Record fine for Goldman Sachs to end SEC suit over disclosure
Investment bank agrees to pay but maintains it broke no laws
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.
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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.