Bank Agrees to Record Settlement

The US Securities and Exchange Commission (SEC) has announced that Goldman Sachs has agreed to pay US$550 million to settle claims that it misled investors in the subprime mortgage market as the American housing market declined. The fine is the “largest-ever penalty paid by a Wall Street firm” and is accompanied by an undertaking to reform the firm’s business practices. Though neither admitting nor denying the claims, Goldman Sachs has agreed to conduct a firm-wide review of its business standards, provide additional staff training and will review the roles and responsibilities of “internal legal counsel, compliance personnel, and outside counsel in the review of written marketing materials” for certain mortgage securities.

The SEC alleged that Goldman Sachs “misstated and omitted key facts regarding a synthetic collateralized debt obligation (CDO)”, including that hedge fund Paulson & Co was involved in the portfolio selection process but had taken a short position against the CDO. This meant that Paulson & Co’s economic interests were “adverse to CDO investors”.

SEC enforcement division director Robert Khuzami said that the fine was a stark lesson for Wall Street firms that they must not violate fundamental principles of “honest treatment and fair dealing”.
SEC’s media release (15 July 2010)

Related news item:
Reuters: Goldman to settle with SEC for $550 million (15 July 2010)
(Source: SEC; Reuters)