Resolving a high-profile government case linked to the mortgage meltdown, Goldman Sachs & Co. has agreed to pay a record $550 million to settle civil fraud charges that it misled buyers of complex investments.
The Securities and Exchange Commission announced the settlement Thursday with the Wall Street titan, just hours after Congress gave final approval to legislation imposing the stiffest restrictions on banks and Wall Street firms since the Great Depresssion.
For Goldman, it was a chance to put behind it a case that had tarnished its reputation after it emerged relatively unscathed from the financial crisis. For the SEC, emerging from the embarrassment of a series of lapses, the charges and the settlement were a high-stakes opportunity to prove it could be tough on Wall Street.
And the agency's sweeping investigation of the conduct of financial firms in the run-up to the mortgage market collapse could bring more cases.
The deal calls for Goldman to pay a $535 million fine and $15 million in restitution of fees it collected. Of the total $550 million, $300 million will go to the government and $250 million goes to compensate two European banks that lost money on their investments.
The penalty was said to be the largest against a Wall Street firm in SEC history. But the settlement amounts to less than 5 percent 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 $151.95 in after-hours trading.
The SEC had alleged that Goldman sold mortgage-related 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.
Goldman acknowledged Thursday that its marketing materials for the deal at the center 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," Goldman'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 at a news conference at agency headquarters.
"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.
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.
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 also will pay back $15 million in fees it collected for managing the deal. The remaining $535 million is considered a civil penalty.
Paulson & Co. was not charged by the SEC.
The SEC brought the case after a series of embarrassing blunders — most notably its failure to detect the massive Ponzi scheme run by Bernard Madoff and the alleged $7 billion fraud by R. Allen Stanford. The Goldman case was a high-profile opportunity for the agency to prove it could 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, though. Investors who lost money on the transactions could still sue the firm for civil damages, according to Thomas Ajamie, a Houston-based defense 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 at a hearing 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, D-Mich., said Thursday. "A key factor in the settlement is that Goldman acknowledges wrongdoing, in addition to paying a fine and changing its practices."
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