The trial of the infamous ex-Goldman Sachs trader Fabrice "Fabulous Fab" Tourre, which starts Monday, could put a face on the type of Wall Street recklessness that imploded the housing market and almost sank the economy five years ago.
"This is one of the few opportunities that a court has had to punish conduct associated with the financial crisis that put this country into a grave recession," said attorney David Marder. Marder is a former assistant director of the SEC's Boston office who now defends clients against SEC charges.
Ever since the economy took a nosedive in 2007, there's been a big public outcry blaming Wall Street and its shenanigans. There have been several penalties levied, notably a $550 million settlement that the Securities and Exchange Commission reached with Goldman Sachs(GS) in 2010. But trials have been few and far between.
Tourre is accused of knowingly selling bad investments that he expected would unravel. When he goes to court, it will be the first such trial since the 2009 acquittal of two former Bear Stearns hedge fund managers, Matthew Tannin and Ralph Cioffi, who were also accused of misleading investors.
If Tourre is found liable, he could face a hefty fine from the SEC and be barred from working in the financial industry. "The SEC can take a real bite out of you," said Marder. "The sky's the limit in terms of the monetary penalties."
The SEC has filed civil charges against Tourre and is taking him to trial largely based on e-mail evidence. The SEC alleges that, based on the messages, Tourre knew he was selling compromised investments - packages of real estate debt that had been expected to fail and were being shorted by hedge fund firm Paulson & Co.
"[Tourre's] hand was caught in the cookie jar," said Marder. "In most of the cases, the investment bankers of the worldcould claim that everybody was sophisticated, they were all big boys and they were all entitled to make their own judgment calls. This case is different because the SEC was able to identify the specific facts [about the investment] that Mr. Tourre had."
The SEC's 2010 complaint against Tourre states that "Tourre knew of Paulson's undisclosed short interest" in the collateralized debt obligation, called Abacus, that he was selling to investors. Tourre, whose defense is being paid for by his former employer Goldman Sachs, has denied the charges.
The complaint also states that Abacus was "tied to the performance of subprime residential mortgage-backed securities, and was structured and marketed by [Goldman Sachs] in early 2007 when the United States housing market and related securities were beginning to show signs of stress."
Investors in Abacus lost $1 billion when the housing market fell apart. The SEC charges that Tourre knew this day would come when he peddled the compromised CDO.
Tourre's moniker, "fabulous Fab," comes from one of his e-mails in 2007, where he boasted to a girlfriend about how he'd be the last man standing amidst the impending financial crisis created by his trades.
"More and more leverage in the system, The whole building is about to collapse anytime now ... Only potential survivor, the fabulous Fab ... standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those moustruosities [sic]!!!" Tourre wrote on Jan. 23, 2007, according to SEC documents.
The trial takes place in U.S. District Court in the Second District of New York in Manhattan.