NEW YORK (Reuters) - Fabrice Tourre, the former Goldman Sachs trader accused of secretly helping the hedge fund of billionaire John Paulson construct a $2 billion deal it could bet against, said Wednesday an email he sent to a key participant in the investment was inaccurate.
Tourre, 34, made the statement after taking the stand in the eighth day of what has become the highest-profile trial to come out of the U.S. Securities and Exchange Commission’s investigations of the 2008 financial crisis.
The trial is a chance for the SEC to show it can win big cases against individuals on Wall Street for wrongdoing that caused the financial crisis.
SEC lawyers say Tourre was driven by “Wall Street greed” to mislead investors in the infamous investment called Abacus 2007-AC1. Tourre denies any wrongdoing.
Early questioning of Tourre on Wednesday afternoon focused on a January 10, 2007, email Tourre sent describing what became Abacus to an executive at ACA Capital Holdings Inc, which the SEC claims was misled into believing hedge fund Paulson & Co Inc was an equity investor.
The email said the riskiest slice of Abacus was “pre-committed,” which an executive at ACA testified she believed meant Paulson would invest in it. Tourre, who left Goldman in 2012, acknowledged Wednesday that it was not pre-committed.
Asked repeatedly by an SEC lawyer if the statement was “false,” Tourre said, “It was not accurate.”
“I wasn’t trying to confuse anybody, it just wasn’t accurate at the time,” he said.
Tourre’s testimony comes three years after the SEC accused him and Goldman Sachs Group Inc of fraud over Abacus, a synthetic collateralized debt obligation.
Defendants can assert the right under the U.S. Constitution not to testify, to avoid incriminating themselves, and frequently do in criminal cases. But experts say that in a civil case, such as Tourre‘s, a jury could draw an adverse inference if he asserted that right.
“It creates the presumption you did something wrong,” said David Marder, a former SEC lawyer at Robins, Kaplan, Miller & Ciresi.
Goldman and Tourre did not tell potential investors that Paulson & Co helped select the mortgage-backed securities linked to Abacus and then went on to bet against it.
When the securities in Abacus turned toxic amid the downturn in the U.S. subprime mortgage market, investors lost $1 billion, the SEC says. Paulson, who made $15 billion betting against the housing market, meanwhile made about $1 billion shorting the CDO, the SEC says.
Goldman Sachs agreed in July 2010 to pay $550 million to settle the claims against it without admitting or denying wrongdoing. Before that accord was announced, Tourre received a settlement offer but rejected it, a person familiar with the matter said.
Tourre, who in an email cited by the SEC is referred to as the “Fabulous Fab,” is now an economics doctoral student at the University of Chicago. He faces a fine and a lifetime ban from the securities industry if jurors find him liable.
At times, the judge or court reporter had difficulty understanding the pronunciation of some words, including “bond,” by Tourre, a Frenchman.
“Sorry, my French accent, I guess,” he said.
‘NOBODY EVER CORRECTED ME’
The January 10, 2007, email was sent by Tourre to Laura Schwartz, a former managing director at ACA, at a time when ACA was being considered as the portfolio selection agent on the Abacus deal.
While Tourre acknowledged that the language about the risky slice of Abacus being “pre-committed” wasn’t accurate, he insisted that he did not intentionally mislead anyone. He also said a description of Paulson as “transaction sponsor” did not mean the hedge fund was an equity investor.
Tourre, dressed in a black suit and purple tie, rejected the interpretation of his former supervisor at Goldman, Jonathan Egol, who last week said he “wouldn’t customarily have used the term” to mean a short investor. Tourre said he used the term to also mean a short in emails about other deals.
“Nobody ever corrected me,” he said.
An email by Schwartz two days later to a Goldman saleswoman forwarded to Tourre referred to Paulson having an “equity perspective.”
Asked by SEC lawyer Matthew Martens if there was an interpretation for that phrase other than Paulson being an equity investor, Tourre said he didn’t have any. He said he had “no memory” of alerting the Goldman saleswoman or Schwartz to say Paulson wasn’t an equity investor.
ACA, which was renamed Manifold Capital Corp in 2008, ultimately not only helped set up Abacus as the portfolio selection agent but also bought $42 million of securities in the deal and agreed to insure a $909 million slice of it via its then-subsidiary ACA Financial Guaranty Corp.
Tourre took the stand after a second day of questioning of Schwartz, the SEC’s star witness. She had testified Tuesday that she ”believed Paulson would be the equity investor in the transaction.
Sean Coffey, a lawyer for Tourre, asked Schwartz on Wednesday if she “just assumed it was an investor.”
Coffey asked Schwartz about other mortgage deals ACA did with hedge funds and asked if she knew if they planned to short them on top of their investments in the transactions. Schwartz said she didn’t recall or know.
Coffey then questioned Schwartz about why she didn’t ask about this if, as she had earlier testified, ACA would have avoided working with Paulson, had its short position been known, to protect ACA’s reputation.
“If it mattered, wouldn’t you ask?” Coffey said.
The case is SEC v. Tourre, U.S. District Court, Southern District of New York, No. 10-03229.
Reporting by Nate Raymond and Lauren Tara LaCapra; Editing by Eddie Evans and Douglas Royalty