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Goldman Sachs Will Settle Fraud Case for $550 Million

Goldman Sachs agreed Thursday to pay a record $550 million to settle civil claims it misled investors about a subprime mortgage product it sold in 2007, resolving a major public relations nightmare for the Wall Street financial giant.

The Goldman Sachs booth on the floor of the New York Stock Exchange
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The Goldman Sachs booth on the floor of the New York Stock Exchange

The settlement, first reported by CNBC, sent Goldman shares up sharply in after-hours trading. (Click here for an after-hours quote)

"This is a very favorable outcome for investors," said Bill Fitzpatrick, equity analyst for Optique Capital Management.
"The dollar amount wasn't really going to be the issue, particularly if it was under a billion dollars and this has put some closure around what was a black eye for Goldman Sachs."

"They pay $550 million and they get an $800 million pop in their stock price—they got off easy,'' said Kevin Caron, a market strategist at Stifel, Nicolaus & Co in Florham Park, New Jersey.

The settlement came on the same day that the financial overhaul bill won final approval in the Senate, imposing the stiffest restrictions on banks and Wall Street since the Great Depression.

The deal calls for Goldman to pay the Securities and Exchange Commission fines of $300 million. The rest of the money will go to compensate those who lost money on their investments.

CNBC understands that the SEC was originally looking for a settlement near $750 million dollars and that management change within Goldman was not on the table during the negotiations. Goldman's response over the complaint would have been due on Monday.

The fine was the largest against a financial company in SEC history. Goldman earned $3.3 billion in the first quarter of this year. It earned $13.4 billion in 2009.

The settlement also requires Goldman to review how it sells complex financial mortgage investments. Goldman acknowledged in a court filing that its marketing materials for the deal at the center of the charges omitted key information for buyers.

But Goldman did not admit any legal wrongdoing.

Demonstrators from Code Pink for Peace hold photographs of Lloyd Blankfein, chairman and CEO of The Goldman Sachs Group, and demand he be jailed with other executives before a hearing of the Senate Homeland Security and Governmental Affairs Investigations Subcommittee on Capitol Hill.
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Demonstrators from Code Pink for Peace hold photographs of Lloyd Blankfein, chairman and CEO of The Goldman Sachs Group, and demand he be jailed with other executives before a hearing of the Senate Homeland Security and Governmental Affairs Investigations Subcommittee on Capitol Hill.

The investments were crafted with input from a Goldman client who was betting on them to fail. The securities cost investors close to $1 billion while helping a Goldman client—hedge fund billionaire John Paulson—capitalize on the housing bust.

The civil charges the SEC filed April 16 were the most significant legal action related to the mortgage meltdown that pushed the country into recession.

The SEC said its case continues against Fabrice Tourre, a Goldman vice president accused of shepherding the deal.

"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," said Robert Khuzami, the SEC's enforcement director.

The settlement is subject to approval by a federal judge in New York's Southern District.

The Justice Department opened a criminal investigation of Goldman over the transactions in the spring, following a criminal referral by the SEC. Executives of the firm were grilled and publicly rebuked by senators at a politically charged hearing.

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 will get $150 million. Royal Bank of Scotland, which bought ABN AMRO Bank, will receive $100 million.

Goldman will pay back $15 million in fees it collected for managing the deal. The remaining $535 million is considered a civil penalty.

Paulson was not charged by the SEC.

—The AP and Reuters contributed to this report.

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