agreed Thursday to pay a record $550 million to settle charges that it misled investors in its Abacus subprime mortgage CDO deal, sold to institutional investors. The settlement is the largest the S.E.C. has ever leveled at a Wall Street firm in its history, said enforcement director Robert Khuzami in a press conference. The settlement, which must still be approved by the court, represents the first case brought by the S.E.C.’s new structured and new products unit.
Khuzami said the settlement would serve as a reminder to other firms that “there will be heavy price to pay if firms violate the principle of securities laws, full disclosure, honest treatment and fair dealing.” Those goals do not change regardless of how complex the product or sophisticated the product, he said. “The securities laws provide protection to all investors sophisticated or otherwise.” If they are misled, they are entitled to be compensated, he said.
As part of the settlement, Goldman Sachs was required to publicly acknowledge the basis of the SEC complaint: that itsmaterials contained incomplete information and failed to disclose the nature of hedge fund manager John Paulson’s involvement in the deal, including that his involvement was adverse to investors.
Under the settlement, Goldman has also agreed to tighten internal controls to ensure that CDO product disclosures are accurate and complete in the future. “We also took into account that Goldman is engaged in broad-based review and self assessment of its business,” said Khuzami.
Of the full amount, $250 million will go to compensate investors, who will be paid within 30 days. The balance goes to the US Treasury.Earlier today the Senate passed the Wall Street reform bill with just 60 votes, the minimum needed for final approval. When reporters asked, Khuzami said the scheduling of the Senate vote was not a consideration in the timing of the Goldman announcement. These are “absolutely not the kinds of considerations the SEC engages in.”