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SEC Lawsuit: Paolo Pellegrini's He-Said/She-Said Perjury

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That's right. Pellegrini "runs into Schwartz" in a ski lodge on Friday night. Calls her up on Saturday morning to say he wants to meet her later that day in a bar, and later that evening says that the purpose of the meeting was to inform her of Paulson's intention to short the portfolio.

And Schwartz, who kept her promise to keep Goldman informed, fails to mention this critical fact.

Pellegrini's Dissemblances, Half-Lies and Flat Out Lies

Then you have to consider the Pellegrini's word games, which are used to deceive. At three meetings, either they discussed investment recommendations, or they discussed Paulson's intention to short. Which means there could have been three meetings where the shorting strategy never came up. And, "wanting to buy protection on tranches of a synthetic RMBS portfolio," is not the same as wanting to buy protection on the portfolio being assembled for the ABACUS transaction.

And no, Steve, buying protection is very different from buying a naked short. Generally speaking, people buy protection on risk exposures they already own. Shorting something you do not own is altogether different.

Which is why Abacus 2007-AC1  and $100 billion other synthetic mezzanine CDOs just like it, were all deeply immoral and unethical transactions. They had no legitimate purpose, since they financed nothing. They never added "liquidity to the market," since everything about CDOs and credit default swaps is kept secret in order to protect the guilty. And they did not represent "a bearish view on housing," since this was money on a sure thing, the fatal flaws in the triple-B ratings of hyper-levered tranches of subprime bonds. Their singular purpose was to screw a bunch of suckers, the outsiders who never made it on to Greg Lippmann's email distribution list.

Here's an absolute must-read for anyone in business: George Orwell's, "Politics and the English Language," because corruption in finance is largely rooted in corruption in language.

Pellegrini Flaunts His Contempt For Ethics and the Rule of Law In Court

Eleven months after the SEC complaint was filed, Pellegrini working closely with defense lawyer Pamela Chepiga, sat for a deposition wherein they both worked hard to throw sand in everyone's face. Chepiga was relentless in her objections to each and every question. At that time, Pellegrini, who seemed to have the memory of a sieve, could not quite remember whether he contacted other potential CDO arrangers by stating his intention to purchase the CDO's equity, which was essentially a loss leader for people who bought shorts.

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But in fact, if you were an insider, you knew that everyone was doing it, not just Paulson, Goldman or Magnetar. Here's what the FCIC uncovered in its hedge fund survey:

Investors, usually hedge funds, often used credit default swaps to take offsetting positions in different tranches of the same CDO security; that way they could make some money as long as the CDOs performed, but they stood to make more money if the entire market crashed. An FCIC survey of more than 170 hedge funds encompassing over $1.1 trillion in assets as of early 2010 found this to be a common strategy among medium-size hedge funds: of all the CDOs issued in the second half of 2006, more than half of the equity tranches were purchased by hedge funds that also shorted other tranches. The same approach was being used in the mortgage-backed securities market as well. The FCIC's survey found that by June 2007, the largest hedge funds held $25 billion in equity and other lower-rated tranches of mortgage-backed securities. These were more than offset by $45 billion in short positions.

Once again, CDOs and CDS are used with the explicit purpose of exploiting secrecy, of keeping outsiders in the dark. As Pellegrini testified: 

It was implicit in the relationship between Paulson and Goldman Sachs that Paulson would not disclose that Goldman Sachs was involved in transactions involving Paulson and vice versa.
At that time, almost a year after his first effort to smear Schwartz, Pellegrini also testified that he could not remember whether he informed her or anyone from ACA of his intent to short the entire CDO portfolio. Again, Pellegrini has good reason to speak out of two sides of his mouth. If he says he told her, then he was colluding with her to perpetrate a fraud, which was why it was wise not to remember.   But if he  says he told her, then he undercuts the SEC case. He also undercuts the fraud case filed by ACA against Paulson on January 3, 2013. So why not split the difference and say she was too dumb not to understand what he was saying?

After reviewing a lot of testimony by a lot of players in the financial crisis, its apparent that they lie under oath a lot. But they lie with an awareness that its almost impossible to hold them legally accountable. Think of it this way. If you asked a dozen middle aged New Yorkers what they remember about 9/11, and they all say nothing comes to mind, then, by my reckoning, somebody is lying. But it's impossible to prove what people know or don't know. Pellegrini, who partnered up with Chepiga once again, lied relentlessly, sometimes in ways that failed the laugh test. For instance, Pellegrini said he wasn't sure what CDO stood for.

Let's put it this way. If CNBC doesn't explain on the air what CDO stands for, it's because everyone knows that it stands for collateralized debt obligation. For a Harvard MBA like Pellegrini, who works with CDOs, to say that he isn't sure what the letters stand for, is like a Federal prosecutor saying he doesn't know what FBI stands for.

In his obnoxious and dishonest performance on the witness stand, aided and abetted by Chepiga, acted sometimes like he just fell off the cabbage truck, and other times like a meek little mouse, who had not been heavily coached by lawyers prior to giving testimony. So even though Pellegrini is not sure of anything much, he was absolutely certain that he told Laura Schwartz of Paulson's intention to fabricate a CDO that was designed to fail.

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Pellegrini said that his testimony for the March 2011 deposition was false because he was afraid of the big mean SEC lawyers, who asked him, "hostile questions, intimidating questions." "I thought you tried to trick me in some way," he said.

Here's how The Wall Street Journal explained his about face:

Mr. Pellegrini said he spoke with Ms. Schwartz about the Abacus transaction at a structured-finance "shindig" in Jackson Hole, Wyo., in late January 2007, but initially couldn't remember specifics of the conversation. [Pellegrini never attended the structured finance conference. He just made a point to "run into," Schwartz.]

Mr. Tourre's lawyer Pamela Chepiga pointed to other excerpts of his deposition and email exchanges to show that the former Paulson executive had, in fact, remembered telling Ms. Schwartz his firm was interested in shorting, or betting against, mortgage-linked deals.

"I think I told her we like to short things," Mr. Pellegrini said, recalling the Jackson Hole meeting. [Liking to short things is not the same as fabricating a CDO in order to short the entire portfolio.]

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For over 20 years, David has been a banker covering the energy industry for several global banks in New York. Currently, he is working on several journalism projects dealing with corporate and political corruption that, so far, have escaped serious (more...)

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