Will the Fabulous Fab verdict hurt Goldman?
In a trial that was closely watched by those in finance, the journalists who cover them and not many others, Goldman Sachs trader Fabrice Tourre was found guilty of six of seven charges Thursday. The case, which centered around a mortgage-related security, was complicated and is being hailed as a victory for the Securities and Exchange Commission, but what does it mean for Goldman?
Here’s the Wall Street Journal’s lead:
A federal jury found former Goldman Sachs Group Inc. trader Fabrice Tourre liable for misleading investors in a mortgage-linked deal that collapsed during the financial crisis, delivering a historic win for a U.S. regulator eager to prove its mettle inside the courtroom.
The panel of nine jurors reached their verdict during the second day of deliberations, finding Mr. Tourre liable on six of seven claims that he violated federal securities law.
“It was a long, slow process,” said juror Beth Glover, a 47-year-old Episcopal priest, after the verdict.
The victory is an important one for the Securities and Exchange Commission, which has struck out in past efforts to make a convincing case to jurors in high-profile trials against individuals.
The New York Times offered this context about the trial:
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.
A spokesman for Goldman Sachs said, “As a firm, we remain focused on being more transparent, more accountable 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, Mr. 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.
Goldman, which paid a $550 million fine in July 2010 to settle with the SEC over the deal, paid for Tourre’s legal defense, according to Reuters:
The win could give the SEC ammunition to address critics who have long argued the agency has been insufficiently aggressive in holding individuals on Wall Street accountable for their roles in the events leading to the financial crisis.
“The SEC can tout the victory and use it to show it’s been able to go after bad actors associated with financial collapse and do it successfully,” said David Marder, a former lawyer with the SEC and partner at Robins, Kaplan, Miller & Ciresi.
The verdict may not assuage all those critics. Dennis Kelleher, chief executive of financial regulation advocacy group Better Markets, said that regardless of the verdict the case was “a waste of SEC resources and efforts” that targeted a junior staffer.
“The SEC is hunting for a headline to cover up their years of total failure to police Wall Street or to go after any senior executives at any of the major firms,” Kelleher said on Wednesday, the day before the verdict.
The SEC says it has brought charges against 157 entities and individuals in financial crisis-linked enforcement actions. It has obtained $2.68 billion in penalties and other judgments from defendants, largely through settlements.
The SEC’s trial record in financial crisis cases before the Tourre verdict had been mixed.
Goldman hired a new global head of public relations, Richard “Jake” Siewert in March of 2012. At the time, the New York Times said it would bolster its PR ranks as well as help the large bank battle negative headlines.
Now that Goldman’s name is in the headline and lead of every story about someone convicted of fraud, the firm is taking another beating. They’ve gone to great lengths to distance the bank from Tourre and his actions, but the Google test still remains. Today’s news links the words “Goldman” and “fraud” in the same sentence, not exactly the place you want your firm to be.
While this story and the outcome have little to do with regular investors, it is probably causing some salespeople to call clients to reassure them that this was the act of an individual. Again, the damage is in the amount of control that’s likely being done.