Goldman pays $550m in fraud settlement

16th Jul 2010 07:39

Goldman Sachs has been slapped with a massive $550m fine, the biggest ever imposed by US regulators, for misleading investors in the marketing of a product based on sub-prime mortgages.The Securities and Exchange Commission (SEC) found the bank guilty of "half truths and deception" that resulted in big losses for clients."Half a billion dollars is the largest penalty ever assessed against a financial services firm in the history of the SEC," said Robert Khuzami, director of the SEC's division of enforcement. "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," he added.Although Goldman accepted the settlement and agreed to make changes to its business methods, it stopped short of admitting wrongdoing. It said the fine was "the right outcome for our firm, our shareholders and our clients," and added it did not expect any further charges related to mortgage back products. Despite the record fine, critics argue the bank got away lightly. Many had thought the Wall Street colossus would be hit with a penalty nearer $1bn.The charges relate to dealings in 2007 by Goldman trader Fabrice Tourre, who the SEC accused of encouraging investors to buy a package of securitised sub-prime mortgages called Abacus 2007-AC1. But investors weren't told that the mortgages had been picked by US hedge fund Paulson, a partner of the bank, or that they had been chosen because they were likely to default. When they did default, Paulson made a $1bn profit because it had bet on the value of the mortgages falling. Those who'd bought the product, a synthetic collateralised debt obligation (CDO), made losses of a similar size, including Britain's Royal Bank of Scotland which became caught up when it bought Dutch firm ABN Amro in 2008.It will get $100m compensation after losing about $841m, but is considering launching a civil suit against Goldman to recoup the rest."RBS has been monitoring the complaint closely," it said Friday. "Following the SEC's announcement, RBS will now carefully consider all of its options."Paulson has escaped censure, while Tourre denies he did anything wrong and has not settled his case with the SEC.