NEW YORK (Reuters) – Fabrice Tourre, the former Goldman Sachs trader accused of secretly helping the hedge fund of billionaire John Paulson construct a $2 billion deal it could bet against in 2007, is set to testify Wednesday in his civil fraud trial.
The U.S. Securities and Exchange Commission has said it will call Tourre, 34, on the eighth day of what has become the highest-profile trial to come out of the agency’s investigations of the 2008 financial crisis. He is not likely to be called before the afternoon.
The trial is a chance for the SEC to show it can win big cases against individuals on Wall Street for wrongdoing that caused the financial crisis.
SEC lawyers say Tourre was driven by “Wall Street greed” to mislead investors in the infamous investment called Abacus 2007-AC1. He denies any wrongdoing.
His testimony comes three years after the SEC accused him and Goldman Sachs Group Inc of fraud over Abacus, a synthetic collateralized debt obligation.
Goldman and Tourre did not tell potential investors that Paulson’s hedge fund, Paulson & Co Inc, helped select the mortgage-backed securities linked to Abacus and then went on to bet against it. Amid the outcry that followed, Tourre was called before a congressional committee.
Goldman Sachs agreed in July 2010 to pay $550 million to settle the claims against it without admitting or denying wrongdoing. Before that accord was announced, Tourre received a settlement offer but rejected it, a person familiar with the matter said.
Tourre, who left Goldman in 2012, is now an economics doctoral student at the University of Chicago. He faces a fine and a lifetime ban from the securities industry if jurors find him liable.
The SEC also contends Tourre misled a company brought on to help select the securities, ACA Capital Holdings Inc, into believing that Paulson was an equity investor in Abacus when in fact the hedge fund planned to bet against, or short, the deal.
ACA, which was renamed Manifold Capital Corp in 2008, ultimately not only helped set up Abacus as the portfolio selection agent but also bought $42 million of securities in the deal and agreed to insure a $909 million slice of it via its then-subsidiary ACA Financial Guaranty Corp.
The SEC cites in its complaint an email Tourre sent on January 23, 2007, to his girlfriend at the time, in which he said the “whole building is about to collapse anytime now” – a reference to the financial markets.
The email continued: “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!!!”
When the securities in Abacus turned toxic amid the downturn in the U.S. subprime mortgage market, investors lost $1 billion, the SEC says. Paulson, who made $15 billion betting against the housing market, meanwhile made about $1 billion shorting the CDO, the SEC says.
During testimony before the U.S. Senate Permanent Subcomittee on Investigations in 2010, Tourre said ACA and another investor in the deal, IKB Deutsche Industriebank AG, had “significant resources and extensive experience in the CDO market.”
He denied telling ACA that Paulson was an equity investor, saying he recalled “informing ACA that Paulson’s fund was expected to buy credit protection” on parts of the CDO deal, meaning it would be taking a short position.
“Quite frankly, I am surprised that ACA could have believed that the Paulson fund was an equity or long investor in the deal,” Tourre said then.
The case is SEC v. Tourre, U.S. District Court, Southern District of New York, No. 10-03229.
(Reporting by Nate Raymond; Editing by Eddie Evans and Douglas Royalty)
Business Insider Emails & Alerts
Site highlights each day to your inbox.