A Securities and Exchange Commission lawyer found himself sparring with his own witness, a former top Paulson & Co. executive who claimed the agency intimidated and tricked him in its investigation into the deal at the heart of its civil fraud case against Fabrice Tourre.
Paolo Pellegrini, the third witness called by the SEC in the Tourre trial in Manhattan federal court and designated as “hostile” by the judge, picked frequent quarrels with lawyer Matthew Martens yesterday and the day before.
At one point he disavowed testimony he’d given in a 2008 deposition, in which he said he didn’t recall telling a key participant in the transaction that Paulson planned to take a short position.
“I thought that you were trying to trick me in some way,” Pellegrini said. “Yeah, I was scared.”
The SEC sued Tourre and his then-employer, Goldman Sachs Group Inc., in 2010 over Abacus 2007-AC1, a synthetic collateralized debt obligation that Paulson, the hedge fund run by billionaire John Paulson, used to bet against mortgage-backed securities. Investors on the other side of the bet lost more than $1 billion. Goldman Sachs, based in New York, paid a then-record $550 million to settle the case.
Martens was trying to show that the witness and Tourre misled the company that helped select mortgage-backed securities for the deal. The SEC claims Tourre, dubbed “Fabulous Fab” by a friend, misled ACA Financial Guaranty Corp. into thinking the Paulson firm planned to take an equity stake in Abacus.
Instead, the hedge fund, which made $15 billion betting subprime mortgages would fail, planned to short the mortgage-backed securities underlying the deal. Pellegrini and Paulson aren’t defendants in the SEC civil suit.
U.S. District Judge Katherine Forrest ruled that Martens could treat Pellegrini as a hostile witness, allowing him to ask leading questions. She said yesterday he could cut Pellegrini off if his answers continued to be long and unresponsive.
On the stand yesterday, Pellegrini said ACA knew of Paulson’s intention to use Abacus to short the mortgage market.
Martens questioned Pellegrini about his 2008 testimony that he didn’t have any specific memory of telling Laura Schwartz, a former ACA Financial Guaranty Corp. executive in charge of its CDO business, that Paulson planned to short the transaction by buying protection in a credit default swap.
“I remember that those are the words I used under pressure from the SEC,” Pellegrini said.
“Weren’t you just asked questions?” Martens responded.
“Hostile questions, yes, intimidating questions,” Pellegrini said.
“I was not trying to trick you in any proceeding,” Martens told the witness.
“They were,” Pellegrini responded, appearing to refer to other SEC lawyers.
Later, with the jury and the witness outside the courtroom, Martens told Forrest that Pellegrini’s claims were “garbage” and “utter nonsense.”
The SEC claims Tourre misled ACA, which lost money on an investment in Abacus, into believing Paulson was taking an equity stake in the CDO. Evidence presented by the SEC shows ACA and Paulson both participated in selecting the 90 mortgage-backed securities behind Abacus.
The SEC alleges Paulson selected assets that were doomed to fail and Tourre hid that information from investors. The agency also claims Tourre used ACA’s participation in selecting the assets to make Abacus more attractive to long investors, while hiding Paulson’s role.
Pellegrini frequently bridled at Martens’s questions from the start of his testimony on July 16.
Shortly after calling Pellegrini to the stand, Martens asked him: “What does CDO stand for?”
“I’m not sure,” the former Paulson executive said.
“Sir, your testimony is you don’t know what CDO stands for, is that correct?” Martens asked.
“It may stand for collateralized debt obligations, but I’m not sure,” he replied.
Tourre’s counsel, John “Sean” Coffey, sought to distance himself from the witness, asking Forrest to tell jurors his objections were meant to protect Tourre, not Pellegrini.
“I certainly don’t want to be identified as slightly sympathetic to Mr. Pellegrini,” Coffey told the judge.
For a third day, some of the nine jurors struggled with the testimony about complicated financial transactions.
“We’re losing some of the jurors here who are trying—valiantly, I think—both to follow and to stay awake,” Forrest told the lawyers while the jury was outside the courtroom. She suggested they try to shorten and focus the testimony, particularly an upcoming stretch with a videotaped deposition.
“I have considered giving people popcorn,” Forrest joked.
After Pellegrini concluded his testimony, the SEC called Jonathan Egol, the senior member of Tourre’s former trading desk.
The SEC sued Tourre after dropping a plan to file claims against Egol, according to interviews with SEC enforcement staff conducted by the agency’s inspector general, which were made available to Bloomberg News through a Freedom of Information Act request. Egol testified yesterday that Tourre was the Goldman Sachs employee responsible for the Abacus transaction.
Egol will continue his testimony today, to be followed by another Goldman employee, David Gerst, a member of the Abacus deal team.