Goldman Sachs Group Inc. agreed to pay $550 million and change its business practices to settle U.S. regulatory claims it misled investors in collateralized debt obligations linked to subprime mortgages.
The penalty is the largest ever levied by the Securities and Exchange Commission against a Wall Street firm, the agency said in a statement announcing the accord today. Under the deal, Goldman Sachs acknowledged it made a “mistake” and that marketing materials for the instruments had “incomplete information,” the agency said.
For Goldman Sachs, the payment amounts to 14 days of earnings, based on first-quarter results. It’s the equivalent of 93 cents a share, said Brad Hintz, an analyst at Sanford Bernstein & Co., who had estimated a cost of $1.05.
“This appears to be negligence, not fraud,” Hintz said in an e-mail, citing the SEC’s use of words such as “mistake” and “incomplete information.” “Bottom line the SEC and the administration gets a headline and a ‘political win’ and GS gets an ‘economic win.’”
Goldman Sachs created and sold the CDOs in 2007, as the U.S. housing market faltered, without disclosing that hedge fund Paulson & Co. helped pick the underlying securities and bet against the vehicles, the SEC said in an April 16 lawsuit. Billionaire John Paulson’s firm earned $1 billion on the trade and wasn’t accused of wrongdoing.
‘It Was a Mistake’
“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 SEC’s statement quoted Goldman Sachs as saying in settlement documents.
The bank, based in New York, didn’t admit or deny wrongdoing under the accord, the SEC said. The payment includes a $300 million fine and $250 million as restitution to investors. IKB Deutsche Industriebank AG, the first German lender bailed out during the subprime crisis, will receive $150 million, and Royal Bank of Scotland Plc will get $100 million, the SEC said.
Shares of Goldman Sachs, which closed today at $145.22, dropped 21 percent since April 15, the day before the suit was filed, and jumped 4.4 percent today after the SEC said it planned a “significant announcement.” The S&P 500 Financial Index declined 13 percent since the SEC filed suit.
“This takes a cloud off the stock,” said Peter Sorrentino, senior portfolio manager at Huntington Asset Advisors in Cincinnati, which manages $13.3 billion including Goldman Sachs shares. For Goldman Sachs, the settlement means “we’re done, turn the spotlight off, we’re out of here,” he said.
Fabrice Tourre’s Case
Sorrentino said his firm may still reduce its holdings in Goldman Sachs on any price gains because he’s concerned about the effect of financial regulatory legislation passed today by the Senate. Goldman Sachs said the agency doesn’t ‘‘anticipate’’ it will bring more claims linked to collateralized debt obligations.
Fabrice Tourre, the only Goldman Sachs worker targeted by the SEC, remains an employee of the firm and is on leave, said Lucas van Praag, a company spokesman. The firm promised to cooperate with the SEC in the case against Tourre and other “ongoing litigation,” the agency’s deputy enforcement director, Lorin Reisner, told reporters in Washington.
SEC Enforcement Director Robert Khuzami called the settlement “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.”