5 Min Read
NEW YORK, Feb 20 (Reuters) - A U.S. judge on Thursday weighed the limits of the U.S. Securities and Exchange Commission's ability to punish former Goldman Sachs Group Inc trader Fabrice Tourre, including whether the agency could block him from asking the bank to cover any penalties.
At a hearing in New York, U.S. District Judge Katherine Forrest grappled with the SEC's request that Tourre pay $1.15 million after a jury found him liable for fraud in one of the highest-profile trials to spill out of the financial crisis.
As part of that request, the SEC had pushed for an order preventing Tourre from accepting reimbursement from Goldman Sachs or anyone else for the $910,000 in penalties the agency requested the judge impose as part of that potential judgment.
"There's no punishment in a penalty that is automatically paid by your employer," said Bridget Fitzpatrick, a lawyer for the SEC.
But a lawyer for Tourre said no court had ever held that an employer could not pay for an employee's penalties in an SEC case. The judge at one point asked why the SEC had not asked Congress to pass a specific law saying employers could not reimburse penalties.
"That's an easy fix for that," Forrest said.
The hearing provided some of the first hints of how the judge might penalize Tourre, a French citizen who became a symbol of the financial meltdown after the SEC sued him in 2010.
In August, a federal jury found Tourre, 35, liable for six of the seven civil charges stemming from SEC claims that he misled investors in a complex investment product linked to mortgages called Abacus 2007-AC1.
The SEC accused Tourre of concealing from investors that Paulson & Co Inc, the hedge fund of billionaire John Paulson, had helped put the deal together and planned to bet it would fail. Investors lost about $1 billion, the SEC said.
Forrest made no rulings at the hearing, which Tourre did not attend, saying instead she would issue a decision in the "near future."
It is unclear if Goldman would be willing to cover any penalty imposed. Goldman Sachs declined to comment, but court papers show the bank told the SEC in November no agreement or informal understanding existed on reimbursing Tourre.
In court papers last month, Tourre's lawyers said their client in fact planned to transfer "sufficient funds" to his U.S. bank account to satisfy the SEC's requested judgment.
That has not stopped Tourre's lawyers from opposing a request by the SEC Forrest block him from accepting reimbursement for the potential penalty. Pamela Chepiga, a lawyer with Allen & Overy who represents Tourre, said the SEC was asking Forrest to be first judge to ever restrict reimbursement.
"You would be putting yourself in the shoes of the legislature," she said.
On top of the penalty, the SEC has also pushed for Forrest to order Tourre to disgorge $175,463 in ill-gotten gains the agency calculates he received as a bonus in 2007, when he earned $1.7 million.
But Forrest questioned if the SEC had already obtained the ill-gotten gains it might seek from the $15 million Goldman Sachs itself had disgorged as part of a $550 million settlement in the case in 2010.
The judge also expressed concerns about the SEC's request for an injunction prohibiting future violations of the securities laws. As a proposition, injunctions like that "don't make a whole lot of sense" since the SEC could sue him anyway if he broke the law, Forrest said.
While SEC lawyers argued the injunction would allow them to hold Tourre in contempt if he committed fraud again, they acknowledged the agency rarely has taken such an action.
But Forrest said she was concerned an injunction could "stigmatize" Tourre as he pursues a career outside of the securities sector.
Tourre has been pursuing a doctorate in economics at the University of Chicago, and his lawyers have said he is looking to go into academia.
Instead a broad injunction, Forrest suggested she would consider crafting one that would become active if Tourre re-entered the securities sector.
The case is SEC v. Tourre, U.S. District Court, Southern District of New York, No. 10-03229.