S.E.C. Tries to Use Trader\'s Goldman Colleague to Bolster Case

Jonathan Egol and Fabrice Tourre were close colleagues on Wall Street, a team of traders who worked side by side on a Goldman Sachs mortgage desk in the lead-up to the financial crisis.

On Thursday, that relationship came under the spotlight as Mr. Egol took the witness stand in the civil trial of Mr. Tourre, a 34-year-old Frenchman accused of misleading investors about a mortgage security that ultimately failed.

The case, one of the most prominent actions stemming from the 2008 crisis, centers on the claim that Mr. Tourre and Goldman failed to warn investors that a hedge fund run by the billionaire John A. Paulson helped construct the mortgage security and then bet against it. Mr. Tourre's lawyers argue that the investors were sophisticated and helped structure the deal.

The Securities and Exchange Commission, which brought the charges in 2010, used Mr. Egol's appearance as an opportunity to introduce a series of e-mails and documents that could damage Mr. Tourre's defense. The e-mails, many of which were dispatches between the traders, show that Mr. Tourre told colleagues at Goldman that the mortgage security was “selected by ACA/Paulson,” referring to Mr. Paulson's hedge fund and ACA Management, the independent company Goldman hired to choose the mortgages in the deal.

Matthew T. Martens, who is leading the S.E.C.'s case, noted that Goldman produced reams of disclosures to investors, all of which emphasized ACA's role and omitted Mr. Paulson's. “There's no disclosure?” Mr. Martens queried, his voice rising.

“I am not aware of any,” Mr. Egol, who was senior to Mr. Tourre at the time and is now a managing director at Goldman, conceded.

The revelations, partly rebutted when Mr. Tourre's lawyers cross-examined Mr. Egol, steadied the S.E.C.'s case after a crucial government witness did his best to unravel it. The witness, Paolo Pellegrini, an executive at Mr. Paulson's hedge fund, suddenly retracted his earlier statements that investors were unaware the hedge fund was betting against the deal. He said on the witness stand that he had been “scared” and pressured by S.E.C. officials.

While it is unclear whether the jury will find Mr. Pellegrini believable, his change of heart is potentially damaging to the S.E.C. Hours after his testimony, the agency shuffled the order of its witness list to move up the testimony of Gail Kreitman, a former Goldman employee, who could cause problems for the defense. Ms. Kreitman may take the stand as soon as Friday, though Mr. Egol's testimony is not yet done.

Outside the presence of the jury, Sean Coffey, a lawyer for Mr. Tourre, briefly sparred with Mr. Martens. “I assume they're doing it based on what happened in court yesterday,” Mr. Coffey said of the change in the witness lineup. Later, in response to another barb, Mr. Martens said: “I don't think the sarcasm is necessary.”

When Mr. Egol took the stand, his gentle demeanor presented a contrast to Mr. Pellegrini, an imposing figure with an acerbic tongue.

Yet, when the S.E.C. first pursued the case involving the soured mortgage deal, the agency warned that it might charge Mr. Egol. It reversed course to sue only Goldman and Mr. Tourre. Goldman ultimately settled the case, paying what was then a record $550 million penalty without admitting or denying guilt.

Mr. Egol, whose honey-brown hair and beard project an avuncular presence, spent much of his testimony explaining the minutiae of mortgage securities to the jury. Still, the jurors struggled to stay awake at times, and at least three nodded off during an exchange between Mr. Egol and Mr. Coffey that involved terms like “intermediation,” “counterparty risk” and “monoline insurers.”

For its part, the S.E.C. tried to use Mr. Egol to bolster its case. In one e-mail the S.E.C. presented to the jury, Mr. Tourre referred to Mr. Paulson's hedge fund as the “sponsor” of the mortgage security, a label that might imply Mr. Paulson was betting for the deal, not against it. Mr. Paulson's fund made $1 billion betting against the security.

“That's not how I would customarily have used the term,” Mr. Egol said, supporting the S.E.C.'s argument.

Mr. Martens also walked Mr. Egol through Goldman's disclosures to investors. In all of the documents - including a term sheet and a 66-page marketing book - Goldman said the portfolio was “selected by ACA,” without reference to Paulson.

But under cross-examination, Mr. Egol suggested that it was not industry practice to disclose Mr. Paulson's involvement to investors, and there was no “regulatory” requirement to do so.

Mr. Egol also testified on cross-examination that the German bank IKB Deutsche Industriebank, a main investor in the transaction, knew the contents of the deal and had a say in what went into it, a victory for Mr. Tourre's defense.

During cross-examination, Mr. Coffey sought to clarify what Mr. Tourre said in an e-mail when he called the mortgage security “infamous.” Mr. Egol testified that his desk lost about $90 million in 2007 because of its position in the trade with Mr. Paulson, offering an alternate theory to the jury of why Mr. Tourre used the word.

If found liable, Mr. Tourre faces fines and could be barred from the securities industry.

As for his relationship with Mr. Egol, the two had not seen each other since 2011. It was then, Mr. Egol said, that they “happened” to bump into each other at a restaurant in New York.

A version of this article appeared in print on 07/19/2013, on page B7 of the NewYork edition with the headline: S.E.C. Tries to Use Trader's Goldman Colleague to Bolster Case .