| NEW YORK, April 4
NEW YORK, April 4 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 administrative trial on Friday before yelling, "Shame
on you!" at a lawyer for the U.S. government.
The dramatic moment came as Chau attempted to defend himself
against charges from the U.S. Securities and Exchange Commission
that he misled investors in a complex financial vehicle linked
to subprime mortgages.
The trial 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.
On Friday morning, the fifth day of the trial, Chau gave
several long, sometimes meandering answers to questions from
Howard Fisher, an SEC prosecutor, 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, saying he was upset
that Harding employee Alison Wang had been forced to endure
questioning in the trial from SEC lawyer Daniel Walfish and his
own defense lawyers.
"What we did to poor Alison was wrong," Chau said, crying.
"I should have stopped it. Shame on me. Shame on you, Mr.
It was unclear what portion of Wang's testimony, which took
place earlier this 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 of the collateralized debt obligation market in 2008.
That prompted 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 also said he would likely include Chau's "shame on
you" shout in his ruling and 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 also said Chau's emotional
outburst was authentic.
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.
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, as it was in 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.
Chau has sued the SEC, seeking to block the case against
him, arguing that the regulator had violated his constitutional
rights by "shoehorning" its case into an administrative
proceeding after failing to win similar cases elsewhere.
Last month, U.S. District Judge Lewis Kaplan denied Chau's
request to block the SEC temporarily from pursuing its case.
Chau was featured prominently in "The Big Short," Michael
Lewis' bestseller about the economic crisis. Chau sued the
author in 2011 for defamation, claiming he was unfairly
portrayed as a "villain." A federal judge in New York threw out
the lawsuit last year.
Chau, who has not yet answered questions from his own
lawyers, is expected to continue testifying into next week.
(Reporting by Joseph Ax; Editing by Noeleen Walder and Dan