WASHINGTON — Goldman Sachs & Co. has agreed to pay $550 million to settle civil fraud charges that the Wall Street giant misled buyers of mortgage-related investments.
The settlement was announced Thursday by the Securities and Exchange Commission hours after Congress gave final approval to the stiffest restrictions on banks and Wall Street since the Great Depression.
The deal calls for Goldman to pay the SEC fines of $300 million. The rest of the money will go to compensate those who lost money on their investments.
The penalty was the largest against a Wall Street firm in SEC history. But the settlement amounts to less than 5 per cent of Goldman’s 2009 net income of $12.2 billion after payment of dividends to preferred shareholders — or a little more than two weeks of net income.
Word that Goldman had settled began leaking about a half hour before stock markets closed and appeared to please investors. Goldman had been trading at about $140 a share. The stock rose to close at $145.22, up $6.16, and shot up to $153.60 in after-hours trading.
The settlement involves charges that Goldman sold mortgage investments without telling buyers that the securities had been crafted with input from a client that was betting on them to fail.
The securities cost investors close to $1 billion while helping Goldman client Paulson & Co. capitalize on the housing bust, the SEC said in the charges filed April 16.
The charges were the most significant legal action related to the mortgage meltdown that pushed the country into recession. They dealt a blow to the reputation of a Wall Street giant that had emerged relatively unscathed from the financial crisis. Goldman acknowledged Thursday that its marketing materials for the deal at the centre of the charges omitted key information for buyers.
But the firm did not admit legal wrongdoing.
In a statement, Goldman said “it was a mistake” for the marketing materials to leave out that a Goldman client helped craft the portfolio and that the client’s financial interests ran counter to those of investors.
“We believe that this settlement is the right outcome for our firm, our shareholders and our clients,” the firm’s statement said.
Robert Khuzami, the SEC’s enforcement director, called the settlement 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 SEC’s wide-ranging investigation of Wall Street firms’ mortgage securities dealings in the years running up to the financial crisis goes on, Khuzami said.
“We are looking at deals across a wide variety of institutions and a wide variety of circumstances,” he said.
Though the fine won’t make much of a dent in Goldman’s finances, the settlement will have sweeping legal implications for future securities fraud cases, said John Coffee, a securities law professor at Columbia University.
“Even if the penalty was lower than the market expected, the fact that Goldman admitted that it made misleading and incomplete disclosures to its clients vindicates the SEC’s legal theory for the future,” Coffee said. “You have to understand that the defendant almost never makes such a concession in SEC settlements.”
The settlement is subject to approval by a federal judge in New York’s Southern District.
The SEC said its case continues against Fabrice Tourre, a Goldman vice-president accused of shepherding the deal.
Tourre is still employed by Goldman and remains on paid administrative leave, according to a person familiar with his status who wasn’t authorized to discuss the matter publicly. Goldman is paying Tourre’s legal expenses, the source said.
The Justice Department opened a criminal inquiry of Goldman in the spring, following a criminal referral by the SEC, the Associated Press reported in April, citing a knowledgeable person who spoke on condition of anonymity because the inquiry was in a preliminary phase.
Of the $550 million Goldman agreed to pay, $250 million will go to the two big losers in the deal. German bank IKB Deutsche Industriebank AG will get $150 million. Royal Bank of Scotland, which bought ABN AMRO Bank, will receive $100 million.
Goldman will also pay back $15 million in fees it collected for managing the deal. The remaining $535 million is considered a civil penalty.
Paulson was not charged by the SEC.
The SEC filed the case after a series of high-profile missteps — most notably its failure to detect the Ponzi scheme run by Bernard Madoff and the alleged fraud by R. Allen Stanford.
The Goldman case was a high-profile opportunity for the agency to prove it can be tough on Wall Street.
Jacob Frenkel, a former SEC enforcement attorney, said the SEC met that objective.
“This was a bet-the-agency case,” Frenkel said. “They had a lot at stake here, and this did wonders to re-establish a strong enforcement image and presence.”
Goldman dodged major risks as well. The company quieted a source of public criticism and can return to focusing on its business.
Goldman’s legal troubles may not be over. Despite the settlement, investors who lost money on the transactions could still sue the firm for civil damages, Thomas Ajamie, a Houston-based defence lawyer who specializes in financial fraud cases.
“Nothing stops the investors from filing their own claims,” Ajamie said.
The chairman of a Senate panel that interrogated Goldman officials after the SEC filed its charges, applauded the settlement.
“Goldman played fast and loose … misled its clients, and got called on it today,” Sen. Carl Levin said Thursday. “A key factor in the settlement is that Goldman acknowledges wrongdoing, in addition to paying a fine and changing its practices.”