Trader's Testimony Raises Legal Issues

ByStander

Goldman Sachs Group Inc. trader Fabrice Tourre's sworn testimony Tuesday on Capitol Hill could strengthen the Securities and Exchange Commission's civil-fraud case against him and the securities firm, some legal experts said.

The 31-year-old Mr. Tourre's responses to questions from lawmakers on the Senate Permanent Subcommittee on Investigations were largely parallel with Goldman's previous denials of any wrongdoing in the 2007 deal called Abacus 2007-AC1.

But internal documents disclosed during the daylong hearing might weaken several arguments that Goldman has been using since the suit was filed earlier this month, according to some legal experts.

For example, Goldman has said that investors in such transactions created by the firm were "sophisticated," a word Mr. Tourre repeated in his testimony.

During the hearing, though, Sen. Susan Collins (R., Maine) referred to an email sent by Mr. Tourre that discussed a list of buyers for a potential mortgage-related investment that "should include fewer sophisticated hedge funds."

"This sounds like a deliberate attempt to sell your products to less-sophisticated clients," she said. Mr. Tourre responded that the comment reflected his view of hedge funds, which "have a tendency to argue … very, very much about prices."

Michael Perino, a law professor at St. John's University who studies securities litigation, said such emails could help the SEC if the case goes to trial, adding, "Is the jury going to believe these post hoc explanations for 'what we meant' in these internal memos?"

During the hearing, another Goldman email was used against Mr. Tourre, when he repeated Goldman's previous statements that a firm called ACA Management LLC had "sole authority" to select the securities portfolio in the deal, with hedge-fund Paulson & Co. merely suggesting securities to the advisory firm.

Sen. Carl Levin (D., Mich.) noted an email Mr. Tourre wrote to a superior, in which the trader said ACA and Paulson had "selected" the securities used in the deal. "I could have been more accurate," Mr. Tourre responded.

The SEC alleges that Goldman failed to tell investors of the role of Paulson in choosing mortgage securities underlying the Abacus deal. Paulson hasn't been charged in the case.

The SEC also alleges ACA was misled into believing Paulson wanted the deal to perform well. Mr. Tourre said Tuesday he told ACA that Paulson was betting against the deal.

Mr. Tourre's comment was consistent with testimony provided to the SEC by a former Paulson executive who said he had told ACA of Paulson's intention, according to people familiar with the matter.

One of Mr. Tourre's answers on Tuesday could weaken a key Goldman response to the SEC claims—that Goldman had no incentive to structure the deal so it would fail. Goldman has said it was an investor in the deal and lost $90 million when the deal lost value.

But Mr. Tourre told the senators that Goldman tried early on to sell its investment, and couldn't find a buyer.

A Goldman spokesman declined to comment Tuesday on Mr. Tourre's testimony. A lawyer for Mr. Tourre didn't immediately respond to a request for comment.