Embattled US bank Goldman Sachs will pay a record US$550 million to settle government fraud charges, the Securities and Exchange Commission (SEC) said on Thursday.
Facing allegations of defrauding investors, the storied investment bank admitted it had made a “mistake” and given “incomplete” information to clients.
The SEC had accused Goldman of allowing a prominent hedge fund — Paulson & Co Inc — to put together a package of subprime mortgages that were sold to clients, but which Paulson was also betting against.
“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,” SEC prosecutor Robert Khuzami said.
REPUTATION
The firm had said it would “vigorosly contest” the charges and “defend the firm and its reputation.”
But in a statement on Thursday it acknowledged marketing materials for the product “contained incomplete information.”
“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,” the statement said.
Goldman will pay US$300 million to the Treasury and US$250 million to investors.
Among clients of Goldman’s controversial product were German commercial bank IKB and Britain’s RBS.
Goldman claimed that it lost US$90 million from its own investment in the security.
The type of mortgage-backed securities sold by Goldman in the deal were a key contributor to the financial crisis that peaked in 2008 because many contained risky mortgages.
MELTDOWN
The trade, which took place during a massive mortgage meltdown in 2007 and as the country was about to fall into a brutal recession, was said to have cost investors around US$1 billion.
Goldman reportedly made billions of dollars by betting against the housing market in the years before its collapse.
“Half a billion dollars is the largest penalty ever assessed against a financial services firm in the history of the SEC,” Khuzami said.
The fraud allegations had rattled markets around the world and sent the company’s stock plummeting.
Goldman was among the top gainers in US stocks on Thursday, its shares rising 4.43 percent to US$145.22 by the close of trade and a further five percent in after-hours trade.
After the settlement was announced Goldman said the deal was the “right outcome for our firm, our shareholders and our clients.”
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