Trials & Litigation

At least one juror appears to snooze during CDO testimony in 'Fabulous Fab' securities trial

Jurors appeared bored and sleepy during complex testimony on Tuesday in the civil securities fraud trial of former Goldman Sachs Group vice president Fabrice Tourre, who once described himself as “Fabulous Fab” in an email.

Tourre is accused of failing to tell investors about a client’s role in creating an investment vehicle that was designed to fail. Investors lost $1 billion but the hedge-fund client profited by betting against the deal. The Wall Street Journal (sub. req.), the Washington Post and the New York Times have stories on Tuesday’s testimony.

One juror appeared to be sleeping during testimony about collateralized debt obligations by University of California finance professor Dwight Jaffee, the Wall Street Journal says. Jurors rubbed their eyes or looked at a courtroom clock. The Washington Post noted a juror with closed eyes “as an expert testified about CDOs, synthetic CDOs and CDOs of CDOs.” The New York Times said some jurors appeared to nod off from time to time, while others “scribbled diligently in their notepads.”

The Securities and Exchange Commission claims Tourre lied to investors about a mortgage securities investment—a synthetic CDO—that was designed to fail. The SEC alleges that Goldman created the investment, called Abacus 2007-AC1, at the request of hedge fund manager John Paulson, but Tourre didn’t disclose his role. Paulson’s hedge fund effectively shorted the Abacus investments. No one at the Paulson hedge fund has been accused of wrongdoing.

A traditional CDO is a debt security backed by pools of mortgage loans or other asset-backed securities, the Washington Post explains. Synthetic CDOs aren’t backed by actual mortgage securities; instead, they are linked to the performance of such assets. Tourre’s lawyers say jurors need to understand synthetic CDOs to understand why it was natural for Paulson to have input in Abacus—because investors betting on the assets must be countered by those who bet against them.

The SEC complaint had cited a Tourre email to a friend. “More and more leverage in the system, The whole building is about to collapse anytime now,” he wrote. “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!!!”

The SEC also sued Goldman, which paid a $550 million penalty without admitting or denying guilt.

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