The agency alleged that Goldman failed to disclose key information about an investment product that had been designed with input from a client with a "short" position – a bet that the investment would go down in value.
By settling the case, Goldman lifts a cloud of uncertainty that had hung over the investment bank since April. Its share price rose sharply as news of the settlement emerged Thursday.
But the broader meaning may not be so reassuring for Wall Street. The SEC won a lot money, plus other concessions, from the largest and most powerful investment bank in a case that some securities experts thought was weak. In the process, Goldman saw its image tarnished by negative press reports and a congressional inquiry into the firm's behavior toward clients.
Most important, the case is just the opening salvo in what the SEC intends to be a broader campaign against alleged abuses on Wall Street. The settlement may help Goldman by showing some conciliation to regulatory authorities, but it doesn't mean the firm or others on Wall Street won't face further lawsuits in coming months.
At the very least, the case is helping to usher in an era when Wall Street firms will be more zealous to see that their staffs are schooled in legal and media-relations issues as well as the art of dealmaking.
"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, director of the SEC's enforcement division, in a statement as the news was announced.
Goldman shares rose 4.4 percent during formal trading Thursday and continued to rise in after-hours trading (up another 5 percent as of 5:40 p.m.)
The deal at issue was a so-called synthetic collateralized debt obligation (CDO), in which one group of investors would gain if the portfolio of underlying mortgage debts did well, and other investors would gain if that pool went down in value.
In the settlement, Goldman acknowledged marketing materials for the so-called Abacus 2007-ACI deal "contained incomplete information. 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 SEC touted that admission as a victory. But in its statement, Goldman emphasized that it "entered into the settlement without admitting or denying the SEC’s allegations."
Of the $550 million settlement, $250 million would be returned to harmed investors and $300 million paid to the US Treasury.
In the settlement, the SEC said it took into account that Goldman is conducting a comprehensive, firm-wide review of its business standards.
The settlement is subject to approval by a US judge in the Southern District of New York.