[JURIST] Goldman, Sachs & Co. [official website; JURIST news archive] on Thursday agreed to a $550 million settlement [text, PDF] with the US Securities and Exchange Commission (SEC) [official website] to resolve charges [press release] that they marketed a subprime mortgage product and made misleading statements and omissions to investors in early 2007. Of the $550 million settlement, $300 million will be paid to the US Treasury and $250 million will be distributed to harmed investors. Additionally, Goldman agreed to implement a series of changes to its business practices and acknowledged [press release] “that the marketing materials for the … transaction contained incomplete information … [and] regrets that the marketing materials did not contain [full] disclosure.” In response to the penalty, SEC 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.
The penalty, subject to the approval of the US District Court for the Southern District of New York [official website], is the largest against a financial company in SEC history. The SEC had filed suit [JURIST report] against Goldman in April alleging securities fraud in regard to its conduct in marketing collateralized debt obligations (CDOs) [Investopedia backgrounder] to investors in violation of the Securities Act of 1933 [text, PDF] and Securities Exchange Act of 1934 [text, PDF].
The SEC action continues a trend in bringing action against financial corporations and their agents that engaged in allegedly illegal conduct at the start of the subprime mortgage downturn in 2007. In June, Bank of America (BOA) [corporate website] subsidiary Countrywide Home Loans, Inc. reached a $108 million settlement agreement [JURIST report] with the Federal Trade Commission (FTC) [official website] to resolve charges that the subsidiary collected excessive fees from homeowners facing foreclosure. In February, a district court judge accepted a $150 million dollar settlement agreement [JURIST report] between BOA and the SEC. The SEC had charged [JURIST report] BOA with misleading investors regarding billions of dollars paid to Merrill Lynch [corporate website] executives during the acquisition of the firm. The judge twice rejected a proposed settlement [JURIST report] between the SEC and BOA for $33 million, which did not admit any fault or directly penalize any corporate executives, calling the settlement unfair to the shareholders.