The Securities and Exchange Commission announced today that it has reached a settlement agreement with Goldman Sachs over the sale and marketing controversial mortgage securities. The news was first relayed via CNBC's Twitter feed. The settlement comes on the heels of Congress's passage of a sweeping financial reform bill earlier today.
From the SEC's press release on the settlement:
Securities and Exchange Commission today announced that Goldman, Sachs & Co. will pay $550 million and reform its business practices to settle SEC charges that Goldman misled investors in a subprime mortgage product just as the U.S. housing market was starting to collapse.
In agreeing to the SEC's largest-ever penalty paid by a Wall Street firm, Goldman also acknowledged that its marketing materials for the subprime product contained incomplete information...
In settlement papers submitted to the U.S. District Court for the Southern District of New York, Goldman made the following acknowledgment:
Goldman acknowledges that the marketing materials for the ABACUS 2007-AC1 transaction contained incomplete information. 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.
In April, the SEC charged Wall Street's most profitable bank with civil fraud over complex mortgage securities sold under its 'Abacaus' deals. The SEC alleged that Goldman failed to disclose the securities in the Abacus portfolio were chosen by another bank client, the hedge fund manager John Paulson, who made billions betting against the housing market. The securities were, according to the SEC, secretly designed to fail.
Still, the bank's stock surged today (scroll down for a chart) rising 4.43 percent as rumors swirled about a settlement. (The bank's stock continued rising an additional 5 percent in after hours trading.)
With a cost of roughly $550 million (plus millions in legal fees), Goldman Sachs likely came out ahead for the day, as the stock's surge added hundreds of millions to the bank's market cap. The settlement amount comes to roughly 3.4 percent of the bank's 2009 bonus pool.
As a part of the settlement, the bank will pay $300 million to the SEC and the rest will be paid out to investors that were harmed through the Abacus deals, including IKB AG and the Royal Bank of Scotland. In a statement, the bank acknowledged "it was a mistake" to fail to disclose Paulson's role in selecting the Abacus assets.
The case against Goldman Sachs vice president Fabrice Tourre, however, is expected to continue.
Reuters blogger Felix Salmon said the settlement was "surely a massive win for Goldman, whose entire business was at stake if it was found guilty of serious wrongdoing."
Check back for more details as the story develops.
Check out Goldman's stock performance today:
(Source: Google Finance)
READ the judgment: