Goldman Settles With SEC Over Fraud Charges

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Goldman Sachs has agreed to pay $550 million to settle SEC charges that it defrauded investors. In 2007, Goldman worked with a hedge fund manager to set up an investment that allowed investors to bet on the housing boom. It didn't tell investors that it had allowed the hedge fund manager to select many of the mortgages that made up the security.

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This is MORNING EDITION, from NPR News. Good morning. I'm Renee Montagne.

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And I'm Mary Louise Kelly.

It's one of the largest fines ever paid by a Wall Street firm. Goldman Sachs has agreed to pay more than a half billion dollars to settle charges that it misled investors about a subprime mortgage product it sold.

The Securities and Exchange Commission announced the massive settlement yesterday, and NPR's Jim Zarroli has our report.

JIM ZARROLI: Goldman Sachs was one of the survivors of the financial crisis. It emerged from the carnage of 2008 more powerful than ever. So when the SEC sued the firm in April over a murky mortgage deal called Abacus, it looked like a battle royal was about to take place. Yesterday, Goldman caved. Not only did it agree to pay a hefty fine, it also said it would train its employees on their responsibilities to investors.

SEC enforcement director Robert Khuzami said the settlement was a reminder of the importance of full disclosure and honest treatment of investors.

Mr. ROBERT KHUZAMI (Director of Enforcement, SEC): And those principles do not change, regardless of how complex the product or how sophisticated the investor. For that reason, today's settlement sends a powerful message of deterrence and accountability.

ZARROLI: The case involved a subprime mortgage product put together by a Goldman trader named Fabrice Tourre, who referred to himself in emails as Fabulous Fabrice. What investors didn't know was that the mortgages underlying the product were selected by the hedge fund Paulson and Company, and Paulson was also betting against those same mortgages in separate transactions, which made for a huge conflict of interest.

Lorin Reisner is the SEC's deputy director of enforcement.

Mr. LORIN REISNER (Deputy Director of Enforcement, SEC): Undisclosed in the marketing materials was that the Paulson and Company Inc., hedge fund played a significant role in the portfolio selection and had an economic incentive to choose what it viewed as the poorest quality mortgage security.

ZARROLI: Goldman repeatedly denied it intended to defraud anyone, and in yesterday's settlement, it said only that it had made mistakes. The firm noted that the victims of the mistakes were mostly institutional investors who should have known what they were getting into.

But Dan Strachman, author of the blog HedgeAnswers.com, says Goldman ultimately decided fighting the suit wasn't worth the trouble.

Mr. DAN STRACHMAN (Author, HedgeAnswers.com Blog): This is clearly the cost-benefit analysis. I mean, the bean counters at Goldman Sachs decided that, at some point, it makes sense to just pay the government off, and this number is the number that makes the most sense to them.

ZARROLI: That number ended up being $550 million dollars. A little more than half will go to the U.S. Treasury. The rest will go to investors hurt by the deal. The money represents just a fraction of the $13 billion dollars that Goldman earned last year, so it's hardly going to break the firm, and Goldman was not required to make any management changes. Still, for a company that rarely stumbles, the settlement is a black eye.

Professor JAY BROWN (University of Denver Law School): I think this is a big victory for the SEC. I just don't think there's any other way to look at it.

ZARROLI: Jay Brown of the University of Denver Law School says the SEC had a tough case to prove, and Goldman had the resources to fight in court for a long time, so the fact that Goldman decided to settle is a break for the government. And though the settlement has to be approved by a judge, it most likely will be.

Prof. BROWN: The combination of the amount of money, half of which will be essentially returned to investors, and also the litigation risk involved, I think this will be approved.

ZARROLI: As for Fabrice Tourre, the man at the center of the Goldman deal, he's not getting off so easily. The SEC said yesterday that it was proceeding with the case against him, and Goldman will cooperate in the investigation. Tourre has denied any wrongdoing and said he will fight to clear his name.

Jim Zarroli, NPR News.

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