Goldman Sachs & Co has agreed to pay $550m and reform its business practices to settle Securities and Exchange Commission (SEC) charges that Goldman misled investors in a subprime mortgage product just as the US housing market was starting to collapse.
In agreeing to the SEC’s largest-ever penalty paid by a Wall Street firm, Goldman also acknowledged that its marketing materials for the subprime product contained incomplete information.
In its complaint, the SEC alleged that Goldman misstated and omitted key facts regarding a synthetic collateralized debt obligation (CDO) it marketed that hinged on the performance of subprime residential mortgage-backed securities. Goldman failed to disclose to investors vital information about the CDO, known as ABACUS 2007-AC1, particularly the role that hedge fund Paulson & Co played in the portfolio selection process and the fact that Paulson had taken a short position against the CDO.
Goldman agreed to settle the SEC’s charges without admitting or denying the allegations by consenting to the entry of a final judgment that provides for a permanent injunction from violations of the anti-fraud provisions of the Securities Act of 1933.
According to SEC, of the $550m to be paid by Goldman in the settlement, $250m would be returned to harmed investors through a Fair Fund distribution and $300m would be paid to the US Treasury.
Robert Khuzami, director of the SEC’s division of enforcement, said: “Half a billion dollars is the largest penalty ever assessed against a financial services firm in the history of the SEC. 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.”
Lorin Reisner, deputy director of the SEC’s division of enforcement, said: “The unmistakable message of this lawsuit and today’s settlement is that half-truths and deception cannot be tolerated and that the integrity of the securities markets depends on all market participants acting with uncompromising adherence to the requirements of truthfulness and honesty.”