(Adds testimony and background on Chau's portrayal in book)
By Joseph Ax
NEW YORK, April 4 (Reuters) - Wing Chau, an investment adviser made infamous in the "The Big Short," a best selling book about the financial crisis, wept on the witness stand during his trial on Friday before yelling "Shame on you!" at a lawyer for the U.S. government.
Chau's outburst came as he was defending himself against allegations by the U.S. Securities and Exchange Commission that he misled investors in a complex financial vehicle linked to subprime mortgages.
The trial in New York is one of the highest-profile cases in which the government has sought to hold an individual responsible for events leading up to the 2008 financial meltdown. Chau is facing administrative charges brought by the regulator and has not been criminally charged.
On Friday morning, the fifth day of the trial, Chau gave several long, sometimes meandering answers to questions from SEC lawyer Howard Fischer about his firm, Harding Advisory, and its management of a $1.5 billion transaction called Octans I CDO Ltd.
At one point, in response to a seemingly innocuous question about whether he had reviewed management agreement documents before signing them, Chau became emotional. He said he was upset that Harding employee Alison Wang had been forced to endure questioning in the trial from another SEC lawyer, Daniel Walfish, and his own lawyers.
"What we did to poor Alison was wrong," Chau said, crying. "I should have stopped it. Shame on me. Shame on you, Mr. Walfish!"
It was unclear what portion of Wang's testimony from earlier in the week had upset him. But Chau told the judge he had cried only twice before in his adult life, when his mother and father died.
Just before the lunch break, Chau answered a question from Fischer with a minutes-long monologue on the causes of the collapse in 2008 of the collateralized debt obligation (CDO) market.
That prompted SEC Administrative Law Judge Cameron Elliot to send Chau out of the courtroom so he could warn Chau's lawyer, Alex Lipman, that he was "not impressed" with the testimony.
"His answers are evasive and discursive," Elliott said. "If he wants to help himself, he should just give a straight answer and stop talking. So far, I am not finding him to be a particularly credible witness."
Elliott encouraged Lipman to speak to his client during lunch about his testimony.
Lipman said he was surprised by the judge's opinion because Chau had been entirely truthful. He said Chau's outburst was authentic.
Chau was featured prominently in "The Big Short," author Michael Lewis' bestseller about the economic crisis. Lewis portrayed Chau as one of several investors piloting a "ship of doom" that would eventually sink, taking the economy with it.
In one passage, Lewis called Chau "a man who had made it possible for tens of thousands of actual human beings to be handed money they could never afford to repay."
Chau sued the author in 2011 for defamation, claiming Lewis' book could "destroy" his professional reputation. A federal judge in New York threw out the lawsuit last year.
The SEC has charged Chau and Harding Advisory with allowing hedge fund Magnetar Capital LLC to have undisclosed influence over the selection of collateral for Octans I.
According to the government, Magnetar played a role in the deal despite its known strategy of taking short positions on mortgage-backed securities in CDOs, including ones it was investing in like Octans I.
The CDO deal, which closed in September 2006, was structured and marketed by Merrill Lynch. The CDO failed in April 2008, leaving investors with $1.1 billion in losses, the SEC said.
Bank of America Corp, which now owns Merrill Lynch, agreed in December to pay $131.8 million to resolve claims the company misled investors about Magnetar's role in two CDOs, including Octans I.
The SEC also has accused Chau and Harding of purchasing notes issued by a troubled Merrill-underwritten CDO called Norma despite Chau's belief that the investment was subpar.
On Friday afternoon, Fischer showed Chau an internal Harding analysis concluding that the Norma notes had several negative indicators. Chau said he could not recall if he had that analysis in hand when he agreed to invest in Norma.
Elliott, the judge, said at the end of the day that Chau was "doing much better" with his answers.
"I get nervous," Chau explained.
After the proceeding, which could last two weeks, Elliott will issue his ruling on whether Chau is liable. If Chau loses the case, he may appeal it to the full commission of the SEC, and ultimately, a U.S. appeals court. (Reporting by Joseph Ax; Additional reporting by Sarah Lynch and Nate Raymond; Editing by Dan Grebler and Grant McCool)