Goldman to Pay $550m and Reform Subprime Mortgage Investment Activity

The Securities and Exchange Commission (SEC) today announced that Goldman, Sachs & Co. (GS) will pay the largest-ever penalty by a Wall Street firm. The $550m fine comes as Goldman acknowledges that its marketing materials for the subprime mortgage products “contained incomplete information,” according to an SEC statement. As a result, investors in synthetic collateralized debt obligation, which perform only as well as the underlying subprime mortgage collateral, had “key facts” and “vital information” knowingly withheld. Of the $550m to be paid by Goldman in the settlement, $250m would be returned to harmed investors through a Fair Fund distribution and $300m would be paid to the U.S. Treasury. The SEC alleged that Goldman failed to disclose this knowledge of the CDO, known as ABACUS 2007-AC1, as well as the role that hedge fund Paulson & Co. played in the portfolio selection process and the fact that Paulson had taken a short position against the CDO. In a statement on its website Goldman admits that it was a mistake for their marketing materials to state that the reference portfolio was selected by ACA Management without disclosing the role of Paulson & Co. Inc. in the portfolio selection process and that Paulson’s economic interests were adverse to CDO investors. “We believe that this settlement is the right outcome for our firm, our shareholders and our clients,” the statement reads. “We understand that the SEC staff also has completed a review of a number of other Goldman Sachs mortgage-related CDO transactions and does not anticipate recommending any claims against Goldman Sachs or any of its employees with respect to those transactions based on the materials it has reviewed.” Nonetheless, the SEC said its litigation against Fabrice Tourre, a vice president and ABACUS trader, at Goldman will continue. Robert Khuzami, director of the SEC’s Division of Enforcement said: “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.” In the settlement, Goldman acknowledged that it is presently conducting a comprehensive, firm-wide review of its business standards, which the SEC has taken into account in connection with the settlement of this matter. The settlement is subject to approval by the United Sates District Judge Barbara Jones for the Southern District of New York. Write to Jacob Gaffney.