Goldman Sachs to Pay $550M to Settle Charges It Misled Subprime Investors

NEW YORK - Goldman, Sachs & Co. has agreed to pay $550 million in penalties and to change its business practices to settle allegations brought by the U.S. Securities and Exchange Commission that it misled investors in a subprime mortgage product, the SEC announced June 15 (Securities and Exchange Commission v. Goldman, Sachs & Co., No. 10 Civ. 3229, S.D. N.Y.).

In its complaint filed in the U.S. District Court for the Southern District of New York, the SEC claims that Goldman Sachs structured and marketed a synthetic collateralized debt obligation (CDO) called ABACUS 2007-AC1 that it marketed to investors when the U.S. housing market and related securities were beginning to show signs of distress.

According to the SEC, hedge fund Paulson & Co. Inc. "played a significant role in the portfolio selection process" and then "effectively shorted the . . . portfolio it helped select by entering into credit default swaps (CDS) with Goldman Sachs to buy protection on specific layers of the ABACUS 2007-AC1 capital structure."

In a consent document filed in the court, the firm acknowledged that the marketing materials contained incomplete information and said it "was a mistake for the Goldman marketing materials to state that the reference portfolio was 'selected by' [financial insurer] 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."

Goldman settled the charges without an admission or denial of the allegations.  More than $250 million of the settlement, which is the largest ever to be paid by a Wall Street firm to the SEC, will be returned to harmed investors through a Fair Fund distribution, and $300 million will be paid to the U.S. Treasury, the SEC said in a July 15 press release.

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Read analysis on the settlement by Thomas Gorman: An Important Settlement for the SEC and Goldman