Every trial is a gamble, and the case of former Goldman Sachs trader Fabrice Tourre—which produced a stunning success for the government on Thursday—was no exception.
The Securities and Exchange Commission faced the daunting task of engaging jurors in the workings of a diabolically sophisticated financial product—namely a synthetic collateralized debt obligation backed by mortgage securities—that Tourre helped create and market to unlucky investors in 2007. The SEC headed to trial under withering criticism for its failure to target high level Wall Street execs implicated in the financial crisis. The few cases the agency did bring against individuals—all low or mid-level bank employees like Tourre—turned out to be busts. Would the jurors figure that Tourre was just a scapegoat for subprime-era excess? Would they even understand the case?
For Tourre's lawyers—John "Sean" Coffey and Allen & Overy's Pamela Chepiga—the wager was maybe simpler. Would the nine jurors buy the SEC's allegations that Tourre deceived investors in the Goldman CDO, known as ABACUS 2007-AC1? Or would they believe, as Coffey maintained in his closing argument, that there was no way Tourre knowingly duped ABACUS investors?
On Thursday afternoon, after a day and a half of jury deliberations in federal court in Manhattan, the SEC finally got the victory it was hoping for. The jury found Tourre liable on six of seven of the SEC's civil charges, including securities fraud, paving the way for U.S. District Judge Katherine Forrest to levy sanctions ranging from $5,000 to $130,000 per violation. The SEC may also bar Tourre from working in the industry.
As we reported in our coverage of the trial (here, here, and here), the SEC's case hinged on the claim that Tourre marketed the ABACUS CDO to investors and to ACA Management LLC—the deal's portfolio selection agent—without disclosing that the hedge fund Paulson & Co. helped select the mortgage-backed securities underlying the transaction and also planned to bet against them. When the CDO tanked in value, Paulson pocketed $1 billion in profits while investors lost an equal amount, the SEC alleged. Goldman settled parallel claims for $550 million in July 2010.
Coffey and Chepiga appeared to like their odds after watching the SEC's Matthew Martens make the agency's case over the last two weeks. They rested their defense early on Monday, without calling a single witness.
That, it turns out, may have been a very bad bet.
This article originally appeared in The Am Law Litigation Daily.
