Investment bank Goldman Sachs will pay a record fine of $550 million to US market regulator SEC for settling charges related to misrepresentation of facts about a financial product tied to sub-prime mortgages.
“Goldman Sachs will pay $550 million and reform its business practices to settle SEC charges that Goldman misled investors in a sub-prime mortgage product just as the US housing market was starting to collapse,” the Securities and Exchange Commission (SEC) said in a statement yesterday.
Sub-prime mortgages, where chances of defaults are high as loans are granted to borrowers with poor credit histories, were one of primary causes for the global financial crisis.
“Half a billion dollars is the largest penalty ever assessed against a financial services firm in the history of the SEC,” SEC’s Division of Enforcement Director Robert Khuzami said.
“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,” Mr Khuzami added.
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 statement said.
In the settlement papers submitted to the US District Court for the Southern District of New York, Goldman Sachs has accepted that marketing materials for its product ‘ABACUS 2007—AC1’ contained incomplete information and it had been “a mistake“.
The settlement is, however, subject to approval by the US District Judge for the Southern District of New York.
On April 16, the SEC had filed a complaint alleging misstatement and omission of key facts in a product marketed by Goldman-collateralised debt obligation (CDO). The fortunes of CDO hinge on the performance of sub-prime residential mortgage-backed securities (RMBS).
Excessive issuing of CDOs, a complex instrument, was also blamed for the financial meltdown.
Goldman had failed to disclose vital information about the CDO to investors, especially the role of a major hedge fund player, Paulson & Co, in the portfolio selection.
The settlement also requires remedial action by Goldman in its review and approval of offerings of certain mortgage securities.
Goldman Sachs’ shares gained over five per cent to close at $145 on the New York Stock Exchange yesterday.