The Securities and Exchange Commission reached a record $550 million settlement with investment banking firm Goldman Sachs (GS) over fraud claims linked to subprime mortgage investments.
As part of the settlement, Goldman admitted to not providing complete information on a fund it marketed to its investors and agreed to reform some of its practices.
The SEC sued Goldman in April over claims that it defrauded investors by misstating and leaving out key facts about a financial product tied to subprime mortgages as the housing market was about to tank. The SEC claimed Goldman's actions in the case cause investors $1 billion in losses.
The SEC said the settlement money will be returned to some of those investors.
"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 said Robert Khuzami, Director of the SEC's Division of Enforcement.
Regulators said the deal helped certain investors cash-in on the collapse of the housing market and hedge Goldman from losses due to the struggling market.
The SEC alleged that one of the world's largest hedge funds, Paulson & Co., paid Goldman to structure a transaction in which Paulson & Co. could take short positions against mortgage securities chosen by Paulson & Co. based on a belief that the securities would fall.
The landmark settlement requires remedial action by Goldman in its review and approval of offerings of certain mortgage securities. This includes the role and responsibilities of internal legal counsel, compliance personnel, and outside counsel in the review of written marketing materials for such offerings.
The SEC's case against Goldman Vice President Fabrice Tourre continues and was not part of the settlement. Goldman had denied any wrongdoing in the case, and was scheduled to file a response to the SEC's lawsuit on Monday. A judge still needs to approve the deal.
Goldman Sachs stock surged 5% in afternoon trading in anticipation of the settlement.
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