Published July 11, 2013
NEW YORK – The trial of former Goldman Sachs bond trader Fabrice "Fabulous Fab" Tourre next week gives the U.S. Securities and Exchange Commission an opportunity to prove that it can win big cases tied to the financial crisis.
The SEC claimed an 85 percent success rate in all trials last year, but its critics have said that, when it comes to the financial crisis, its win rate has been dismal.
Tourre's civil fraud trial, which starts in federal court in New York on Monday, could help silence those critics, but experts said the regulator is facing no easy task.
The SEC has said that Tourre, while a vice president at Goldman Sachs Group Inc in 2007, misled investors in a structured investment vehicle called Abacus 2007-AC1 by not disclosing the role a hedge fund that planned to bet against the transaction played in setting it up.
Investors lost more than $1 billion when the investment vehicle failed, according to the SEC.
Goldman Sachs agreed to pay $550 million in July 2010 to settle its part of the case, without admitting or denying wrongdoing. Tourre turned down a settlement offer and instead elected to fight, a person familiar with the matter said on Wednesday.
For the SEC to prove fraud it must show Tourre intended to dupe the investors about the role played by the hedge fund run by billionaire John Paulson in the Abacus investment.
A negligence charge will turn on whether the information about the part Paulson played was material to investors.
Tourre's defense, as summarized by U.S. District Judge Katherine Forrest in June, is that the victims were "not be-hooded children, but rather large financial institutions, operating in a dog-eat-dog world."
Tourre is "confident that when all the evidence is considered, the jury will soundly reject the SEC's charges," his lawyers, Pamela Chepiga and Sean Coffey, said in a statement on Thursday.
Thomas Sporkin, a former SEC lawyer who is now in private practice, said it is always difficult to hold an individual accountable for "institution wide culpability." Sporkin is not involved in the case.
"It's an enormously challenging task to put institutional blame on one person," Sporkin said.
Goldman Sachs, which agreed to cooperate with the SEC as part of its own settlement and which is also paying Tourre's legal fees, declined to comment.
Sporkin said a finding of liability against Tourre even just for negligence would help show it can be successful at trial in complex case.
"They'll be able declare victory and put Wall Street on notice that they can win complex cases against individuals at trial," he said.
Andrew Ceresney, co-director of enforcement at the SEC, said losing is a risk the SEC has to take in any case.
"We want to win every case," Ceresney said. "But it is probably true that if we're not losing a small number of cases, we're not being aggressive enough."
The SEC has disputed that it has not tackled the financial crisis head on, pointing to charges brought against 157 entities and individuals and $2.68 billion recovered from defendants, largely in settlements.
The stakes have grown even higher for the SEC since Chair Mary Jo White said last month that the agency was moving toward requiring defendants in some settlements to admit liability, a move that is likely to push more of them to take their chances in court.
The SEC filed 734 cases in the 2012 fiscal year and obtained 714 settlements, according to the SEC and NERA Economic Consulting. It took 15 cases to trial, losing just two of them, the SEC said.
Among the victories, the agency secured judgments of nearly $8.9 million against investor relations firm Big Apple Consulting USA Inc and its executives after a jury trial in Florida.
A jury in Nebraska found two former chief financial officers of infoUSA Inc liable for their roles in a scheme to enable the company's CEO to illegally use millions of dollars in corporate funds for perks. The CEO settled without admitting or denying the charges.
But in cases against individuals at Wall Street firms at the center of the financial crisis and mortgage meltdown, the SEC's setbacks have mounted.
In July 2012, a federal jury in New York found former Citigroup manager Brian Stoker was not liable for violating securities laws regarding a $1 billion collateralized debt obligation tied to risky mortgage debt.
And in November the SEC dropped a similar case against Edward Steffelin, a former managing director at GSC Capital Corp, who was accused of negligence in his role in a mortgage-bond deal by JPMorgan Chase & Co.. JPMorgan agreed to pay $153.6 million to settle related charges without admitting or denying the charges.
The same month, a jury in New York cleared Bruce Bent, the chairman of Reserve Management Co, of civil fraud charges stemming from his management of the $62 billion Reserve Primary Fund, which "broke the buck" after the bankruptcy of Lehman Brothers.
The SEC does not count that case as a loss: While the jury cleared Bent's son Bruce Bent II on fraud charges, it found him liable for negligently violating securities laws and also held two corporate entities liable.
But critics of the SEC say it was a loss because the SEC failed to secure a finding of liability against the senior Bent, one of the few Wall Street leaders to face trial after the financial crisis.
"The ability to handle large, complex cases is beyond the SEC," said John Coffee, a law professor at Columbia Law School.
In an op-ed piece in the National Law Journal in January, Coffee said the SEC's record was close to zero in financial crisis trials, saying it should hire private lawyers on contingency to bring cases on its behalf.
While many former SEC lawyers said Coffee's attack was overblown, they acknowledge a public perception that the SEC cannot win trials, thanks to the financial crisis cases.
Sporkin, one of the former SEC lawyers, contrasted the SEC's failures in cases over the financial crisis to an unbroken streak of convictions U.S. prosecutors have secured in their insider trading crackdown, including against Raj Rajaratnam.
On Wednesday, the SEC won a small victory in the Tourre case, when Judge Forrest ruled it could use as evidence an infamous email in which Tourre was referred to as "the fabulous Fab.
And it appears to be devoting significant manpower to the case. In an unusual move, it has put the head of its national trial unit, Matthew Martens, in charge of the case.
"In all my years at the SEC, I can't remember when the head of the trial unit actually tried a case," said Mark Fickes, a former SEC trial lawyer who is now in private practice. "But I guess this is a pretty big case."
(Reporting by Nate Raymond; Additional reporting by Sarah Lynch in Washington; Editing by Eddie Evans and Carol Bishopric)