Speech by SEC Staff:
Remarks at News Conference Announcing Landmark $550 Million Goldman Sachs Settlement
Robert Khuzami and Lorin Reisner
Division of Enforcement
U.S. Securities and Exchange Commission
July 15, 2010
Good afternoon. I'm Rob Khuzami, Director of the Division of Enforcement at the SEC.
I'm joined today by Lorin Reisner, Deputy Director of Enforcement, and by the SEC staff responsible for the Goldman Sachs case, who I will introduce shortly.
Today we are announcing that Goldman Sachs has agreed to pay more than half a billion dollars to settle charges that it misled investors in the Abacus synthetic CDO transaction.
The more than half billion dollars is the largest penalty ever assessed against any investment bank or other Wall Street firm in the history of the SEC.
We also insisted that as part of the settlement, Goldman publicly acknowledge the fundamental basis of our allegations. And that is what they did.
They acknowledge that their marketing materials for the ABACUS CDO contained incomplete information, and that they failed to disclose both Paulson & Company's role in the portfolio selection process, and that Paulson's economic interests were adverse to CDO investors.
The settlement also contains forward-looking reforms. Goldman has agreed to tighten internal controls and assess the roles and responsibilities of Goldman personnel and others to insure that disclosures in future offerings of mortgage and CDO products are full and accurate.
In agreeing to the settlement, we also took into account that Goldman is engaging in a broad-based self-assessment of their overall business practices that will increase transparency, evaluate and remediate conflicts, and take other steps that collectively will reduce the chances that investors in the future will be misled.
This resolution achieves the goals of accountability, punishment for past misconduct and prospective reforms that are the hallmark of a successful outcome.
Today's settlement is a stark reminder that there will be a heavy price to be paid if firms violate the principles fundamental to our securities laws - full disclosure, honest treatment and fair dealing - and those principles do not change, even if the product is complex or the investor sophisticated.
For that reason, today's settlement sends a powerful message of deterrence and accountability.
Let me now turn this over to Deputy Director Lorin Reisner, who will discuss the details of the settlement.
Let me outline the terms of the settlement.
Goldman is consenting to the entry of a permanent injunction prohibiting it from violating the anti-fraud provisions of the Securities Act of 1933.
Goldman is paying $15 million in disgorgement and a penalty of $535 million. As Rob said, this record-setting penalty reflects the egregiousness of Goldman's misconduct and should serve as a powerful deterrent to others on Wall Street and elsewhere who consider engaging in deceptive conduct.
Approximately half of the money - $250M - will be used to compensate investors. The balance - $300M - will go to the United States Treasury.
Goldman also is acknowledging that its marketing materials were deficient and failed to disclose material information.
As you may recall, in our April complaint, the SEC alleged that Goldman's marketing materials represented that an independent third party, named ACA Management, "selected" the portfolio of residential mortgage back securities underlying the CDO.
Undisclosed in the marketing materials was that the Paulson & Co. Inc. hedge fund played a significant role in the portfolio selection and had an economic incentive to choose what it viewed as the poorest-quality mortgage securities.
Marketing materials provided to CDO investors were misleading because they revealed none of this information. As a result, investors in the CDO lost the full amount of their investment, and Paulson's opposite CDS positions gained in the same amount.
Today, Goldman Sachs expressly acknowledged that its marketing materials "contained incomplete information" by representing that the portfolio was "selected by" ACA without disclosing Paulson's role in the portfolio selection process and that its economic interests were adverse to investors.
Goldman also has agreed to reform its business practices as they relate to the sale of financial products like ABACUS and other mortgage-related securities.
Goldman also has agreed to cooperate with the SEC in connection with ongoing litigation, including the case filed against Fabrice Tourre. There is no settlement with Mr. Tourre and we are proceeding with that case.
In closing, let me state that the settlement as it now stands is between Goldman and the SEC. To be finalized and have the force of law it must be approved by the court.
I'll turn the podium back over to Rob.
This is the first case brought by the Structured and New Products Unit, which will specialize in bringing cases involving these types of complex financial instruments.
The attorneys who investigated the case are here as well. They are, from my right to left: David Gottesman, Rick Simpson, Jeff Leasure, Cree Kelly, Lorin Reisner, Ken Lench, Reid Muoio, Jason Anthony, Mellissa Lamb and Jeff Tao.
It is perhaps the highest honor of this job to be able to stand up and speak on behalf of persons as talented and dedicated as these.
I'd be happy to take some questions.