By Reuters
Filed under: Goldman Sachs, SEC, Scandals and Lawsuits, Securities, Investing
By Nate Raymond
NEW YORK — The U.S. Securities and Exchange Commission heads to trial Monday against a former Goldman Sachs bond trader in a case it says highlights what went wrong on Wall Street in the financial crisis.
Jury selection begins in federal court in New York in the civil fraud case against Fabrice Tourre, 34, who the SEC says misled investors in an ill-fated mortgage-securities investment called Abacus 2007-AC1.
It is the highest-profile trial to date stemming from the SEC’s investigation of the events leading up to the 2008 crisis and, legal experts say, presents a chance for the SEC to hold an individual responsible at trial.
The SEC’s case, as summed up by U.S. District Judge Katherine Forrest last month, is that Tourre “handed Little Red Riding Hood an invitation to grandmother’s house while concealing the fact that it was written by the Big Bad Wolf.”
According to the SEC, the wolf in question is John Paulson, a hedge fund billionaire whose bet against the subprime mortgage market was chronicled in “The Greatest Trade Ever” by Gregory Zuckerman.
In 2006, Paulson’s hedge fund, Paulson & Co., turned to Goldman Sachs Group (GS) for help betting against subprime mortgages, the SEC said.
They began discussing Abacus, which would give Paulson a role in picking the underlying portfolio of mortgage securities, the SEC said. Paulson could then short, or bet against, it through an insurance product called a credit default swap.
At the time, Tourre, a French national, was 28 years old and working at Goldman Sachs in New York. He became the bank’s principal employee working on what became Abacus, known in the financial industry as a synthetic collateralized debt obligation.
The SEC said Abacus’s marketing materials failed to disclose Paulson’s role in picking the underlying assets, instead saying that a subsidiary of ACA Capital Holdings selected them.
Tourre’s goal, the SEC contends, was to deceive investors into buying the liabilities of Abacus.
In a much-cited email sent on Jan. 23, 2007, to his girlfriend at the time, Tourre said of the financial markets: the “whole building is about to collapse anytime now.”
“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!!!”
When the underlying mortgage securities turned sour, investors including IKB Deutsche Industriebank AG and ABN AMRO Bank NV, now owned by Royal Bank of Scotland Group (RBS), lost over $1 billion, the SEC said.
Paulson, meanwhile, netted …read more
Source: FULL ARTICLE at DailyFinance
