The case, one of the most prominent actions stemming from the 2008 crisis, centers on the claim that Mr. Tourre and Goldman failed to warn investors that a hedge fund run by the billionaire John A. Paulson helped construct the mortgage security and then bet against it.
Billionaire John Paulson could be called to the witness stand in the case of former Goldman Sachs Group Inc (NYSE:GS) executive Fabrice Tourre, according to Bloomberg. Lawyers for the executive involved in a civil trial brought by the Securities and Exchange Commission have told the judge in the case they plan to call the famed billionaire to testify.
Paulson, a New-York based hedge fund, used the deal to bet against mortgage-backed securities. Investors on the other side of the bet lost more than $1 billion. Goldman Sachs Group Inc (NYSE:GS), based in New York, paid a then-record $550 million to settle the case. Paulson and his firm, Goldman clients, weren’t sued.
Tourre is to argue he was just a cog in the machine
In her opening arguments, Tourre’s lawyer, Pamela Chepiga, argued that Tourre did not mislead investors or ACA Capital Holdings, the third-party firm brought in to select the securities included in Abacus.
Tourre is to argue he was just a cog in the machine, and that those who lost money were sophisticated investors who made their own bad decisions. He also challenged the idea that they did not know Paulson was betting against them. “Tourre might be well known now but I don’t think you could have picked a more obscure banker to pin this on,” said Peter Henning, professor of law at Wayne State University.
He said the SEC would have a tough time proving that Tourre was the mastermind of a conspiracy to hoodwink sophisticated investors. “The SEC has to prove he’s the baddest guy at Goldman Sachs Group Inc (NYSE:GS),” he said. The SEC has disputed accusations that it has not done enough to tackle the individuals and companies that helped cause the credit crunch. It points to charges brought against 157 entities and individuals, as well as $2.68 billion recovered from defendants, largely in settlements.
What is the SEC trying to prove?
The investment Tourre helped create, the Abacus 2007-AC1, was what’s known as a synthetic CDO — meaning it was built through an insurance contract that allows clients to bet for or against its success. The SEC is accusing Tourre of encouraging clients to bet on the underlying mortgage assets, while concealing a relevant fact: John A. Paulson’s hedge fund, which helped construct the deal, was betting against them. When the mortgage market cracked up, those who bet in favor lost more than $1 billion.