May 28, 2023

DealBook: Top Witness for the S.E.C. Turns Testy on the Stand at Tourre Trial

Paolo Pellegrini, formerly of Paulson  Company, seemed to disappoint the S.E.C. on the stand.Brendan McDermid/ReutersPaolo Pellegrini, formerly of Paulson Company, seemed to disappoint the S.E.C. on the stand.

Paolo Pellegrini has been lauded as an architect of one of the biggest hedge fund victories in recent memory: Paulson Company’s audacious bet against subprime home loans in 2007.

But in a Manhattan federal courtroom on Tuesday, Mr. Pellegrini professed not to know what one of the basic acronyms of the industry meant.

During questioning by a government lawyer, Mr. Pellegrini said that he was not sure what “C.D.O.” — the type of security, which the hedge fund stalwart helped construct, that is at the heart of the government’s civil lawsuit against a former Goldman Sachs employee — stood for. After several minutes of verbal sparring, he conceded that it might stand for “collateralized debt obligation.”

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Over around two hours of testimony, Mr. Pellegrini, a tall, imposing investment executive, repeatedly paused and claimed he could not remember what he previously said. At one point, he complained that his questioner, Matthew T. Martens of the Securities and Exchange Commission, was being too imprecise in his queries, making them hard to answer. “It’s a bit of a trick question, but I’ll try to answer it,” he said.

The S.E.C. had hoped that Mr. Pellegrini would be one of the top witnesses of the trial. His employer at the time, Paulson Company, profited handsomely from the investment product that Goldman had created, yielding about $1 billion.

Mr. Pellegrini at one point spent about 10 minutes bickering with Mr. Martens over the definition of a “custom C.D.O.”

Later, Mr. Pellegrini sighed, “I am upset about this conversation.”

The testimony represented some of the liveliest moments yet in the trial of Fabrice P. Tourre, 34, whom the government has accused of defrauding investors as part of Goldman’s mortgage desk in 2006 and 2007. The S.E.C.’s lawsuit over Mr. Tourre’s role in the construction of a complex mortgage investment that ultimately failed has made him a prominent face of the government’s investigation into the financial crisis.

Much of Mr. Martens’s questioning sought to show that the financial firms responsible for constructing the mortgage securities were wary of working with hedge funds like Paulson Company that wanted to bet virtually exclusively against the investments’ success.

In 2010, Goldman agreed to settle an S.E.C. lawsuit by paying a $550 million penalty while admitting that it made a “mistake” in not disclosing that “that Paulson’s economic interests were adverse to C.D.O. investors.”

Both Mr. Pellegrini and Sihan Shu, a managing director at Paulson, testified that the firm was interested only in wagering that home loans would falter, wiping out the value of debt instruments built from those mortgages. Mr. Pellegrini acknowledged that the firm raised two funds to carry out its bet against home loans. Mr. Pellegrini is expected to be just the first in a series of prominent witnesses. His cross-examination by Mr. Tourre’s lawyers is scheduled for Wednesday. It will be followed by testimony from two of Mr. Tourre’s former bosses at Goldman.

Jurors sometimes appeared to struggle with the discussions on Tuesday, which were often laden with financial jargon. Lawyers for Mr. Tourre made it a point of explaining some terms at the beginning of the day’s proceedings, including “Q.I.B.’s,” which stands for “qualified institutional buyers,” and “single-tranche C.D.O.’s.” Still other arcana, like “WARF scores” and “Libor,” received minimal explanation.

Though some jurors scribbled diligently in their notepads, others appeared to nod off from time to time.

The presiding judge, Katherine B. Forrest, took an active role in both ensuring that jurors were aware of the various legal proceedings and in keeping the trial on its three-week schedule.

She was also quick to mediate disputes between the government and Mr. Tourre’s lawyers, sometimes rephrasing objected questions to witnesses to speed things along.

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DealBook: Lawyer Withdraws From Case by Man Claiming Facebook Ownership

Paul Ceglia, who claimed he owns half of Facebook, at home in 2010.John Anderson/Wellsville Daily ReporterPaul Ceglia, who claimed he owns half of Facebook, at home in 2010.

The lawyer representing a man claiming to own a substantial stake in Facebook withdrew from the case on Tuesday, just a day after he defended his client in an interview with The New York Times.

Federal prosecutors arrested the entrepreneur, Paul Ceglia, last week on fraud charges, accusing him of forging the e-mails and contract that supported his two-year-old claim against the social networking giant.

Dean Boland, the lawyer for Mr. Ceglia, notified the court that he was dropping out of the civil lawsuit. His reasons for withdrawing were filed under seal, but in the public portion of his filing, Mr. Boland supported his client.

“The undersigned feels it is important to emphasize in the strongest terms possible, that the reasons underlying this request, provided to the court for its review, have nothing to do with any belief by the undersigned that plaintiff is engaged in now or has been engaged in during the past, fraud regarding this case,” Mr. Boland wrote.

In an interview with The Times on Monday, Mr. Boland backed his client’s claims and said he would continue to pursue the case against Facebook. He said that the government’s criminal charges would help his client’s cause because it suggested that some of Mr. Ceglia’s evidence was authentic.

Prosecutors say that Mr. Ceglia, 39, of Wellsville, N.Y., filed a spurious lawsuit claiming that Mr. Zuckerberg, as Harvard freshman in 2003, promised him an at least 50 percent in the social network, and that he doctored, fabricated and destroyed evidence to support his claims.

“Ceglia’s alleged conduct not only constitutes a massive fraud attempt, but also an attempted corruption of our legal system through the manufacture of false evidence,” Preet Bharara, the United States attorney in Manhattan, said in a statement. “Dressing up a fraud as a lawsuit does not immunize you from prosecution.”

Mr. Ceglia has been detained since his arrest on Friday and is expected to make an appearance and enter a plea in Federal District Court in Buffalo on Wednesday. A federal public defender represents him in the criminal case.

Mr. Boland is the latest lawyer to withdraw from his civil case.

Mr. Ceglia’s lawyers since 2010 have included Robert W. Brownlie of DLA Piper, the world’s largest law firm, and Dennis C. Vacco, a former New York attorney general now in private practice. Mr. Brownlie and Mr. Vacco dropped out of the case after Kasowitz Benson Friedman Torres, another law firm that had briefly represented Mr. Ceglia, notified them that it believed Mr. Ceglia’s supposed contract with Mr. Zuckerberg was a sham.

Mr. Brownlie, who last year staunchly defended the legitimacy of his client’s claims to The Times, has not returned multiple calls and e-mails seeking comment. Mr. Vacco declined to comment, citing attorney-client privilege.

In his withdrawal filing on Tuesday, Mr. Boland, of Lakewood, Ohio, said that no one had proved that Mr. Ceglia’s claims were fraudulent.

“Myself and prior counsel all have and had a duty to bring to this court any evidence of fraud, even fraud by our own client, should we have come across it,” wrote Mr. Boland. “No prior counsel and current counsel, including the undersigned, have done so. The undersigned, at no time, has encountered evidence of fraud by plaintiff.”

Facebook’s lawyers at Gibson, Dunn Crutcher have suggested that Facebook could pursue disciplinary claims against some of the lawyers that represented Mr. Ceglia.

“Now that Ceglia is being brought to justice for his crimes, Facebook intends to hold accountable all of those who assisted Ceglia in this outrageous fraud,” Orin Snyder, a partner at Gibson Dunn, said in a statement. “Facebook will send a strong message that it does not tolerate legal shakedowns and will take aggressive action against all those who file abusive lawsuits against the company.”

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