Why an SEC Victory Counts More Than an SEC Loss

Since the SEC won a jury verdict against former Goldman Sachs VP Fabrice Tourre last week, the financial press has published semi-snarky commentary about how the SEC has lost more financial crisis cases than it has won.  This game of statistics misses an essential point.  Wall Streeters, corporate executives and directors, and their attorneys are cautious folk.  You might not think so from some of the inexplicably risky things they occasionally do, but on the whole they are more concerned about downside risk than upside potential.  (Even good hedge fund traders look first at how much they can lose before they focus on how much they might make.)

A high profile SEC win, like the Tourre case, makes the risk averse pause and reflect all the more so before taking the plunge.  It's better to settle and hide behind your PR person who repeatedly declines to comment to press inquiries than to be photographed outside a federal courthouse wearing a nice suit and a gloomy expression.  People will remember that expression for a long time.  Tourre didn't have to do a perp walk, but there's nobody--absolutely nobody--on Wall Street, Main Street or anywhere else in the corporate world who wants to wear his suit. 

When the SEC loses in court, the defendants have a day in the sunshine.  But then their cases are largely forgotten.  Major SEC victories are remembered.  The SEC's cases against notorious insider trader Ivan Boesky and junk bond king Michael Milken still receive public mention, even after 25 or so years.  Who remembers the cases the SEC lost in the 1980's?

In the plush conference rooms and offices where corporate lawyers and their clients under SEC investigation discuss the risks of settling versus litigating, you can be sure that the SEC victory in the Tourre case is getting a lot of attention.  The SEC's losses are probably mentioned as well.  But no good attorney wants to be caught making, or even implying, a promise s/he can't keep, and the story of Fabrice Tourre is likely being presented as a cautionary tale.  People with a lot more to lose from an SEC victory than they have to win from an SEC loss may well see the merit of capping their downside risks.

SEC 1, Tourre 0, Goldman 0, Financial Press -1

Today's jury verdict finding Fabrice (the "Fabulous Fab") Tourre liable on six of the seven civil counts against him represents a major victory for the SEC.  That's not simply because of the prominence of the case, which involved the sale of a controversial motgage-backed derivatives investment and is the highest profile SEC enforcement action to come out of the 2008 financial crisis.  It's because the agency's very efficacy has been under attack for the better part of a decade.  Widely viewed as ineffectual, the SEC has re-established its presence as a cop on the beat.  While one victory doesn't win the war, a victory this big will make a lot of corporate and white collar defendants think harder about settling, even if the price involves admitting to making bad choices.

Fabrice Tourre rolled the dice and lost.  Litigation is a gamble, and some bets turn out to be losers.  Perhaps he chose to fight instead of settling up front because he was angry about being a lower level guy who was singled out as a named defendant.  But anger doesn't equate to victory in court.  Above all, what matters is the evidence.  Tourre may have been his own worst enemy, seemingly adding insouciance as too much of a fillip to his e-mails.  Most likely, his attorneys will soon make motions for this and that, and perhaps later file appeals.  But now that the jury has spoken, Tourre faces an uphill battle.

Goldman Sachs wasn't a party to the case.  But it reportedly financed Tourre's defense.  And perhaps it has reasons beyond loyalty to a former employee.  Goldman faces potential liability in private civil lawsuits involving charges similar to those in the SEC case.  If Tourre had won, Goldman might have negotiated more favorable settlements in those cases.  Now that he's lost, GS has shifted closer to the 8-ball.  But that's all just a matter of money, of which GS has a fair pile.  GS isn't going to be kicked out of the securities business, as Tourre might be, because GS already settled with the SEC, thereby capping its regulatory liability.   Now that he's been held liable by a jury, Tourre not only faces SEC sanctions, but perhaps demands for payment from the plaintiffs' attorneys in those private civil lawsuits as well.  Poor Fab.  Not so fabulous any more.

The financial press ends up looking silly.  Not one publication of any prominence, to this writer's knowledge, predicted the SEC's victory.  Many expressed serious doubt about the SEC's case.  The coverage during the trial was frequently skeptical of the SEC's evidence and efforts.  It might be interesting to know why the press coverage was so imbalanced.  Whatever the reason, the press was scooped by the SEC staff, which convinced the jury to announce the real story.