March 28, 2024

DealBook: In Tourre Trial, S.E.C. Wages Battle Against Its Own Witness

Fabrice Tourre, a former Goldman Sachs trader, outside a Manhattan federal court on Monday.Andrew Burton/Getty ImagesFabrice Tourre, a former Goldman Sachs trader, outside a Manhattan federal court on Monday.

The Securities and Exchange Commission had hoped to use Paolo Pellegrini, a chief architect of one of the most lucrative hedge fund bets in history, to buttress its case against Fabrice Tourre, a former Goldman Sachs trader charged with defrauding investors in a complex mortgage security.

But on Wednesday, Mr. Pellegrini did his best to try and dynamite the government’s case. At one point, he apparently contradicted testimony he had previously given in a deposition with S.E.C. lawyers, leading to a terse exchange on the witness stand.

Mr. Pellegrini’s role in helping Paulson Company earn $1 billion by betting against home loans through an investment assembled in part by Mr. Tourre made him an ideal witness for the government’s side. The S.E.C. had been hoping to use the hedge fund executive to show that the onetime Goldman employee failed to let investors in the mortgage security know that Paulson Company was actually betting against them.

That plan was thrown into disarray during several hours of combative testimony in a Lower Manhattan federal courtroom on Wednesday, as Mr. Pellegrini — who had already proved a difficult presence — repeatedly accused the agency of trying to trick and intimidate him.

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In perhaps the most striking moment of the trial so far, the witness asserted that he had informed an executive at the bond insurer, the ACA Financial Guaranty Corporation, one of the purported victims of the failed investment, that his then-employer did in fact intend on betting against the mortgage deal.

That led to the first of several battles between Mr. Pellegrini and Matthew Martens, the S.E.C.’s lead lawyer in the case, over what the hedge fund executive had previously testified under oath. Mr. Martens, his voice tight and arms crossed over his chest, repeatedly read back Mr. Pellegrini’s previous claim that he could not recall telling ACA of Paulson Company’s intentions.

Mr. Pellegrini, fixing an unblinking stare at his questioner, instead contended that he used those words “under pressure” from the S.E.C. and its “hostile questions.” He subsequently explained that he intentionally took a more careful and vague approach during the deposition because he was concerned that the agency was trying to deceive him.

“You are tricking me into saying so many things,” Mr. Pellegrini declared on the witness stand at one point. At another, he said, “It depends on what you mean by factual knowledge.”

The change of heart could cut against a core assertion of the S.E.C. that Mr. Tourre had failed to tell ACA and another investor that the mortgage security at the heart of the case was constructed in large part by a hedge fund betting against its success. In a court filing from March, the agency quoted Mr. Pellegrini as saying that he had trouble meeting with potential partners if he made it known that he would bet against them. A number of e-mails presented in court on Wednesday suggested that Mr. Pellegrini’s boss, the hedge fund billionaire John Paulson, and one adviser were aware of the troubles that publicizing the bet against mortgages would pose.

An executive at ACA has testified that executives at Goldman and at Paulson had failed to make the true nature of the hedge fund’s interest known.

But Mr. Pellegrini insisted repeatedly in court that he had informed several potential business partners that Paulson Company intended on betting against securities built on home loans, depicting a firm whose motivations should have been well-known in the investment community. At one point, he suggested that his memory was jogged in part by helpful instruction from the presiding judge in the case, Katherine B. Forrest.

Barely veiled contempt colored many of the exchanges between Mr. Pellegrini and Mr. Martens. When the S.E.C. lawyer asked the witness to find a particular section of a document, Mr. Pellegrini leaned back in his chair, casually sipped from a cup of water, and drily asked, “Do you mind locating it for me?”

During a break in proceedings, Mr. Martens told Judge Forrest that he thought the hedge fund executive’s claims to have been pressured by his office was “garbage.”

Article source: http://dealbook.nytimes.com/2013/07/17/in-tourre-trial-s-e-c-wages-battle-against-its-own-witness/?partner=rss&emc=rss

Bank of America to Set Aside $14 Billion in Mortgage Deal

The whopping charge represents the banking industry’s biggest single settlement tied to the subprime mortgage boom and the subsequent financial crisis of 2008.

Of the $14 billion, $8.5 billion will go to help settle claims by heavyweight holders of the securities, including Pimco, BlackRock and the Federal Reserve Bank of New York, that have been pressing for a settlement since last fall.

The losses stem largely from mortgages underwritten by Countrywide Financial, the subprime mortgage lender that Bank of America bought in 2008.

“This is another important step we are taking in the interest of our shareholders to minimize the impact of future economic uncertainty and put legacy issues behind us,” Brian T. Moynihan, the bank’s chief executive, said in a statement. “We will continue to act aggressively, and in the best interest of our shareholders, to clean up the mortgage issues largely stemming from our purchase of Countrywide.”

In early trading, Bank of America shares rose roughly 3 percent, a sign that investors hope this deal will lift a cloud that has been hanging over the stock since last year. The bank’s mortgage woes have been considered a main reason why it has underperformed giant peers like JPMorgan Chase and Citigroup.

In addition to the $14 billion hit, the bank is taking additional charges totaling $6.4 billion in the second quarter to clean up other areas of its troubled mortgage business. That includes the $2.6 billion noncash write-off of the value of its home lending business, a move that tacitly acknowledges that it overpaid for Countrywide.

The deal will also require Bank of America, based in Charlotte, N.C., to improve its payment collection process by hiring specialists to focus on high-risk loans and to do a better job of tracking whether the bank is adhering to its own internal loan-servicing standards. 

The negotiations toward a settlement began last fall but picked up speed in recent weeks as the end of the second quarter approached. For the investors, settling avoids a costly, multiyear legal fight, while Bank of America can pile a load of its troubles into the second-quarter results and clear away one of the biggest uncertainties hanging over the company.

Last fall, Mr. Moynihan promised “hand-to-hand” combat to fight these and other legal efforts by investors to force Bank of America to make payouts for soured mortgage securities.

But he told analysts on a conference call Wednesday morning that the settlement did not mark a forced surrender. “We did fight for the last several months,” he said. “But when you look at this over all, it’s a better decision for the company. It was much more adverse to the company if we kept fighting. We’ve been battling it out.”

“It is our job, management’s job, to eliminate risk,” he added. “There is still work ahead of us on the mortgage issues but this is a major step forward for the company.”

Despite the staggering size of the settlement with the investors and other charges announced Wednesday, additional liability remains from mortgage securities that were assembled and sold by Bank of America.

Bruce Thompson, the company’s chief financial officer, said the agreement does not cover loans sold by Bank of America to other private trusts, nor does it cover mortgage securities assembled from the home loans of third parties.

He added that sales and trading in the company’s vast Wall Street business is ahead of last year but remains “below the seasonally strong first quarter.” The quarter’s results include $2.5 billion in gains from the sale of assets including the company’s Balboa insurance subsidiary and a stake that it sold in BlackRock.

Bank of America, JPMorgan Chase, Citigroup and Wells Fargo have the greatest exposure to legal claims that they bundled troubled home loans and sold them as sound investments. Together, they are likely to absorb roughly 40 percent of the industry’s mortgage-related losses.

In a recent research note, Paul Miller of FBR Capital Markets projected that Bank of America could face a total of $25 billion of losses from the soured mortgages, the most of any of the major banks.

Other big banks face sizable risks, too. Mr. Miller predicted that Chase could expect losses reaching as much as $11.2 billion. Wells Fargo has potential losses of up to $5.2 billion, while Citigroup could see losses top $3.3 billion.

The Bank of America settlement will require court approval in New York.

Under the terms of the accord, Bank of America would deliver the money to the trustee for the securities, Bank of New York Mellon, which would distribute it to the institutional investors.

The bank does not anticipate having to raise capital or sell stock to find the money for the settlement.

Still, other huge risks loom from the fallout of the subprime mortgage crisis. All 50 state attorneys general are in the final stages of settling an investigation into abuses by the biggest mortgage servicers, and are pressing the big banks to pay up to $30 billion in fines and penalties.

What’s more, insurance companies that backed many of the soured mortgage-backed securities are also pressing for reimbursement, arguing that the original mortgages were underwritten with false information and did not conform to normal standards.

In an interview on Tuesday, before reports of the Bank of America settlement, Sheila C. Bair, the chairwoman of the Federal Deposit Insurance Corporation, worried that the unresolved mortgage claims continued to hurt the broader economy.

“Unresolved legal claims could serve as a drag on the recovery of the housing market,” Ms. Bair said. “The healing of the housing market is essential to the recovery of the broader economy.”

Article source: http://feeds.nytimes.com/click.phdo?i=191b3cb0fc65f09932a69666c8bf44e9