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From Securities Regulation Daily, March 12, 2014

Tourre penalized, SEC gets less than requested

By Mark S. Nelson, J.D.

The SEC today won a split decision over its request for penalties in its civil case against the Goldman Sachs & Co. trader, Fabrice Tourre, who is now on paid leave from the firm. The federal court in Manhattan imposed over $825,000 in penalties against Tourre for his involvement in an alleged scheme to sell complex financial instruments. The award was less than  the SEC asked for, and the SEC did not persuade the judge to grant injunctive relief. A jury found Tourre liable last August on six of seven counts that he violated the federal securities laws (SEC v. Tourre, March 12, 2014, Forrest, K.).

Andrew Ceresney, director, SEC Division of Enforcement, said in a public statement, the SEC was “pleased” the court ordered “significant penalties,” including the requested disgorgement amount. He added, “The ruling reflects the SEC’s intent of pursuing meaningful sanctions to punish individuals responsible for misconduct and deter others from violating the federal securities laws.”

Disgorgement. The SEC won more than $175,000 in disgorgement against Tourre, whose lawyers had asked the court not award disgorgement because Goldman Sachs had already paid disgorgement related to the same transaction in an earlier settlement with the SEC. The court, however, said the SEC must recalculate the amount of prejudgment interest to be collected using a rate of 3 percent.

In rejecting Tourre’s argument, the court noted that Goldman Sachs got initial trading revenues plus nearly $1 billion in gains from long investors. Goldman Sachs then passed many of these gains to Paulson & Co. via credit default swaps. The court also noted that Goldman Sachs’ $15 million in initial trading revenues were not truly profits, and the parties here agreed that the firm ultimately lost over $90 million.

Civil penalties. The court awarded the SEC $650,000 in civil money penalties, less than the SEC had requested. The court said three transactions in which Tourre was involved merited third-tier penalties of $130,000 each, for a total of $390,000. But only second-tier penalties were justified for four other transactions, totaling $260,000, or $65,000 per violation.

The court noted that the Securities Enforcement Remedies and Penny Stock Reform Act of 1990, and its legislative history, call for punishing “violations,” which consist of “acts” or “omissions.” Second Circuit and Southern District of New York precedents instruct courts to determine the number of “violations” from the “number of acts” alleged to violate the federal securities laws.

Here, the SEC had asked the court to impose civil money penalties for all seven alleged violations by Tourre, which would have totaled $910,000. While the court noted that Tourre did not challenge the per violation framework, he claimed that he could be subject to only second-tier penalties because of the jury’s general, rather than specific, verdict.

The SEC made the required showing to justify third-tier penalties for three of the alleged violations. The court noted that, among other things, Tourre hid Paulson & Co.’s role in at least one transaction, and he never showed “remorse or contrition” for his conduct. The court, however, said that the SEC had not shown that four of the alleged transactions involved substantial loss or the significant risk of substantial losses, as required for third-tier penalties.

Indemnity. On the issue of whether Tourre may seek indemnification from Goldman Sachs, the SEC again won a split decision. The SEC had asked the court to bar Tourre from being reimbursed by anyone. The court, however, ruled that while Tourre may not seek reimbursement from Goldman Sachs, he may seek reimbursement from non-Goldman Sachs persons or entities.

The SEC cited media reports alleging that Goldman Sachs had “privately” said it would indemnify Tourre. The SEC itself, however, noted that Goldman Sachs’s counsel said the firm had no agreement with Tourre as of November 2013 in correspondence with SEC staff. The court reasoned that barring Goldman Sachs from paying Tourre’s penalties was justified by the jury’s finding that Tourre was liable under Exchange Act Sec. 20(e), which required a finding that Tourre aided and abetted Goldman Sachs’s Exchange Act Sec. 10(b) and Rule 10b-5 violation.

Said the court, “To permit Tourre to obtain reimbursement from Goldman, which the jury in this case found to be a co-violator of the securities laws, would undermine the purposes of the civil penalty statutes—to punish the individual violator and to deter future violations.”

The court added that although the imposition of a no-reimbursement provision is within its “broad equitable power,” it said its decision here was “highly dependent” on the facts and laws specific to the SEC’s case against Tourre.

No injunction. The question of whether to impose a permanent injunction on Tourre was the only item for which the SEC came away empty-handed. Tourre argued that he had no plans to return to the securities industry, allegedly bolstered by his paid administrative leave from Goldman Sachs since April 2010, and his plans to finish an economics doctorate program at the University of Chicago in 2016.

The court said it was “skeptical” of the SEC’s requested “obey-the-law” injunction, and the SEC admitted that this type of injunction often goes unenforced. The court, however, said it would retain jurisdiction over the case for three years and it could mull appropriate action, if needed, during that time.

The case is No. 10 Civ. 3229 (KBF).

Attorneys: Andrew Matthew Calamari for the SEC. Andrew Rhys Davies (Allen & Overy, LLP ) for Fabrice Tourre.

Companies: Goldman Sachs & Co.; Paulson & Co.

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