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Goldman Sachs to pay $550 million to settle investment fraud charges

WASHINGTON — Goldman Sachs & Co. has agreed to pay $550 million to settle civil fraud charges that accused the Wall Street giant of misleading buyers of mortgage-related investments.

The deal calls for Goldman to pay the Securities and Exchange Commission fines totaling $300 million. The rest of the money will go to compensate those who lost money on their investments. The fine was the largest against a financial company in SEC history.

The settlement involves charges that Goldman sold mortgage investments without telling buyers that the securities were crafted with input from a client that was betting on them to fail.

The securities cost investors close to $1 billion while helping Goldman client Paulson & Co. capitalize on the housing bust, the SEC said in the charges filed on April 16. It was the most significant legal action related to the mortgage meltdown that pushed the country into recession.

Goldman acknowledged that its marketing materials for the deal at the center of the charges omitted key information for buyers, but it did not admit legal wrongdoing.

In a statement, the firm acknowledged that "it was a mistake" for the marketing materials to leave out that a Goldman client helped craft the portfolio and that the client's financial interests ran counter to those of investors.

"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," said Robert Khuzami, the SEC's enforcement director.

The settlement is subject to approval by a federal judge in New York's Southern District.

The Justice Department opened a criminal investigation of Goldman over the transactions in the spring, following a criminal referral by the SEC. Executives of the firm were grilled and publicly rebuked by senators at a politically charged hearing.

Of the $550 million Goldman will pay, $250 million will go to the two big losers in the deal. German bank IKB Deutsche Industriebank AG will get $150 million, and Royal Bank of Scotland, which bought ABN AMRO Bank, will receive $100 million.

Goldman's legal troubles may not be over. Despite the settlement, investors who lost money on the transactions could still sue Goldman for civil damages, said Thomas Ajamie, a Houston-based defense lawyer who specializes in financial fraud cases.

"Nothing stops the investors from filing their own claims," Ajamie said.

Chase earns $4.8B

JPMorgan Chase & Co. said Thursday its second-quarter net income soared 77 percent to $4.8 billion as a slowdown in losses from failed loans helped offset a difficult spring in trading and investment banking. Chase earned $1.09 a share, up 28 cents a share from a year earlier. Net revenue, however, fell nearly 8 percent from a year ago to $25.6 billion. The bank set aside $3.36 billion to cover bad loans, down 65 percent from a year ago and 52 percent from the first quarter. The improvements mean the bank is seeing fewer delinquencies in its lending business. JPMorgan's drop in loan loss reserving is encouraging. The banking industry has struggled over the past two years to work through billions in bad loans made before the financial crisis. Until that happens, banks' capital will remain constrained and they won't be able to open the credit spigot and help grow the economy.

Settlement perspective

ProPublica.org did a little math on Goldman's settlement:

• It's less then a tenth of the gain Goldman's stock had Thursday. The firm's stock added back $6.7 billion to its market cap as news of the settlement circulated.

• It's about two weeks' worth of profit. Goldman reported earning $3.46 billion in the first quarter of 2010. That's about $270 million in profit per week.

Goldman Sachs to pay $550 million to settle investment fraud charges 07/15/10 [Last modified: Thursday, July 15, 2010 9:39pm]
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