The U.S. Securities and Exchange Commission has reached a settlement with Goldman, Sachs & Co. over allegations that it misled investors in a synthetic collateralized debt obligation it created.

As part of the deal, Goldman will pay US$550 million and pledges to reform its business practices. The SEC alleged that the firm failed to disclose to investors vital information about the CDO it sold to investors, 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 against the CDO.

Goldman agreed to settle the SEC’s charges without admitting or denying the allegations. It consented to the entry of a permanent injunction from violations of securities laws, and a US$550 million penalty, comprised of YS$250 million in restitution to harmed investors, and US$300 million that will be paid to the U.S. Treasury. The settlement, which is subject to court approval, also requires remedial action by Goldman in its review and approval of offerings of certain mortgage securities, and it requires additional education and training of Goldman employees.

“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.”

The SEC’s litigation continues against Fabrice Tourre, a vice president at Goldman, who was named in the original complaint.

IE