Securities Law Blog

Goldman, Sachs & Co. will pay $550 million to settle the charges raised in the April 16, 2010 complaint filed by the Securities and Exchange Commission (SEC). The settlement also requires the Wall Street firm to review its business practices related to complex mortgage securities, and the way it educates its employees in that part of its business. The role of Goldman’s internal legal counsel, compliance personnel, and outside counsel is also expected to expand to include the review of written marketing materials for mortgage securities offerings.

According to the SEC complaint, “Goldman misstated and omitted key facts regarding a synthetic collaterized debt obligation (CDO) it marketed that hinged on the performance of subprime mortgage-backed securities.” The CDO, known as ABACUS 2007-AC1, was created by Goldman in 2007 as a vehicle for the bank and some of its clients to bet against the housing market.

Goldman allegedly told investors that the bonds were chosen by independent manger, ACA Management LLC. Instead, the SEC claims that Goldman failed to disclose to investors that hedge fund manager John Paulson of Paulson & Co. Inc. was allowed to select mortgage bonds that he believed were most likely to lose value. Investors lost more than $1 billion in the deal, while Paulson netted an estimated $3.7 billion by betting on the housing bubble to burst, according to the complaint.

In the settlement papers, Goldman stated 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.”

Of the $550 million to be paid by Goldman, $250 would be returned to harmed investors through a Fair Fund distribution and $300 million would be paid to the U.S. Treasury.

The settlement does not include charges against Goldman employee Fabrice P. Tourre, who played a key role in marketing the security to potential investors, according to the SEC.