NEW YORK (Reuters) - The SEC has ended a probe of a central witness it intends to call at this month's fraud trial against former Goldman Sachs Group Inc vice president Fabrice Tourre for his role in a notorious 2007 debt instrument that hedge fund billionaire John Paulson successfully shorted.
The decision by the Securities and Exchange Commission to drop the investigation of former ACA Financial Guaranty Corp employee Laura Schwartz was confirmed by a letter filed Wednesday in U.S. District Court in Manhattan.
An unresolved investigation could have damaged the SEC's case against Tourre, whose lawyers have been seeking details about Schwartz that could hurt her credibility.
Schwartz could help establish at Tourre's trial, scheduled to begin on July 15, how he misled investors in a complex collateralized debt obligation called ABACUS 2007-AC1 in 2007, according to court filings.
In February, Schwartz had received a "Wells notice," indicating that SEC staff could recommend that the commission bring civil charges against her, as part of a probe of ACA's role as collateral manager for a different CDO, ACA ABS 2007-2.
The Wells notice had been disclosed in a broker report, filed with the Financial Industry Regulatory Authority.
A letter dated June 27 and made public Wednesday from Lara Shalov Mehraban, a SEC assistant regional director in New York, to Schwartz's lawyer said the SEC's staff did "not intend to recommend any enforcement action by the commission."
Tourre was accused of misleading investors by failing to disclose that the hedge fund operated by Paulson was involved in selecting mortgage securities behind the Abacus CDO, and was betting against the transaction.
Goldman agreed to pay $550 million to settle related charges in 2010. Paulson was not charged.
Robin Alperstein, a lawyer for Schwartz, declined to comment on Wednesday. A spokesman for Tourre's lawyer, Pamela Chepiga, also declined to comment.
Tourre's lawyers had been seeking to subpoena documents regarding the investigation of Schwartz to call into question her credibility.
At a June 10 hearing, Sean Coffey, a lawyer for Tourre, said the investigation could provide Schwartz a "motive for her to shade her testimony to support the merits of her own case."
Coffey had at that time said if the SEC dropped the probe into Schwartz, it would raise questions about "what she was willing to do at trial in order to avoid being charged."
But in a motion Wednesday, Schwartz's lawyer said no cooperation agreement existed with the SEC as a result of the investigation being dropped, and there is now no potential her client would bias her testimony.
"The potential lines of inquiry about which Tourre seeks to cross-examine her at trial, and for which he purportedly seeks the Wells materials, are similarly moot," Schwartz's lawyers wrote.
The status of the SEC's review of the ACA ABS 2007-2 CDO is unclear.
UBS AG, which sold more than $748 million in notes tied to ACA ABS 2007-2, has said it is in talks with the SEC over its "structuring and underwriting of one CDO in 2007."
John Nester, an SEC spokesman, declined to comment. A UBS spokeswoman did not immediately respond to requests for comment. A lawyer for ACA did not immediately respond to a request for comment.
The case is SEC v. Tourre, U.S. District Court, Southern District of New York, No. 10-03229.