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From Securities Regulation Daily, August 1, 2013

SEC wins verdict against Goldman Sachs trader Fabrice Tourre

By Matthew Garza, J.D.

A Manhattan jury found former Goldman Sachs trader Fabrice Tourre liable today for making material misstatements and omissions in the marketing of a synthetic collateralized debt obligation (CDO) product sold by Goldman called “ABACUS,” which was tied to the performance of subprime residential mortgage-backed securities. Investors were alleged to have lost over $1 billion in the deal (SEC v. Goldman Sachs & Co., April 16, 2010).

The SEC alleged that Tourre made materially misleading statements and omissions in connection with the ABACUS CDOs to an investor, ACA Management LLC. Specifically, he was accused of failing to disclose that a large hedge fund, Paulson & Co. Inc., had helped select the content of the mortgage-backed securities portfolio, while Paulson simultaneously shorted the portfolio through the purchase of credit default swaps. Tourre was accused of misleading ACA into believing that Paulson took a long position of approximately $200 million in ABACUS and that the hedge fund’s interests were aligned with ACA’s.

Goldman settlement. The SEC announced a $550 million settlement with Goldman Sachs on July 15, 2010, three months after the complaint was filed in the Southern District of New York. Goldman settled the charges without admitting or denying the allegations, but made the following statement in settlement papers: “Goldman acknowledges that the marketing materials for the ABACUS 2007-AC1 transaction contained incomplete information. In particular, it was a mistake for the Goldman marketing materials to state that the reference portfolio was ‘selected by’ ACA Management LLC without disclosing the role of Paulson & Co. Inc. in the portfolio selection process and that Paulson's economic interests were adverse to CDO investors. Goldman regrets that the marketing materials did not contain that disclosure.”

Andrew Ceresney, Co-Director of the SEC’s Division of Enforcement, said about the Tourre verdict: “We are gratified by the jury’s verdict finding Mr. Tourre liable for fraud. We will continue to vigorously seek to hold accountable, and bring to trial when necessary, those who commit fraud on Wall Street. As shown by this verdict, we proved that Mr. Tourre, as a Goldman Sachs Vice President, put together a complicated financial product that was secretly designed to maximize the likelihood that it would fail, and marketed and sold it to investors without appropriate disclosure.”

Companies: Goldman Sachs & Co.

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