Former Goldman Sachs trader Fabrice Tourre, nicknamed ‘Fabulous Fab’, accused of duping investors into buying high-risk mortgage-backed securities that saw them incur $1 billion in losses, went on trial in New York on Monday.

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The trial of the French-born former Goldman Sachs trader Fabrice Tourre, accused of misleading investors and helping to bring about the collapse of the US housing market that triggered the 2008 financial crisis, got underway in New York on Monday.

According to the US financial watchdog the Securities and Exchange Commission (SEC), 34-year-old Tourre, best known by his nickname ‘Fabulous Fab’, was behind a complex mortgage securities investment product that ultimately lost investors a total of around $1 billion.

Known as ‘Abacus’ and developed by Tourre as early as 2007 while working at Goldman Sachs in New York, the product saw investors purchase bundles of high-risk, or subprime, mortgage-backed securities.

However, the SEC alleges that Tourre failed to disclose to investors that the hedge fund Paulson & Co Inc, headed by billionaire John Paulson, had been given a role in choosing the underlying portfolio of mortgage securities sold to investors.

At the same time, Mr Paulson was betting against, or “shorting”, the US mortgage securities market via a financial mechanism known as a credit default swap, bringing him direct financial rewards from the failure of the Abacus investments.

‘A product of pure intellectual masturbation’

Key to the SEC’s case are a number of highly publicised private emails sent by Tourre during his time at Goldman Sachs, which the organisation says show he deliberately set out to deceive investors.

In one such email, sent on January 23, 2007, Tourre states in reference to the financial markets that “the entire system is about to crumble any moment”.

He adds: “[T]he only potential survivor the fabulous Fab … standing in the middle of all these complex, highly levered, exotic trades he created without necessarily understanding all the implications of those monstruosities [sic] !!!"

In another, sent on January 29, he refers to Abacus as “a product of pure intellectual masturbation” and “a little like Frankenstein turning against his own inventor”.

These emails, along with Tourre’s ‘Fabulous Fab’ image, have also served to incur the wrath of the general public, with Tourre seen by many as a figurehead for the type of reckless behaviour typical of Wall Street in the years leading up to the financial crisis.

Just a scapegoat?

However, Tourre’s lawyers are likely to portray their client as something of a scapegoat for the banking system and merely a minor cog in a much larger machine.

Tourre was just aged 28 and a mid-level employee at Goldman Sachs when he was handed responsibility for Abacus.

He is also the sole Goldman executive being sued individually by the SEC in relation to Abacus. The watchdog had initially sought to charge Goldman Sachs over the case but in 2010 the investment bank paid a then record $550 million fine to settle out of court. Tourre is believed to have passed up a chance to settle himself, instead choosing to fight the case.

His defence team is also set to argue that the investors who lost money on Abacus, which include the likes of IKB Deutsche Industriebank AG and ABN AMRO Bank NV, were all highly experienced and had the tools and information available them to properly analyse mortgage investments and make their own decisions over their risk.

SEC under pressure

Meanwhile, the SEC is under pressure to show that it is taking strong action against those seen as responsible for the 2008 financial crisis.

While the watchdog has seen some success in extracting settlements from banks following the crisis, it has so far struggled to hold individuals accountable.

Recent setbacks include the SEC’s failed attempt to charge Citigroup manager Brian Stoker, who it alleged misled investors in a $1 billion mortgage product by failing to tell them the bank had bet against it. The charges were rejected by a federal jury in New York in July last year.

Tourre, should he be found guilty, could be fined, forced to reimburse investors and be banned from the trading floor for life.

Raised in a suburb of Paris, Tourre earned a degree in mathematics from the prestigious École Centrale Paris. He moved to the United States in 1999, aged 20, where he obtained a master’s degree in management science and engineering from Stanford before taking up an internship with Goldman Sachs.

Since leaving Goldman Sachs in the wake of the SEC allegations, Tourre reportedly spent time in Rwanda where he worked as a volunteer helping to create business plans for local farmers, before returning to the US to study for a Ph.D. at the University of Chicago.

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