Record fine for Gold­man Sachs to end SEC suit over dis­clo­sure

In­vest­ment bank agrees to pay but main­tains it broke no laws

Austin American-Statesman - - BUSINESS - By Daniel Wag­ner and Marcy Gor­don

WASHINGTON — Gold­man Sachs Group Inc. agreed to pay $550 mil­lion to set­tle civil fraud charges that ac­cused the Wall Street gi­ant of mis­lead­ing buy­ers of mort­gage-re­lated in­vest­ments.

The set­tle­ment came on the same day the Se­nate passed the stiffest re­stric­tions on banks and Wall Street since the Great De­pres­sion.

The deal calls for Gold­man to pay the Se­cu­ri­ties and Ex­change Com­mis­sion fines of $300 mil­lion. The rest of the money will go to com­pen­sate those who lost money on their in­vest­ments.

The fine was the largest against a fi­nan­cial com­pany in SEC his­tory. The set­tle­ment amounts to less than 5 per­cent of Gold­man’s 2009 net in­come of $12.2 bil­lion af­ter pay­ment of div­i­dends to pre­ferred share­hold­ers — or a lit­tle more than two weeks of net in­come.

The set­tle­ment in­volves charges that Gold­man sold mort­gage in­vest­ments with­out telling buy­ers that the se­cu­ri­ties were crafted with in­put from a client that was bet­ting on them to fail.

Con­tin­ued from B

The se­cu­ri­ties cost in­vestors close to $1 bil­lion while help­ing Paul­son & Co. — a hedge fund and Gold­man client the SEC did not ac­cuse of wrong­do­ing — cap­i­tal­ize on the hous­ing bust, the SEC said in fil­ing charges April 16. It was the most sig­nif­i­cant le­gal ac­tion re­lated to the mort­gage melt­down that helped push the coun­try into re­ces­sion.

Gold­man ac­knowl­edged that mar­ket­ing ma­te­ri­als for the deal at the cen­ter of the charges omit­ted in­for­ma­tion for buy­ers, but the firm did not ad­mit le­gal wrong­do­ing.

In a state­ment, the firm ac­knowl­edged that “it was a mis­take” for the mar­ket­ing ma­te­ri­als to leave out that a Gold­man client helped craft the port­fo­lio and that the client’s fi­nan­cial in­ter­ests ran counter to those of in­vestors.

“We be­lieve that this set­tle­ment is the right out­come for our firm, our share­hold­ers and our clients,” the state­ment said.

The SEC said it is con­tin­u­ing a sep­a­rate case against Fabrice Tourre, a Gold­man vice pres­i­dent ac­cused of shep­herd­ing the deal.

“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,” said Robert Khuzami, the SEC’s en­force­ment di­rec­tor.

The SEC’s wide-rang­ing in­ves­ti­ga­tion of Wall Street firms’ mort­gage se­cu­ri­ties deal­ings in the years run­ning up to the fi­nan­cial cri­sis will go on, Khuzami said.

“We are look­ing at deals across a wide va­ri­ety of in­sti­tu­tions and a wide va­ri­ety of cir­cum­stances,” he said.

Al­though the fine won’t make much of a dent in Gold­man’s fi­nances, the set­tle­ment will have sweep­ing le­gal im­pli­ca­tions for fu­ture se­cu­ri­ties fraud cases, said John Cof­fee, a se­cu­ri­ties law pro­fes­sor at Columbia Uni­ver­sity.

“Even if the penalty was lower than the mar­ket ex­pected, the fact that Gold­man ad­mit­ted that it made mis­lead­ing and in­com­plete dis­clo­sures to its clients vin­di­cates the SEC’s le­gal the­ory for the fu­ture,” Cof­fee said. “You have to un­der­stand that the de­fen­dant al­most never makes such a con­ces­sion in SEC set­tle­ments.”

The Jus­tice Depart­ment opened a crim­i­nal in­ves­ti­ga­tion of Gold­man over the trans­ac­tions in the spring af­ter a re­fer­ral by the SEC.

Of the $550 mil­lion Gold­man agreed to pay, $250 mil­lion will go to the two com­pa­nies that sus­tained the biggest losses in the deal: Ger­man bank IKB Deutsche In­dus­triebank AG will get $150 mil­lion, and Royal Bank of Scot­land, which bought ABN AMRO Bank, will re­ceive $100 mil­lion.

Gold­man will pay back $15 mil­lion in fees it col­lected for man­ag­ing the deal. The re- main­ing $535 mil­lion is con­sid­ered a civil penalty. The set­tle­ment is sub­ject to ap­proval by a fed­eral judge in New York’s South­ern District.

The SEC filed the case af­ter a se­ries of high-pro­file mis­steps, most no­tably its fail­ure to de­tect the Ponzi scheme run by Bernard Mad­off. The Gold­man case was an op­por­tu­nity for the agency to prove it can be tough on Wall Street.

Ja­cob Frenkel, a for­mer SEC en­force­ment at­tor­ney, said the SEC met that ob­jec­tive.

“This was a bet-the-agency case,” he said. “They had a lot at stake here, and this did won­ders to re-es­tab­lish a strong en­force­ment im­age and pres­ence.”

Gold­man’s le­gal trou­bles might not be over. De­spite the set­tle­ment, in­vestors who lost money on the trans­ac­tions could still sue Gold­man for civil dam­ages, said Thomas Ajamie, a Hous­ton-based de­fense lawyer who spe­cial­izes in fi­nan­cial fraud cases.

“Noth­ing stops the in­vestors from fil­ing their own claims,” Ajamie said.

Word of Gold­man’s set­tled leaked about a half hour be­fore stock mar­kets closed and ap­peared to please in­vestors. Gold­man stock, which had been trad­ing at about $140 a share, shot up 4.4 per­cent to close at $145.22 and gained an­other 4.6 per­cent in af­ter­hours trad­ing.

Robert Khuzami

Fabrice Tourre

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