WASHINGTON — The Securities and Exchange Commission’s courtroom victory over ex-Goldman Sachs employee Fabrice Tourre is helping the agency turn the page on years of criticism that it isn’t holding Wall Street accountable.
The win adds weight to pledges by SEC Chairwoman Mary Jo White to reinvigorate the regulator, seeking tougher settlements in some cases and, if necessary, taking them to trial. It also could bolster support for a 27 percent budget increase for the agency that Congress is considering.
“To take on cases that are low-hanging fruit and pound its chest in front of Congress is not the same as winning a high-profile trial,” said Jacob Frenkel, a former SEC lawyer and now partner at Shulman Rogers Gandal Pordy & Ecker in Potomac, Md. “It’s a tremendous shot in the arm for an agency that has come under criticism for its enforcement program.”
The SEC has struggled to repair its image after a decade of debacles that began with accounting fraud at Enron and ended with an unprecedented taxpayer bailout of Wall Street amid a credit crisis.
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The intervening years included analyst and mutual-fund scandals unearthed by New York’s attorney general, and Bernard Madoff’s multibillion-dollar Ponzi scheme, which the SEC missed despite repeated warnings.
Judges and lawmakers criticized the regulator’s policing of Wall Street after 2008’s market meltdown, saying investigators reached expedient settlements with firms that hurt shareholders and didn’t hold senior executives accountable for wrongdoing.
The agency never brought claims tied to the collapse of Lehman Brothers or the events that led to the bailout of American International Group.
While the trial could be a bellwether for a more aggressive SEC, the agency is still struggling to build a stronger bench of litigators to strengthen its hand in settlement negotiations.
White, who became the SEC’s leader in April, told lawmakers last week she’s seeking additional resources to hire trial attorneys.
“We can’t judge at this point how many additional trials we’re going to have, but we already don’t have enough,” White said in a July 30 hearing before the Senate Banking Committee. “We have to be prepared to go to trial.”
The case against Tourre, 34, stemmed from one of the SEC’s highest-profile fights related to the crisis. In 2010, the agency sued Goldman Sachs, alleging it misled investors in a 2007 deal known as Abacus about the role played by John Paulson’s hedge fund, Paulson & Co. The SEC claimed Tourre, then a Goldman Sachs vice president, hid that Paulson helped choose the portfolio of subprime mortgage-backed securities underlying Abacus while betting it would fail.
Goldman Sachs agreed to pay a record $550 million to resolve the case three months later, setting the stage for claims against JPMorgan Chase, Citigroup, Mizuho Financial Group and Wells Fargo over investment products tied to mortgages.
As the SEC lost fights against people involved in Citigroup and JPMorgan deals, the contest against Tourre became a referendum on the agency’s settlement with Goldman Sachs and its work on financial-crisis cases.
“The SEC needed at least one scalp from the financial crisis, or they were going to face a lot of heat from Congress,” said Adam Pritchard, a University of Michigan law professor who previously worked as a lawyer for the regulator.
The trial required the SEC to teach jurors how to parse disclosures on synthetic collateralized debt obligations.
As jargon-filled testimony rolled on, pundits predicted the government would lose its case.
Tourre’s lawyers, funded by Goldman Sachs, didn’t call anyone to the stand, relying instead on SEC witnesses including Tourre to mount their defense.
The jury found him liable Aug. 1 on six of seven of the SEC’s claims.
Andrew Ceresney, co-chief of the SEC’s enforcement division, said the agency was “gratified” by the verdict and that it will bring others to trial whenever needed.
“The verdict against Tourre validates the Goldman settlement,” Pritchard said. “It was questioned at the time, and now the jury has said that there was something there.”
The SEC’s victory isn’t enough to overshadow the agency’s other shortcomings, said Dennis Kelleher, president of nonprofit Better Markets.
“No one should be allowed to break the law, but the SEC must stop chasing minnows while letting the whales of Wall Street go free,” Kelleher said.