New York: A jury found former Goldman Sachs Group Inc (GS.N) vice president Fabrice Tourre liable for fraud for his role in a failed mortgage deal that cost investors USD 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 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 plans 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 to disgorge any illegal profits as a result of his misconduct. Tourre testified he earned USD 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, 34, 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 Holdings Inc, a company also involved in selecting assets for Abacus, into believing Paulson & Co Inc would be an equity investor in the synthetic collateralized debt obligation.
In a 2007 email 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 U.S. housing market.
The SEC said Paulson & Co made about USD 1 billion from his short position on Abacus, while investors including ACA and IKB Deutsche Industriebank AG (IKBG.F) 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 2012. Goldman is continuing to pay for his legal defense, however.
Goldman agreed in July 2010 to pay USD 550 million to settle with the SEC over Abacus, without admitting or denying wrongdoing. But the bank did say that 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.
"Maybe he really believed he was innocent; fraud is a funny thing," said Hillary Sale, a professor at the Washington University School of Law. "But poor Fabrice. You have to kind of feel bad for him; he was just a kid."
Jurors remained largely tight-lipped as they dodged reporters and walked quickly out of the court.
"It was a long, slow process," said Reverend Beth Glover, 47, an Episcopal priest, outside of the courthouse.
None of the jurors would discuss the intricacies of their decision.
"It's been a long day," said Reece Pate, 37, a graphic designer.
The win could give the SEC ammunition to address critics who have long argued the agency has been insufficiently aggressive in holding individuals on Wall Street accountable for their roles in the events leading to the financial crisis.
"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 Group.
"This win reinforces that the agency can and will litigate appropriate cases," she continued. "That may make it easier to secure admissions (of wrongdoing)."
In June, Schapiro's successor as SEC chair, Mary Jo White, said the regulator plans to seek admissions of wrongdoing in select enforcement cases. It also still plans to let many targets settle cases without admitting or denying the charges.
"The SEC win in this matter illustrates they have the trial ability to effectively present these complicated cases to jurors," said Stephen Crimmins, a former SEC lawyer at K&L Gates.
The verdict may not assuage all the SEC's critics. Dennis Kelleher, chief executive of financial regulation advocacy group Better Markets, said in a statement all the SEC had done was "scapegoat a single mid-level Goldman Sachs' trader who bragged in emails to his girlfriend."
"Wall Street crashed the global financial system and almost caused a second Great Depression," Kelleher said. "Yet, the SEC failed to go after Wall Street's bonus-bloated executives who ran the banks that sold trillions of dollars of worthless securities."
The SEC says it has brought charges against 157 entities and individuals in financial crisis-linked enforcement actions. It has obtained USD 2.68 billion in penalties and other judgments from defendants, largely through settlements.
The likelihood that the SEC would win was not clear cut before the verdict, and the agency's record in financial crisis-related cases before the Tourre trial had been less than perfect.
In November 2012, the SEC dropped civil charges against Edward Steffelin, a former managing director at GSC Capital Corp, in light of what a spokesman said was "information that came to light as the litigation progressed.
The lawsuit had accused Steffelin of failing to ensure marketing materials for a USD 1.1 billion CDO structured by JPMorgan Chase & Co disclosed the involvement of hedge fund Magnetar Capital LLC in selecting assets.
In the Stoker and Steffelin cases, the two banks that were also sued agreed to pay nine-figure settlements without admitting or denying allegations.
In Tourre's case, the judge and lawyers alike had over the course of the trial expressed concerns that the five women and four men on the jury were growing bored and were struggling to stay awake during the complex trial.
Tourre's lawyers had also, in a sign of confidence, said on Monday they would call no witnesses after the SEC rested its case.