In the largest-ever penalty paid by a Wall Street firm, Goldman Sachs & Co. on Thursday agreed to pay $550 million to settle Securities and Exchange Commission fraud charges.
Goldman, in the 10-page consent decree, admitted that it made mistakes and regretted its failure to disclose relevant information.
The SEC on April 16 charged Goldman with misleading investors in a collateralized debt obligation, or CDO, by misstating and omitting key facts.
The CDO at issue was linked to the performance of subprime residential mortgage-backed securities. The problem, according to the SEC, was that Goldman did not reveal to investors the role that a major hedge fund, Paulson & Co., played in the portfolio selection process and the fact that Paulson took a short position against the CDO.
In the settlement, Goldman acknowledged that the marketing materials “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.”
Of the $550 million to be paid by Goldman in the settlement, $250 million would be returned to harmed investors through a Fair Fund distribution and $300 million would be paid to the U.S. Treasury.
“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 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.”
The settlement also requires remedial action by Goldman in its review and approval of offerings of certain mortgage securities. For example, all written marketing materials used in connection with mortgage securities offerings must be reviewed and signed by in-house counsel or the compliance department. Outside counsel will be asked to review terms sheets, prospectus or other marketing materials in offerings of mortgage securities where Goldman is the lead underwriter.
The settlement also requires additional education and training of Goldman employees in this area of the firm’s business.
The SEC’s litigation continues against Fabrice Tourre, a vice president at Goldman.
The settlement is subject to approval by Judge Barbara Jones of U.S. District Court for the Southern District of New York.
The case was viewed by many in the securities bar as a bellweather for Khuzami and chairman Mary Schapiro, who vowed to ramp up agency enforcement. As David Martin, co-head of Covington & Burling‘s securities practice put it in May, “There’s a high sense of urgency in terms of delivering results.”
The SEC team working on the investigation and litigation included Kenneth Lench, Reid Muoio, Jason Anthony, N. Creola Kelly, Melissa Lamb, Jeffrey Leasure, Lorin Reisner, Richard Simpson, David Gottesman and Jeffrey Tao.
This article first appeared on The BLT: The Blog of Legal Times.