For S.E.C., a Much-Needed Win

Wall Street’s top regulator has taken a number of hard knocks in the courtroom. Now a federal judge has handed the regulator, the Securities and Exchange Commission, a pat on the back that may embolden it to take more cases to trial.

The judge on Wednesday ordered Fabrice Tourre, the former Goldman Sachs trader at the center of a troubled mortgage deal, to pay the S.E.C. $825,000 in penalties and other costs. The sum fell just short of the roughly $1 million payout that the agency had requested.

The ruling, a capstone to one of the S.E.C.’s most prominent Wall Street cases and its first significant courtroom victory stemming from the financial crisis, was equal parts validation and leverage for an agency that has threatened harsher penalties and fewer settlements. The case could signal to Wall Street employees, with all their legal resources, that the agency is willing to take them on and just might win.

But the S.E.C.’s track record in other recent trials shows that challenges remain. The agency has lost five of its last 12 trials. And in one losing effort, a judge scolded “the overreaching, self-serving interpretation that the S.E.C. imposed on the evidence presented at trial.”

The recent losses have raised questions about the costs of a trial, which can take several weeks and drain resources from the S.E.C. The trials are often scattered across the country, incurring travel and hotel costs for S.E.C. lawyers from Washington.

For a trial held in Kansas City last year, the S.E.C. had six lawyers and a paralegal present at various points during the proceedings. The agency, court records show, also spent $600,000 on a single expert witness, similar to what the defense spent on its own experts.

Despite the costs of the case, which involved accusations of fraud against the chief financial officer of a technology company, the S.E.C. lost the trial.

“Trials are expensive for the government and career-threatening for defendants,” said Nicole Rabner, a partner at Wilmer Hale who was part of the defense team that won the Kansas City trial. “The S.E.C. should redouble its efforts to ensure it is making smart and fair charging decisions.”

The headline-grabbing victory over Mr. Tourre and the lesser-known losses — all coming in cases filed before the tenure of the S.E.C.’s current chairwoman, Mary Jo White — reflect the balancing act facing the agency’s enforcement staff. If the recent losses illustrated the pitfalls of an aggressive litigation strategy, Mr. Tourre’s case offered a precedent for fighting tooth and nail.

“We’re proud of our long record of success at trial in difficult cases, including victories in our last four jury trials,” Andrew Ceresney, the S.E.C.’s enforcement director, said in a statement. “We will continue to bring aggressive cases to protect investors and hold wrongdoers accountable.”

Responding to the judge’s ruling against Mr. Tourre on Wednesday, Mr. Ceresney said it reflected “the S.E.C.’s intent of pursuing meaningful sanctions to punish individuals responsible for misconduct and deter others from violating the federal securities laws.”

Under Mr. Ceresney and Ms. White, both former federal prosecutors and defense lawyers, the agency has pushed for admissions of wrongdoing from defendants, a policy reversal that could prompt companies and individuals to take more cases to court. The agency, which has secured a handful of such admissions against Wall Street giants like JPMorgan Chase and Credit Suisse, has also warned that it will seek stiffer penalties.

The victory against Mr. Tourre, who became both a symbol and a scapegoat of the crisis, underpinned some of the agency’s newfound swagger. Just weeks after a jury found Mr. Tourre liable for defrauding investors in the mortgage deal, Ms. White acknowledged that “we may see more financial firms that say: ‘We’ll see you in court,’ ” but that the “S.E.C. has a well-established record of winning when we go to trial — our recent win in the Tourre case is just the latest example.”

The S.E.C.’s case centered on an investment known as Abacus 2007-AC1, a mortgage deal that Goldman created with the help of a hedge fund, Paulson & Company. Mr. Tourre and Goldman, the S.E.C. argued, failed to disclose to investors that the hedge fund was separately betting the deal would fail. When the deal ultimately imploded during the crisis, investors lost about $1 billion. The deal, the S.E.C. said, was created to fail.

The S.E.C. linked its case to Wall Street greed, a strategy that appeared to resonate with jurors. Mr. Tourre was living in a “Goldman Sachs land of make-believe” where deceiving investors is not fraudulent, Matthew T. Martens, who led the S.E.C.’s case, declared during closing arguments.

Mr. Tourre’s lawyers, however, argued that Paulson & Company’s bet should not have mattered to investors who were sophisticated financial players. The investors knew, for instance, that the mortgage deal had to have one party betting it would fail and another betting it would rise.

The lawyers also questioned why the S.E.C. chose to make an example of their client. Mr. Tourre — a midlevel, 20-something employee at the time he helped design the mortgage deal — was hardly the face of the crisis. And since departing Goldman, Mr. Tourre traveled to Rwanda as a volunteer and enrolled at the University of Chicago, where professors described him as a “standout.”

For Mr. Tourre, a 35-year-old Frenchman who had sought a nominal fine of $65,000 or less, the judge’s ruling on Wednesday was the latest in a series of painful setbacks. Mr. Tourre watched his Wall Street career come apart after the S.E.C. charged him and the bank in 2010.

Goldman settled the accusations, paying $550 million.

It is unclear whether Mr. Tourre will appeal the verdict and the fine. Through a spokesman, Mr. Tourre said on Wednesday: “I am focused on earning my doctorate in macroeconomics and pursuing an academic career.”

With Mr. Tourre vowing to leave Wall Street behind, Judge Katherine B. Forrest of Federal District Court in Manhattan rejected the S.E.C.’s request for a so-called obey the law injunction that would essentially order Mr. Tourre not to repeat his crimes. Although it might seem redundant — Mr. Tourre, like everyone else, is already obligated to obey the law — the injunction would have helped the S.E.C. permanently ban Mr. Tourre from working on Wall Street.

But when it came to fines, Judge Forrest aimed high. Her ruling ordered Mr. Tourre to pay $650,000 in penalties and forfeit a roughly $175,000 bonus arguably tied to his work on the mortgage deal. Judge Forrest prohibited Goldman — which has already paid millions of dollars for Mr. Tourre’s defense — from covering the penalty portion of the payout.

“The evidence admitted at trial clearly showed that Tourre participated in a scheme to defraud,” the judge wrote in her opinion.

Recent trial verdicts, however, underscored the perils of taking a case to trial. The most prominent loss came in an insider trading case against Mark Cuban, the billionaire owner of the Dallas Mavericks basketball team, who has since become a vocal critic of the agency and a mascot of sorts for those who face S.E.C. investigations.

The loss in that trial and other appeared to highlight the bureaucratic hurdles facing the S.E.C.’s litigation efforts. Unlike federal prosecutors who work alongside the F.B.I. from the outset of an inquiry, the S.E.C.’s trial lawyers work separately from the investigators who build the agency’s cases. At a recent legal conference, Mr. Martens lamented this “bifurcation of the investigative process.”

Over the last year, the S.E.C. has taken steps to address such concerns. In one important move, the agency pushed trial attorneys and investigators closer together during the course of a case.

At a legal conference last year, Mr. Ceresney emphasized the importance of occasionally going to trial.

“We wanted to bring the swagger back to the enforcement division, and I think we’re doing that,” he said.