Goldman Sachs to pay $550M to settle civil fraud charges

Goldman Sachs Group Inc. agreed to pay $550 million and change its business practices to settle U.S. regulatory claims it misled investors in collateralized debt obligations linked to subprime mortgages.

The penalty is the largest ever levied by the Securities and Exchange Commission against a Wall Street firm, the agency said in a statement announcing the accord today. Under the deal, Goldman Sachs acknowledged it made a “mistake” and that marketing materials for the instruments had “incomplete information,” the agency said.

“This settlement is a stark lesson to Wall Street firms that no product is too complex, and no investor too sophisticated, to avoid a heavy price if a firm violates the fundamental principles of honest treatment and fair dealing,” SEC Enforcement Director Robert Khuzami said in the statement.

Goldman Sachs created and sold the CDOs in 2007, as the U.S. housing market faltered, without disclosing that hedge fund Paulson & Co. helped pick the underlying securities and bet against the vehicles, the SEC said in an April 16 lawsuit. Billionaire John Paulson’s firm earned $1 billion on the trade and wasn’t accused of wrongdoing.

“It was a mistake for the Goldman marketing materials to state that the reference portfolio was ‘selected by’ ACA Management LLC without disclosing the role of Paulson & Co. Inc. in the portfolio selection process,” the SEC’s statement quoted Goldman Sachs as saying in settlement documents.

The bank, based in New York, didn’t admit or deny wrongdoing under the accord, the SEC said. The payment includes a $300 million fine and $250 million as restitution to investors. The settlement is subject to a judge’s approval.

The firm’s stock, which closed today at $145.22, has dropped 21 percent since April 15, the close before the suit was filed. The S&P 500 Financial Index declined 13 percent in the same period.
–Bloomberg

Related Topics: Goldman Sachs & Co.