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.
Lawyers for Tourre have said they will question Schwartz’s credibility by focusing on a recently concluded probe by the SEC of Schwartz’s role in a different transaction.
Schwartz received a so-called Wells notice in February indicating that SEC was considering recommending a case against her over that transaction. Then, a week before Tourre’s trial, Schwartz’s lawyers notified the court that the SEC staff had decided against bringing a case against her.
On Monday, former ACA Chief Executive Alan Roseman told the court that ACA would have stopped the Abacus deal “in its tracks” if Paulson’s real role had been known.
Last week, a former executive at Paulson & Co, Paolo Pellegrini, testified that he believed he told Schwartz about Paulson’s strategy of betting against the U.S. housing market before the Abacus transaction closed.
The case is SEC v. Tourre, U.S. District Court, Southern District of New York, No. 10-03229.
Reporting by Nate Raymond; Editing by Eddie Evans and Lisa Shumaker