Goldman Gains After Paying Record $550 Million to Settle SEC Lawsuit

(July 16, 2010) — After Goldman Sachs Group agreed to pay $550 million to settle a civil  fraud suit brought by the Securities and Exchange Commission (SEC), the bank’s shares surged in early trading Friday.

“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 the SEC’s Division of Enforcement, said in a statement. The charges, filed April 16, had pushed the firm’s market value down by more than $25 million at one point.

The suit charged Goldman of deceiving clients by selling mortgage securities that were secretly designed by a hedge-fund firm to cash in on the housing market’s collapse. The settlement may mean the SEC could now divert its attention to other Wall Street firms, such as Morgan Stanley, J.P Morgan Chase, Deutsche Bank, Bank of America and UBS, as Goldman was not the only bank to structure and market risky products as the US housing market was beginning to falter.

“The SEC is continuing to investigate the practices of investment banks and others involved in the securitization of complex financial products tied to the US housing market as it was beginning to show signs of distress,” Kenneth Lench, chief of the SEC’s Structured and New Products Unit, said in a release.

While Goldman acknowledged that marketing materials for its Paulson-constructed collateralized debt obligations (CDOs) were ‘incomplete,’ the bank settled the SEC charges without admitting or denying the allegations. Goldman Sachs agreed in the settlement to “reform its business practices,” the statement said.

Despite the bank ridding itself of the SEC suit, which represented a major risk hanging over the stock, Goldman still faces continued scrutiny and a number of other lawsuits relating to its actions surrounding the financial crisis. For example, the Royal Bank of Scotland said it may seek to recover hundreds and millions of dollars from Goldman in addition to the $100 million it received as part of the $550 million settlement.

Many analysts say the blow to Goldman’s reputation may be even harder to recoup. “Reputation risk is the biggest issue in our view,” Citigroup analyst Keith Horowitz wrote in a note to clients earlier this year, the AP reported.

Earlier this month, Goldman asked a judge to combine 18 shareholder lawsuits it faces.