Jury Acquits Brian Stoker in CDO Case, Tells SEC Not to Be Too Discouraged

You can read about Brian Stoker, the former Citigroup executive acquitted of charges that he mislead investors in mortgage-backed securities structured and marketed by Citi in early 2007 here or here.

The (not so) basic deal: The Securities and Exchange Commission said that Mr. Stoker should have disclosed to investors that a) Citi played a role in selecting the collateral used to assemble a synthetic CDO called Class V III and b) Citi placed a large proprietary bet against the CDO by purchasing credit default protection on some of its underlying assets. (You can read the complaint here.)

If that reminds you of the case of Fabulous Fabrice Tourre, the Goldman Sachs executive charged with deceiving investors in a CDO called Abacus, then you’re paying attention. Goldman settled the SEC’s case in the Abacus deal in 2010 for $550 million, and Mr. Tourre is expected to eventually stand trial. You may also recall that Citigroup entered a $285 million settlement with the SEC over the CDO involved in the Stoker case, only to have the deal rejected by Judge Jed Rakoff.

To all of that, two quick points:

The Observer chatted briefly this afternoon Stephen Plotnick, a partner at Carter Ledyard & Milburn who’s been following the case. His takeaway:

“It highlights one of the difficulties that the SEC faces in cases like these, which is that it’s difficult to get the Street to testify against the Street,” he said. A key witness in the case was a Credit Suisse collateral manager who testified that his firm had managed the collateral, Mr. Plotnick added. “It’s difficult to expect that Credit Suisse would concede, ‘We didn’t do our job.'”

And: It sounded to us that the jury wanted to convict. At the very least, jurors seemed sensitive to the fact that securities cases are difficult for the government to try, and that a loss in Stoker might dissuade the agency from bringing similar cases in the future. (Not that the SEC has been rushing to the courthouse steps to sue CDO managers, but still.) From The Times:

In addition to handing up its verdict, the federal jury also issued an unusual statement addressed to the Securities and Exchange Commission, the government agency that brought the civil case.

“This verdict should not deter the S.E.C. from investigating the financial industry and current regulations and modify existing regulations as necessary,” said the statement, which was read aloud in the courtroom by Judge Jed S. Rakoff, who presided over the trial.

So maybe, don’t get too excited Fab?