To Settle Civil Securities Fraud. Goldman Sachs has agreed to pay a record $550 million to settle civil securities fraud allegations with the U.S. Securities and Exchange Commission (SEC). The settlement, which still has to be approved by a judge, is the largest penalty a Wall Street company has ever paid to the SEC.
According to an SEC statement released yesterday, $250 million of the total settlement would be returned to harmed investors through a Fair Fund distribution and $300 million would be paid to the U.S. Treasury.
A Synthetic Collateralized Debt Obligation
The settlement resolves charges that Goldman Sachs misled investors in a subprime mortgage product just as the U.S. housing market was starting to collapse. This past April, the SEC alleged that Goldman Sachs 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. According to an SEC statement, Goldman Sachs failed to disclose to investors vital information about the CDO, known as ABACUS 2007-AC1, particularly the role that hedge fund Paulson & Co. Inc. played in the portfolio selection process and the fact that Paulson had taken a short position against the CDO.
In agreeing to the settlement, the investment bank also acknowledged that its marketing materials for the subprime product contained incomplete information, the SEC said.
“Half a billion dollars is the largest penalty ever assessed against a financial services firm in the history of the SEC,” said Robert Khuzami, Director of the SEC’s Division of Enforcement, said in a statement. “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.”
In agreeing to the settlement, Goldman Sachs did not admit or deny the allegations in the SEC complaint.
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