Goldman Settles Paulson CDO Charges For $550 Million

Jul 15 2010 | 4:58pm ET

Goldman Sachs will pay $550 million to settle charges that it misled investors in a collateralized debt obligation it allegedly structured and marketed on behalf of hedge fund Paulson & Co.

The Wall Street giant will pay $300 million in fines, with the remaining $250 million going to investors who lost almost $1 billion on the CDO, called ABACUS-AC1-2007. The figure is substantially less than the $1 billion or more that Goldman was reportedly willing to pay to settle the allegations. Still, it is the largest penalty ever assessed against a financial services firm, according to the SEC.

The bank found itself in hot water over its alleged failure to disclose Paulson’s role in selecting the securities that went into the CDO, or that the hedge fund would short the CDO through credit default swaps it bought from Goldman. The SEC filed its fraud charges against Goldman in April.

Paulson has not been accused of any wrongdoing.

Goldman did not admit any wrongdoing in the case. But the firm did admit that its marketing materials for the CDO “contained incomplete information.”

“Goldman acknowledges that the marketing materials for the ABACUS 2007-AC1 transaction contained incomplete information,” the bank said in settlement papers submitted to federal court in New York. “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.”

The settlement still requires approval by U.S. District Judge Barbara Jones. It does not cover Goldman’s Fabrice Tourre, the vice president who structured and marketed the CDO. Tourre is on indefinite paid leave from the firm.

Contrary to reports earlier this week, the settlement covers only the ABACUS allegations. The SEC is currently probing three other Goldman CDO deals, and the settlement does not end the regulator’s investigations of Goldman’s mortgage department, as The Wall Street Journal reported the bank proposed.

“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 of enforcement at the SEC, said.

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