The US financial regulator will attempt to prove it can win high-profile cases related to the credit crunch this week when a former Goldman Sachs trader nicknamed "Fabulous Fab" goes on trial.
The Securities and Exchange Commission (SEC) alleges that Fabrice Tourre misled investors when he was a vice-president at the bank in 2007. Some of the evidence in the civil fraud trial could reopen the debate over Wall Street's accountability during the credit crunch, while Tourre could face a fine or a ban from the securities industry.
Judge Katherine Forrest of the federal district court in Manhattan has said she is likely to allow jurors to see emails sent by French-born Tourre using the moniker Fabulous Fab. One of those emails, sent to his girlfriend as the markets teetered on the edge of panic, read: "The whole building is about to collapse anytime now … Only potential survivor, the fabulous Fab … standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstruosities [sic]!!!" In another message that may be read out in court Tourre called the derivatives he was selling "a product of pure intellectual masturbation". He likened collateralised-debt obligations (CDOs), the bundled mortgage investments whose implosion triggered the banking crisis, to a "little Frankenstein turning against his own inventor".
Other messages note that a friend had given Tourre his now infamous nickname even though "there is nothing fabulous about me". The SEC case places Tourre at the heart of a conspiracy to defraud investors while lining the pockets of the hedge fund billionaire John Paulson.
The regulator contends the emails and more show Goldman and Tourre misled investors about the role that Paulson & Co played in picking assets in a portfolio of investments known as Abacus. One CDO, known as Abacus 2007-AC1, lost more than $1bn (£662m). The SEC argues that investors in Abacus were misled because Tourre did not disclose the role of Paulson, which planned to bet against the Abacus assets. Paulson has not been accused of wrongdoing.
Goldman Sachs paid a then-record $550m fine to settle the charges in 2010, without admitting or denying guilt. Tourre, a mid-level employee, was the only Goldman executive to be charged individually and chose to fight the case.
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. "Fabulous Fab 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," 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 $2.68bn recovered from defendants, largely in settlements.
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