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Is the "Fabulous Fab" case a show trial?

(MoneyWatch) After the bursting of the housing bubble and the ensuing near-collapse of the financial system, the Securities and Exchange Commission and other federal financial regulators have been much criticized for not taking cases to trial. Today, as the agency began its case against former Goldman Sachs (GS) trader Fabrice Tourre for the sale of rotten securities, there is finally a trial.

But it's hard to imagine that a full-throated prosecution of one relatively low-level employee of one of the most powerful financial institutions in the world is what anyone had in mind.

Tourre, a French-born executive, stands accused of selling investors mortgage-backed securities, dubbed Abacus, that he knew were doomed to fail. The deal allowed hedge fund kingpin John Paulsen, who chose the toxic securities that would form the foundation of the derivatives, to pocket $1 billion. Goldman collected millions in fees and was heavily criticized amid allegations that it, too, shorted the securities, in essence betting that the bonds it created would fail. Goldman claimed that it was merely hedging.

Goldman quickly settled the case in 2010 for a cool $550 million, which sounds like a lot of money, and for anyone but a giant Wall Street bank, would be. The bank admitted to "mistakes," but did not admit to the fraud that the SEC alleged. When the settlement was announced, investors reacted to the price of justice imposed on Goldman by sending its shares surging.

The SEC, with a long history of losing courtroom trials, desperately wants to win this one. Matthew Martens, the chief of litigation for the agency, is arguing the case, a sign of just how important it is to the SEC's morale. For his part, Tourre's defense, headed by top-flight counsel, is being paid for by Goldman.

The SEC may feel it is on firm ground because of seemingly incriminating emails by Tourre to his girlfriend. "I'm managed (sic) to sell a few abacus bonds to widow and orphans that I ran into at the airport," he joked, capturing the amoral ethos that pervades Wall Street. Martens quoted another of the love-notes in his opening arguments: "The whole building is about to collapse any time now," referring to the subprime debt about to swamp the world's biggest banks, but he bragged famously that the "Fabulous Fab" would survive.

"This is a case about Wall Street greed," Martens told the jury. "It's a case about lies, trickery and deception."

At this point, many Americans are well-aware that there are lies, trickery, deception and above all greed on Wall Street. But the question is whether a jury is going to play along with a case that seems to pin such realities on rogue employees.

"This doesn't rise to the level of a show trial," said Dennis Kelleher, a former corporate litigator and Senate aide who now heads Better Markets, an advocacy group lobbying for stricter policing of Wall Street. "It's a joke trial. They are throwing all their might and power at this one scapegoat. Why can't they do that against the biggest executives who crashed the system and stuffed their pockets with billions in bonuses?"

The SEC in 2010 charged Goldman and Tourre with securities fraud, alleging that they misled investors in so-called synthetic collateralized debt obligations that the bank designed and marketed. CDOs, a type of credit derivative, pool loans into securities that can be sliced up and sold. With a synthetic CDO, investors don't buy the securities themselves, but rather place what is effectively a bet on whether the value of contracts tied to the value of the assets will rise or fall.

Goldman did not disclose to other investors who took the other side of the trade that the bank had worked with Paulson to structure the Abacus CDO and that he had bet against it, the agency claimed.

Kelleher noted that Paulsen was one of Goldman's biggest, richest clients, and that dozens of people worked on the Abacus securities. "Do you think Goldman Sachs was letting a 28-year-old, junior guy make any decisions? No way. No way. Charging this trader for bragging in emails to his girlfriend is a fraud on the American people."

While no one can predict with certainty how a jury will vote, Kelleher said it's hard to believe that they'll accept a version of events that hangs primary responsibility on Tourre, whatever he said in emails. Indeed, in a recent case remarkably similar to this one, jurors tossed out the government's case, saying the U.S. was wrong to prosecute a small fish when they should have been going after top executives.

In that case, decided last August in a New York federal court, jurors exonerated Brian Stoker, a mid-level employee at Citigroup (C), for his role in a $1 billion mortgage bond deal. In doing so, they sent a note to U.S. District Judge Jed Rakoff, which Rakoff read in court, that their verdict should in no way deter the SEC from investigating and prosecuting financial fraud and tightening regulations. 

"This is why we have a jury system," Kelleher said. "In the Citi case, the jury not only acquitted a defendant exactly like Tourre, but sent a note to the judge saying, "Don't scapegoat the little fish. Go after the whales."