I was disappointed in the general lack of press commentary on the utter stupidity of letting Fabrice Tourre testify. I say that without having read his testimony. Anyone in his position, a defendant in an SEC civil fraud suit who is also the subject/target of a criminal investigation, has no business talking about the facts of the case to anyone other than his attorney. He certainly has no business testifying under oath to U.S. Senators and their staffers. A person in Tourre’s position will inevitably be accused of perjuring himself, making false exculpatory statements, admitting key facts, or all of the above. He should have taken five. Of course, Goldman needed him in its publicity war. Maybe Goldman would have fired him if he invoked the privilege. So what. Better to be fired than in FCI Butner.

Here is a thoughtful analysis on the SEC case against Goldman Sachs by Taesik Yoon of Forbes.com.

If Pellegrini tipped off ACA, what does it mean? For one thing, it helps to explain why Paulson & Co. wasn’t added to the  SEC’s suit based on aider and abettor liability. For another, it will substantially weaken the SEC’s case. If key players at ACA knew that Paulson was going short, it will be virtually impossible for the Government to show that ACA was misled. Even if Goldman misled and intended to mislead ACA as to Paulson’s role, such activity would have been rendered immaterial once ACA in fact learned of Paulson’s role.

Although the Pellegrini revelation, if substantiated, may not theoretically affect the part of the SEC’s suit related to the alleged misleading of investors, ACA’s knowledge of Paulson’s role, along with its participation in the deal, will undoubtedly change the atmospherics of the case.

     The Report details the abysmal failure of the SEC’s Fort Worth District Office Enforcement Branch to publicize and stop Stanford Group Company’s Ponzi Scheme, despite numerous warnings from the same Office’s Examination Branch. The Journal rightfully notes that the SEC’s failure was even greater here than in the Madoff case, because here the warnings were consistent, forceful and coming from within the Commission’s own ranks.

     Reading the the pitiful regulatory record contained in the OIG Report reminds me of my days investigating and prosecuting Savings & Loan Fraud in the early 1990s for the U.S. Attorney’s Office in the Western District of Texas. We were consistently faced with historical fraud that was identified by conscientious bank examiners and ignored or downplayed by their regulatory superiors.

     Finally, the OIG investigation revealed that the former head of Enforcement in Fort Worth, who played a significant role in numerous decisions by the Fort Worth office to deny investigations of Stanford, sought to represent Stanford on three separate occasions after he left the SEC, and represented Stanford briefly in 2006 before he was informed by the SEC Ethics Office that it was improper to do so.

     This former head of Enforcement in Fort Worth was responsible for: (1) in 1998, deciding to close a MUI opened regarding Stanford after the 1997 broker-dealer examination; (2) in 2002, deciding to forward the [redacted] complaint letter to the TSSB and deciding not respond to the [redacted] complaint or investigate the issues it raised; (3) in 2002, deciding not to act on the Examination staff’s referral of Stanford for investigation after its investment adviser examination; (4) in 2003, participation in a decision not to investigate Stanford after receiving [Confidential Source]’s complaint letter comparing Stanford’s operations to the [redacted] fraud; (5) in 2003, participating in a decision not to investigate Stanford after receiving the complaint letter from an anonymous insider alleging that Stanford was engaged in a “massive Ponzi scheme;” and (6) in 2005, informing senior Examination staff after a presentation was made on Stanford at a quarterly summit meeting that Stanford was not a matter they planned to investigate.

     Yet, in June 2005, a mere two months after leaving the SEC, this former head of the Enforcement in Fort Worth e-mailed the SEC Ethics Office that he had been “approached about representing [Stanford] . . . in connection with (what appears to be) a preliminary inquiry by the Fort Worth office.” He further stated, “I am not aware of any conflicts and I do not remember any matters pending on Stanford while I was at the commission.”

      After the SEC Ethics Office denied his request in June 2005, in September 2006, Stanford retained this former head of Enforcement in Fort Worth to assist with inquiries Stanford was receiving from regulatory authorities, including the SEC. He met with Stanford Financial Group’s General Counsel in Stanford’s Miami office and billed Stanford for his time. Following the meeting, he billed 6.5 hours to Stanford on October 4, 2006, for, inter alia, “review[ing] documentation received from company about SEC and NASD inquiries.” On October 12, 2006, he billed Stanford 0.7 hours for a “[t]elephone conference with [Stanford Financial Group’s General Counsel] regarding status of SEC and NASD matters.” In late November 2006, he called his former subordinate, the Assistant Director who was working on the Stanford matter in Fort Worth, who asked him during the conversation, “[C]an you work on this?” and who in fact told him, “I’m not sure you’re able to work on this.” Near the time of this call, he belatedly sought permission from the SEC’s Ethics Office to represent Stanford. The SEC Ethics office replied that he could not represent Stanford for the same reasons given a year earlier and he discontinued his representation.

     In February 2009, immediately after the SEC sued Stanford, this same former head of Enforcement in Fort Worth contacted the SEC Ethics Office a third time about representing Stanford in connection with the SEC matter – this time to defend Stanford against the lawsuit filed by the SEC. An SEC Ethics official testified that he could not recall another occasion in which a former SEC employee contacted his office on three separate occasions trying to represent a client in the same matter. After the SEC Ethics Office informed him for a third time that he could not represent Stanford, the former head of Enforcement in Fort Worth became upset with the decision, arguing that the matter pending in 2009 “was new and was different and unrelated to the matter that had occurred before he left.” When asked why he was so insistent on representing Stanford, he replied, “Every lawyer in Texas and beyond is going to get rich over this case. Okay? And I hated being on the sidelines.”

     The OIG investigation found that the former head of Enforcement in Fort Worth’s representation of Stanford appeared to violate state bar rules that prohibit a former government employee from working on matters in which that individual participated as a government employee. Accordingly, we are referring this Report of Investigation to the Commission’s Ethics Counsel for referral to the Office of Bar Counsel for the District of Columbia and the Chief Disciplinary Counsel for the State Bar of Texas, the states in which he is admitted to practice law.

There were two brief but good stories on the Report, however, by Zachary Goldfarb of the Washington Post and Michael R. Crittenden and Kara Scannell of the Wall Street Journal. Here is Goldfarb’s piece and here is Crittenden-Scannell’s.

I haven’t read the Report, but according to the stories, on-the-ground SEC examiners in the Fort Worth District Office’s Examination Branch found evidence of a Ponzi scheme as early as 1997, and concluded on four separate occasions that Stanford’s businesses were fraudulent. They were essentially ignored by the Fort Worth District Office’s Enforcement Branch. One such Enforcment Supervisor, Attorney Spencer Barasch, repeatedly quashed probes into Stanford, but later attempted to represent him in front of the SEC. According to the Journal, the IG has referred Mr. Barasch for possible bar disciplinary action.

“As the SEC said at its press conference, Paulson is not the subject of this complaint, made no misrepresentations and is not the subject of any charges.”

“While Paulson purchased credit protection from Goldman Sachs on securities issued under the ABACUS ABS CDO program, we were not involved in the marketing of any ABACUS products to any third parties.”

Jolly good, old chap! But didn’t Paulson know the securities were going to be marketed to investors? Wasn’t that the whole point of asking Goldman Sachs to created a CDO in the first place? And did Paulson really think that Goldman Sachs would reveal Paulson’s role in selecting the 123 mortgage-backed securities that went into the Abacus 2007-ACI CDO to potential investors? Anybody ever hear of willful blindness?

The Paulson statement continues:

“ACA as collateral manager had sole authority over the selection of all collateral in the CDO, securities of which were subsequently rated AAA by both S&P and Moody’s.”

But, according to the WSJ and the Washington Post, Paulson & Co. had a major hand in selecting the risk, and ACA was not told that Paulson would be betting against it. Also, investors were not informed of Paulson’s role in selecting the risk. This question of who had a role and who had ”sole authority” over selecting the risk is likely to be at the heart of Goldman Sachs’ defense.

Reading between the lines of the various stories, it would appear that Paulson & Co. Inc. cooperated with the SEC probe and that the SEC needed that cooperation in order to fill in various conversational blanks. You can’t make an entire case from a paper trail alone, although sometimes you can come pretty close.

According to Khuzami: “The product was new and complex, but the deception and conflicts are old and simple.”