The silly trial of Fabrice Tourre

By Felix Salmon
July 17, 2013

There’s a huge amount of legal firepower on display in lower Manhattan right now, all centered on a University of Chicago grad student named Fabrice Tourre. Arrayed against him, in this civil case, is the might of the SEC, which has tapped the head of its trial unit, Matthew Martens, to take a lead role. Tourre’s own lawyers, who have been representing him for the past three years, include none other than Sean Coffey.

It’s fair to assume that many, many millions of dollars are being spent on this trial. But what’s much less clear is why. Tourre was a junior salesman, buried deep inside the Goldman Sachs CDO machine, and, almost exactly three years ago, Goldman Sachs paid $550 million to settle the charges against it. Why is the SEC, in 2013, still putting so much effort into chasing a single individual from Goldman Sachs? Certainly Tourre doesn’t have the wherewithal to be able to make any significant difference to the amount of money the SEC will end up collecting in this case — which means that this case is personal: the SEC wants to ban Tourre from the securities industry, and to possibly drive him into personal bankruptcy, as well, if they can extract a large enough fine.

The pathos here is unavoidable: this single case, brought against a minor spear-carrier in the great CDO saga, has become the SEC’s best hope, in the words of the NYT, for “a defining victory in its uneven campaign to punish those at the center of the crisis”. Surely the SEC would have been better off quietly settling: even a victory will seem pretty thin gruel, given that the people who really made out like bandits are being celebrated with keynote luncheon appearances at the Pierre Hotel even as the trial drags on downtown.

Meanwhile, of course, the downside is substantial. If the SEC loses this case — which is entirely possible, given how incomprehensible the charges are — it looks even more Keystone Cops. The burden of proof in civil cases is lower than it is in criminal cases: the SEC just needs to convince the jurors that a preponderance of the evidence is on its side. But while I’m pretty sure that what Goldman did was immoral, I’m much less convinced that it will be easy to convince a stultified jury that there was something illegal going on.

All in all, the upside for Goldman, here, is much bigger than the upside for the SEC. Goldman is paying Tourre’s legal fees — they’re a rounding error, in the context of the cost of the bigger settlement, and doing so also sends a clear internal signal that Goldman will have its employees’ backs, should they get into trouble as a result of the work they do for the firm. A victory for Tourre would be a victory for Goldman — which, remember, never admitted the allegations the SEC made against it.

The rather dispiriting truth of the matter is that the SEC has spent four years and millions of dollars trying to find someone, anyone, to prosecute in the wake of the financial crisis — and has ended up bringing to trial a guy whose biggest mistake was to display a little too much braggadocio in private emails to his girlfriend. If I were on the jury, I’d be hesitant to find Tourre not guilty, if only because of the synecdoche here: one look at the legal teams is enough to demonstrate that the defendant in this trial is not really Tourre, so much as it is a man standing in for Goldman Sachs as a whole. But Goldman has already settled. So the best outcome, I think, would be for the jury to find Tourre guilty, to fine him $1, and to let him go back to his studies and to the rest of his life. But in order to do that, the jury would probably have to have a reasonably sophisticated understanding of what exactly is going on. Which, quite clearly, they don’t.


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Don’t they usually go after the small fish (Fab), so that he turns in the big fish (delivering alpha panelists)?

So what are we missing? Is Fab supposed to be the stand-in for Blankfein? Is he the highest up, without significant connections, so that he’ll have to suffice as that stand-in (notwithstanding GS footing the bill)?

Posted by JudenChino | Report as abusive

Another clear demonstration that we’re all in the best of hands with this administration.

Also demonstrates they’re doing a smack up job at keeping their priorities in line!

Posted by Twinkbait | Report as abusive

Why are Tourre and Stoker considered too junior to bear responsibility? I wonder if their paychecks c. 2006 reflected their having played merely bit parts in a drama set In a board room far removed from the trading floor. The traders and salesmen whined that they should eat what they kill, lest they take their talents elsewhere. They won. And they ate plenty. And if along the way they illegally deceived some unsympathetic counterparties, and got caught, what’s the appropriate response? Should we throw up out hands and declare that it’s not really Fab’s fault, even if he lied. Not really truly. No more so than a thousand other guys who got rich playing with other people’s money. He was just a low-level guy who happened to leave an eye-catching paper trail. It’s not like he was getting paid to take risks.

Dear Fabrice: I’m sorry your negligent bosses gave you so much responsibility, so young. I wish they never had. I’m sorry you were the only one to get caught. I wish more of you were. I’m sorry you’ve been made into a scapegoat for the entire financial crisis. I wish that on Dick Fuld instead. But thems the breaks. Man up, take your ban, and good luck on the PhD market.

Posted by Sandrew | Report as abusive

I think that Felix is saying that he’d make his decision based on his assessment of the morality of Goldman Sachs’ role in the transaction as opposed to his assessment of the legality of Tourre’s role. If I’m understanding that correctly, then I’m glad that he’s not on the jury. Though, to be fair, the decision will ultimately be made by a jury that more than likely has no idea what the hell is going on, while Felix would at least understand the case.

Also, I don’t believe that “guilty” or “not guilty” is the appropriate terminology here because it’s a civil case – it’s “SEC wins” or “Tourre wins”.

Posted by realist50 | Report as abusive

1. The SEC might be hoping Fab will break, and tell on his superiors.
2. contrary to what you suggest, there is a fairly good case to be made that the business model on which the entire CDO market is based is problematic; but for that to happen we would need an expert capable of explaining why the whole business of slicing and dicing and re-rating tranches was one elaborate system of accounting fraud. This is never going to happen, of course, because too many reputations rest on the public never coming to realize how corrupt its elites are.

Having said that, I have no problem at all with their “persecuting” (just come out and say it rather than allude to it, please) Tourré. The only problem is that this is a show trial because the SEC doesn’t want to bring down the system, if only because it would lead to the airing of facts about its institutional behavior that would strongly disfavor the SEC. Etc.
I just keep hoping the stupid bureaucrats make a mistake that winds its way through the system long enough for them to lose the ability to put a lid on it…

Posted by Foppe | Report as abusive

“The rather dispiriting truth of the matter is that the SEC has spent four years and millions of dollars trying to [avoid] find[ing] anyone to prosecute in the wake of the financial crisis”

There, fixed it for you.

Posted by Moopheus | Report as abusive

yes they aren’t as sophisticated as you are to go after Blankfein. The trial is neither silly nor should he be allowed to hide at a university.

Posted by rambos | Report as abusive

I’m no bigger fan of agency misguidance than anyone else on here, but I think you’re missing some critical facts about this case, Felix:

Tourre was a co-defendant to the SEC’s original complaint against Goldman. As expected, Goldman settled. Unexpectedly, Tourre did not. Instead, he very vocally declared that he was not going to settle so that he could, as they say, see his day in court. Whichever side you’re on, it’s not an entirely unreasonable stance to take.

However, the notion that the SEC would be better off “quietly settling” places the blame in the wrong place. I’d bet that the SEC would LOVE to settle this case, avoiding this circus altogether. Talk to any investor advocate and you’d find that the biggest issue with the SEC is not that they don’t settle enough, but that they settle too much (usually without any admission of guilt).

Posted by shammgod | Report as abusive

The SEC would not be “better off quietly settling”. It’s well established that “the people who really made out like bandits” are untouchable. That doesn’t reduce the value of going after a “minor spear-carrier” and punishing him severely. Yes it’s risky. But if the SEC can win, “minor spear-carriers” everywhere might think about obeying the law once in a while. Sure, the power of a company like Goldman Sachs is so immense that people at some level can get away with anything. But if this case can be won, and it can sow doubt within the mind of each and every non-executive worker on Wall Street as to whether or not they are at “that level”, it’s a win for the rule of law.

Posted by Mike_SD_CA | Report as abusive

[quote]8:46 PM UTC
“The rather dispiriting truth of the matter is that the SEC has spent four years and millions of dollars trying to [avoid] find[ing] anyone to prosecute in the wake of the financial crisis”
There, fixed it for you.
Posted by Moopheus[/quote]

where is the like button for this comment?

Posted by udonomi | Report as abusive

If I understand the SEC’s theory, Goldman had a duty to disclose to buyers of the CDO that another client planned to short it. My understanding is that, should GS have done so, it would have been a breach of client confidentiality. By analogy, when I go online to Fidelity to buy a share of Google, does Fidelity has a duty to tell me who is selling the share, and what his long/short position is?

Posted by nixonfan | Report as abusive