The SEC has settled with Goldman, Sachs & Co. which has agreed to pay $550 million and change its business practices to settle charges that Goldman misled investors in a subprime mortgage product as the housing market was crashing.
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. Goldman failed to disclose to investors vital information about the CDO, known as ABACUS 2007-AC1, specifically the role that hedge fund Paulson & Co. Inc. played in the portfolio selection process and that Paulson had taken a short position against the CDO.
Goldman acknowledges that the marketing materials for the ABACUS 2007-AC1 transaction contained incomplete information, but 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 U.S. Treasury.
The landmark settlement also requires remedial action by Goldman in its review of offerings of certain mortgage securities. 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.
This is the largest settlement of its kind and shows that the aftermath of Madoff has had its impact on the SEC. The SEC’s new regime under Obama appears to be progressing to a different level of enforcement and sanctions in punishing firms that have violated securities laws and rules.