The Securities and Exchange Commission must convince a federal judge in Manhattan that a recent U.S. Supreme Court ruling does not require her to throw out charges against an ex-Goldman Sachs executive who allegedly sold a subprime securities portfolio that was rigged to collapse.
U.S. District Judge Barbara Jones of the Southern District of New York allowed the SEC to file an amended complaint against former Goldman Sachs Vice President Fabrice Tourre to show why the agency's securities fraud charges are not barred by Morrison et al. v. National Australia Bank Ltd. et al., No. 08-1191, 2010 WL 2518523 (U.S. June 24, 2010).
In that ruling the Supreme Court said the federal securities laws do not give U.S. courts jurisdiction over fraudulent transactions when they occur outside the United States and involve foreign companies and investors. Tourre contends that his case fits that description.
SAME JUDGE, SAME ISSUE
It was Judge Jones who issued the initial Morrison decision. The 2nd U.S. Circuit Court of Appeals affirmed. The Supreme Court agreed with the lower courts' conclusion but applied a different jurisdictional test.
In so-called "f-cubed" suits - involving foreign investors, a foreign company and foreign fraud - U.S. courts lack jurisdiction because the Securities Exchange Act of 1934 simply does not cover securities transactions on foreign stock exchanges, the high court said.
That ruling came after the SEC charged Goldman and Touree in April, so the agency's complaint did not address the new jurisdictional standard.
The high-profile Goldman suit alleged Tourre helped Paulson & Co., one of the world's largest hedge funds, set up and then bet against a package of high-risk, subprime-mortgage-backed securities that Goldman promoted to other investors.
According to the complaint, Paulson made more than $1 billion by heavily betting the housing market would collapse along with the value of the securities package.
The SEC claimed Goldman and Tourre violated various sections of the federal securities laws through misrepresentations and omissions about the securities, and the agency sought to recover the $1 billion that unwary investors lost.
A RECORD SETTLEMENT
Goldman agreed to pay a record $550 million in July to settle the charges, leaving Tourre as the remaining defendant.
Tourre moved for summary judgment on the pleadings, arguing that the Morrison decision bars any charges involving securities purchases that took place offshore and included foreign companies and foreign investors, as was the case here.
In opposition, the SEC said the suit alleges that Goldman and Tourre made false and misleading statements and engaged in fraudulent transactions in New York even if some of the securities purchases were offshore.
WHERE DID FRAUD OCCUR?
"The SEC's complaint rests on transactions entered into overseas by a German bank and a [deal] entered into by a Dutch bank," Tourre said in a reply memorandum.
If Judge Jones adopted the SEC's interpretation of Morrison, nearly every transaction with the most tenuous ties to the United States would be exempted from the ruling, Tourre said.
In a brief order Judge Jones denied Tourre's motion for summary judgment with leave to renew after the SEC files an amended complaint addressing the Morrison jurisdiction issue.
At that point, the question for Judge Jones to decide in light of Morrison is where did the alleged fraudulent deal occur.
In the Supreme Court's lead opinion in Morrison, Justice Antonin Scalia said, "the focus of the Exchange Act is not upon the place where the deception originated, but upon the purchases and sales of securities in the United States.”
Securities and Exchange Commission v. Goldman Sachs & Co. et al., No. 10-3229, order entered (S.D.N.Y. Nov. 1, 2010).