NEW YORK -- A judge presiding over the civil trial of a former Goldman Sachs trader accused of misleading investors about the true prospects of their bet on a package of mortgage-based securities has summed up the charges against him with a fairy tale, saying it's as if he's accused of handing Little Red Riding Hood an invitation to grandmother's house while concealing the fact the invitation was written by the Big Bad Wolf.
In the case against Fabrice Tourre, U.S. District Judge Katherine B. Forrest says the victims weren't to be "hooded children but rather large financial institutions, operating in a dog-eat-dog world."
The charges stem from a group of mortgage-based securities that were marketed in early 2007 when Tourre worked for Goldman Sachs as a vice president. Tourre was born in France and moved to the United States in 2000 to study at Stanford University, where he obtained a graduate degree in science.
The Securities and Exchange Commission accused Tourre in an April 2010 lawsuit of making misstatements and omissions to investors in a portfolio of 90 subprime and mid-prime residential mortgage-backed securities.
The charges accused Tourre of making false and misleading statements and aiding false statements and material omissions by his employer. The SEC sought a declaration that Tourre had violated securities laws, along with a disgorgement of profits and unspecified penalties and damages.
In July 2010, Goldman Sachs settled charges brought against it, agreeing to pay $550 million. It still faces private litigation in the matter, including a federal securities class action lawsuit.
The SEC's civil fraud charges concern the role of a large hedge fund, Paulson & Co. Inc., and its billionaire president, John A. Paulson, in helping to choose the assets that would decide the value of the investment. While Paulson played a significant role in selecting the assets, the company also shorted over $1 billion of those assets through credit default swaps, the SEC said.
The SEC said the kinds of mortgage-based securities Tourre was selling just as the housing market was showing signs of distress contributed to the financial crisis a year later by magnifying losses associated with the downturn of the U.S. housing market.
While investors lost more than $1 billion in the investment, Paulson's positions earned it more than $1 billion, the SEC said.
At trial, which begins Monday, the SEC said it plans to call a number of Goldman Sachs employees as witnesses.
The defense has said in court papers that the SEC has had difficulty finding evidence to support its charges despite its review of more than 12 million pages of documents, thousands of tapes and dozens of investigation interview and deposition transcripts.
Tourre's lawyers, Pamela Chepiga and Sean Coffey, said in a statement: "Fabrice Tourre has done nothing wrong. He is confident that when all the evidence is considered, the jury will soundly reject the SEC's charges."