.
Goldman agreed in July 2010 to pay US$550 million to settle with the SEC over Abacus, without admitting or denying wrongdoing. But the bank did say some of its marketing materials were misleading.
"As a firm, we remain focused on being more transparent, more accountable and more responsive to the needs of our clients," said Michael DuVally, a Goldman spokesman.
Tourre himself received an SEC offer to settle around the same time, a person familiar with the matter said.
"It is a great result for the SEC," said Mary Schapiro, who chaired the regulator when it brought the case against Goldman and Tourre, and now heads the governance and markets practice at consulting firm Promontory Financial.
"This win reinforces that the agency can and will litigate appropriate cases. That may make it easier to secure admissions [of wrongdoing]."