The U.S. District Court for the Southern District of New York has refused the Securities and Exchange Commission’s request to reinstate its antifraud claim against Goldman Sachs & Co. (GS) executive Fabrice Tourre for alleged misstatements related to a collateralized debt obligation connected to subprime mortgages. Judge Katherine Forrest said that the facts did not offer enough domestic nexus to support applying 1934 Securities Exchange Act Section 10(b). To do so otherwise would allow a 10(b) claim to be made whenever a foreign fraudulent transaction had even the smallest link to a legal securities transaction based in the US, she said, and that this is “not the law.” The case is SEC v. Tourre.
The SEC had sued the Goldman and its VP, Tourre, over alleged omissions and misstatements connected with the ABACUS 2007-AC1’s sale and structuring. This 2007 CDO was linked to subprime residential mortgage-backed securities and their performance. The Commission claimed Goldman had misrepresented the part that Paulson & Co., a hedge fund, had played in choosing the RMBS that went into the portfolio underlying the CDO and that Tourre was primarily responsible for the CDO deal’s marketing and structuring.
In 2010, Goldman settled the SEC’s claims by consenting to pay $550M, which left Tourre as the sole defendant of this case. Last year, the court dismissed one of the Section 10(B) claims predicated on $150 million note purchases made by IKB, a German bank, because of Morrison v. National Australia Bank Ltd. In that case, the US Supreme Court had found that this section is applicable only to transactions in securities found on US exchanges or securities transactions that happen in this country. The court, however, did let the regulator move forward under Section 10(b) in regards to other ABACUS transactions, and also the 1933 Securities Act’s Section 17(a).
However, following Absolute Activist Value Master Fund Ltd. v. Facet in which the U.S. Court of Appeals for the Second Circuit earlier this year found that ““irrevocable liability is incurred or title passes” within the US securities transaction may be considered domestic even if trading did not occur on a US exchange, the SEC requested that the court revive the Section 10(b) claim. Although IKB was the one that had recommended the CDO to clients, including Loreley Financing, it was Goldman that obtained the title to $150 million of the notes through the Depository Trust Co. in New York. Goldman then sent the notes to the CDO trustee in Chicago before the notes were moved from the DTC to Goldman’s Euroclear account to Loreley’s account. The Commission said that, therefore, transaction that the claim was based on had closed here.
Noting in its holding that Section 10(b) places liability on any person that employs deception or manipulation related to the selling or buying of a security, the court said that the Commission was trying to premise the domestic move of the notes’ title from the CDO trustee to Goldman at the closing in New York as a “hook” to show liability under this section. The court pointed out that while the title of the transfer that took place in New York was legal and it wasn’t until later that the alleged fraud happened. The “fraud was perpetuated upon IKB/Loreley, not Goldman” so “no fraudulent US-based” title transfer related to the note purchase is “sufficient to sustain a Section 10(b) and rule 10b-5 claim against Tourre” for the transaction.
SEC v. Tourre (PDF)
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