Goldman Sachs Pays $550M to Settle SEC Fraud Suit

Tue, Jul 20, 2010


By: Carrie Bay

Goldman Sachs & Co. has agreed to pay more than half a billion dollars to settle federal charges that the Wall Street broker-dealer misled investors to sink money into a product backed by dicey subprime mortgages just as the housing market was beginning to collapse.

In a civil suit brought by the Securities and Exchange Commission (SEC) on April 16, the federal regulator accused Goldman of defrauding investors by misstating and omitting key facts about a synthetic collateralized debt obligation (CDO) – known as ABACUS 2007-AC1 – that hinged on the performance of subprime residential mortgage-backed securities (RMBS).

The SEC says Goldman failed to disclose to investors vital information about the ABACUS CDO, particularly the role that hedge fund Paulson & Co. Inc. played in selecting which RMBS should make up the portfolio, and the fact that Paulson had taken a short position against the CDO and stood to benefit if the underlying loans defaulted.

To settle the case, Goldman Sachs will pay a total of $550 million, $250 million of which will be returned to investors and $300 million which will be paid to the U.S. Treasury, according to Lorin Reisner, deputy director of the SEC’s enforcement division.

The SEC is touting the settlement as the regulator’s “largest-ever penalty against a Wall Street firm.”

The ratings agency DBRS says while the penalty is “substantial,” Goldman can absorb this cost through its quarterly earnings and the greatest impact of the allegation being its affect on Goldman’s reputation.

The $550 million total payout is a little more than 4 percent of the $13.4 billion profit Goldman raked in last year.

As part of the agreement, Goldman Sachs is also required to tighten internal controls and assess the roles and responsibilities of Goldman personnel to ensure that disclosures in future offerings of mortgage and CDO products are complete and accurate, according to the SEC.

In a statement released by the company, Goldman acknowledged “that the marketing materials for the ABACUS 2007-ACI transaction contained incomplete information. In particular, 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 and that Paulson’s economic interests were adverse to CDO investors.”

The company said the SEC has also completed a review of a number of its other mortgage-related CDO transactions, but the federal agency is not recommending any claims against Goldman Sachs or any of its employees with respect to those transactions.

The SEC says, though, that it is proceeding with its case against Fabrice Tourre, the creator of ABACUS and the only Goldman Sachs staff member to be sued over the CDO. He has denied the SEC’s charges of fraud.

Reisner says Goldman Sachs has agreed to cooperate in the case filed against Tourre, who is currently on leave from the company.


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