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Goldman agrees to settle fraud case with SEC, will pay $550 million

July 15, 2010 |  1:40 pm

The Securities and Exchange Commission said Thursday it reached a settlement with Goldman Sachs Group in the landmark fraud case the agency brought against the banking titan over the sale of mortgage-related securities.

Under terms of the deal, Goldman will pay $550 million, which the SEC says is the largest-ever penalty paid by a Wall Street firm. The total amounts to about 4% of Goldman's net profit last year.

As usual in these settlements, Goldman won't admit or deny guilt. But the firm will acknowledge that its marketing materials for the securities it sold contained "incomplete information," the SEC said.

The agency is planning a news conference at 1:45 p.m. PDT.

Goldman shares jumped $6.16 to $145.22 in the final half hour of trading as the rumor of a settlement spread. The broader market also got a lift, with the Dow industrials closing off fractionally after being down about 95 points.

The SEC sued Goldman in April, alleging that the Wall Street titan duped investors in toxic mortgage securities by failing to give them the entire story about a deal the bank was selling -- and who really stood to benefit. The investors ultimately lost more than $1 billion on the securities Goldman sold as the mortgage market crashed, the SEC said.

The SEC alleged that Paulson & Co., one of the world's biggest hedge funds, paid Goldman $15 million in April 2007 to structure a so-called collateralized debt obligation, or CDO, that Paulson could then bet against via the use of credit default swaps.

The agency said that Goldman had "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."

Paulson, led by former Bear Stearns banker John Paulson (no relation to former Goldman CEO and ex- Treasury Secretary Henry M. Paulson), was one of the biggest beneficiaries of the housing meltdown because the firm saw early on that the market was headed for collapse, and figured out ways to profit from that catastrophe.

“This settlement is 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,” said Robert Khuzami, head of the SEC’s enforcement division.

Rumors of a Goldman deal with the SEC had grown louder in recent days.

Of the $550 million the firm will pay, $250 million will go to harmed investors and $300 million will go to the Treasury. The settlement must be approved by a federal judge.

For Goldman, the penalty is a fraction of its annual earnings. The firm posted a profit of $13.4 billion in 2009.

The SEC said the settlement did not cover Fabrice Tourre, the 31-year-old Goldman banker who assembled the securities sale and the only individual who was charged in the case. The suit against Tourre continues, the agency said.

-- Tom Petruno
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