topleft
topright

Login or Register


Featured Blogger

The Chinese Economy is On a Slowing Boat
James Finnan

Red-Hot Thread

"The corporate brand is not only used to improve competitive positioning and express company aspirations, it can also be a powerful tool to motivate employees."

CFOZone Experts

Opinions and views from expert CFOZone members.


Jul 16
2010

Goldman to pay $550 million to settle with SEC

Posted by Stephen Taub in settlementSecurities and Exchange Commissionsec, Mary Schapiro, compliancecollateralized debt obligation

Stephen Taub

Score this one for the Securities and Exchange Commission and chairman Mary Schapiro.

In perhaps their biggest accomplishment since she took over the securities regulator over a year ago, Goldman, Sachs agreed to pay $550 million and reform certain business practices to settle SEC charges that Goldman misled investors in a subprime mortgage product just as the US housing market was starting to collapse.

The SEC said this is the largest-ever penalty paid by a Wall Street firm.

Goldman also acknowledged that its marketing materials for the subprime product contained incomplete information, according to the announcement.

Back in April, the SEC alleged that Goldman misstated and omitted key facts regarding a synthetic collateralized debt obligation (CDO) it marketed that hinged on the performance of subprime residential mortgage-backed securities. The regulator said Goldman failed to disclose to investors vital information about the CDO, known as ABACUS 2007-AC1, particularly the role that hedge fund Paulson & Co. played in the portfolio selection process and the fact that Paulson had taken a short position against the CDO.

"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, Director of the SEC's Division of Enforcement.

Some commentators are spinning that this is a big win for Goldman, especially since no top executives had to step down and that the firm did not have to pay more than $1 billion to settle.

However, many skeptics thought the SEC had no case altogether and that Goldman's expensive cadre of lawyers would overwhelm the earnest, but relatively young SEC legal staff.

Wrong!

 "Goldman acknowledges that the marketing materials for the ABACUS 2007-AC1 transaction contained incomplete information," Goldman said in settlement papers submitted to the US District Court for the Southern District of New York. "In particular, it was a mistake for the Goldman marketing materials to state that the reference portfolio was "selected by" 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 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 $550 million to be paid by Goldman in the settlement, $250 million would be returned to harmed investors through a Fair Fund distribution and $300 million would be paid to the US Treasury.

The landmark settlement also requires remedial action by Goldman in its review and approval of offerings of certain mortgage securities. This includes 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. In the settlement, Goldman acknowledged that it is presently conducting a comprehensive, firm-wide review of its business standards, which the SEC has taken into account in connection with the settlement of this matter.

The settlement is subject to approval by the Honorable Barbara S. Jones, United Sates District Judge for the Southern District of New York.

The SEC stressed the settlement, if approved by Judge Jones, resolves the SEC's enforcement action against Goldman related to the ABACUS 2007-AC1 CDO. It does not settle any other past, current or future SEC investigations against the firm. Meanwhile, the SEC's litigation continues against Fabrice Tourre, a vice president at Goldman.

Comments (0)Add Comment

Write comment
You must be logged in to post a comment. Please register if you do not have an account yet.

busy
Copyright © 2009-2013 CFOZone. All rights reserved. CFOZone is a property of PSN, Inc.