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Goldman Settles SEC Charges for $550 Million

Today — coincidentally or not, the day Congress passed sweeping legislation reforming the regulation of Wall Street banks — the Securities and Exchange Commission announced it has settled with investment bank Goldman Sachs. For misinforming foreign investors about a complex credit-default swap product designed to fail by a hedge fund, Goldman will pay the largest fine in SEC history, $550 million. Still, Goldman does not have to admit wrongdoing, and has settled over lesser charges than the initial civil fraud charge.

From the SEC’s press release:

The Securities and Exchange Commission today announced that Goldman, Sachs & Co. will pay $550 million and reform its business practices to settle SEC charges that Goldman misled investors in a subprime mortgage product just as the U.S. housing market was starting to collapse.

In agreeing to the SEC’s largest-ever penalty paid by a Wall Street firm, Goldman also acknowledged that its marketing materials for the subprime product contained incomplete information.

In its April 16 complaint, the SEC alleged that Goldman 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. Goldman 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 settlement papers submitted to the U.S. District Court for the Southern District of New York, Goldman made the following acknowledgement:

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.

“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.”

The settlement was widely expected. And given its timing on the day of the passage of Dodd-Frank, it underscores the need for good regulators. In this case, Goldman seemingly got off easy, and it is one of few banks dinged for what Wall Street’s own have described as a pervasive business practice. The Dodd-Frank bill gives enormous power and discretion to regulators. But it cannot make them do their job well.

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