Category Archives: Fabrice Tourre, former employer: Goldman Sachs

The admission of guilt came on July 15 as Goldman Sachs settled civil fraud charges with the Securities and Exchange Commission (SEC) over its marketing of a collateralized debt obligations (CDO) package known as Abacus 2007-ACI.

In settling the matter, Goldman agreed to pay a $550 million fine. It is biggest fine ever levied by the SEC on a U.S. financial institution. Goldman also acknowledged that its marketing materials for Abacus contained incomplete information.

“This settlement is a stark lesson to Wall Street firms that no product is too complex, and no investor too sophisticated, to avoid a heavy price if a firm violates the fundamental principles of honest treatment and fair dealing,” says Robert Khuzami, Director of SEC Enforcement.

Goldman’s troubles began back in April, when the SEC accused the investment bank of failing to disclose that one of its clients, Paulson & Co, had helped select the securities contained in the Abacus mortgage portfolio and which was later sold to investors.

According to the SEC, Goldman did not reveal that Paulson, one of the world’s largest hedge funds, had, in fact, bet that the value of the securities would fall.

Following the collapse of the housing market, the securities in that mortgage portfolio – i.e. Abacus – lost more than $1 billion.

Despite the settlement with the SEC, Goldman is far from being out of legal hot water. One of the investors in Abacus was the Royal Bank of Scotland PLC (RBS), which lost $841 million as a result of the deal. Of Goldman’s $550 million settlement with the SEC, approximately $100 million will be paid to RBS. However, the RBS may be considering a civil suit against Goldman Sachs Group to recoup additional financial losses it sustained in Abacus, according to a July 16 article in the Wall Street Journal.

Meanwhile, Fabrice Tourre, who is the only Goldman Sachs executive named as a defendant in the SEC’s fraud lawsuit, has yet to settle with the regulator.

Tourre, the creator of Abacus, has repeatedly denied the SEC’s charges that he misled investors. A number of potentially damaging emails seem to refute Tourre’s claims, however. In one email, Tourre comments on the state of the housing market and the inevitable demise of Abacus:

“More and more leverage in the system. The whole building is about to collapse anytime now … Only potential survivor, the fabulous Fab … standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implication of those monstrosities!!!”

Already facing a fraud lawsuit by the Securities and Exchange Commission (SEC) related to collateralized debt obligations (CDOs), Goldman Sachs says additional CDO lawsuits over its mortgage-trading activities are likely in the coming months.

“We anticipate that additional putative shareholder derivative actions and other litigation may be filed, and regulatory and other investigations and actions commenced against us with respect to offering of CDOs,” Goldman Sachs said in its 10-Q filing with the SEC on May 10.

The SEC’s lawsuit against Goldman accuses the investment bank and Vice President Fabrice Tourre of misleading investors about a mortgage-linked security and the role the hedge fund, Paulson & Co., played in selecting and then betting against the investment.

Following the SEC’s lawsuit, Goldman Sachs stock fell 22%.

Last month, current and former Goldman Sachs executives, including CEO Lloyd Blankfein and Tourre, faced intense grilling by the Senate’s Permanent Subcommittee on Investigations. Members of the committee subsequently released potentially damaging e-mails that showed various Goldman Sachs employees questioning the securities at the heart of the SEC’s lawsuit and referring to them as “junk.”

Goldman also warned in its 10Q filing that any settlement with the SEC could affect its business operations, including potentially hindering its core broker/dealer activities, as well as its ability to advise mutual funds.

Embattled investment bank Goldman Sachs has been fined $450,000 by the Securities and Exchange Commission (SEC) and the New York Stock Exchange over what regulators say are hundreds of violations involving short sales.

According to the SEC’s complaint, Goldman continued to write naked short sale orders following a ban by regulators two days after Lehman Brothers collapsed in September 2008.

Short-sellers often borrow a company’s shares in a short sale deal, sell them, then buy them back when the shares decline and pocket the difference in price. As reported May 4 by the Associated Press, the SEC requires brokers to promptly buy or borrow securities to deliver on a short sale. In the case involving Goldman, the SEC and the NYSE allege that the company failed to procure shares to cover its customers’ short positions in the time required.

Read the SEC’s complaint.

Meanwhile, Goldman Sachs and Goldman VP Fabrice Tourre face a fraud lawsuit by the SEC, which alleges the bank and Tourre sold a collateralized debt obligation called Abacus 2007-AC1 without disclosing the fact that the hedge-fund firm of Paulson & Co. helped to pick some of the underlying mortgage securities and was betting on the financial instrument’s failure.

The Senate investigation into Goldman Sachs unveils undeniable evidence about the risks of collateralized debt obligations (CDOs) and how Wall Street’s repackaging of the products produced not only billions of dollars in losses for investors, but also fueled a financial tsunami across the globe.

A May 2 story in the Wall Street Journal details the multiplier effect of what happened when Wall Street banks replicated certain toxic bonds into numerous securities, or CDOs. The article highlights one $38 million mortgage-related bond that was created in June 2006 and ended up in more than 30 debt pools. According to the article, that one bond ultimately caused “$280 million in losses to investors by the time the bond’s principal was wiped out in 2008.”

Goldman Sachs has spent the past week responding to questions and accusations from the Senate Permanent Subcommittee on Investigations on whether the firm and several employees helped inflate the housing bubble and then profited when the market collapsed.

On April 16, Goldman Sachs was named in civil fraud lawsuit by the Securities and Exchange Commission (SEC). The SEC accused Goldman of creating and selling a mortgage investment that was secretly intended to fail. The SEC’s lawsuit also names Goldman Vice President Fabrice Tourre, who helped create and sell the investment at the center of the SEC’s fraud allegations.

As predicted, Goldman Sachs announced hefty first-quarter profits of $3.5 billion. The news, which comes amid fraud charges by the Securities and Exchange Commission (SEC) that Goldman knowingly duped investors, may be good for the bank but could lend further credence to the notion of Wall Street making profits at the expense of investors.

“Their reputation is at stake. Ironically, if there was a day that Goldman Sachs wishes that their results were not so good, it’d probably be today,” said Suzy Welch, business and economic issues contributor for ABC News, during an April 20 appearance on Good Morning America. “What makes people mad in the first place is the fact that Goldman makes so much money and perhaps profited off of other people’s suffering, and here they are making more money. Could it get more outrageous?”

On the April 20 earnings call, Goldman Sachs said it was “surprised” by the charges filed by the SEC on April 16. The focus of the SEC’s claims center on a risky mortgage product called Abacus that Goldman Sachs sold to investors but allegedly did not disclose details about another client, Paulson & Company, that helped selected the underlying securities in Abacus and then bet against it to fail.

The SEC claims that Paulson & Company made $1 billion from the deal, while investors lost billions. Goldman Sachs received $15 million as the “middleman” of the transaction.

Also named in the SEC’s lawsuit is Goldman Sachs Vice President Fabrice Tourre. Tourre is alleged to have created and sold the product in question while knowing its risks but keeping them to himself. In a 2007 e-mail, Tourre writes the following:

“More and more leverage in the system, the whole building is about to collapse anytime now. “Only potential survivor, the fabulous Fab … standing the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstrosities!!!”

In addition to the SEC’s charges, the UK’s regulatory agency also plans to begin a formal enforcement investigation into another alleged fraud scheme by the Goldman Sachs that may have cost the Royal Bank of Scotland millions of dollars.

The “Fabulous Fabrice Tourre,” as he refers to himself in an e-mail cited in an April 16 securities fraud lawsuit filed by the Securities and Exchange Commission, is reportedly set to rake in a massive bonus courtesy of his employer Goldman Sachs.

An April 18 story in the Guardian first reported the bonus news, which is set to be announced on April 20 by Goldman Sachs CEO Lloyd Blankfein as part of the first-quarter 2010 financial results for the bank.

News of Tourre’s potential bonus comes on the heels of the SEC’s lawsuit against the VP and Goldman Sachs over claims involving a package of collateralized debt obligations – called Abacus 2007-AC1 – that regulators contend was designed to fail. According to the civil complaint, Tourre knew that the hedge fund, Paulson and Company, had helped select the assets backing Abacus while at the same time betting on it fail.

The SEC further alleges that Tourre misled a collateral manager, ACA Management, about Paulson’s role.

“Marketing materials for Abacus 2007-AC1 were false and misleading because they represented that ACA selected the reference portfolio while omitting any mention that Paulson, a party with economic interests adverse to CDO investors, played a significant role in the selection of the reference portfolio,” the complaint reads.

The SEC’s complaint also includes potentially damning e-mails from Tourre about Abacus. One of those e-mails states the following:

“Only potential survivor, the fabulous Fab standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstrosities!!!”

According to an April 19 article in the Wall Street Journal, Tourre received a paycheck of more than $2 million in 2007. The compensation was reportedly due in part to the success of the CDO at the center of the SEC’s lawsuit. Meanwhile, Tourre apparently has taken an “indefinite vacation” but remains employed at Goldman Sachs.

The fraud lawsuit involving Fabrice Tourre and Goldman Sachs may be just the tip of the iceberg for Wall Street. On April 16, the SEC accused Tourre, a VP at Goldman Sachs, and the bank of creating and selling high-risk collateralized debt obligations tied to mortgages without disclosing to investors the role of a hedge that helped picked the underlying securities and then bet against them to fail.

A number of analysts now say the probe may prompt additional investigations in CDOs at other Wall Street firms.

“This is probably just the tip of the iceberg,” said Chizu Nakajima, director of the Centre for Financial Regulation and Crime at Cass Business School in London, in an April 19 article in Investment News. “As far as other financial institutions are concerned, they are obviously very worried. If the SEC’s action is actually successful, it could well open up the gates to other litigation worldwide.”

Besides Goldman Sachs, at least 20 banks arranged more than $400 billion CDO deals in 2007 – the same time that the U.S. housing market began to collapse. Citigroup was the leader of those deals, followed by Merrill Lynch and Deutsche Bank, according to the Investment News story.

The New York Post reported this morning that the SEC is now investigating transactions structured by other big players in the CDO market, including Deutsche Bank, UBS and Merrill Lynch.

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.

The name Fabrice Tourre probably wasn’t widely recognized – until now. The Securities and Exchange Commission (SEC) filed a civil lawsuit against the Goldman Sachs broker and his employer last week for their connection to a complex financial product – known as Abacus 2007-AC1 – that was filled with equally complex and high-risk synthetic collateralized debt obligations (CDOs).

According to the SEC’s 22-page complaint, Goldman and Tourre are alleged to have knowing deceived investors when they marketed and sold Abacus. In addition, the SEC says Goldman failed to disclose that one of its clients, Paulson & Co., actually helped choose the risky securities that were packaged into Abacus. Moreover, Goldman did not disclose that Paulson, one of the world’s largest hedge funds, had bet that the value of the securities would fall, the SEC says.

Tourre was the mastermind behind the creation of Abacus, and agreed to the deal with Paulson in April 2007, the SEC claims. Regulators allege, however, that Tourre knew the market in mortgage-backed securities was about to be hit well before April 2007.

The SEC’s April 16 lawsuit against Goldman Sachs and Tourre contains a number of potentially incriminating e-mails from Tourre, one of which reads as follows:

“More and more leverage in the system. Only potential survivor, the fabulous Fab[rice Tourre]… standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstrosities!!!”

Tourre, 31, currently resides in London as executive director of Goldman Sachs International. He’s apparently worked for Goldman since 2001.

French trader Fabrice Tourre and his employer, Goldman Sachs, are being sued by the Securities and Exchange Commission (SEC) for allegedly devising a package of highly risky credit default swaps (CDS) and then betting against the investments – and their clients – to fail. The deals produced massive losses for investors but big profits for Tourre and, ultimately, for Goldman Sachs.

The SEC filed its civil lawsuit on April 16, and the move seems to confirm what many people have long believed: The world of Wall Street is indeed rigged, and investors are the ones who wind up on the losing end.

“The SEC suit against Goldman, if proven true, will confirm to people their suspicions about the total selfishness of these financial institutions,” said Steve Fraser, a Wall Street historian, in an April 18 article in the New York Times. “There’s nothing more damaging than that. This is way beyond recklessness. This is way beyond incompetence. This is cynical, selfish exploiting.”

Tourre is the only Goldman Sachs employee named in the SEC’s complaint. As for the deals Tourre created, they consisted of collateralized debt obligations (CDOs), which were contingent on the performance of risky mortgage-related securities. Those details, however, were never disclosed to investors, according to the SEC.

In the SEC’s complaint, Tourre is accused of structuring the CDO, called ABACUS 2007-AC1, with input from the hedge fund Paulson & Co. The CDO itself held some of the riskiest assets around, a key fact that allegedly was never stated in any marketing materials related to ABACUS or by Tourre when he sold the investments to investors. Regulators say Paulson then bet against the CDO. Again, investors in the CDO were never told about Paulson’s role or intentions.

When the housing market began to spiral out of control in 2007 and 2008, ABACUS felt the pain. In an e-mail that Tourre sent to a friend on Jan. 23, 2007, he states the following:

“More and more leverage in the system, The whole building is about to collapse anytime now…Only potential survivor, the fabulous Fab[rice Tourre]…standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstruosities!!!”

Another e-mail from Tourre – this one dated Feb. 11, 2007 – reads as follows:

“The CDO biz is dead we don’t have a lot of time left.”

And neither did investors as it turns out. When the housing market collapsed, investors in ABACUS 2007 AC1 suffered losses of more than $1 billion, according to the SEC. Paulson, meanwhile, made a profit of about $1 billion. And Goldman Sachs? It was paid about $15 million for structuring the bonds and selling them to investors.