World Business

Goldman to pay $550m to settle civil fraud charges

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

Flags fly outside of the Goldman Sachs headquarters building in the financial district of New York May 8, 2009. [Agencies]

WASHINGTON – Goldman Sachs & Co has agreed to pay $550 million to settle civil fraud charges that the Wall Street giant misled buyers of mortgage-related investments.

The settlement was announced Thursday by the Securities and Exchange Commission (SEC) hours after the US Congress gave final approval to the stiffest restrictions on banks and Wall Street since the Great Depression.

The deal calls for Goldman to pay the SEC fines of $300 million. The rest of the money will go to compensate those who lost money on their investments.

The penalty was the largest against a Wall Street firm in SEC history. But the settlement amounts to less than 5 percent of Goldman's 2009 net income of $12.2 billion after payment of dividends to preferred shareholders — or a little more than two weeks of net income.

Word that Goldman had settled began leaking about a half hour before stock markets closed and appeared to please investors. Goldman had been trading at about $140 a share. The stock rose to close at $145.22, up $6.16, and shot up to $153.60 in after-hours trading.

The settlement involves charges that Goldman sold mortgage investments without telling buyers that the securities had been crafted with input from a client that was betting on them to fail.

The securities cost investors close to $1 billion while helping Goldman client Paulson & Co capitalize on the housing bust, the SEC said in the charges filed April 16.

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The charges were the most significant legal action related to the mortgage meltdown that pushed the country into recession. They dealt a blow to the reputation of a Wall Street giant that had emerged relatively unscathed from the financial crisis.

Goldman acknowledged Thursday that its marketing materials for the deal at the center of the charges omitted key information for buyers.

But the firm did not admit legal wrongdoing.

In a statement, Goldman said "it was a mistake" for the marketing materials to leave out that a Goldman client helped craft the portfolio and that the client's financial interests ran counter to those of investors.

"We believe that this settlement is the right outcome for our firm, our shareholders and our clients," the firm's statement said.