Goldman Sachs' 'Fabulous Fab' Tourre Hung Out to Dry?

July 22, 2010— -- Soon after the Securities and Exchange Commission announced July 15 that it had reached a $550 million fraud charge settlement with Goldman Sachs, shares of the bank soared. Analysts immediately scored it a victory for CEO Lloyd Blankfein.

Meanwhile, back at the SEC's Washington, D.C. headquarters, as a press conference was winding down, Lorin Reisner, the agency's deputy director of enforcement, made it clear the bombshell case was not entirely closed.

Fabrice Tourre, a Goldman vice president and the firm's only employee singled out in the SEC's civil securities fraud complaint, was still on the hook. "There is no settlement with Mr. Tourre," Reisner said. "We are proceeding with that case."

What's more, he added, Goldman has agreed to cooperate in the case against Tourre, who is better known on Wall Street as "Fabulous Fab," a moniker he gave himself in a now infamous email obtained by regulators.

Sending a Message?

Getting Goldman to agree to cooperate in the SEC case against 31-year-old Tourre (pronounced "Tour") may seem like a whale hunter flipping its prey to extract a barnacle, but in the financial world the curious legal twist is being interpreted as a boldface attempt by regulators to send a message: individual bankers and traders will be held liable for their actions.

In its complaint, the SEC alleges Tourre deliberately misled investors in a complex mortgage-linked derivative deal.

However, there's another possible scenario playing out here, according to Harvey Pitt, former SEC Chairman and now the CEO of Washington, D.C.-based corporate strategy consultants Kalorama Partners. "This isn't about the SEC sending a message," Pitt said. "My sense, and I have no way of knowing, is that Tourre likely would have been presented an opportunity to piggyback on the settlement but for whatever reason he or his lawyers chose not to." "The Fabulous Fab seems to be in the process of being hung out to dry," said Suzanne McGee, author of the book "Chasing Goldman Sachs" and a former Wall Street Journal reporter. "It's hard to call him a scapegoat, based on the contents of some of his not very discreet emails that have come out, but for the SEC he's a much less formidable opponent than Goldman Sachs would have been, so there's less incentive to settle and more incentive to use him to make a broader point."

Efforts to reach Tourre were unsuccessful. His attorney, Pamela Chepiga of the New York law firm of Allen & Overy, did not return several calls and an email message requesting comment. In a court filing July 19, Tourre denied the charges, arguing that he can't be held responsible for any "alleged failings" on the part of Goldman.

His case will be heard by the U.S. District Court for the Southern District of New York. If he's found guilty,Tourre could be banned from the securities industry. He also faces stiff SEC fines, though not likely anywhere near the more than half-billion dollars Goldman just agreed to pay. Tourre has been on paid leave since mid-April when the SEC first brought the charges. A Goldman spokesman said the firm is paying for Tourre's legal expenses.

Infamous Email

A French native, Tourre in 2000 graduated from Ecole Centrale Paris, a top French university known for its engineering program. He later earned a master's degree in management science and engineering at Stanford University. By 2001, he was working for Goldman. In 2007, the firm paid Tourre $2 million, the Wall Street Journal reported.

In an email sent to an acquaintance in January 2007 and included in the SEC's complaint, Tourre appears to be describing his role in, and thoughts about, an investment deal, dubbed ABACUS 2007-AC1, between a German bank and a Manhattan hedge fund manager, Paulson & Co.

"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 implications."

In its April 16 civil suit, the SEC accused Goldman and Tourre of defrauding investors in a mortgage-backed collateralized debt obligation. Specifically, the SEC said, Goldman failed to tell investors that Paulson helped to design the CDO instrument, a synthetic grab bag of mortgage-pool-linked side bets pegged to whether the pools defaulted. Paulson hoped and figured the subprime mortgages in the CDO would go south because, as a short seller, the hedge fund stood to profit on the ABACUS trade if the CDO failed. On the other side of the trade was an investor who was betting on, not against, the mortgage pools, but who never knew that Paulson, an aggressive short-seller monumentally bearish on the housing market, had a hand in picking them.

Despite the seemingly damning email, and others, Goldman originally called the SEC's case "unfounded in law and fact" insisting it made all necessary disclosures about the deal in question. Goldman vowed to fight the charge. In settling last week, Goldman acknowledged that marketing materials for the 2007 deal at the center of the case contained "incomplete information" but it did not admit (nor did it deny) any wrongdoing.

"This now puts Goldman in a difficult position where they are going to have to provide the SEC documents and other information that could potentially be damaging to Tourre, without the SEC having to jump through hoops," said Pitt.

What's unclear, Pitt added, is whether Goldman attorneys will have to turn over any notes the company's legal counsel might have taken in the course of discussing the case with Tourre after the charges were first filed.

Goldman did not return calls for this article. It's unclear what their cooperation in the case against Tourre has entailed so far. An SEC spokesman declined to comment.