A Window Into the Business: The Tourre Trial
The conviction of Fabrice Tourre on six counts of securities fraud for misrepresenting the investment intention of the hedge fund Paulson & Company has received all the expected commentary. Once again, senior executives have escaped culpability. Mr. Tourre was a junior member of team Goldman Sachs. As commentators have noted, it is possible to obtain a fraud conviction despite the high standard of proof. Mr. Tourre was responsible for structuring a mortgage-backed security that Goldman sold to its clients, while Paulson & Company was allowed to make a huge bet against the offering. The jury found that Mr. Tourre failed to disclose Paulson’s huge financial interest in seeing the mortgage-backed offering fail.
From my perspective, the Tourre trial wasn’t about punishing unusual behavior. Rather, the trial was a window on how business is conducted on Wall Street. Mr. Tourre had the misfortune of not being powerful enough to fight off prosecution and not being careful enough in writing emails. The Tourre case merely illustrates the power of transactions and fees. Whether it's a merger, a securities offering, or a trade, Wall Street’s goal is to close the deal and siphon off a fee. It’s the fee that generates the bonuses that drive everyone from Mr. Tourre all the way up to Lloyd Blankfein. Obviously, some transactions are straightforward and don’t raise legal or ethical concerns. However, in order to keep generating ever higher profits and bonuses quarter after quarter, every firm on Wall Street has to do their fair share of deals with “hair” on them.
As long as SAC Capital continues to generate millions of dollars in commissions and settle its trades, Goldman Sachs will wine and dine SAC’s traders and do business with the firm. The fact that SAC Capital has engaged in a systematic practice of insider trading is someone else’s problem. So long as there’s money to be made, Goldman will do business with SAC.
And as far as Goldman is concerned, Mr. Tourre was doing a great job by successfully managing a highly questionable transaction. If not for the legal proceedings, Mr. Tourre probably would have been promoted after completing the complex and difficult piece of business. His only sin was getting caught.
Back in the early 1980s, I was asked to perform due diligence for a pending initial public offering (IPO). My sessions with the company didn’t go well. The CEO seemed more interested in selling some of his interest in the company than explaining to me why his inventory and receivables were rising rapidly. The CFO didn’t seem to have command over the company’s financials. This deal had lots of hair on it. As I was getting into the car to head back to the airport, I told the head of investment banking that we needed to walk away from the deal. He told me my concerns were overblown, and that in any event our co-manager on the IPO had most of the deal sold. He also reminded me that we needed the fees to make next quarter’s earnings. When I got home I reported my findings to my boss, but we went ahead with the deal anyway. Three months later, problems surfaced at the company and the stock collapsed. By then we’d earned our fees and bonuses. Some small part of our kitchen renovation was probably funded from that deal.
Mr. Tourre’s case is merely one chapter in the long history of how Wall Street really works that happened to be publicized. From time to time, prosecutors and regulators will single out a particular deal or trader. However, the Wall Street system marches on unimpeded.