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Securities and Exchange Commission v. Tourre

United States District Court, Second Circuit

June 4, 2013

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
FABRICE TOURRE, Defendant.

OPINION & ORDER

KATHERINE B. FORREST, District Judge.

This case involves a three-year dispute between the SEC and Fabrice Tourre concerning allegations of fraud in the marketing and sale of interests in a synthetic collateralized debt obligation ("CDO").[1] The SEC alleges various misstatements and omissions concerning the role of Paulson & Co., Inc., ("Paulson") in structuring the CDO in issue: ABACUS 2007-AC1 ("AC1").[2] Although Paulson helped to select the assets that would determine AC1's value, it also shorted over $1 billion of those assets through credit default swaps ("CDS").[3]

Whether Tourre's statements or omissions about Paulson's interests and his role in the AC1 transaction were, in fact, fraudulent will be determined at trial, scheduled to commence in six weeks. The present motions for summary judgment focus primarily on the narrower question of whether the events that took place in the United States are sufficient to render any fraud that occurred actionable under Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), Rule 10b-5, 17 C.F.R. § 240.10b-5, or Section 17(a) of the Securities Act of 1933 ("Securities Act"). The reason the parties ask that question - as well as the answer to it lies in the Supreme Court's watershed decision Morrison v. National Australia Bank Ltd. , 130 S.Ct. 2869 (2010), which redefined what it means for a claim of securities fraud to be "domestic" for purposes of Section 10(b) and Rule 10b-5.[4]

Now before the Court are cross motions for partial summary judgment from both Tourre and the SEC (ECF Nos. 184, 191).[5] Tourre moves for summary judgment on the SEC's claims under Section 17(a) of the Securities Act to the extent it alleges fraud in "offers" made to IKB Deutsche Industriebank AG CIKB"), ABN AMRO Bank N.V. ("ABN"), and unspecified domestic investors. He argues that the alleged offers to IKB and ABN were not domestic and that the SEC has, more generally, failed to develop record evidence with respect to any offers to other entities. The SEC, for its part, moves for summary judgment on (1) the interstate commerce element of its Section 17(a) claim as it relates to ACA and on (2) the domestic element of its Section 10(b) and Section 17(a) claims in connection with the offer and sale of securities to ACA and ACA LLC.[6]

For the reasons set forth below, Tourre's motion for partial summary judgment is DENIED, and the SEC's motion for partial summary judgment is GRANTED in part and DENIED in part.

I. BACKGROUND

A. ABACUS 2007-AC1 and the Complaint

The transactions at the heart of this action involved AC1, a synthetic CDO. AC1 referenced a portfolio of ninety sub-prime and mid-prime residential mortgage-backed securities ("RMBS"). (See Chepiga Decl. Ex. 51, at S-A-1 to S-A-4, ECF No. 186; Martens Decl. Ex. 6, ECF No. 231, ) Through notes and CDS arrangements, AC1 offered investors a way to bet on the performance of its reference portfolio without actually owning the underlying mortgages. The value of the reference portfolio depended in large part on the likelihood of "credit events, " such as a failure to pay the principal on underlying assets, or the writedown or downgrade of components of the portfolio. (See Def.'s Resp. SEC's Rule 56.1 Statement Material Facts ¶ 9, ECF No. 228 ("DCSOF").) Investors with a net long interest in AC1 (i.e., investors who bought AC1 notes or who sold protection through CDS) were betting against the likelihood of credit events in the referenced portfolio. Investors with a net short interest in AC1 (i.e., investors who bought protection through CDS) were betting that credit events would occur in the reference portfolio.

Tourre worked with Paulson and ACA Management LLC (referred to, along with ACA Capital Holdings, Inc., as "ACA") to structure AC1. (See DCSOF ¶¶ 16, 33; Martens Decl. Ex. 10, at 56:11-58:1, ECF No. 231.) He, along with other colleagues, then worked with ACA to market AC1. (See Martens Decl. Ex. 10, at 56:11-58:1, ECF No. 231; id. Ex. 11, at 321:12-13.)

The crux of the SEC's complaint is that Tourre knew Paulson was both participating in the selection of the reference portfolio and taking a short position on AC1, but, through misstatements or omissions, he: (1) gave ACA the impression that Paulson was taking a long position on AC1, and (2) gave potential investors the impression that ACA selected the reference portfolio without input from Paulson. (See Am. Compl. ¶¶ 2-3, ECF No. 44.) The SEC essentially argues that Tourre handed Little Red Riding Hood an invitation to grandmother's house while concealing the fact that it was written by the Big Bad Wolf. Tourre disputes the SEC's characterization writ large and also points out that the alleged victims were not be-hooded children, but rather large financial institutions, operating in a dog-eat-dog world.

At present, however, the parties focus on the location of the alleged fraud, rather than whether the conduct in issue was fraudulent. The Court limits its recitation of the facts accordingly.

B. The Record Evidence[7]

From the end of 2006 through October 2007, Tourre worked as a vice president on the structured products correlation desk at Goldman Sachs & Co. ("Goldman") in New York. (DCSOF ¶ 2.) While there, his responsibilities were primarily to develop, structure, trade, and market synthetic CDOs and to hedge those products. (See id.; Chepiga Decl. Ex. 13, at 18:24-19:2, ECF No. 230; Martens Decl. Ex. 4, at 21:9-12, ECF No. 194.) At that time, Paulson was a New York-based company "that managed the investments of certain hedge funds." (DCSOF ¶ 3.)

In late 2006, Paulson expressed interest to Goldman in buying protection on (i.e., shorting) a portfolio of sub-prime RMBS. (Id. ¶ 11.) ACA was invited to serve as portfolio selection agent, in part to help make potential long investors more comfortable with the transaction. (See id. ¶ 13; Chepiga Decl. Ex. 6, at 34:22-35:21, ECF No. 230.) On January 8, 2007, Tourre met with representatives of Paulson and ACA to discuss the possible AC1 transaction. (See DCSOF ¶ 16.)

On January 10, 2007, Tourre sent an e-mail to Laura Schwartz (the head of ACA's portfolio management team) summarizing ACA's proposed role in AC1. (Id. ¶¶ 6, 17.) The e-mail described the equity (or first loss) tranche of AC1 as "pre-committed" and stated that "the compensation structure" aligned the "incentives" of Paulson, Goldman, and ACA. (Martens Decl. Ex. 9, ECF No. 194.) At that time, however, Tourre did not anticipate that the equity tranche of AC1 would be placed (DCSOF ¶ 18), and he knew that Paulson contemplated taking a short interest in AC1 (see id. 20; Martens Decl. Ex. 4, at 189:11-14, ECF No. 194).

ACA was formally engaged as the portfolio selection agent for the AC1 transaction by February 2007. (DCSOF ¶ 31.) In that capacity, ACA worked with Paulson to select the reference portfolio (see id. ¶ 33), which eventually included ninety Baa2-rated sub-prime and mid-prime RMBS (see Chepiga Decl. Ex. 51, at A-1 to S-A-4, ECF No. 186; Martens Decl. Ex. 6, ECF No. 231).

Tourre, along with colleagues at Goldman, Goldman Sachs International ("GSI"), and ACA, then worked together to market and negotiate the AC1 transaction. (See Martens Decl. Ex. 10, at 56:11-58:1, ECF No. 231; id. Ex. 11, at 321:12-13.) They made a term sheet, flip book, and offering circular, each of which described the reference portfolio as selected by ACA, without mentioning Paulson's role in the selection process or its contemplated short position. (See Def.'s Resp. Pl.'s Resp. Def.'s Rule 56.1 Statement of Material Facts ¶ 187, ECF No. 255 ("Def.'s Reply SOF").) Tourre e-mailed a preliminary draft of the offering circular to Jorg Zimmermann and Thomas Schirmer of IKB. (See Martens Decl. Ex. 17, ECF No. 231.) He and his colleagues at Goldman and GSI also discussed the AC1 transaction with IKB over the phone (see Martens Decl. Ex. 1, at 32-36, ECF No. 231; id. Ex. 19) and e-mailed other AC1 offering materials to IKB (Def.'s Reply SOF ¶ 193) and to numerous other individuals (see Martens Decl. Exs. 77, 78, ECF No. 231). Tourre also e-mailed ABN discussing its potential role in intermediating a CDS transaction involving the super senior tranche of AC1. (See id. Ex. 11, at 323-25; id. Ex. 25.) The e-mail indicated that the reference portfolio was "selected by ACA." (Id. Ex. 25.)

On April 26, 2007, the AC1 transaction closed. (Pl.'s Resp. Def.'s Rule 56.1 Statement of Material Facts ¶ 110, ECF No. 226 ("PCSOF').) That day, three ACA-managed funds purchased $42 million in Class A2 notes. (See DCSOF ¶ 40.) The trade confirmations for those purchases show a trade from Goldman to the three ACA-related entities with an account address for each entity listed as 140 Broadway, 48th Floor, New York, NY 10005. (Martens Decl. Ex. 26, ECF No. 194.) Two Loreley entities (advisory clients of IKB) also purchased $150 million in Class Al and A2 notes. (See Def.'s Reply SOF ¶¶ 203-04.) Title and irrevocable liability passed to the Loreley entities in Europe. (See Nov. 19, 2012, Opinion & Order 3-4, ECF No. 164.) Also on April 26, 2007, Paulson purchased protection on $192 million of Class Al and A2 notes. (See DCSOF ¶ 42; PCSOF ¶ 132.)

On approximately May 31, 2007, ACA LLC entered into a CDS in which it sold protection on $909 million of the super senior (50% - 100%) tranche of the AC1 reference portfolio. (DCSOF ¶ 45.) ACA LLC entered into that transaction pursuant to a master agreement and a trade confirmation, each of which were signed by Nora Dahlman on behalf of ACA LLC in the United States. (See DCSOF ¶¶ 47-48; Martens Decl. Exs. 36, 37, 40, 41, ECF No. 194.) ACA LLC also issued a financial guaranty insurance policy on that same tranche of the AC1 reference portfolio. (See PCSOF ¶ 140.) On May 31, 2007, Paulson purchased protection on approximately $1 billion of the super senior (45%-100%) tranche of the AC1 reference portfolio. (See PCSOF ¶ 143.)

II. DISCUSSION

A. Standard on Summary Judgment

Summary judgment may not be granted unless all of the submissions taken together "show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). The moving party bears the burden of demonstrating "the absence of a genuine issue of material fact." Celotex Corp. v. Catrett , 477 U.S. 317, 323 (1986). In making that determination, the Court must "construe all evidence in the light most favorable to the nonmoving party, drawing all inferences and resolving all ambiguities in its favor." Dickerson v. Napolitano , 604 F.3d 732, 740 (2d Cir. 2010). The Court is not to act as a trier of fact or to weigh the evidence. Weyant v. Okst , 101 F.3d 845, 854 (2d Cir. 1996).

"When a motion for summary judgment is properly supported by documents or other evidentiary materials, the party opposing summary judgment may not merely rest on the allegations or denials of his pleading; rather his response, by affidavits or otherwise as provided in the Rule, must set forth specific facts demonstrating that there is a genuine issue for trial." Wright v. Goord , 554 F.3d 255, 266 (2d Cir. 2009) (internal quotation marks and citations omitted). "[A] party may not rely on mere speculation or conjecture as to the true nature of the facts to overcome a motion for summary judgment, " and "[m]ere conclusory allegations or denials... cannot by themselves create a genuine issue of material fact where none would otherwise exist." Hicks v. Baines , 593 F.3d 159, 166 (2d Cir. 2010) (internal quotation marks and citations omitted).

B. Legal Background

The SEC will prevail on a claim under Section 17(a) of the Securities Act if it can prove that a defendant: (1) committed a fraudulent act; (2) that was material; (3) in the offer or sale of a security or security-based swap agreement; (4) through the use of any means or instruments of interstate commerce; and, with certain exceptions, (5) with the requisite scienter. See 15 U.S.C. § 77q(a); SEC v. First Jersey Sec., Inc. , 101 F.3d 1450, 1467 (2d Cir. 1996). To be liable, the defendant need not speak a falsehood directly to a defrauded investor; it is enough to have "knowledge of the fraud and [to have] assisted in its perpetration." First Jersey , 101 F.3d at 1471 (internal quotation mark and citation omitted). In addition, for conduct that predates the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the SEC must also prove that the fraud is domestic for purposes of Morrison. See generally Morrison , 130 S.Ct. 2869; SEC v. Goldman Sachs & Co. , 790 F.Supp.2d 147, 164 (S.D.N.Y. 2011) (applying Morrison to claims under Section 17(a) of the Securities Act); see also 15 U.S.C. § 77v(c) (delineating the extraterritorial scope of post-Dodd Frank enforcement actions). Section 10(b) of the Exchange Act and Rule 10b-5 also prohibit securities fraud. Section 10(b) and Rule 10b-5 claims share, inter alia, the domestic transaction element of Section 17(a) claims. See generally Morrison , 130 S.Ct. 2869.

The primary question of law that the parties dispute on these motions is what it means for fraud made "in the offer" of securities to be domestic ...


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