naked capitalism

SEC enforcement chief Robert Khuzami is set to announce a settlement with Goldman at 4:45 PM today. Goldman shares rallied more than $5 on the news.

A leak at the New York Times:

Goldman Sachs has agreed to pay $550 million to the Securities and Exchange Commission to settle charges of securities fraud linked to mortgage investments sold to investors, a person briefed on the matter told The New York Times’s Edward Wyatt.

Under the terms of the deal, Goldman will pay $300 million in fines to the S.E.C., with the rest serving as restitution, this person said. Goldman will not admit wrongdoing

Yves here. Goldman was seeking a global settlement, that is, to extinguish not simply the current suit on Goldman’s 2007 Abacus trade that is now the subject litigation, but current and potential future investigations.

The increase in Goldman’s market cap thanks to the announcement was roughly $3 billion. This already looks like a very good trade for Goldman. If the settlement was any broader than Abacus, (does “charges” mean filed lawsuits, or any potential action in this space?) this was a stunningly attractive deal for Goldman. The SEC will have been rolled.

Update 4:45 Details at the SEC website. This settlement is not bad, much better than I thought.

Per press release and consent decree (and note the NY Times was wrong in details):

Disgorgement of $15 million
Civil penalty of $535 million
Goldman admits making a “mistake” in the marketing materials
Goldman agrees to “reform its business practices”

The fine is VERY hefty relative to the size of the deal, roughly $1 billion and was higher than most anticipated for a settlement on this transaction. The SEC will distribute some proceeds from the penalty to investors, presumably ACA and IKB. Note also that any payment that to IKB and ACA via the SEC cannot be used by Goldman to reduce any claims against them via separate litigation:

To preserve the deterrent effect of the civil penalty, Defendant agrees that it shall not, after offset or reduction of any award of compensatory damages in any Related Investor Action based on Defendant’s payment of disgorgement in this action, argue that it is entitled to, nor shall it further benefit by, offset or reduction of such compensatory damages award by the amount of any part of Defendant’s payment of a civil penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such a Penalty Offset, Defendant agrees that it shall, within 30 days after entry of a final order granting the Penalty Offset, notify the Commission’s counsel in this action and pay the amount of the Penalty Offset to the United States Treasury or to a Fair Fund, as the Commission directs.

Yves here. IKB is suing Goldman separately, so this preserves the the civil fines independent of any damages that IKB wins separately. I’m not certain how standard this is, but this is a meaningful concession.

The SEC has also imposed a much more thorough review process on Goldman for residential mortgaged backed securities offerings, including CDOs, including a review by the legal department of all marketing materials. Outside counsel will review marketing materials, term sheets, and offering documents on any Goldman led deal. Review of final deal docs is likely part of current procedures, review of marketing materials and term sheets probably not. This may sound like a mere formality, but the practical effect is that Goldman would find it very hard to engage in a “rogue employee” or “whoops, that sort of detail didn’t rise to the scrutiny of the big dogs” defense.

This settlement is clearly limited to the 2007 Abacus deal and is much tougher than I expected. All in all, not bad. Tourre does not appear to be included; the consent decree has only Goldman as a signatory.

This is a climbdown for Goldman and Blankfein, who said the SEC charges were baseless and had no merit. Goldman has now admitted “a mistake” which is a formulaic way of admitting bad behavior while dodging liability. I wonder how much longer Blankfein will be at the helm.

Update 5:50 PM. Whoops, this is a defacto global settlement, despite the consent decree not saying so. Per Goldman’s announcement:

We understand that the SEC staff also has completed a review of a number of other Goldman Sachs mortgage-related CDO transactions and does not anticipate recommending any claims against Goldman Sachs or any of its employees with respect to those transactions based on the materials it has reviewed. We recognize that, as is always the case, the SEC has reserved the right to reopen those matters based on new information.

Yves here. So while the SEC consent is not LEGALLY a global settlement, for all practical purposes, it appears it is. I was hopeful that the exclusion of Tourre meant the SEC might move forward. I should have realized the dollar amounts attached (over $300 million) meant it was broader than the language of the consent decree suggested.

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