Goldman Sachs Settles With SEC For Mere $550 Million, Shares Rise

The SEC once again proved that it cannot complete a large case against a major company. In a settlement that looks like those that it made with Bank of America (NYSE: BAC) over disclosures connected to its purchase of Merrill Lynch and a number of firms accused of backdating stock options to increase executive compensation, the agency went the route of a relatively modest penalty. That is all the $550 million represents to Goldman Sachs Inc. (NYSE: GS).

The Securities and Exchange Commission today announced that Goldman Sachs will pay the fine and reform its business practices to settle SEC charges that it misled investors in a subprime mortgage product just as the U.S. housing market was starting to collapse.

In agreeing to the SEC’s largest-ever penalty paid by a Wall Street firm, Goldman also acknowledged that its marketing materials for the subprime product contained incomplete information.In its April 16 complaint, the SEC alleged that Goldman misstated and omitted key facts of a synthetic collateralized debt obligation (CDO) it marketed that hinged on the performance of subprime residential mortgage-backed securities. Goldman failed to disclose to investors vital information about the CDO, known as ABACUS 2007-AC1, particularly the role that hedge fund Paulson & Co. Inc. played in the portfolio selection process and the fact that Paulson had taken a short position against the CDO.

In settlement papers submitted to the U.S. District Court for the Southern District of New York, Goldman made the following acknowledgement:

Goldman acknowledges that the marketing materials for the ABACUS 2007-AC1 transaction contained incomplete information. In particular, 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 and that Paulson’s economic interests were adverse to CDO investors. Goldman regrets that the marketing materials did not contain that disclosure.