The Securities and Exchange Commission (SEC) said Thursday that Goldman Sachs agreed to pay $550 million and reform its business practices to settle charges that the securities firm misled investors in marketing a synthetic CDO known as ABACUS 2007-AC1.
It is the largest-ever penalty paid by a Wall Street firm to the SEC.
As part of the agreement, Goldman acknowledged that its marketing materials for the said CDO contained incomplete information.
In its April 16 complaint, the SEC alleged that Goldman misstated and omitted key facts regarding ABACUS that hinged on the performance of subprime RMBS.
It said Goldman failed to disclose to investors vital information about the CDO, particularly the role that hedge fund Paulson & Co. 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 said that it "acknowledges that the marketing materials for the ABACUS 2007-AC1 transaction contained incomplete information."
Specifically, Goldman said it was a mistake for the marketing materials to state that the reference portfolio was selected by ACA Management without disclosing Paulson's role in the portfolio selection process. It was also a mistake not to say that Paulson's economic interests were adverse to CDO investors.
Of the $550 million to be paid by Goldman in the settlement, $250 million would be returned to harmed investors and $300 million would be paid to the U.S. Treasury.
The SEC said the settlement also requires remedial action by Goldman in its review and approval of offerings of certain MBS.
This includes the role and responsibilities of internal legal counsel, compliance personnel, and outside counsel in the review of written marketing materials for such offerings.
The settlement also requires additional education and training of Goldman employees in this area of the firm's business.
In the settlement, Goldman acknowledged that it is presently conducting a comprehensive, firm-wide review of its business standards, which the SEC has taken into account in connection with the settlement of this matter.
The settlement is subject to approval by the court