Fabulous Liabilities For 'Fab' Tourre

By: Andrew_McKillop

UNAMIMOUS JURY
A nine-member federal jury in Manhattan on July 31 unanimously found Fabrice “Fabulous Fab” Tourre guilty on 6 of 7 counts of fraud brought against him by the US Securities and Exchange Commission, the financial sector watchdog. The former Goldman Sachs Group Inc. trader was accused of misleading certain participants in a 2007 “crisis-era” deal that cost them $1 billion, and resulted in the Paulson & Co hedge fund gaining more than $1 billion.

Tourre's defence lawyer John “Sean” Coffey told the trial judge, U.S. District Judge Katherine Forrest on July 29 that the billionaire hedge-fund founder, John Paulson, credited with having in total made “billions of dollars” from the subprime mortgage crisis would not be called to testify. Tourre’s lawyers had earlier said that Paulson might be called to the witness stand. As of present, the hedge fund is not accused of any wrongdoing.

The SEC charged that Tourre defrauded investors of $1 billion by tricking them into investing money in a mortgage deal that was secretly designed to fail. The SEC's lead attorney, Matthew Martens claimed that Tourre personally and greatly profited from the scheme and then tried to alter the recorded track of events in order to stay out of trouble. According to a 'Washington Post' report, Paulson & Co. hired Goldman Sachs in 2006 to create a mortgage product enabling them to bet against the inflated US housing market that crashed in 2007. The SEC alleged in court that Tourre committed fraud by not telling certain selected investors about Paulson's strategy. He also did not inform them that the Paulson hedge fund had itself picked securities that were bundled into the mortgage portfolio. In addition to Paulson & Co profiting from probable foreknowledge that the portfolio would rapidly lose value, Goldman Sachs was claimed by the SEC to have made $1 billion off this scheme.

The Tourre case had been called the most significant legal action related to the 2007-2008 mortgage securities meltdown, but due to its highly technical content, it has lacked the drama and high stakes of white-collar crime in cases like the 'Bernie' Madoff scam, which however made a tiny fraction of the illicit profits that were generated by the Tourre fraud. Much of the testimony in the Tourre trial concerned the intricacies of algorithm-based synthetic collateralized debt obligations, or CDOs -- a complex type of financial product central to the case.

WHO PAYS WHAT?
Within hours of the Tourre verdict, comment in the media featured the “minnows crucified while the sharks go free” interpretation of what, for the SEC, is a highly satisfying result, after several failures when pursuing alleged fraud and wrongdoing linked with the 2008 crisis and its aftermath. Goldman Sachs, acting well in advance of the Tourre trial, paid $550-million to settle SEC charges against the firm, without admitting or denying liability, more than three years ago. Despite this, Goldman Sachs has at all times paid the full legal costs of Tourre estimated at several million dollars to date, both before and after his formal resignation from the firm,. 'Huffington Post' reports that the firm has also paid Mr Tourre a total $738 000 (480 000 GBP) in “leave payments” since he resigned and quit active presence in the firm's offices and facilities in 2010.

A spokesman for Goldman responded to the verdict with a laconic e-mailed statement: “As a firm, we remain focused on being more transparent, more accountable and more responsive to the needs of our clients”. For Goldman Sachs, this tortured prose shows the trial verdict was painful.

With the guilty verdict on six counts of fraud, Mr. Tourre is unlikely to be jailed but can face a fine as well as a long, probable lifetime ban from the US financial industry. His most-renowned product, the so-called “Abacus 2007-AC1” CDO, and the losses it incurred for “unlucky players” in the affair may result in record fines and charges being levied.

New reports from sources including the 'Wall St Journal', 'Financial Times', CNNMoney, 'Huffington Post' and others identify the prime “unlucky player' in the Tourre affair as ACA Capital Holdings Inc. This firm was claimed by the SEC to have been purposefully misled by Tourre while employed by Goldman Sachs. The company had been hired by Goldman to oversee the deal, and persuaded to invest in it believing that the Paulson hedge fund was also investing in the deal - rather than betting that the “bundle of mortgage linked securities” would collapse in value.

ACA, as well as becoming an investor in Abacus, also insured it. When the underlying mortgage securities turned toxic, ACA lost about $1 billion, while Paulson's “short” positions made about the same amount. ACA's parent company, ACA Capital, failed in late 2007 and it operates today as a secondary market “run-off guaranty” insurance company.

Another “unlucky player”in the Tourre affair, IKB Deutsche Industriebank AG, based in Dusseldorf is estimated to have lost about $150 million from “wrong way bets” on Abacus, and had to be bailed out in August 2007 because of these and other massive losses it sustained from the US subprime market meltdown.  The SEC says that IKB was on the wrong side of the Abacus CDO deal and IKB had previously invested in several of Goldman’s CDOs prior to 2007.

Assessing liabilities and compensation – and who pays it – are now the main issues in the Tourre affair, with the major point that due to Goldman's 2010 payment of $550 million to the SEC, the firm is at least in theory not a target for paying compensation for Abacus losses, and Fabrice Tourre is. Despite his “highly attractive” salary for a presently retired 34-year-old, payment by him of fines and compensation that could reach far above $1 billion, possibly $3 billion according to financial lawyers with knowledge of the case, would place him in the same position as fellow-Frenchman Jerome Kerviel   the so-called “rogue trader” of Societe Generale.

Kerviel unlike Tourre was convicted of theft, forgery and other wrongdoing, and at his appeals court trial, October 2012, his sentence of 3 years in prison was upheld. He was also ordered to pay Soc Gen compensation of €4.9 billion. The amount, equivalent to 345 000 years of France's basic minimum salary, is to be paid at “a variable monthly amount” depending on Kerviel's employment. At present he is unemployed, suggesting a possible “plead poverty” solution for Fabrice Tourre.

By Andrew McKillop

Contact: xtran9@gmail.com

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

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