Bond manager featured in 'The Big Short' breaks down on stand

Reuters News
Posted: Apr 04, 2014 3:19 PM

By Joseph Ax

NEW YORK (Reuters) - Wing Chau, an investment adviser made infamous in the "The Big Short," a best-selling book about the financial crisis, wept on the witness stand during his administrative trial on Friday before yelling, "Shame on you!" at a lawyer for the U.S. government.

The dramatic moment came as Chau attempted to defend himself against charges from the U.S. Securities and Exchange Commission that he misled investors in a complex financial vehicle linked to subprime mortgages.

The trial is one of the highest-profile cases in which the government has sought to hold an individual responsible for events leading up to the 2008 financial meltdown.

On Friday morning, the fifth day of the trial, Chau gave several long, sometimes meandering answers to questions from Howard Fisher, an SEC prosecutor, about his firm, Harding Advisory, and its management of a $1.5 billion transaction called Octans I CDO Ltd.

At one point, in response to a seemingly innocuous question about whether he had reviewed management agreement documents before signing them, Chau became emotional, saying he was upset that Harding employee Alison Wang had been forced to endure questioning in the trial from SEC lawyer Daniel Walfish and his own defense lawyers.

"What we did to poor Alison was wrong," Chau said, crying. "I should have stopped it. Shame on me. Shame on you, Mr. Walfish!"

It was unclear what portion of Wang's testimony, which took place earlier this week, had upset him. But Chau told the judge he had cried only twice before in his adult life, when his mother and father died.

Just before the lunch break, Chau answered a question from Fischer with a minutes-long monologue on the causes of the collapse of the collateralized debt obligation market in 2008.

That prompted Administrative Law Judge Cameron Elliot to send Chau out of the courtroom so he could warn Chau's lawyer, Alex Lipman, that he was "not impressed" with the testimony.

"His answers are evasive and discursive," Elliott said. "If he wants to help himself, he should just give a straight answer and stop talking. So far, I am not finding him to be a particularly credible witness."

Elliott also said he would likely include Chau's "shame on you" shout in his ruling and encouraged Lipman to speak to his client during lunch about his testimony.

Lipman said he was surprised by the judge's opinion because Chau had been entirely truthful. He also said Chau's emotional outburst was authentic.

After the proceeding, which could last two weeks, Elliott will issue his ruling on whether Chau is liable. If Chau loses the case, he may appeal it to the full commission of the SEC, and ultimately, a U.S. appeals court.

The SEC has charged Chau and Harding Advisory with allowing hedge fund Magnetar Capital LLC to have undisclosed influence over the selection of collateral for Octans I.

According to the government, Magnetar played a role in the deal despite its known strategy of taking short positions on mortgage-backed securities in CDOs, including ones it was investing in, as it was in Octans I.

The CDO deal, which closed in September 2006, was structured and marketed by Merrill Lynch. The CDO failed in April 2008, leaving investors with $1.1 billion in losses, the SEC said.

Bank of America Corp, which now owns Merrill Lynch, agreed in December to pay $131.8 million to resolve claims the company misled investors about Magnetar's role in two CDOs, including Octans I.

Chau has sued the SEC, seeking to block the case against him, arguing that the regulator had violated his constitutional rights by "shoehorning" its case into an administrative proceeding after failing to win similar cases elsewhere.

Last month, U.S. District Judge Lewis Kaplan denied Chau's request to block the SEC temporarily from pursuing its case.

Chau was featured prominently in "The Big Short," Michael Lewis' bestseller about the economic crisis. Chau sued the author in 2011 for defamation, claiming he was unfairly portrayed as a "villain." A federal judge in New York threw out the lawsuit last year.

Chau, who has not yet answered questions from his own lawyers, is expected to continue testifying into next week.

(Reporting by Joseph Ax; Editing by Noeleen Walder and Dan Grebler)