Goldman Sachs Trader Fabrice Tourre Found Guilty in $1 Billion Fraud Case.
The jury found Goldman Sachs banker Fabrice Tourre liable for his role in a mortgage deal that lost some investors $1 billion during the subprime crisis. Fabrice Tourre, 34, was just one of a team of Goldman employees that worked on a complex investment known as Abacus, which failed, netting investors who bet against the product big profits. But Tourre was the only banker who sent mirthful e-mails to a girlfriend referencing his nickname, “the Fabulous Fab,” and describing the financial products he created as “pure intellectual masturbation.” A jury found Tourre liable for misleading investors in a 2007 mortgage deal. Known as Abacus 2007-AC1, the deal allowed investors to make side bets on the performance of bonds backed by home loans made to shaky borrowers. At issue was whether Tourre knowingly concealed the role of hedge fund Paulson & Co. Inc., which was betting that the borrowers would default. By disguising Paulson’s short bet, Goldman — through Tourre as its salesman — was able to convince others, including Germany’s IKB Deutsche Industriebank AG (IKB), to take the opposite side of Paulson’s bet.
In parsing the verdict, it is important to recognize that there is nothing wrong with selling investments you think are bad, which is what happens whenever you sell a stock you think will decline. Similarly, there is nothing wrong with buying securities you think will rise in value, or with helping sellers find buyers. That is part of what drives financial markets — and part of how Goldman Sachs and all Wall Street securities firms legally and rightfully make money. The investors who made bullish bets on Abacus must have known that someone was betting against them; the deal couldn’t have existed otherwise.
The crucial issue here is how Goldman and Tourre represented what they were selling. Did Goldman act as an honest dealer, bringing together investors with differing views? Or did it, in concert with a seller, dupe a buyer? In its $550 million settlement with the Securities and Exchange Commission in July 2010, Goldman admitted that its marketing materials, which claimed that an independent investment manager had selected the bonds in Abacus, shouldn’t have left out the fact that Paulson had played a big role in the selection.
Now a jury has decided that Tourre’s misrepresentations amount to civil securities fraud. As a result, Tourre could end up paying hundreds of thousands of dollars in penalties to compensate the investors he misled, and he could be barred from the securities business for life.