By Nate Raymond
NEW YORK, July 23 The U.S. Securities and
Exchange Commission called its top witness in the fraud trial of
Fabrice Tourre on Tuesday, a day before the former Goldman Sachs
trader himself takes the stand.
The testimony of Laura Schwartz, a former managing director
at ACA Capital Holdings Inc, bolstered the U.S. Securities and
Exchange Commission's case that Tourre misled investors in a
2007 deal tied to subprime mortgages.
Schwartz stopped short of saying Tourre misled her about the
role the hedge fund of billionaire John Paulson planned to play
in the deal, known as Abacus 2007-AC1.
But she said she believed Paulson & Co Inc planned to invest
in a 2007 mortgage deal rather than entirely betting against it.
"I believed Paulson would be the equity investor in the
transaction," she told the court on Tuesday.
The Tourre case, which began last week in federal court in
New York and is expected to last three weeks, is one of the
biggest brought by the SEC over the events leading up to the
financial crisis of 2008.
The trial follows setbacks in similar cases the SEC has
brought against people on Wall Street tied to complex mortgage
investment products linked to the 2008 financial crisis.
The SEC accuses Tourre of failing to tell investors that
Paulson & Co intended to bet against Abacus. It also claims
Tourre misled ACA into thinking Paulson was investing in the
Tourre, who is expected to testify Wednesday afternoon, is
on trial alone after Goldman Sachs Group Inc settled for
$550 million without admitting or denying the allegations soon
after the case was filed in 2010.
According to the SEC, Paulson & Co came to Goldman Sachs
looking for a way to bet against the subprime mortgage market.
They came up with a $2 billion synthetic collateralized debt
obligation tied to mortgage securities the SEC says was designed
When Goldman brought on a subsidiary of bond insurer ACA to
help select the mortgage securities underlying Abacus, Tourre
allegedly misled ACA into believing Paulson intended to invest
in the transaction.
ACA went on to not only help select the assets for the CDO
but also bought $42 million of securities in Abacus and agreed
to insure a $909 million slice of it via its then-subsidiary ACA
Financial Guaranty Corp.
'VERY DIFFERENT FOR US'
Schwartz, who now works at the broker-dealer Seaport Group,
was the main point of contact with Tourre and Paulson & Co, the
She said her belief that Paulson had invested in the equity
of the CDO was based in part on discussions with people at
Goldman and a document Tourre emailed her summing up the
Had she known Paulson was a short investor, Schwartz said,
ACA would not have participated in the Abacus deal.
"ACA would not overall want to work with an investor who was
purely betting against the portfolio we selected," she said.
Her testimony mirrored that of former ACA Chief Executive
Alan Roseman, who on Monday told the court that ACA would have
stopped the Abacus deal "in its tracks" if Paulson's real role
had been known.
Schwartz's testimony, meanwhile, contradicted that of a
former executive at Paulson & Co, Paolo Pellegrini, who
testified that he believed he told Schwartz over drinks in
January 2007 at a conference in Jackson Hole, Wyoming, about
Paulson's strategy of betting against the U.S. housing
On Tuesday, Schwartz said she recalled the drinks meeting
but said Pellegrini never told her Paulson was going to short
ACA had never worked on a deal with a purely short investor,
she said, adding it "would have been something very different
Matthew Martens, a lawyer for the SEC, asked Schwartz about
a recently closed investigation of Schwartz related to a
different CDO, a probe that Tourre's lawyers have repeatedly
said they wanted to ask her about.
Schwartz received a so-called Wells notice in February
indicating that SEC was considering recommending a case against
her over that transaction.
Then, a week before Tourre's trial, Schwartz's lawyers
notified the court that the SEC staff had decided against
bringing a case against her.
Tourre's lawyers did not ask Schwartz on Tuesday about the
probe but have said they would seek to question her credibility
on the basis of the probe being closed so close to the trial.
On cross-examination, Sean Coffey, a lawyer for Tourre,
focused much of his questioning on the extent Schwartz knew
hedge funds generally were taking short positions against CDOs
in 2006 and 2007.
He played audio recordings ACA took of a December 2006
conference call where Schwartz discussed the possibility of Gulf
Investment Corp both investing in and shorting a CDO in
Schwartz on the call called the idea of both investing in
and shorting a CDO an "excellent strategy."
She also said the "trade is available for me from lots of
people to be honest in the market," a remark Schwartz testified
meant the combo strategy.
The case is SEC v. Tourre, U.S. District Court, Southern
District of New York, No. 10-03229.