SEC, Goldman reach fraud charges deal

The U.S. Securities and Exchange Commission announced a settlement Thursday with Wall Street investment bank Goldman Sachs over civil fraud charges.

The settlement calls for Goldman to pay a fine of $550 million US, the largest penalty ever paid by a Wall Street firm. It must still be approved by the courts.

Goldman will pay $300 million to the Treasury Department and the rest will go to investors in the mortgage-linked security that prompted the SEC charges.

Goldman did not admit wrongdoing but said its marketing materials for the investment "contained incomplete information."

Goldman shares rose in after-hours trading, gaining $7.58, or 5.2 per cent, to $152.80 US.

"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," Robert Khuzami, the SEC's director of enforcement, said in a statement.

The commission said it is continuing with separate civil fraud charges against Fabrice Tourre, a Goldman vice-president.

Charges announced in April

The SEC announced April 16 it had charged the bank with civil fraud.

It accused Goldman of defrauding investors in its disclosures about securities it sold tied to subprime mortgage securities as the housing market was faltering in 2007.

The SEC said the investment bank failed to disclose that one of its clients, the giant hedge fund Paulson & Co., helped Goldman Sachs create — and then bet against — subprime mortgage securities that Goldman sold to other investors.

Two European banks that bought the mortgage securities lost nearly $1 billion.

The SEC charged that Paulson paid Goldman $15 million US in 2007 to create the portfolio that was tied to mortgage-related securities that the hedge fund viewed as likely to decline in value.

Separately, Paulson took out a form of insurance that allowed it to make a huge profit when those securities became nearly worthless.

The settlement also required Goldman to improve how its reviews and approves offerings of mortgage-based securities with securities regulations over those investments.