Goldman Sachs agreed to pay $550 million to the Securities and Exchange Commission (SEC), one of the largest penalties ever paid by a Wall Street firm, to settle charges of securities fraud linked to mortgage investments.
The SEC filed a lawsuit against Goldman in April, accusing the bank of securities fraud. The settlement came just days before Goldman is scheduled to report its second-quarter earnings.
Under the terms of the deal, Goldman will pay $300 million in fines to the Treasury Department, with the rest serving as restitution to investors in the mortgage-linked security. Goldman will not admit wrongdoing, though it will admit that its marketing materials for the investment “contained incomplete information.”
Goldman will also change several business practices, including the way it draws up marketing materials for complex mortgage securities and the way it educates employees in that part of its business.
The settlement does not cover Fabrice P. Tourre, a Goldman employee who played a key role in marketing the security to potential investors, the SEC said a press conference.
The settlement must still be approved by Judge Barbara S. Jones of federal district court in Manhattan.
Goldman’s stock price climbed more than $5 in the last half-hour of trading after the SEC said its director of enforcement, Robert Khuzami, would hold a news conference late Thursday afternoon.
“Half a billion dollars is the largest penalty ever assessed against a financial services firm in the history of the SEC,” Mr. Khuzami said in a statement. “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 focus of the SEC case, an investment vehicle called Abacus 2007-AC1, was one of 25 such vehicles that Goldman created so the bank and some of its clients could bet against the housing market. Those deals initially protected Goldman from losses when the mortgage market disintegrated and later yielded profits for the bank.
As the Abacus portfolios in the SEC case plunged in value, a prominent hedge fund manager made money from his bets against certain mortgage bonds, while investors lost more than $1 billion.
According to the complaint, Goldman created Abacus 2007-AC1 in February 2007 at the request of John A. Paulson, a prominent hedge fund manager who earned an estimated $3.7 billion in 2007 by correctly wagering that the housing bubble would burst. Mr. Paulson is not named in the suit.
Goldman told investors that the bonds would be chosen by an independent manager. In the case of Abacus 2007-AC1, however, Goldman let Mr. Paulson select mortgage bonds that he believed were most likely to lose value, according to the complaint.
Goldman then sold the package to investors like foreign banks, pension funds and insurance companies, which would profit only if the bonds gained value. The European banks IKB and ABN Amro and other investors lost more than $1 billion in the deal, the commission said.