A federal jury in Manhattan found Goldman Sachs executive Fabrice Tourre liable on Thursday for misleading investors about a complex mortgage product, handing the Securities and Exchange Commission its first major court victory in its quest to hold Wall Street accountable for reckless behavior leading up to the 2008 financial crisis.
After two days of deliberation, the jury decided Tourre — best known for his “Fabulous Fab” nickname — was liable for six of the seven counts charged by the SEC. The agency had accused the 34-year-old Frenchman of defrauding investors out of $1 billion by selling them a mortgage 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 to 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.
Andrew Ceresney, co-director of the SEC’s enforcement division, said in a statement that the agency is “gratified” by the verdict, and will continue to “vigorously seek to hold accountable, and bring to trial when necessary, those who commit fraud on Wall Street.”
The verdict brought to an end a three-week trial that centered on a deal so tangled that some jurors dozed off as each side tried to explain it. U.S. District Court Judge Katherine Forrest, who oversaw the proceedings in Manhattan, repeatedly urged the lawyers to keep the case moving and cutback on the jargon.
Now, Forrest will decide on an appropriate remedy, which could include a financial penalty or a ban from the financial services industry.
The case centered around 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” at Goldman 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 structured to include “long” investors who would profit if the product’s value rose and “short” investors who would make money only if the value 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 role.
It accused Tourre of failing to reveal to key players in the deal that Paulson was betting against the securities, in effect duping some investors into believing that their financial interests were aligned with those of the hedge fund.
The government also charged Tourre with failing to disclose to some investors that Paulson helped select the underlying securities that were included in the product.
“Investors got half the story, half the truth,” Martens said during closing arguments earlier this week. “Half the truth is a fraud.”
The burden of proof in a civil case like this one is lower than the “beyond a reasonable doubt” requirement that the government must meet in a criminal case. In the Tourre case, the SEC had to convince the jury by the “preponderance of the credible evidence,” which essentially allowed the jury to find Tourre liable if it thought the evidence was slightly more against him than in his favor.
Goldman was charged alongside Tourre in 2010, but it settled the case for $550 million without admitting or denying wrongdoing. It has been paying Tourre’s legal fees.
After two days of deliberation, the jury decided Tourre — best known for his “Fabulous Fab” nickname — was liable for six of the seven counts charged by the SEC. The agency had accused the 34-year-old Frenchman of defrauding investors out of $1 billion by selling them a mortgage 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 to 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.
Andrew Ceresney, co-director of the SEC’s enforcement division, said in a statement that the agency is “gratified” by the verdict, and will continue to “vigorously seek to hold accountable, and bring to trial when necessary, those who commit fraud on Wall Street.”
The verdict brought to an end a three-week trial that centered on a deal so tangled that some jurors dozed off as each side tried to explain it. U.S. District Court Judge Katherine Forrest, who oversaw the proceedings in Manhattan, repeatedly urged the lawyers to keep the case moving and cutback on the jargon.
Now, Forrest will decide on an appropriate remedy, which could include a financial penalty or a ban from the financial services industry.
The case centered around 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” at Goldman 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 structured to include “long” investors who would profit if the product’s value rose and “short” investors who would make money only if the value 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 role.
It accused Tourre of failing to reveal to key players in the deal that Paulson was betting against the securities, in effect duping some investors into believing that their financial interests were aligned with those of the hedge fund.
The government also charged Tourre with failing to disclose to some investors that Paulson helped select the underlying securities that were included in the product.
“Investors got half the story, half the truth,” Martens said during closing arguments earlier this week. “Half the truth is a fraud.”
The burden of proof in a civil case like this one is lower than the “beyond a reasonable doubt” requirement that the government must meet in a criminal case. In the Tourre case, the SEC had to convince the jury by the “preponderance of the credible evidence,” which essentially allowed the jury to find Tourre liable if it thought the evidence was slightly more against him than in his favor.
Goldman was charged alongside Tourre in 2010, but it settled the case for $550 million without admitting or denying wrongdoing. It has been paying Tourre’s legal fees.