World Business

Goldman to pay $550m to settle civil fraud charges

(Agencies)
Updated: 2010-07-16 09:54

Robert Khuzami, the SEC's enforcement director, called the settlement 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 SEC's wide-ranging investigation of Wall Street firms' mortgage securities dealings in the years running up to the financial crisis goes on, Khuzami said.

"We are looking at deals across a wide variety of institutions and a wide variety of circumstances," he said.

Though the fine won't make much of a dent in Goldman's finances, the settlement will have sweeping legal implications for future securities fraud cases, said John Coffee, a securities law professor at Columbia University.

"Even if the penalty was lower than the market expected, the fact that Goldman admitted that it made misleading and incomplete disclosures to its clients vindicates the SEC's legal theory for the future," Coffee said. "You have to understand that the defendant almost never makes such a concession in SEC settlements."

The settlement is subject to approval by a federal judge in New York's Southern District.

The SEC said its case continues against Fabrice Tourre, a Goldman vice president accused of shepherding the deal.

Tourre is still employed by Goldman and remains on paid administrative leave, according to a person familiar with his status who wasn't authorized to discuss the matter publicly. Goldman is paying Tourre's legal expenses, the source said.

The Justice Department opened a criminal inquiry of Goldman in the spring, following a criminal referral by the SEC, the Associated Press reported in April, citing a knowledgeable person who spoke on condition of anonymity because the inquiry was in a preliminary phase.

Goldman made no mention of a criminal case in its statement Thursday.

Of the $550 million Goldman agreed to pay, $250 million will go to the two big losers in the deal. German bank IKB Deutsche Industriebank AG will get $150 million. Royal Bank of Scotland, which bought ABN AMRO Bank, will receive $100 million.

Goldman will also pay back $15 million in fees it collected for managing the deal. The remaining $535 million is considered a civil penalty.

Paulson was not charged by the SEC.

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The SEC filed the case after a series of embarrassing blunders — most notably its failure to detect the Ponzi scheme run by Bernard Madoff and the alleged fraud by R. Allen Stanford. The Goldman case was a high-profile opportunity for the agency to prove it could be tough on Wall Street.

Jacob Frenkel, a former SEC enforcement attorney, said the SEC met that objective.

"This was a bet-the-agency case," Frenkel said. "They had a lot at stake here, and this did wonders to re-establish a strong enforcement image and presence."

Goldman dodged major risks as well. The company quieted a source of public criticism and can return to focusing on its business.

Goldman's legal troubles may not be over. Despite the settlement, investors who lost money on the transactions could still sue the firm for civil damages, Thomas Ajamie, a Houston-based defense lawyer who specializes in financial fraud cases.

"Nothing stops the investors from filing their own claims," Ajamie said.

The chairman of a Senate panel that interrogated Goldman officials after the SEC filed its charges, applauded the settlement.

"Goldman played fast and loose ... misled its clients, and got called on it today," Sen. Carl Levin, D-Mich., said Thursday. "A key factor in the settlement is that Goldman acknowledges wrongdoing, in addition to paying a fine and changing its practices."