SEC, ex-Goldman VP Tourre battle over key fraud trial witness NEW YORK (Reuters) - As the civil fraud trial approaches of former Goldman Sachs Group Inc vice president Fabrice Tourre, the two sides are focusing on a key witness and whether her own legal troubles could affect her testimony. The U.S. Securities and Exchange Commission has said Laura Schwartz, who worked at a bond insurer, can help establish how Tourre misled investors in a complex structured mortgage transaction. But Tourre's lawyers say that Schwartz has a motive to "shade her testimony" because she is herself under investigation by the SEC in a similar case. Before the trial starts on July 15, U.S. District Judge Katherine Forrest in Manhattan must decide the extent Tourre's lawyers can obtain documents related to the investigation that could be used to undermine Schwartz's testimony against Tourre. "It would undercut her credibility as a witness if introduced into evidence," said Stanley Twardy, a former U.S. attorney for Connecticut who is now a white-collar defense attorney at Day Pitney in Stamford. The SEC accuses Tourre of misleading investors in a collateralized debt obligation known as ABACUS 2007-AC1 in 2007. It says he failed to disclose that the hedge fund run by billionaire John Paulson helped pick the mortgage securities behind the CDO and was also betting against it. By January 2008, the SEC says almost all of the securities in the CDO had been downgraded. The investors lost more than $1 billion, while Paulson netted about the same amount from his short positions, the SEC says. Goldman Sachs Group Inc agreed to pay $550 million in 2010, in the largest settlement resulting from the SEC's probe of CDOs. Paulson was not charged. At trial, a key issue will be Tourre's interaction with bond insurer ACA Financial Guaranty Corp, which helped put the Abacus CDO together and which then insured it. In a letter to the court on June 10, the SEC said Schwartz, who was Tourre's "primary point of contact" at ACA, will testify that Tourre misled her into believing that Paulson was an equity investor in the CDO and not a short seller. Sean Coffey, a lawyer for Tourre, said at a court hearing also on June 10 that he planned to raise questions at the trial about Schwartz's credibility, because she was being investigated as part of a probe of another CDO. In that probe, the SEC is looking into ACA Financial Guaranty's role as collateral manager for a CDO called ACA ABS 2007-2, according to a broker report filed in February with securities industry self-regulatory body Financial Industry Regulatory Authority (FINRA). The FINRA report said Schwartz, who left ACA in 2007, received a so-called Wells notice, which indicates SEC staff was considering recommending the commission approve taking action against her. A lawyer for Schwartz, Robin Alperstein, said no charges were warranted against her client. A lawyer for ACA Financial did not respond to requests for comment. UBS AG, which sold more than $748 million in notes tied to the CDO, has said it was in discussions with the SEC about "one CDO in 2007." A spokeswoman declined to comment further. While Tourre's lawyers have put Schwartz on their own witness list, they have made clear they are mostly concerned about how she could help the SEC. Coffey said at the June 10 court hearing that the investigation into Schwartz could provide a "motive for her to shade her testimony to support the merits of her own case." If in the future the SEC decides to drop the investigation into Schwartz, that would raise questions about "what she was willing to do at trial in order to avoid being charged," Coffey said. Tourre's lawyers have sought to subpoena material related to the investigation of Schwartz, which Coffey has said they could ask her about during Tourre's trial. In court filings Wednesday, the SEC and Schwartz both sought to block Tourre's subpoenas. Allowing Tourre's lawyer to probe Schwartz would amount to a mini trial over the other CDO, the SEC said. The judge will rule on the motions before the trial. The case is Securities and Exchange Commission v. Goldman Sachs & Co., U.S. District Court, Southern District of New York, No. Reporting by Nate Raymond; Editing by Eddie Evans and Nick Zieminski