The Securities & Exchange Commission said Thursday that it has reached a settlement with Goldman Sachs on the civil charges, filed in April, that the Wall Street firm had defrauded investors. The settlement, first reported by Edward Wyatt of the New York Times, was confirmed by the SEC in a late afternoon press conference. According to the terms of the settlement, Goldman will pay $550 million. Of that amount, $300 million will go into the SEC’s pocket and the remainder will go to investors who suffered losses.
The SEC presented the settlement as a win, both for the size of the payment—the largest ever for a Wall Street firm— and that fact that it got Goldman to agree to publicly acknowledge “the fundamental allegations of our complaint,” according to an SEC spokesperson. Goldman did that by agreeing that its marketing materials provided incomplete data and also by acknowledging that it failed to disclose the involvement of the Paulson & Company hedge fund in the selection of securities for the CDO that was sold to investors.
Here is a snippet of the settlement papers that Goldman submitted to the the U.S. District Court for the Southern District of New York:
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.
It’s hard not to see this as a good day for Goldman, which will pay the SEC far less than many experts had imagined. When I first reported on this, the day Goldman was charged, I noted that potential damages, which the SEC said would include injunctive relief, disgorgement of profits, prejudgment interest, and financial penalties, could easily exceed $1 billion because that is the amount investors reportedly lost on the CDO security that was created and marketed by Goldman Sachs. The fact that the settlement came down to a mea culpa plus $550 million—with just $250 million going to the investors—saves a bit of face for the SEC but more importantly lets Goldman’s partners wipe beads of sweat off their brow. That’s not because they saved a few bucks on the settlement, but because they are now spared what could have been an exhaustive discovery process if this case had headed to trial.
One wild card in this settlement is the fact that the SEC will continue to press its case against Fabrice Tourre, a vice president at Goldman who was involved in the creation of the CDO. But Wall Street doesn’t seem too concerned about that. After news of the settlement leaked out, Goldman’s stock shot up more than 10%. After the SEC’s announcement, Sanford Bernstein analyst Brad Hintz told cnbc that his target price for the stock is $200, up about $50 bucks from the Thursday runaway price.