In SEC v. Tourre, Judge Forrest rejected the SEC’s motion to reconsider part of its complaint against Fabrice Tourre, the thirty-something Goldman executive involved in selling subprime mortgage securities to Goldman clients. In an e-mail, Tourre unfortunately referred to himself as ‘Fabulous Fab’ for standing tall while the subprime mortgage market collapsed – a moniker that stuck. 

The question before Judge Forrest was whether the Supreme Court’s decision in Morrison v. Nat’l Australia Bank barred securities fraud claims against Tourre for the sale of subprime securities made by Goldman to a customer in Germany, even if Goldman obtained title to the securities in New York. Under Morrison, the Supreme Court made clear that section 10(b) and Rule 10b–5 apply only to “transactions in securities listed on domestic exchanges[ ] and domestic transactions in other securities.” 

The SEC argued that Goldman’s taking title in New York was in connection with its fraudulent sale to its customer in Europe, and therefore fell within Morrison’s ambit. The SEC relied on a recent Second Circuit decision, holding that for purposes of section 10(b), “a sale of securities can be understood to take place at the location in which title is transferred.” Absolute Activist, 677 F.3d at 68.

Here, although the securities were transferred to Goldman in the United States, that was not enough to establish a claim against Tourre. The defrauded German customer did not assume irrevocable liability for the purchase until the transfer to it in Europe, and Tourre’s fraud was in connection with that purchase. There was no fraud in connection with Goldman’s assumption of title in New York since no fraud was perpetrated on Goldman. 

“According to the SEC, the broad interpretation of section 10(b)’s “in connection with” language provides the necessary link between the Goldman transfer of title and the [German] note purchase to establish 10(b) liability. The Court finds, however, that the “in connection with” language modifies how close the fraud and the offending domestic transaction must be – not whether the domestic transaction can sit between the fraud and a purely foreign transaction, thereby itself providing the ‘connection.’ “

The SEC motion was brought under Rule 54(b) of the federal rules of civil procedure, which provides that “[A]ny order or other decision … may be revised at any time before the entry of a judgment adjudicating all the claims and all the parties’ rights and liabilities.”  The SEC argued that the new Second Circuit decision required revision of an earlier order dismissing the claims against Tourre, but Judge Forrest did not agree: “There is substantial case law supporting that prior “law of the case” should only be revisited in the face of “an intervening change of controlling law, the availability of new evidence, or the need to correct a clear error or prevent manifest injustice.”

On the other hand, the balance of the SEC’s complaint on sales of the same subprime securities to other Goldman customers is set for trial against Tourre next year.