Economy

Goldman Sachs To Pay $550 M To Settle SEC Fraud Charges

Lloyd Blankfein

Goldman Sachs CEO Lloyd Blankfein puts SEC fraud charges behind his firm with a $550 million settlement.  Charles Dharapak/AP hide caption

itoggle caption Charles Dharapak/AP

We now know the answer to the question: How much does investment bank Goldman Sachs & Co. have to pay to make the Securities and Exchange Commission's civil charges against it go away? It's $550 million.

Goldman Sachs, one of Wall Street's most powerful names, agreed to pay the amount as fines and restitution to settle a case in which it was charged with defrauding investors by selling them investments in which the firm withheld some critical information from buyers.

One key piece of information, for instance, was that many of the mortgages packaged into the investments were chosen by one of the nation's most successful hedge fund managers, John Paulson, who chose them expressly because he was betting that those mortgages would default.

The SEC and many lawmakers contended that if investors had known this information, they might have been more wary about those investments which eventually wound up losing them a lot of money.

Here's the essence of the what Goldman agreed to although, as is customary in such settlements, the firm neither legally admitted or denied wrongdoing. From the SEC's news release:

Goldman acknowledges that the marketing materials for the ABACUS 2007-AC1 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. Goldman regrets that the marketing materials did not contain that disclosure.

In what appeared a happy accident of history, news of the settlement came on the same afternoon that Congress passed historic financial-overhaul legislation, the biggest changes in financial regulation since the Great Depression, meant to clean up some of Wall Street's more questionable practices.

The $550 million settlement included fines of $300 million. The balance would be paid out in restitution.

The SEC said the settlement was the largest it had ever extracted from a financial firm.

Another excerpt from the SEC news release:

"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. "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."

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