Corporate & Securities Law

Fabrice Tourre And The Lawsuit Against Goldman Sachs

By Keith Griffin

A recent lawsuit against Fabrice Tourre may be emblematic of public sentiment regarding Wall Street. The Securities and Exchange Commission (SEC) filed a civil lawsuit against Tourre and his employer, Goldman Sachs, on April 16, accusing the duo of defrauding investors by misstating and omitting key facts about a financial product tied to mortgage-related investments.

The focus of the lawsuit is on a collateralized debt obligation that Tourre created. The performance of that CDO, called Abacus, was linked to the performance of the housing market. When the housing market tanked, so, too, did Abacus. The SEC isn?t focused on that aspect, however. Its lawsuit concerns a hedge fund, Paulson & Co., which selected the losing assets that went into Abacus and then bet against them. Goldman never revealed Paulson?s role to investors, according to the SEC.

Meanwhile, another company became involved in the deal - ACA Management. Allegedly, Goldman and Tourre convinced ACA that Paulson was investing in Abacus, instead of betting against it.

The SEC?s complaint accuses Tourre as the person principally responsible for ABACUS 2007-AC1. Tourre structured the transaction, prepared the marketing materials, and communicated directly with investors, the SEC says. Tourre also allegedly knew of Paulson & Co.’s undisclosed short interest and role in the collateral selection process.

In addition, Tourre is charged with misleading ACA into believing that Paulson & Co. invested approximately $200 million in the equity of ABACUS, indicating that Paulson & Co.?s interests in the collateral selection process were closely aligned with the interests of ACA. In reality, however, their interests were sharply conflicting.

In the end, Paulson paid Goldman $15 million for putting Abacus together. Investors lost more than $1 billion, while Paulson made a profit of $1 billion, the SEC says.

Full post as published by Representing Investors on April 19, 2010 (boomark / email).