Key witness takes stand in SEC case against Goldman's Tourre

Tue Jul 23, 2013 2:25am EDT
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By Nate Raymond

NEW YORK (Reuters) - A key witness is scheduled to testify on Tuesday in the U.S. Securities and Exchange Commission's case accusing former Goldman Sachs trader Fabrice Tourre of misleading investors in a 2007 bond deal.

The SEC has said in court papers that Laura Schwartz, a former executive at a bond insurer, will testify that Tourre told her that hedge fund Paulson & Co Inc was backing the deal. Her testimony is central to the SEC's case that Tourre hid from investors the fact that Paulson & Co was in fact betting against the deal.

The Tourre case, which began last week in federal court in New York, is one of the biggest brought by the SEC over the events leading up to the financial crisis of 2008.

According to the SEC, Paulson & Co came to Goldman Sachs looking for a way to bet against the subprime mortgage market. They came up with a $2 billion synthetic collateralized debt obligation tied to mortgage securities that became known as Abacus 2007-AC1.

When Goldman brought on a subsidiary of bond insurer ACA Capital Holdings Inc to help select the mortgage securities underlying Abacus, Tourre allegedly misled ACA by failing to disclose that Paulson was selecting toxic securities for the deal and planned to bet against it.

Goldman Sachs Group Inc, which was also initially a defendant when the case was filed in 2010, settled for $550 million without admitting or denying the allegations.

Schwartz, who left ACA in late 2007 and now works at the Seaport Group, was the main point of contact with Tourre and Paulson & Co, the SEC says.

She can testify that she understood Paulson would be an equity investor in Abacus and the role that understanding played in ACA's decision to participate in the deal, the SEC says.   Continued...

Former Goldman Sachs bond trader Fabrice Tourre arrives at the Manhattan Federal Court in New York, July 22, 2013.REUTERS/Mike Segar