There was considerable skepticism that the Securities and Exchange Commission would be successful in its civil fraud case against Fabrice Tourre, the former Goldman Sachs vice president, in connection with the sale of a synthetic collateralized debt obligation. After suffering defeats, or at least significant setbacks, in other fraud actions arising from the financial crisis, many viewed the S.E.C.’s chances about as favorably as New York Jets fans feel about the quarterback Mark Sanchez.
The jury’s verdict holding Mr. Tourre liable on six of the seven charges in the complaint may not be a ringing endorsement of how the government has pursued cases since the meltdown, but the court victory surely comes as a huge relief to the S.E.C.’s enforcement division. And that result is all the sweeter because the agency faced a defense team financed by Goldman, which still had a stake in the outcome despite its earlier $550 million settlement.
Floyd Norris compared the C.D.O. to betting on the outcome of a football game, and like a sporting contest, the question in Mr. Tourre’s case may well focus not so much on how the S.E.C. won but whether his lawyers lost it.
Mr. Tourre’s lawyers put on the Arthur Fonzarelli defense â€" “Aaaayy†â€" by resting without calling any witnesses. This is a high-risk strategy that tells the jury the opponent’s case is so weak that the opponent need not deign to respond.
Of course, it was not exactly a trial without a defense because, unlike a criminal prosecution, the government put Mr. Tourre on the witness stand as part of its case. So his lawyers were able to offer his side of the story, which may in the end have hurt the case as much as the S.E.C. put on convincing evidence to prove a fraud.
The defendant’s testimony often becomes the focal point of the trial because deciding whether there was a fraud can depend on the person’s credibility. If the denials of any misconduct are believable, like Mr. Tourre’s statement that “I haven’t done anything wrong,†then establishing intent to defraud or even negligence is almost impossible.
On the flip side, if the jury does not accept the defendant’s claims of innocence, then it becomes much easier to interpret equivocal evidence â€" like e-mails Mr. Tourre claimed were just “silly, romantic†statements to a girlfriend â€" as sufficient to establish fraudulent intent or recklessness. This is how a fraud case is built because no one writes a memorandum outlining their knowledge of misstatements, so these little snippets can make the difference between success and failure.
The S.E.C. also had the benefit of two witnesses, Laura Schwartz from the ACA Financial Guaranty Corporation and Gail Kreitman, a former Goldman saleswoman, who testified that they were misled about who was investing in the C.D.O. that Mr. Tourre helped put together. Unlike other cases in which the S.E.C. was unsuccessful, these were witnesses from inside Wall Street stating that the disclosures were inadequate.
Now that Mr. Tourre has been found liable for fraud, the case shifts to determining what remedies the court should impose. He will be subject to civil monetary penalties, which range from $5,000 to as much as $130,000 for each violation.
In addition, the court can order Mr. Tourre to forfeit any profits from his violations. Goldman paid $15 million in disgorgement when it settled with the S.E.C. in July 2010, and it is unclear whether he received any specific benefit from the C.D.O. transaction beyond what the firm reaped from selling it.
The jury’s verdict can also subject Mr. Tourre to a separate administrative proceeding before the S.E.C. to determine whether he should be barred from any association with the financial industry in the future.
Section 925 of the Dodd-Frank Act expanded the S.E.C.’s power by allowing it to issue a broad order barring someone who engaged in fraudulent conduct from being associated with any broker, investment adviser or other type of securities firm, a prohibition which can be permanent. In addition, this remedy was extended to those no longer affiliated with the financial industry but who committed a violation while associated with a firm regulated by the S.E.C.
Mr. Tourre is studying for a doctorate in economics and may be headed for the verdant pastures of academia, so a bar might not have much effect. Yet he may want put his experience on Wall Street together with academic credentials to work in the world of finance, and any type of bar could make securing a position difficult.
It is not clear whether the S.E.C.’s authority to issue a bar from working in the financial industry, and the extension to those no longer associated with a firm, can be applied retroactively. Congress passed the Dodd-Frank Act in 2010, and the violations happened three years earlier.
The Supreme Court has explained that there is a general presumption against retroactive application of a statute unless Congress makes it clear that it wants a new law applied to past conduct. In Landgraf v. USI Film Products, the court explained that determining whether a statute came within this presumption required looking at “whether it would impair rights a party possessed when he acted, increase a party’s liability for past conduct, or impose new duties with respect to transactions already completed.â€
The S.E.C. already ran into this issue when it tried to apply a Dodd-Frank provision retroactively by filing an administrative proceeding against Rajat Gupta for insider trading, which it was not authorized to do until after the law went into effect. Mr. Gupta challenged the S.E.C.’s procedural tactic in Federal District Court, and after a favorable ruling by Judge Jed S. Rakoff in Manhattan, the S.E.C. dismissed the administrative case and later refiled the charges in Federal District Court.
So if the S.E.C. seeks to bar Mr. Tourre from the financial industry, he can try to block the proceeding by arguing that retroactive application of the law would violate his rights by increasing his “liability for past conduct.â€
Regardless of whether the S.E.C. pursues a bar order, Mr. Tourre can appeal the jury’s verdict, with the legal fees continuing to be borne by Goldman. That means the case can drag on for another year or two as the two sides fight over whether the trial was conducted properly.
To paraphrase Winston S. Churchill, the jury’s verdict looks like just the end of the beginning for Mr. Tourre.
