Former Goldman Trader Is Found Liable in Mortgage Deal

Fabrice Tourre, the former Goldman Sachs trader at the center of a toxic mortgage deal sold to investors on the eve of the financial crisis, was found liable on Thursday for civil securities fraud.

Five years after the crisis, he is the only employee of a big American bank to lose a courtroom battle to Wall Street’s top regulator, the Securities and Exchange Commission. The S.E.C. took only a handful of employees to court over the crisis, but most cases were settled.

After two days of deliberation, the nine-person jury concluded that Mr. Tourre misled investors about the mortgage deal, capping a more than two-week civil trial in one of the most prominent cases involving the 2008 crisis.

Of the seven charges facing Mr. Tourre, the jury found him liable on six.

Mr. Tourre, a 34-year-old Frenchman who is enrolled in a doctoral economics program at the University of Chicago, now faces a fine, or worse, a ban from the Wall Street. The verdict raises questions about his lawyers’ decision not call a single witness, a show of confidence that failed to impress the jury.

The S.E.C. overcame a rocky start to its case. In the opening days of the trial, the S.E.C. blanketed the jury with financial jargon and called a witness who suddenly contradicted earlier statements he made to the agency, saying that he had been “scared” and pressured by S.E.C. officials.

For the S.E.C., an agency still dogged by its failure to thwart the crisis, the verdict delivered a long-sought courtroom victory for its crisis-era cases. The defining moment follows one courtroom disappointment after another, including two similar mortgage-related cases that crumbled. In one case, a jury cleared a midlevel Citigroup employee, questioning why the agency declined to charge more senior executives at the bank.

Even with the triumph over Mr. Tourre, however, the S.E.C. could face scrutiny all the same.

Some critics have questioned why the agency chose to make Mr. Tourre â€" a midlevel employee who was stationed in the bowels of Goldman’s mortgage machine â€" the face of the crisis. Rather than take aim at a high-flying executive, the agency pursued someone barely known on Wall Street, let alone Main Street.

Although the agency has won about 80 percent of its trials under Matthew T. Martens, and has sued 66 chief executives and other senior officers in crisis-related cases, most Wall Street employees settled without fighting in court.

Despite the criticism, the S.E.C. threw its resources at Mr. Tourre’s case. For one, the agency talked to a private jury consultant. It also assigned Mr. Martens to the case, even though he typically oversees the agency’s trial lawyers without acting as one.

“There is no denying the importance of this to the S.E.C. because it is a financial crisis case,” said Stephen J. Crimmins, a partner at law firm K&L Gates and former deputy chief litigation counsel in the S.E.C. enforcement division.

Andrew Ceresney, co-director of the S.E.C.’s division of enforcement, on said in a statement: “We are gratified by the jury’s verdict finding Mr. Tourre liable for fraud. We will continue to vigorously seek to hold accountable, and bring to trial when necessary, those who commit fraud on Wall Street.”

Judge Katherine B. Forrest has the final say on monetary sanctions, be it disgorgement of profits made from the trade in question or a fine. The fine could range from $5,000 to $130,000 per violation.

Mr. Tourre also faces a ban from the securities industry, but any decision to prohibit Mr. Tourre from working on Wall Street, and for how long, lies solely with the S.E.C.

A lawyer for Mr. Tourre declined to comment on Thursday.

A spokesman for Goldman Sachs said, “As a firm, we remain focused on being more transparent, more acountable and more responsive to the needs of our clients.”

The verdict comes three years after the S.E.C. thrust Mr. Tourre into the spotlight with civil charges and a series of embarrassing e-mails. Those e-mails, in which Mr. Tourre referred to a friend nicknaming him the “Fabulous Fab,” a moniker that has come to define Mr. Tourre’s persona, transformed him from an obscure trader into a symbol of Wall Street hubris.

The S.E.C.’s case against Mr. Tourre hinged on the claim that he and Goldman sold investors a mortgage security in 2007 without disclosing a crucial conflict of interest: a hedge fund that helped construct the deal, Paulson & Company, also bet it would fail. In his opening argument to the jury, Matthew Martens, the S.E.C.’s lead lawyer, depicted the commission’s case as an assault on “Wall Street greed,” arguing that Mr. Tourre created a deal “to maximize the potential it would fail.”

Mr. Tourre was living in a “Goldman Sachs land of make believe” where deceiving investors is not fraudulent, Mr. Martens declared on Tuesday when delivering his closing arguments.

Lawyers for the former Goldman trader, however, portrayed their client as a scapegoat who was 28 at the time of the crisis. Throughout the trial, the defense lawyers reminded the jury that senior Goldman executives approved the deal.

“The idea that Fabrice Tourre, a 28-year-old vice president, was conjuring up a $1 billion fraud, or conspiring with others, is just not supported by the evidence,” Sean Coffey, one of his lawyers, said during his closing arguments.

Mr. Tourre, whose fresh face and diminutive stature suggest he is much younger than his current age of 34, took the witness stand for three crucial days. While he showed a sympathetic side as someone who has shunned Wall Street to pursue his Ph.D. and a teaching career, he also stumbled at times and even conceded that he made mistakes.

But his defense failed to persuade a jury that included a minister, a graphic designer and a former stockbroker. The broker routinely whipped his head back and forth between the lawyers and the witness stand, but other jurors appeared to nod off as the case became bogged down in financial minutiae.

In finding Mr. Tourre liable for civil fraud, the jury concluded that he made a material â€" or important â€" misstatement to investors and failed to correct it. The S.E.C. had to prove its case by a preponderance of the evidence, a lower standard than criminal cases.

In deliberating the S.E.C.’s most serious claims, the jury was instructed to weigh whether Mr. Tourre intended to defraud investors, or at least acted recklessly. The lesser charges required only that Mr. Tourre acted negligently.

In 2010, the S.E.C. had also charged Goldman with fraud. Not long after the case was announced, the bank settled for $550 million, a record fine at the time.

The S.E.C.’s victory reopens some wounds for Goldman, which is paying for Mr. Tourre’s defense. Inside the bank, employees had been quietly cheering for Mr. Tourre, whom one executive called “the poor kid.” Viewing the S.E.C.’s case as thin, the executives saw Mr. Tourre as a proxy for the fight they wanted to wage with regulators.

Mr. Tourre’s troubles trace to early 2007, the end of Goldman’s mortgage security boom. At the urging of Paulson & Company, the hedge fund run by the billionaire John Paulson, Mr. Tourre set out to create a mortgage deal known as Abacus 2007-AC1.

Paulson & Company, which helped pick the underlying mortgage bonds in the deal, made $1 billion betting Abacus would fail. To bolster the deal’s credibility in the eyes of investors, Goldman persuaded an outside company, ACA, to work with Paulson & Company to pick the mortgages.

The S.E.C. took aim at Mr. Tourre and Goldman for failing to warn investors that Mr. Paulson was not only helping to create the deal, but was betting against it. In the documents Goldman submitted to investors â€" including a term sheet and a 66-page marketing book â€" the banks said the portfolio was “selected by ACA,” without reference to Paulson & Company.

Yet Mr. Tourre’s boss at Goldman, Jonathan Egol, testified that it was unheard-of for any Wall Street bank to disclose the name of the hedge fund betting against an investment. Client confidentiality rules typically prevented Goldman from doing so.

Mr. Egol, an S.E.C. witness, 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.

Mr. Tourre’s lawyers have argued it should not have mattered to IKB what Paulson & Company was doing. The trade in question had to have an investor who was betting it would fail, and another betting it would rise â€" a fact that each side knew.

Anticipating this defense, the S.E.C. also accused Mr. Tourre of luring ACA into structuring the deal - and later taking a small investment in it. He did so, the S.E.C. said, by misleading ACA about Paulson & Company’s role.

After Goldman contacted ACA to pitch the potential deal in January 2010, ACA sent out a meeting request to Mr. Tourre and others. The subject field said: “Meet with Paulson, Potential Equity Investor.” For many people on Wall Street, the phrase “equity investor” is shorthand for someone who bets a deal will rise in value, also known as a long investor.

A few days after the meeting, Mr. Tourre sent a “contemplated” structure of the trade to an ACA executive, Laura Schwartz. The e-mail stated that the riskiest slice of the trade - a piece typically bought by someone betting the deal would succeed â€" was “precommitted” when in fact it was not even going to be offered.

Mr. Tourre, the S.E.C. argued, meant to imply wrongly that Paulson & Company bought that risky piece. The e-mail also referenced Paulson & Company as the “transaction sponsor,” a term that could be construed to mean the hedge fund was betting for the deal.

“That’s not how I would customarily have used the term,” Mr. Egol said in one of the most damning moments of the trial for Mr. Tourre.

Mr. Tourre conceded that some of his statements were wrong.

“I wasn’t trying to confuse anybody, it just wasn’t accurate at the time,” he told jurors.

But Mr. Tourre also testified that he likely cut and pasted the language in the e-mail to Ms. Schwartz from another document and there was “no intent to confuse anyone.” Goldman followed up almost immediately with a term sheet that, according to Mr. Tourre’s lawyers, should have clarified to ACA that Paulson & Company was not a long investor.

Mr. Tourre’s lawyers further argued that if ACA did not know of the hedge fund’s bet against Abacus, it should have. ACA, the lawyers note, was a sophisticated player and met separately with Mr. Paulson’s team to discuss the Abacus deal.

Mr. Tourre told jurors it was “inconceivable” to him ACA did not understand Paulson & Company was betting the trade would fail.

Still, ACA’s confusion persisted, and Ms. Schwartz continued to refer to Paulson & Company as the “equity,” or long, investor in an e-mail. That e-mail was forwarded to Mr. Tourre, who failed to clarify the hedge fund’s position. Instead, Mr. Tourre forwarded the e-mail to another colleague, saying that they needed to “discuss” it.

Another Goldman employee added to the confusion. The employee, Gail Kreitman, told one of Ms. Schwartz’s deputies over the phone that Goldman was discussing a deal in which the firm was “placing a hundred percent of the equity,” or long position, with Paulson & Company. In alleging that Mr. Tourre was part of a broader conspiracy at Goldman, the S.E.C. used a recording of that call as evidence against him.

Ms. Schwartz also took the stand for the S.E.C. While Mr. Tourre’s lawyers questioned Ms. Schwartz’s motives for testifying against Mr. Tourre â€" on the eve of trial, the S.E.C. dropped an unrelated investigation against her - she repeated over and over again that “I believed Paulson was the equity investor in the transaction.” Her boss also testified that, had he known Paulson & Company was betting against the deal, ACA would have steered clear of it.

The S.E.C. also used some of Mr. Tourre’s love notes to a girlfriend to impugn his credibility. In one e-mail, he wrote “I love this website” and linked to a site that referred to exploding mortgages. He also joked to his girlfriend that he sold toxic real estate bonds to “widows and orphans.”

On the witness stand, Mr. Tourre acknowledged that the e-mail was “in poor taste.”

But he was confident that he did nothing wrong. “I am here to tell the truth and clear my name,” he said.