SEC Hits Goldman Sachs With Record $550 Million Fine

In April, my co-bloggers Jill Barclift and andre cummings posted wonderful pieces covering the SEC's decision to file civil charges against Goldman Sachs for securities fraud. For a link to Jill's piece click here. For a link to andre's piece please click here. On Thursday the SEC announced that Goldman Sachs had entered into a settlement agreement to resolve the high profile case linked to the mortgage meltdown. Goldman Sachs has agreed to pay a record $550 million to settle civil fraud charges centering on allegations that Goldman misled clients in complex investments. The SEC alleged that Goldman Sachs sold mortgage-backed securities without telling buyers that the securities were hand-picked by a Goldman Sach's client (Paulson & Co.), who in turn was shorting the same securities or betting that the securities would ultimately fail.

The settlement agreement calls for Goldman Sachs to pay a $535 million fine--the largest in the SEC's history--and $15 million in restitution for fees it collected. Out the total settlement of $550 million, $300 million will go to the government and $250 million will go to two (2) European banks (German bank IKB Deutsche Industriebank AG and Royal Bank of Scotland) who lost money on their investments with Goldman. IKB Deutsche Industriebank will recieve $150 million, while Royal Bank of Scotland is set to receive $100 million. Goldman admitted to no legal liability.

Goldman Sachs had a net income of $12.2 billion in 2009. The $550 million settlement with the SEC represents less than 5 % of Goldman's net income after payment of dividends to preferred shareholders--or little more than two weeks of net income. You could say this is a drop in the bucket. Goldman's settlement with the SEC was pleasing to investors. Goldman stock rose in after-hours trading as rumors of the settlement began to whirl shortly before the stock market's close on Thursday.

The Goldman Sachs settlement will leave deep ripples. As John Coffee, a noted securities law professor at Columbia University Law School noted: "Even if the penalty was lower than the market expected, the fact that Goldman admitted that it made misleading and incomplete disclosures to its clients vindicates the SEC's legal theory for the future...You have to understand that the defendant almost never makes such a concession in SEC settlements." Jacob Frenkel, a former SEC enforcement attorney noted: "This was a bet-the-agency case...They [the SEC] had a lot at stake here, and this did wonders to reestablish a strong enforcement image and presence."

At this time, Goldman Sach's settlement will allow the firm to move on and deflect growing public criticism. However, investors damaged by Goldman Sach's alleged misdeeds will almost certainly file civil lawsuits against Goldman Sachs in the coming weeks and months. A federal judge must still approve this proposed settlement before it is finalized. We shall see.