Ex GS Trader Fabrice Tourre Known as ‘Fabulous Fab’. How he used lies and deception to sell $1 billion worth toxic mortgage deals selected by hedge fund billionaire John Paulson.
The civil trial, being heard by a federal jury in Manhattan, revolves around a complex transaction linked to subprime mortgages in 2007, ahead of the implosion of the U.S. housing market. The deal cost investors $1 billion, but allowed a prominent Goldman client—hedge fund firm Paulson & Co.—to profit, according to the Securities and Exchange Commission.
Fabrice Tourre, a party lover who claimed to be from a prominent French family, of misleading investors in a mortgage investment called Abacus 2007-AC1 (hedge fund run by hedge fund billionaire John Paulson) by not telling them that a hedge fund was involved in selecting the underlying assets and betting against it.
The SEC has alleged that Fabrice Tourre, nicknamed “the fabulous Fab” by a co-worker, misled investors about the role of Paulson & Co. in the creation of the financial instrument, known as a synthetic collateralized-debt obligation, or CDO.
During the questioning of an expert witness offered by the SEC on Tuesday, John “Sean” Coffey, one of Mr. Tourre’s lawyers, expressed concern that “the jury was lost” and asked for more time to explore some of the complex concepts at issue in the case.
“It is critical to our defense that the jury understands how a synthetic CDO works,” said Mr. Coffey.
As a result, questioning of Dwight Jaffee, a finance professor at the University of California-Berkeley, stretched through most of the morning. Jurors at times rubbed their eyes or looked toward a clock in the courtroom.
Several investors lost money on the deal at issue in the trial, known as Abacus 2007-AC1, while Paulson & Co., which bet against the performance of the mortgages underlying the transaction, profited. The SEC claims investors weren’t told about Paulson’s role or its bet against the deal’s performance, known as a short.
A synthetic CDO is similar to a traditional CDO, which pools loans, such as subprime mortgages, with slices of the security sold to investors. However, parties in the synthetic-CDO transaction take opposing bets on how the underlying assets will perform, with none of the investors actually owning those assets.
On Tuesday, Sihan Shu, a Paulson employee, also testified that the hedge fund was looking, at the time of the deal, to make a bet against the optimism on Wall Street about housing growth in the U.S.