Washington, July 16: Goldman Sachs has agreed to pay $550 million to settle federal claims that it misled investors in a subprime mortgage product as the housing market began to collapse, officials said Thursday.
If approved by a federal judge in Manhattan, the settlement would rank among the largest in the 76-year history of the Securities and Exchange Commission, but it would represent only a small financial dent for Goldman, which reported $13.39 billion in profit last year.
News of the settlement sent Goldman’s shares 5 percent higher in after-hours trading, adding far more to the firm’s market value than the amount it will have to pay in the settlement.
Even so, the settlement is humbling for Goldman, whose elite reputation and lucrative banking business endured through the financial crisis, only to be battered by government investigations that shed light on potential conflicts of interest in its dealings.
“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,” said Mr Robert S. Khuzami, the commission’s director of enforcement.
The civil suit brought by the SEC focused on a single mortgage security that Goldman created in 2007, just as cracks appeared in the housing market. That security, called Abacus 2007-AC1, enabled a prominent hedge fund manager, Mr John A. Paulson, to place a bet against mortgage bonds.
The commission contended that Goldman misled investors, who were making a positive bet on housing, because Goldman did not disclose Mr Paulson’s involvement in creating the deal.
Mr Paulson has not been accused of wrongdoing.
Though Goldman did not formally admit to the SEC’s allegations, it agreed to a judicial order barring it from committing intentional fraud in the future under federal securities laws.
In addition, Goldman acknowledged that the marketing materials for Abacus “contained incomplete information” and that it was “a mistake” not to have disclosed Mr Paulson’s role.
As part of the agreement, the bank also said it “regrets that the marketing materials did not contain that disclosure.”
Goldman’s general counsel, Mr Gregory K. Palm, signed the S.E.C. settlement on Wednesday, though it was not announced until after markets closed on Thursday.
Officials said the timing was not affected by the Senate’s approval of an overhaul of financial regulations.