UPDATE 5-Goldman settles with SEC for $550 mln; shares surge

* Settles fraud charges over CDO transaction

* Goldman to pay $300 mln fines, rest is restitution

* Shares rose more than 9 pct in late, after market trade
(Adds background on lawsuit, detail on settlement, information
about Goldman)

By Rachelle Younglai and Steve Eder

WASHINGTON/NEW YORK, July 15 (BestGrowthStock) – Goldman Sachs
Group Inc (GS.N: ) agreed to pay $550 million to settle civil
fraud charges over how it marketed a subprime mortgage product,
ending months of negotiations that rattled the bank’s clients
and investors.

The U.S. Securities and Exchange Commission said the
penalty was the largest ever for a financial institution, and
leaves the door open for future civil suits. [ID:nN15225672]

But many investors viewed the $550 million settlement as a
slap on the wrist for a bank that earned more than $13 billion
last year.

“They pay $550 million and they get an $800 million pop in
their stock price … they got off easy,” said Kevin Caron, a
market strategist at Stifel, Nicolaus & Co in Florham Park, New

The company’s shares later rose further, bringing the total
gain in Goldman’s market value on Thursday to about $6.6
billion. In the months after the SEC pressed charges on April
16, Goldman’s market value fell by more than $25 billion.

Goldman, which regretted failing to disclose information in
marketing materials, agreed to require two internal committees
to vet complex deals linked to residential mortgages.

It also agreed to run by its legal or compliance department
all marketing materials used in connection with mortgage
securities offerings.

And even if the monetary impact is relatively slight, it
has been a black eye for a bank that takes pride in its
reputation. In some quarters, Goldman has come to epitomize the
sins of Wall Street in general, with a “Rolling Stone” article
last year famously calling it a “great vampire squid wrapped
around the face of humanity.”

The lawsuit forced Goldman executives to go into overdrive
meeting with clients to reassure them about the overall health
of the firm.

Major clients have generally stuck with Goldman, although
some customers with large public profiles have been more
cautious in working with the firm recently. [ID:nN23261598]

And some investors and former employees have speculated
that Goldman Chief Executive Lloyd Blankfein’s days at the helm
could be numbered.

The settlement came just days before Goldman had been due
to issue an answer to the SEC charges and post quarterly

A Goldman Sachs employee stepping outside of the firm’s
downtown Manhattan headquarters for a cigarette Thursday
afternoon said he was “pleasantly surprised that it didn’t drag
on longer,” and added that people inside the firm were relieved
the suit was over.


The settlement only resolves the issue of this transaction
in particular, and Goldman did not admit or deny charges.

It leaves the door open for additional enforcement actions
in other matters by the SEC and further investigation by
federal prosecutors. The Department of Justice could still
pursue criminal charges, although that now looks unlikely.

The SEC said it planned to continue its lawsuit against
Fabrice Tourre, the vice president at Goldman accused of
putting the deal in question together.

After settling with the SEC, Goldman must now fend of
lawsuits from shareholders and other interested parties.
Earlier this month, the bank asked a judge to combine 18
shareholder lawsuits in the wake of the SEC’s charges.

The SEC accused Goldman of creating and marketing a debt
product linked to subprime mortgage bonds without telling
investors that hedge fund Paulson & Co helped choose the
underlying securities and was betting against them.

The transaction in question, known as ABACUS 2007-AC1,
yielded about $1 billion of profit for Paulson, which was not
accused of wrongdoing. But investors on the other side of the
deal — including Germany bank IKB and Royal Bank of Scotland
— lost about $150 million and $840 million, respectively.

Take a Look [ID:nN15235031]

Instant View [ID:nN15237915]

Breakingviews column [ID:nN15239360]

Graphic on case against Goldman Sachs:


Graphic on a year at Goldman (interactive timeline):


Goldman acknowledged in the settlement that its marketing
materials were incomplete, which lawyers said was unusual.

Annemarie McAvoy, a Fordham University School of Law
professor and a former federal prosecutor, said Goldman’s
acknowledgement could expose it to lawsuits.

“There was some language in there that certainly can be
used against them,” McAvoy said. “If there are other suits that
will be brought, that certainly will be mentioned.”

Of the $550 million settlement, $150 million will go to
Germany’s IKB, $100 million to the Royal Bank of Scotland.
(RBS.L: ) and $300 million will go to the U.S. Treasury.

The settlement is subject to approval by a federal judge,
which independent legal experts said was likely.

“I think it will be approved, given that two of the five
SEC commissioners didn’t think the case should have been
brought at all,” said Jonathan Macey, a securities and
corporate law professor at Yale University Law School.

If the judge approves the settlement, it will represent a
victory for SEC enforcement director Robert Khuzami and his
staff. The former federal prosecutor was hand picked by SEC
Chairman Mary Schapiro to help restore the agency’s reputation
after the regulator was humiliated for failing to stop Bernard
Madoff’s $65 billion fraud.

Khuzami shook up the enforcement division by creating
specialized units to ferret out fraud, including a small squad
to scour through structured products like the one in the
Goldman case.


The fact that the commission was split was evidence to many
on Wall Street and even at the SEC itself that the government
had a weak case. The commission was also split on the
settlement, with the Republican commissioners dissenting.

The SEC announced the settlement on the same day a sweeping
Wall Street regulatory reform package — support for which was
boosted in some quarters by the accusations against Goldman —
cleared Congress and headed to President Barack Obama for his
signature. [ID:nN15226910]

Goldman Sachs’ management — initially shocked by the suit
despite early warnings from the SEC — was defiant and refused
to negotiate. But about a month after the charges were filed in
April, top Goldman officials, including Chief Financial Officer
David Viniar, started talking to the SEC.

“At some point they shifted their attitude,” said one
source familiar with the negotiations.

The lawsuit hinged on the narrow issue of whether Goldman
failed to disclose relevant information to a client. Many
competitors on Wall Street viewed the case as unreasonable,
given that the parties allegedly defrauded were supposed to be
sophisticated investors that can evaluate securities for
themselves. But others said that Goldman failed to disclose key
information that investors would want to know.

So far, the financial crisis has not yielded any criminal
prosecutions, either criminal or civil, which has frustrated
some observers.

But civil or criminal fraud charges are hard to win when
transactions are complicated, lawyers said.

“Every time there’s a bubble burst or a majority of traders
make an ill-advised decision doesn’t always mean fraud was at
the root of the problem,” said Glen Donath, a former federal
prosecutor now a partner at Katten Muchin Rosenman LLP in

UPDATE 5-Goldman settles with SEC for $550 mln; shares surge