SEC Wins Approval for Goldman Sachs Penalty Over Subprime CDOs

The U.S. Securities and Exchange Commission won court approval to levy a $550 million penalty against Goldman Sachs Group Inc., the largest ever against a Wall Street firm, over claims the bank misled investors in collateralized debt obligations linked to subprime mortgages.

U.S. District Judge Barbara Jones in Manhattan granted final approval yesterday to a settlement between the SEC and Goldman Sachs that was announced on July 15.

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 investment vehicles, the SEC said in an April 16 lawsuit. In the accord, Goldman Sachs acknowledged it made a “mistake” and that marketing materials for the instruments had “incomplete information,” the agency said.

“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.

Goldman Sachs acknowledged it made a “mistake” and that marketing materials for the instruments had “incomplete information,” the agency said.

Fabrice Tourre

The judge’s approval of the accord came a day after Fabrice Tourre, the Goldman Sachs executive director sued by the SEC for fraud, filed court papers asking Jones to dismiss the lawsuit against him. Tourre denied making any materially misleading statements or omissions related to the sale of Abacus 2007-AC1 CDOs linked to subprime mortgages.

The bank, based in New York, didn’t admit or deny wrongdoing as part of the settlement, according to the court filing.

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, according to the settlement agreement.

Tourre, the only Goldman Sachs executive named as a defendant in the SEC complaint, 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.

Van Praag declined to comment on yesterday’s court approval of the settlement.

‘A Stark Lesson’

SEC Enforcement Director Robert Khuzami said yesterday he’s pleased with the settlement approval. He earlier called the accord “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.”

In 2008, Jones presided over the settlement of an antitrust suit after Discover Financial Services sought $18 billion from larger rivals Visa Inc. and MasterCard Inc. for blocking banks from issuing its cards. The judge also presided over the prosecution of former WorldCom Inc. executives stemming from an $11 billion fraud that ended in bankruptcy, including former Chief Executive Bernard Ebbers and the company’s former finance chief Scott Sullivan.

Goldman Sachs said yesterday that second-quarter profit had dropped 82 percent, missing analysts’ estimates on a slide in trading revenue. Revenue and earnings were the lowest since the fourth quarter of 2008.

The case is SEC v. Goldman Sachs, 10-CV-3229, U.S. District Court, Southern District of New York (Manhattan).

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