Goldman Sachs Settles With SEC

by Glen Shapiro, LawAndTax-News.com, New York

19 July 2010

The US Securities and Exchange Commission (SEC) has announced that Goldman Sachs & Co (Goldman) will pay USD550m, and reform its business practices, to settle charges that it misled investors.

On April 16 this year, the SEC opened a civil case by charging Goldman Sachs and one of its vice presidents, Fabrice Tourre, with defrauding investors by misstating and omitting key facts about a financial product tied to subprime mortgages, at the time that the US housing market was beginning to run out of steam in 2007.

The SEC had alleged that Goldman structured and marketed a synthetic collateralized debt obligation (CDO) that hinged on the performance of subprime residential mortgage-backed securities. According to the SEC, Goldman failed to disclose vital information about the CDO to investors, who are said to have lost more than USD1bn.

Goldman acknowledged, in settlement papers, that its marketing materials for the subprime product contained incomplete information. In particular, the materials did not disclose the role of the New York-based hedge fund, Paulson & Co, in the portfolio selection process, or that the latter’s economic interests were adverse to the CDO’s investors.

Goldman has agreed to settle the SEC's charges without admitting or denying the allegations by consenting to the entry of a final judgment that provides for a permanent injunction from violations of the antifraud provisions of the Securities Act of 1933. Of the USD550m to be paid by Goldman in the settlement, USD250m would be distributed to harmed investors and the remainder would be paid to the US Treasury.

The settlement also requires remedial undertakings by Goldman, to last for three years after the judgment, regarding its review and approval of offerings of certain mortgage securities. These include the role and responsibilities of internal legal counsel, compliance personnel, and outside counsel in the review of written marketing materials for such offerings. The settlement also requires additional education and training of Goldman employees in this area of the firm's business.

The judgment acknowledges that Goldman is presently conducting a comprehensive, firm-wide review of its business standards, and that the SEC has taken this into account in connection with the settlement of this matter.

The settlement is subject to approval by the judge for the Southern District of New York. If approved, it resolves the SEC's enforcement action against Goldman related to the CDO in question. However, it does not settle any other past, current or future SEC investigations against the firm, and the SEC's litigation continues against Fabrice Tourre.

SEC representatives were severe in their assessment of the settlement. In particular, Robert Khuzami, Director of the SEC's Division of Enforcement, said: "Half a billion dollars is the largest penalty ever assessed against a financial services firm in the history of the SEC. 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."

Lorin Reisner, Deputy Director of the SEC's Division of Enforcement, added: "The unmistakable message of this lawsuit and today's settlement is that half-truths and deception cannot be tolerated and that the integrity of the securities markets depends on all market participants acting with uncompromising adherence to the requirements of truthfulness and honesty."

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