Know The Laws, Know Your Rights: Trader

Now, after striking nine-figure settlements with firms like Goldman Sachs and JPMorgan Chase, the government’s campaign to punish Wall Street over risky investments sold before the crisis will culminate in an unlikely way — with the civil trial of a 34-year-old Frenchman, Fabrice P. Tourre.

In a federal courtroom in Lower Manhattan next week, the former midlevel Goldman employee will fight the Securities and Exchange Commission’s claim that he was part of a conspiracy to mislead investors when selling a mortgage security that ultimately failed. Mr. Tourre, a trader stationed in the bowels of Goldman’s mortgage machine when the S.E.C. thrust him into the spotlight, is one of only a handful of employees at big Wall Street firms to land in court over the crisis.

The rarity of the trial underpins its importance. For Mr. Tourre, who is now enrolled in a doctoral economics program at the University of Chicago, an unfavorable verdict could yield a fine, or worse, a ban from the securities industry. A victory in court, however, would offer only belated consolation to Goldman, which is paying for his defense. For the S.E.C., an agency still dogged by its failure to thwart the crisis, the trial is a defining moment that follows one courtroom disappointment after another.

When a jury cleared a midlevel Citigroup employee in a mortgage-bond trial, the S.E.C. took measures to buoy its case against Mr. Tourre. For one, it talked to a private jury consultant, people briefed on the matter said, though it is unclear whether the agency hired the firm. The head of the agency’s trial team is also leading the Goldman case himself, a surprising move.

“Their reputation for trying cases hangs in the balance,” said Thomas A. Sporkin, who was a senior S.E.C. enforcement official until last year when he departed for the law firm Buckley Sandler. “This is their opportunity to show Wall Street that they can prevail against an individual at trial.”

Both sides were in court Tuesday sparring over what the jury should — and shouldn’t hear. The judge, Katherine B. Forrest, ruled that the defense can question a crucial S.E.C. witness, a woman who was an executive of a company that helped arrange the mortgage security, about the agency’s eve-of-trial decision to drop an unrelated investigation against her, a reprieve Mr. Tourre’s lawyers have argued might color her testimony.

The S.E.C. also walked away with a major victory: Judge Forrest permitted the agency to argue that Mr. Tourre was part of larger conspiracy at Goldman, a move that will allow evidence beyond Mr. Tourre’s actions.

Yet even if it secures a victory at trial, the S.E.C. will probably face scrutiny all the same, as critics question why the agency chose to make Mr. Tourre the face of the financial crisis. Rather than take aim at a high-flying executive, the agency filed its most prominent crisis-era case against someone barely known on Wall Street, a concern that also hampered the Citigroup case, when the foreman of the jury asked, “Why didn’t they go after the higher-ups rather than a fall guy?”

An S.E.C. spokeswoman declined to comment. But in the past, the agency has defended its actions tied to the crisis, noting that it has sued 66 C.E.O.’s and other senior officers in such cases, including a few executives from Wall Street and major mortgage lenders.

When the S.E.C. filed its case against Goldman and Mr. Tourre in April 2010, the allegations shook the bank. Within months, it agreed to pay a $550 million fine, without admitting or denying guilt, then the largest penalty ever levied on Wall Street.

Mr. Tourre, however, rejected a deal on the eve of Goldman’s settlement, people briefed on the matter said. The deal, the people said, would have required Mr. Tourre to face a lifetime ban from the securities industry and a cash penalty — virtually the same punishment he would face if found liable at trial. The agency has not offered to settle since.

At the heart of the agency’s case is the contention that in 2007 Mr. Tourre and Goldman sold investors a mortgage security, known as Abacus, without disclosing a crucial fact: a hedge fund run by the billionaire John A. Paulson helped construct Abacus and then bet against it. The S.E.C. cited Goldman for “misstating and omitting key facts” about Mr. Paulson’s involvement. When the mortgage market soured, a German bank and a handful of other sophisticated investors lost more than $1 billion on the deal.

“The S.E.C. 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,” Judge Forrest explained in a recent ruling.

To win its case, the S.E.C. must show by a preponderance of the evidence that Mr. Tourre “committed a fraudulent act that was material.” The verdict is likely to hinge on whether the S.E.C. can prove what it called two basic acts of “deception” stemming from January 2007, when Mr. Paulson’s hedge fund asked Goldman to create an investment worth betting against.

What led to the first misstep, according to the S.E.C., was Goldman’s decision to use ACA Management to pick the underlying mortgage bonds for the investment. ACA worked closely with Mr. Paulson’s hedge fund in the selection process, the S.E.C. said.

But in a marketing document that Goldman submitted to investors, the bank said the portfolio was “selected by ACA,” with no mention of Mr. Paulson.

Mr. Tourre’s lawyers, however, are expected to note that it was unheard-of for any Wall Street bank to disclose the name of the hedge fund betting against an investment. And e-mails reviewed by The New York Times suggest that the main investor in Abacus, the German bank IKB Deutsche Industriebank, knew the contents of the deal and possibly even removed certain bonds from its makeup. In the two March 2007 e-mails, Goldman employees sent three “replacement” bonds to an IKB executive, saying “hopefully these will work.”

In turn, the S.E.C. is expected to outline a second possible misstep by Mr. Tourre tied to his dealing with ACA. Mr. Tourre, the S.E.C. said, misled ACA into thinking that Mr. Paulson was investing in the bonds rather than betting against it. In a January 2007 e-mail, Mr. Tourre falsely told ACA that one chunk of Abacus was “pre-committed,” meaning that an unnamed investor already agreed to buy it. In a deposition, he later acknowledged that his e-mail “could have been more accurate.”

ACA, the S.E.C. said, interpreted Mr. Toure’s e-mail to mean that Mr. Paulson was the unnamed investor. And when that impression was conveyed to Mr. Tourre in an e-mail, according to the S.E.C., he failed to immediately correct it.

ACA’s chief executive later told the S.E.C. that he “would not have voted to approve” his company’s involvement in Abacus had he known of Mr. Paulson’s strategy.

Yet Mr. Tourre’s lawyers will argue that if ACA did not know of Mr. Paulson’s bet against Abacus, it should have. ACA, the lawyers note, was a sophisticated player and met separately with Mr. Paulson’s team to discuss the Abacus deal. Goldman, the lawyers argue, also sent ACA “a steady stream” of documents correcting Mr. Tourre’s misstatement.

“Fabrice Tourre has done nothing wrong. He is confident that when all the evidence is considered, the jury will soundly reject the S.E.C.’s charge,” his lawyers, Pamela Chepiga and Sean Coffey, said in a statement.

The defense received additional ammunition on Tuesday when Judge Forrest ruled that the S.E.C. could not fully block mention of newspaper articles from 2007 that discussed Mr. Paulson’s penchant for betting against the mortgage market.

The judge has yet to rule on whether to allow the S.E.C. to introduce some of the case’s most colorful e-mails, notably one where Mr. Tourre says a friend had nicknamed him “Fabulous Fab,” and jokes that he sold toxic real estate bonds to widows and orphans.

Sunday, December 23, 2012

DealBook: Former SAC Trader Is Indicted

Andrew Gombert/European Pressphoto AgencyFederal agents had asked Mathew Martoma to help build a case against Steven A. Cohen of SAC.

6:23 p.m. | Updated

A former SAC Capital Advisors portfolio manager was indicted on Friday on securities fraud and conspiracy charges in a case that federal prosecutors have called the most lucrative insider trading scheme ever uncovered.

A federal grand jury in Manhattan indicted the former portfolio manager, Mathew Martoma, a month after the government arrested him on charges that he used inside tips about a clinical drug trial to help SAC earn profits and avoid losses. Prosecutors said the total benefit to SAC was $276 million.

SAC, based in Stamford, Conn., has been touched by several insider trading cases in recent years, but there is heightened attention surrounding the Martoma prosecution. For the first time, the government has tied questionable trades to Steven A. Cohen, the billionaire owner of SAC.

“Though disappointing, today’s events come as no surprise,” Mr. Martoma’s lawyer, Charles A. Stillman, said in a statement. “The simple fact is that Mathew Martoma did not trade on inside information, is innocent of all these charges, and we look forward to his ultimate vindication.”

Before Friday’s indictment, there had been speculation that the government, before formally presenting evidence to a grand jury, was trying to gain Mr. Martoma’s cooperation in building a case against Mr. Cohen. Mr. Martoma has rebuffed several earlier efforts by the authorities to enter into plea talks and implicate his boss.

Mr. Cohen has not been charged with any wrongdoing, and a spokesman for SAC has said that he thinks that he and SAC have acted appropriately at all times. The Securities and Exchange Commission, which brought a parallel civil action against Mr. Martoma, has warned SAC that it is likely to file a fraud lawsuit against the firm related to the Martoma case.

Mr. Martoma, 38, is set to appear in Federal District Court in Manhattan for his arraignment on Jan. 3, when he will enter a plea. The case was assigned to Judge Paul G. Gardephe, a former federal prosecutor who assumed his seat on the bench in 2008 after an appointment by President George W. Bush.

The government says that Mr. Martoma obtained secret, negative information from a doctor about clinical trials of an Alzheimer’s drug being developed by the pharmaceutical companies Elan and Wyeth. He then had a 20-minute telephone conversation with Mr. Cohen, prosecutors say.

A day after the phone call, SAC sold $700 million in Elan and Wyeth stock and made a large negative bet on the companies. The companies’ shares plummeted after they announced the disappointing trial results, and SAC booked big profits.

The doctor, Sidney Gilman, is cooperating with prosecutors and has agreed to testify against Mr. Martoma. The government gave Dr. Gilman a nonprosecution agreement, meaning it will not bring criminal charges against him. Such an agreement is highly unusual, legal experts say, and is being used as a pressure point on Mr. Martoma in an effort to get him to “flip” against Mr. Cohen.

Before coming to New York for his arraignment, Mr. Martoma will be spending the holidays with his wife and three young children at home, in Boca Raton, Fla.

Saturday, November 3, 2012

DealBook: JPMorgan Sues Boss of Trader Who Lost Billions

Carl Court/Agence France-Presse — Getty ImagesOffices of JPMorgan Chase in London. The trade losses were associated with London workers.

The fallout continues from the multibillion-dollar trading loss at JPMorgan Chase.

Now JPMorgan, the nation’s largest bank, is taking aim at one of its former executives in the chief investment office, a once little-known unit at the center of the bungled trades. JPMorgan is suing Javier Martin-Artajo, the manager who directly supervised Bruno Iksil, the so-called London Whale, according to a lawsuit made public on Wednesday.

Mr. Iksil gained that now infamous moniker after reports emerged in April that he had built up an outsize position in an obscure corner of the credit markets. That position ultimately proved devastating for the bank, resulting in a $6.2 billion loss.

The lawsuit, which was filed in a London court, did not disclose the details of JPMorgan’s claims against Mr. Martin-Artajo, according to a person with knowledge of the complaint. Mr. Martin-Artajo and Mr. Iksil have left the bank. A spokeswoman for JPMorgan declined to comment on the lawsuit. Mr. Martin-Artajo’s lawyer could not be reached immediately for comment.

Since announcing the problem in May, JPMorgan has worked to move beyond the loss and reassure skittish investors. JPMorgan has broadly reshuffled its management ranks and united some of its business operations.

As part of that effort, the bank conducted an internal investigation, combing through thousands of e-mails and phone records of traders to determine what went wrong at the chief investment office.

The investigation, led by Michael J. Cavanagh, the bank’s former chief financial officer, uncovered that some traders within the unit might have improperly valued their positions as losses began to mount. Some phone recordings suggest that Mr. Martin-Artajo encouraged Mr. Iksil to value troubled positions in a favorable manner, according to people with knowledge of the situation.

Mr. Martin-Artajo, Mr. Iksil and two other employees who worked in the chief investment office are under investigation by criminal and civil authorities. Authorities are examining whether the group mismarked the positions to cover up losses, according to the people. After revising the valuations on those trades, JPMorgan had to restate its first-quarter earnings.

Federal authorities face a high legal bar. Traders are given significant leeway to price certain financial instruments like the complex credit derivatives at the center of the bet. None of the people have been accused of any wrongdoing.

JPMorgan, too, faces scrutiny. The Securities and Exchange Commission, the Office of the Comptroller of the Currency, and the Federal Reserve Bank are all looking into the botched trade.

The aftershocks of the trading blowup have reverberated throughout the bank. The multibillion-dollar loss tarnished the reputation of Jamie Dimon, the bank’s chief executive, who is considered one of Wall Street’s best risk navigators. In July, Mr. Dimon appeared before Congress to try to account for the misstep.

The trading debacle has also claimed the job of one of the Mr. Dimon’s most-seasoned and trusted lieutenants, Ina R. Drew, who resigned as head of the chief investment office shortly after the trading losses and volunteered to give back her pay. The bank also clawed back millions of dollars of compensation from Mr. Martin-Artajo, Mr. Iksil and others.

Mr. Dimon has also moved swiftly in the last few months to remake his management team. Douglas L. Braunstein, the bank’s chief financial officer since 2010, will resign by the end of the year, according to former and current executives. Mr. Braunstein initially played down concerns about the chief investment office that emerged in April. Barry Zubrow, a former chief risk officer who now runs the bank’s regulatory affairs, announced his own resignation last month from his current post.

The huge loss stemmed from a complex wager on credit derivatives made by Mr. Iksil out of the London unit of the chief investment office, which was formed five years ago. The chief investment office morphed from a relatively sleepy operation into a profit center as the complexity and risk of its positions swelled.

The risk controls did not keep up with the group’s increasingly large bets, according to several current and former executives familiar with the unit. Part of the problem, the executives said, was that the London branch operated without sufficient oversight. Even when some executives in New York, for example, called for greater risk controls, they were ignored or shouted down.

During JPMorgan’s latest earnings call, Mr. Dimon emphasized that the bank had contained the loss from the troubled trade. It closed out the position and moved the remainder of the credit derivative trade to the investment bank.

Ben Protess and Mark Scott contributed reporting.