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'Fabulous Fab' found liable in mortgage-fraud case

Former Goldman Sachs bond trader Fabrice Tourre arrives at Manhattan federal court with his lawyers in the civil fraud case against him, in New York, August 1, 2013.
Emmanuel Dunand | AFP | Getty Images
Former Goldman Sachs bond trader Fabrice Tourre arrives at Manhattan federal court with his lawyers in the civil fraud case against him, in New York, August 1, 2013.

A New York City jury has found that a former Goldman Sachs bond trader known as "Fabulous Fab" is liable on six of seven counts of defrauding investors in a case brought by federal regulators in response to the 2007 mortgage crisis that helped push the country into recession.

A jury reached the verdict after two days of deliberations at the civil trial in Manhattan federal court of Fabrice Tourre—a French-born Stanford graduate described by Securities and Exchange Commission lawyers as the face of "Wall Street greed." Tourre's attorneys portrayed him as a scapegoat in a downturn caused by larger economic forces.

Tourre, 34, faces potential fines and a possible ban from the financial industry. The exact punishment will be determined at a future proceeding.

(Read More: Fabulous Fab and the $1 billion deal that (nearly) wasn't)

The SEC had accused Tourre of misleading institutional investors about subprime mortgage securities that he knew were doomed to fail, setting the stage for a valued Goldman hedge fund client, Paulson & Co., to secretly bet against the investment.

The maneuver ended up making $1 billion for the hedge fund and its wealthy president, John A. Paulson, and millions of dollars in fees for Goldman. The SEC also sought to show that it helped earn Tourre a bonus that boosted his salary to $1.7 million in 2007.

On the witness stand, the SEC lawyers confronted Tourre with a January 2007 email it said deliberately misled another institutional investor about Paulson's short position in the investment called Abacus 2007-AC1.

Asked repeatedly if the information in the email was "false," Tourre responded, "It was not accurate."

He added: "I wasn't trying to confuse anybody; it just wasn't accurate at the time."

SEC lawyer Matthew Martens said, "We're obviously gratified by the jury's verdict and appreciate their hard work." The case marks the regulator's highest-profile trial to come out of its investigations into causes of the 2008 financial crisis.

There was no immediate response from the defense.

(Read More: The love song of 'Fabulous' Fab Tourre)

In closing arguments, Martens called Tourre's testimony "surreal, imaginary, unreal, dreamlike" and told jurors that the defendant wanted them "to live in his imaginary land ... to live in a fantasy world."

"Only if you close your eyes to the facts, you can find Mr. Tourre not liable for his actions," the SEC lawyer said.

Tourre's attorney, John Coffey, countered that the government had "unjustly accused him of wrongdoing."

Coffey urged jurors to put the investment's failure in perspective, noting that all similarly packaged securities "went off the cliff as well" after 2007.

The civil case had been called the most significant legal action related to the mortgage securities meltdown, but it lacked the drama and high stakes of white-collar criminal cases. Much of the testimony was devoted to the intricacies of synthetic collateralized debt obligations, or CDOs—a complex type of investment central to the case.

Some of the testimony focused on a personal email Tourre sent to his girlfriend in France. The SEC lawyers said the missive proved the hubris of a man at the center of a massive fraud, while the defense claimed was "an old-fashioned love letter" penned by a young trader who was full of self-doubt and angst over upheaval in the financial world.

Writing in French, Tourre said of the financial markets: "The whole building is about to collapse anytime now."

(Read More: Wall Street into Snapchat, and regulators are on alert)

"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!!!"

Pressed by Marten on what he meant, Tourre said, "I didn't create any monstrosities."

Goldman settled with the SEC in 2010 by paying a $550 million fine without admitting or denying wrongdoing. Tourre left the firm in 2012.

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