Fabrice Tourre dodged one bullet, at least
The views expressed are her own.
Itâs too bad for Fabrice Tourre, the former Goldman Sachs securities trader, that the portfolio manager on Goldmanâs notorious ABACUS investment vehicle, isnât a foreign company. If it were, Tourre might have entirely escaped Securities and Exchange Commission charges that he engaged in securities fraud in structuring and marketing the ABACUS synthetic collateralized debt obligation.
Under a June 10 ruling by Manhattan federal district court judge Barbara Jones, Tourre is off the hook for allegedly defrauding ABACUS investors IKB and ABN Amro because theyâre foreign companies that dealt with overseas-based Goldman entities. So at least for those companies, Tourreâs actions fall outside the purview of U.S. courts under the U.S. Supreme Courtâs 2010 Morrison v. National Australia Bank opinion. Hereâs Judge Jonesâs 41-page opinionâthe first in which a federal district court judge has applied Morrison in an SEC enforcement case–and hereâs the Reuters story on the ruling.
Tourre still has lots to worry about. In an odd, split-the-baby conclusion, Judge Jones drew a distinction between Goldmanâs âoffersâ and âsalesâ of ABACUS securities, and ruled that, despite Morrison, the SEC can proceed with certain claims involving IKB and ABN Amro under the Exchange Act. Tourreâs lawyers at Allen & Overy will undoubtedly challenge Judge Jonesâs novel interpretation on that point. More predictably, Judge Jones ruled that Morrison doesnât apply to the SECâs allegations that Tourre deceived the U.S.-based ACA Management, which served as the ABACUS portfolio selection agent, and ACA Capital, an investor, for failing to disclose that the hedge fund Paulson & Co., had been involved in picking the securities underlying ABACUS and was betting on the CDO to tank. Tourreâs lawyers have said theyâre confident theyâll be able to defend those allegations.
The big question for other SEC defendants, though, is whether Tourreâs successful invocation of Morrison to knock out at least some of the SECâs charges is a one-off event. Thatâs shaping up as a fascinating battle thatâs going to pit Congressional intent against some supposedly bungled legislative drafting.
In July 2010, as Tourreâs lawyers were working on a motion to dismiss the SECâs April complaint against their client based on the Supreme Courtâs June 2010 Morrison ruling, Congress passed the Dodd-Frank Act, which contains provisions explicitly intended to undo Morrisonâs restrictions on enforcement actions involving foreign securities transactionsâexactly Tourreâs defense. Dodd-Frank adds a phrase to the 1933 and 1934 securities laws stating that âthe district courts of the United StatesâŚshall have jurisdiction of an action or proceeding brought by or instituted by the [SEC] or the United States alleging a violation of the antifraud provisions.â
At the time, a sheaf of law firm client alerts (see here, here, here, and here, for example) reported that Dodd-Frank, in a response to Morrison, had restored power to the SEC and DOJ to bring actions involving overseas securities. That was clearly Congressâs intent, based on the June 30, 2010 Congressional Record. Under that reading of Dodd-Frank, Tourre fell into a narrow crack when he challenged the SEC charges under Morrison because Dodd-Frank hadnât been passed when his case began, so he could assert it as a defense. Securities defendants in the post Dodd-Frank era could forget about any Morrison defense.
Or can they? A subsequent crop of Dodd-Frank interpreters have taken a close look at the language of the Morrison-rollback provision and concluded that Congress didnât accomplish what it intended. George Conway III of Wachtell, Lipton, Rosen & Katzâwho won the Morrison case at the Supreme Courtâgot the Dodd-Frank revisionism started with an August 2010 post at the Harvard Corporate Governance blog. âThe provision unambiguously addresses only the âjurisdictionâ of the âdistrict courts of the United Statesâ to hear cases involving extraterritorial elements; its language clearly does not expand the geographic scope of any substantive regulatory provision,â Conway wrote. âThat is a crucial, and likely fatal, omission. In [Morrison], the Supreme Court reiterated the longstanding principle that the territorial scope of a federal law does not present a question of âjurisdiction,â of a âtribunalâs power to hear a case,â but rather a question of substanceâof âwhat conductâ does the law âprohibitâ? The new law does not address that issue, and accordingly does not expand the territorial scope of the governmentâs enforcement powers at all.â
Law professors, including Richard Painter of the University of Minnesota, Genevieve Beyea of Texas Tech, and Adam Pritchard of the University of Michigan, reached similar conclusions. âThe language that Congress usedâat the behest of the SECâquite clearly creates jurisdiction,â Pritchard said. âUnfortunately, this was never a question about jurisdiction.â According to Pritchard, the Supreme Courtâs Morrison ruling never curtailed the jurisdiction of U.S. courts to hear securities fraud cases involving foreign transactions, but curbed their power to apply U.S. securities fraud laws to such transactions. Congressâs language in the Dodd-Frank Act, he told OTC, doesnât extend the fraud laws. âThereâs a gap between Congressâs intent and the language in the law,â Pritchard said. âItâs a really poor job of drafting.â
Will future courts look to Congressional intent or the language of the law to decide whether the SEC or DOJ can bring fraud cases involving foreign securities? Justice Antonin Scalia, in the Morrison ruling, made clear that, as far as heâs concerned, statutory language trumps intent. But weâll have to see if lower courts follow his lead.
Alison Frankel’s column “On the Case” appears daily in Thomson Reuters News & Insight.
Photo: Fabrice Tourre, Executive Director, Structured Products Group Trading for Goldman Sachs, is sworn in before the Senate Homeland Security and Governmental Affairs Investigations Subcommittee hearing on “Wall Street and the Financial Crisis: The Role of Investment Banks” on Capitol Hill in Washington, April 27, 2010. REUTERS/Jim Young