“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, Director SEC Enforcement, speaking in Washington DC, Thursday, July 15, 2010.

US investment bank Goldman Sachs has agreed to pay a $550m fine for "half-truths and deception," in marketing financial products during the period prior to the financial crisis in 2007. Meanwhile, litigation continues against French employee, Fabrice Tourre, a vice president at Goldman, continues.

The US Securities and Exchange Commission (SEC) on Thursday announced that Goldman, Sachs will pay $550m and reform its business practices to settle SEC charges that Goldman misled investors in a subprime mortgage product just as the US housing market was starting to collapse.

In agreeing to the SEC's largest-ever penalty paid by a Wall Street firm, Goldman also acknowledged that its marketing materials for the subprime product contained incomplete information. The investment banking giant made profits of $13.39bn in 2009. “Goldman played fast and loose in the Abacus deal, misled its clients, and got called on it today,” said Senator Carl Levin, a Democrat from Michigan, who led a separate Congressional investigation that examined the Abacus deal.  “A key factor in the settlement is that Goldman acknowledges wrongdoing, in addition to paying a fine and changing its practices,” Levin said in a written statement. “I hope the Goldman settlement together with the new financial reform law - - which prohibits additional unethical practices and conflicts of interest - - signal an end to the abusive practices that contributed to the 2008 financial crisis and the beginning of needed Wall Street reforms.”

In its April 16 complaint, the SEC alleged that Goldman misstated and omitted key facts regarding a synthetic collateralized debt obligation (CDO) it marketed that hinged on the performance of subprime residential mortgage-backed securities. Goldman failed to disclose to investors vital information about the CDO, known as ABACUS 2007-AC1, particularly the role that hedge fund Paulson & Co. Inc. played in the portfolio selection process and the fact that Paulson had taken a short position (betting against it falling in value) against the CDO.

In settlement papers submitted to the US District Court for the Southern District of New York, Goldman made the following acknowledgement:

Goldman acknowledges that the marketing materials for the ABACUS 2007-AC1 transaction contained incomplete information. In particular, it was a mistake for the Goldman marketing materials to state that the reference portfolio was "selected by" ACA Management LLC without disclosing the role of Paulson & Co. Inc. in the portfolio selection process and that Paulson's economic interests were adverse to CDO investors. Goldman regrets that the marketing materials did not contain that disclosure.

"Half a billion dollars is the largest penalty ever assessed against a financial services firm in the history of the SEC," said Robert Khuzami, Director of the SEC's Division of Enforcement. "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."

Lorin L. Reisner, Deputy Director of the SEC's Division of Enforcement, added, "The unmistakable message of this lawsuit and today's settlement is that half-truths and deception cannot be tolerated and that the integrity of the securities markets depends on all market participants acting with uncompromising adherence to the requirements of truthfulness and honesty."

Discussing the SEC's landmark case against Goldman Sachs, with Andrew Ross Sorkin, NY Times; Jim LaCamp, Microportfolio Advisors; Joseph Grundfest, former SEC commissioner and CNBC's Kate Kelly:

Goldman agreed to settle the SEC's charges without admitting or denying the allegations by consenting to the entry of a final judgment that provides for a permanent injunction from violations of the antifraud provisions of the Securities Act of 1933. Of the $550m to be paid by Goldman in the settlement, $250m would be returned to harmed investors through a Fair Fund distribution and $300m would be paid to the US Treasury.

The landmark settlement also 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 settlement also requires additional education and training of Goldman employees in this area of the firm's business. In the settlement, Goldman acknowledged that it is presently conducting a comprehensive, firm-wide review of its business standards, which the SEC has taken into account in connection with the settlement of this matter.

The settlement is subject to approval by the United Sates District Judge for the Southern District of New York.

Thursday's settlement, if approved, resolves the SEC's enforcement action against Goldman related to the ABACUS 2007-AC1 CDO. It does not settle any other past, current or future SEC investigations against the firm. Meanwhile, the SEC's litigation continues against Fabrice Tourre, a vice president at Goldman, who called himself 'Fabulous Fab' in an e-mail to a girl friend about the trash mortgage products he was selling.

The SEC said Goldman agreed to cooperate in the investigation of Tourre, the Goldman trader accused by the SEC of being "principally responsible" for piecing together the bonds and touting them to investors.

Tourre faces a Monday deadline to respond to the allegations by the SEC in its April lawsuit or seek an extension. Tourre, who still works at Goldman but is on paid leave from the London office, plans to file a response Monday.

To use American parlance, Goldman have likely decided already, to throw him under a bus and chump change to them will buy his silence.

SEE: Finfacts article, April 2010: Goldman Sachs and its Trojan Horse CDOs

The Wall Street Journal commented that Goldman walked away with several victories that raise questions about the strength of the SEC's case. The company wasn't forced to sacrifice any top executives, including Chief Executive Lloyd C. Blankfein, as some executives had feared. The changes it agreed to won't weaken its profits or standing as Wall Street's mightiest firm. The record-setting penalty is equivalent to just 14 days of profits at Goldman in the first quarter.

"That is a steal," said Michael Driscoll, a visiting professor at Adelphi University and a senior managing director at firm Bear Stearns Cos. before that firm collapsed in 2007. Analysts had expected Goldman to pay at least $1bn as part of the deal.