Trader and S.E.C. Lawyer Spar Over E-Mail

The Securities and Exchange Commission waited more than three years to have a chance to shred the credibility of Fabrice Tourre, a former Goldman Sachs trader, in front of a jury. It finally got its chance on Wednesday.

Over the course of two hours, the government’s lawyer, Matthew T. Martens, and Mr. Tourre, who has been accused of participating in a scheme to defraud investors, verbally sparred over what Mr. Tourre knew about a 2007 trade he helped structure. Mr. Tourre seemed exasperated on the stand, and at one point during the questioning, tipped over the water container on the witness stand while reaching for a document.

“So the statement was false,” Mr. Martens asked just minutes after Mr. Tourre took the stand, challenging him over an e-mail he had written.

“It was not accurate,” Mr. Tourre responded, frustration rising in his voice.

“Is there a difference between something being inaccurate or false?” Mr. Martens shot back.

“There is,” Mr. Tourre said.

Mr. Tourre testified at the midpoint of the trial, one of the biggest cases to come out of the 2008 financial crisis. Mr. Tourre is also one of only a few Wall Street employees to land in court over their actions during the period, and the rarity of the trial underpins its importance.

For Mr. Tourre, who is now enrolled in a doctoral economics program at the University of Chicago, an unfavorable verdict from the civil trial could yield a fine, or worse, a ban from the securities industry. For the S.E.C., which has been dogged by its failure to thwart the crisis and hold executives who played a role in it accountable, its reputation is on the line and victory in the case is crucial.

On Wednesday, Mr. Tourre and Mr. Martens sparred over what could turn out to be a critical misstatement Mr. Tourre made in an e-mail to ACA Management, a company that both invested in the trade in question and helped construct it.

In 2007, at Goldman’s behest, ACA helped put together a trade for the hedge fund Paulson & Company. The firm and its leader, John A. Paulson, sensed that the housing market was heading for a collapse and made more than $1 billion by betting against the security ACA had assembled. Earlier this week, a former ACA executive, Laura Schwartz, testified that had she known Mr. Paulson was placing a negative or bearish bet she never would have gone ahead with the transaction.

A central question in the case is whether Mr. Tourre should have corrected ACA’s impression that Paulson & Company had a positive outlook on the security. In another correspondence, a January 2007 e-mail that was forwarded to Mr. Tourre, Ms. Schwartz described the Paulson & Company hedge fund as having an “equity perspective,” indicating that she believed the hedge fund wanted the security to rise in value.

Mr. Tourre acknowledged that he did not correct her error, and that a firm in ACA’s position should have had such a misunderstanding corrected. But Mr. Martens, the S.E.C. lawyer, was not able to get Mr. Tourre to say under oath that he had actually read that phrase in the e-mail from Ms. Schwartz.

Mr. Tourre had forwarded the e-mail to a lawyer at Goldman, saying, “Let’s sit down and discuss when you get a chance.” Mr. Tourre said all he could recall was that his note to the lawyer referred to the final sentence in the three-sentence e-mail, concerning credit analysis of the deal.

The courtroom was packed on Wednesday, as lawyers including Thomas Ajamie, a well-known plaintiffs’ attorney, watched Mr. Martens in action. Mr. Tourre, dressed in a black suit, crisp white shirt and purple tie, looked much younger than his 34 years. He smiled at repetitive questions from Mr. Martens, often raising his eyebrows.

He spoke quickly with a thick accent, and had trouble pronouncing some simple words, which may color the jury’s view of him. On more than one occasion, he referred to “bonds” but it sounded more like “bones.”

“Sorry, it is my French accent,” Mr. Tourre said to the court reporter, who had asked him to repeat a word.

While the highlight of the day was Mr. Tourre’s testimony, most of Wednesday was consumed with the cross-examination by Mr. Tourre’s lawyers of Ms. Schwartz, the ACA employee who worked with Goldman and Paulson & Company in 2007 to assemble the trade.

Though Ms. Schwartz proved to be an articulate witness for the S.E.C., Sean Coffey, Mr. Tourre’s lawyer, spent hours taking apart her testimony, painting her as a poorly informed executive who did not seem to read newspaper articles on the hedge funds she counted as her clients. At one point, she could not remember doing a simple Internet search on Paulson & Company before meeting with them on the trade in question.

Ms. Schwartz, Mr. Coffey contended, was confused about Paulson & Company’s role in the trade from the start.

In early January 2007, Ms. Schwartz received an e-mail from Gail Kreitman, a business acquaintance of hers who was then a Goldman saleswoman, about an unnamed client looking to meet with ACA. That same day Ms. Schwartz called Ms. Kreitman to discuss the e-mail. That call was followed up with an electronic meeting invitation to executives at Goldman and ACA, and referred to Paulson as an “equity” investor, meaning he would be a long investor, betting that the security would rise in value.

“Did she tell you the investment strategy?” Mr. Coffey asked Ms. Schwartz about her call with Ms. Kreitman.

“I have no recollection.” Ms. Schwartz said.

“You had never set eyes on Fabrice Tourre when you wrote this calendar invite,” he said. Ms. Schwartz testified that she did not believe she had met Mr. Tourre at that point.

Mr. Coffey contended that Ms. Schwartz simply assumed Paulson & Company was taking a long position, and never bothered to directly ask Goldman or the hedge fund. Ms. Schwartz has testified that her impression that Paulson & Company was long was based on numerous documents and e-mails stating that Mr. Paulson was the equity investor. She said Goldman never corrected e-mails stating that.

While there were initial representations to ACA from Goldman that left the impression with ACA that Paulson & Company was going long on the trade, Mr. Coffey presented multiple other exhibits, including the offering document, which showed that no investor was taking that equity piece of the trade.

The jury also heard more about the another S.E.C. investigation Ms. Schwartz had been embroiled in. A week before the trial, the court was notified that the S.E.C. had decided not to bring a case against Ms. Schwartz, a reprieve that Mr. Tourre’s lawyers hope will shade the jury’s view of her.

Once the S.E.C. had decided not to move forward with the charges, it met with Ms. Schwartz to prepare her to testify at Mr. Tourre’s trial. Mr. Martens asked Ms. Schwartz what he told her at the end of that preparation session. “You told me to tell the truth and let the chips fall where they may. I have told my truth.”

Mr. Tourre is expected to continue his testimony on Thursday, when his lawyer is expected, and possibly into Friday.