GE PAYING FINES TO SETTLE BRIBERY ALLEGATIONS

Paying bribes to foreign governments is a political argument U.S. politician often make to prove that all U.S. companies are above board and avoid corruption. More cynical people might argue that U.S. politicians are just highly paid PR people for large corporations both foreign and domestic. The following SEC excerpt is about a major U.S. corporation that the SEC alleged to have paid bribes to the Iraqi government:

“Washington, D.C., July 27, 2010 — The Securities and Exchange Commission today charged General Electric Company with violations of the Foreign Corrupt Practices Act (FCPA) for its involvement in a $3.6 million kickback scheme with Iraqi government agencies to win contracts to supply medical equipment and water purification equipment.

The SEC alleges that two GE subsidiaries — along with two other subsidiaries of public companies that have since been acquired by GE — made illegal kickback payments in the form of cash, computer equipment, medical supplies, and services to the Iraqi Health Ministry or the Iraqi Oil Ministry in order to obtain valuable contracts under the U.N. Oil for Food Program.

GE agreed to pay $23.4 million to settle the SEC's charges against the company as well as the two subsidiaries for which GE assumed liability upon acquiring: Ionics Inc. and Amersham plc. The SEC charged GE, Ionics and Amersham with violating the books and records and internal controls provisions of the FCPA. The SEC has now taken 15 FCPA enforcement actions against companies involved in Oil for Food-related kickback schemes with Iraq, recovering more than $204 million.

"Bribes and kickbacks are bad business, period," said Robert Khuzami, Director of the SEC's Division of Enforcement. "This case affirms that law enforcement is active across the globe - offshore does not mean off-limits."

Cheryl J. Scarboro, Chief of the SEC's Foreign Corrupt Practices Act Unit, added, "GE failed to maintain adequate internal controls to detect and prevent these illicit payments by its two subsidiaries to win Oil for Food contracts, and it failed to properly record the true nature of the payments in its accounting records. Furthermore, corporate acquisitions do not provide GE immunity from FCPA enforcement of the other two subsidiaries involved."

According to the SEC's complaint, filed in U.S. District Court for the District of Columbia, the kickback scheme occurred from approximately 2000 to 2003. GE subsidiaries Marquette-Hellige and OEC-Medical Systems (Europa) AG made approximately $2.04 million in kickback payments to the Iraqi government under the Oil for Food Program. Ionics Italba S.r.L. (a then-subsidiary of Ionics) and Nycomed Imaging AS (a then-subsidiary of Amersham) made approximately $1.55 million in cash kickback payments. Since their acquisitions by GE, Amersham and Ionics are now known as GE Healthcare Ltd. and GE Ionics, Inc., respectively.

The SEC alleges that Germany-based Marquette paid or agreed to pay illegal kickbacks in the form of computer equipment, medical supplies, and services on three contracts worth $8.8 million. Through an Iraqi third-party agent, Marquette paid goods and services worth approximately $1.2 million to the Iraqi Health Ministry in order to obtain two of the contracts. The agent offered to make an additional in-kind kickback payment worth approximately $250,000 to obtain the third contract.
The SEC further alleges that Switzerland-based OEC-Medical made an in-kind kickback payment of approximately $870,000 on one contract worth $2.1 million through the same third-party agent who handled the Marquette contracts. OEC-Medical and the agent entered into a fictitious "services provider agreement" identifying phony services the agent would perform in order to justify his increased commission and conceal the illegal kickback from U.N. inspectors.

According to the SEC's complaint, Norway-based Nycomed entered into nine contracts with Iraqi ministries involving the payment of approximately $750,000 in cash kickbacks between 2000 and 2002. As a result, Nycomed earned approximately $5 million in wrongful profits on the contracts. GE acquired Nycomed's parent company — Amersham — in 2004. Italy-based Ionics Italba was a subsidiary of Ionics, Inc., which GE acquired in 2005. Between 2000 and 2002, Ionics Italba paid $795,000 in kickbacks and earned $2.3 million in wrongful profits on five Program contracts to sell water treatment equipment to the Iraqi Oil Ministry. GE acquired its parent company - Ionics Inc., in 2005.

Without admitting or denying the SEC's allegations, GE as well as Ionics (now GE Ionics Inc.) and Amersham (now GE Healthcare Ltd.) have consented to the entry of a court order permanently enjoining them from future violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934. GE is ordered to pay $18,397,949 in disgorgement of profits, $4,080,665 in prejudgment interest, and a penalty of $1 million. GE cooperated with the investigation.

The SEC appreciates the assistance of the U.S. Department of Justice's Fraud Section and the United Nations Independent Inquiry Committee.“

Good job SEC for going after a major U.S. company for bribing a foreign government. We should all hope that the U.S. Department of Justice will be as aggressive in going after companies that bribe U.S. politicians.

SEC FILES CHARGES AGAINS DELL INC. FOR FRAUD

There are so many companies that cook their books to gain the approval of Wall Street. It is perhaps too often that traders and investors alike look to pundits on Wall Street to get information about a company. Some of the problem might be laziness on the part of potential purchasers of a given security. But, I suspect that a lot of the problem for purchases of securities is that the market moves so fast that by the time the real research and analysis is done on a company the company’s stock could have shot up several percent and then taken a nose dive only to shoot back up again. Doing corporate research and background checks is can be used to pick an entry point price to pay for a security but, because of extreme market volatility and the connectivity of our one world economy it is impossible to eliminate the gambling side to Wall Street. If something happens in Indonesia tomorrow it could cause a given company to go bankrupt or make billions. Since most companies are in several different countries keeping track of all the politics and economics in every country a company has ties to may be impossible.

The following is a story released by the SEC regarding Dell Inc. who seemed to consistently meet Wall Street expectations. You might recall the Bernard Madoff story in which he consistently did well for his investors and gave them fantastic returns. The Dell story like the Madoff story is a story of cooking the books so that investors did not panic when they saw that Dell did not meet the expectations of Wall Street gurus. Now Madoff cooked his books strictly to continue getting new investors to keep his Ponzi scheme going. Dell not only wanted to protect itself from investor flight but was also getting kickbacks from Intel to keep Dell from using another company’s CPU. In short, Dell made up for it’s shortfall in earnings from operations by taking bribes from Intel. Please read the excerpt from the SEC web site for details of this somewhat strange story.

“Washington, D.C., July 22, 2010 — The Securities and Exchange Commission today charged Dell Inc. with failing to disclose material information to investors and using fraudulent accounting to make it falsely appear that the company was consistently meeting Wall Street earnings targets and reducing its operating expenses.

The SEC alleges that Dell did not disclose to investors large exclusivity payments the company received from Intel Corporation to not use central processing units (CPUs) manufactured by Intel’s main rival. It was these payments rather than the company’s management and operations that allowed Dell to meet its earnings targets. After Intel cut these payments, Dell again misled investors by not disclosing the true reason behind the company’s decreased profitability.

The SEC charged Dell Chairman and CEO Michael Dell, former CEO Kevin Rollins, and former CFO James Schneider for their roles in the disclosure violations. The SEC charged Schneider, former regional Vice President of Finance Nicholas Dunning, and former Assistant Controller Leslie Jackson for their roles in the improper accounting.

Dell Inc. agreed to pay a $100 million penalty to settle the SEC’s charges. Michael Dell and Rollins each agreed to pay a $4 million penalty, and Schneider agreed to pay $3 million, to settle the SEC’s charges against them. Dunning and Jackson also agreed to settle the SEC’s charges.
“Accuracy and completeness are the touchstones of public company disclosure under the federal securities laws,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Michael Dell and other senior Dell executives fell short of that standard repeatedly over many years, and today they are held accountable.”

Christopher Conte, Associate Director of the SEC’s Division of Enforcement, added, “Dell manipulated its accounting over an extended period to project financial results that the company wished it had achieved, but could not. Dell was only able to meet Wall Street targets consistently during this period by breaking the rules. The financial results that public companies communicate to the investing public must reflect reality.”

The SEC’s complaint, filed in federal district court in Washington, D.C., alleges that Dell Inc., Michael Dell, Rollins, and Schneider misrepresented the basis for the company’s ability to consistently meet or exceed consensus analyst EPS estimates from fiscal year 2002 through fiscal year 2006. Without the Intel payments, Dell would have missed the EPS consensus in every quarter during this period. The SEC’s complaint further alleges that Dell’s most senior former accounting personnel including Schneider, Dunning, and Jackson engaged in improper accounting by maintaining a series of “cookie jar” reserves that it used to cover shortfalls in operating results from FY 2002 to FY 2005. Dell’s fraudulent accounting made it appear that it was consistently meeting Wall Street earnings targets and reducing its operating expenses through the company’s management and operations.

According to the SEC’s complaint, Intel made exclusivity payments to Dell in order for Dell to not use CPUs manufactured by its rival — Advance Micro Devices, Inc. (AMD). These exclusivity payments grew from 10 percent of Dell’s operating income in FY 2003 to 38 percent in FY 2006, and peaked at 76 percent in the first quarter of FY 2007. The SEC alleges that Dell Inc., Michael Dell, Rollins, and Schneider failed to disclose the basis for the company’s sharp drop in its operating results in its second quarter of FY 2007 as Intel cut its payments after Dell announced its intention to begin using AMD CPUs. In dollar terms, the reduction in Intel exclusivity payments was equivalent to 75 percent of the decline in Dell’s operating income. Michael Dell, Rollins, and Schneider had been warned in the past that Intel would cut its funding if Dell added AMD as a vendor. Nevertheless, in Dell’s second quarter FY 2007 earnings call, they told investors that the sharp drop in the company’s operating results was attributable to Dell pricing too aggressively in the face of slowing demand and to component costs declining less than expected.

The SEC’s complaint further alleges that the reserve manipulations allowed Dell to materially misstate its earnings and its operating expenses as a percentage of revenue — an important financial metric that the company itself highlighted — for more than three years. The manipulations also enabled Dell to misstate materially the trend and amount of operating income of its EMEA segment, an important business unit that Dell also highlighted, from the third quarter of FY 2003 through the first quarter of FY 2005.

Without admitting or denying the SEC’s allegations, Dell Inc. consented to the entry of an order that permanently restrains and enjoins it from violation of Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1, and 13a-13. Dell Inc. also agreed to enhance its Disclosure Review Committee and disclosure processes, including the retention of an independent consultant to recommend improvements to those processes and enhance training regarding the disclosure requirements of the federal securities laws.

Michael Dell and Rollins settled the SEC’s disclosure charges, without admitting or denying the SEC’s allegations, by each agreeing to pay the $4 million penalties and consenting to the entry of an order that permanently restrains and enjoins each of them from violating Sections 17(a)(2) and (3) of the Securities Act and from violating or aiding and abetting violations of other provisions of the federal securities laws.

Schneider consented to settle the disclosure and accounting fraud charges against him without admitting or denying the SEC’s allegations, and agreed to pay the $3 million penalty, disgorgement of $83,096, and prejudgment interest of $38,640. Dunning and Jackson consented to settle the SEC’s improper accounting charges without admitting or denying the SEC’s allegations. Dunning agreed to pay a penalty of $50,000. In their settlement offers, Schneider, Dunning and Jackson consented to the issuance of administrative orders pursuant to Rule 102(e) of the Commission’s Rules of Practice, suspending each of them from appearing or practicing before the SEC as an accountant with the right to apply for reinstatement after five years for Schneider and three years for Dunning and Jackson.

The SEC’s investigation is continuing as to other individuals.”

The above might be a very stupid crime on the part of Dell executives. After all, perhaps if they had used the CPU’s of an Intel competitor they might have had more sales, more revenues and more profits in which case, their ability to meet Wall Street expectations would have been met or exceeded. In any case, the fines were quite severe. The one problem I have with fining a company for committing fraud on its stockholders is that the stockholders (victims) end up paying for the crime twice. The first time they pay are when they are defrauded by paying too much for a stock and the second time they also pay by a declining stock price due to decreased profits because of large fines that the SEC levies. To levy fines against the victims seems stupid on the face of it and it is stupid. Congress should find a way to fix this problem but, too many of them became politicians because daddy does not trust them to run the family business.

In full disclosure I own shares in Intel but, I do not own shares in Dell. I do own a Dell computer and I have no complaints about the product or company services.

ACCOUNTANTS CREATE A PONZI SCHEME: MORE BUSINESS AS USUSAL

Thanks to our complex tax and legal system, accounting is one of those few remaining fields in America in which there are still good paying jobs. To become an accountant it takes years of study at an accredited college plus years of on the job training not to mention the tests that must be passed to become a certified public accountant or CPA.

In the following release of information by the SEC two accountants developed a scheme to sell fake securities in a gas pipeline to the public. These investment securities paid a 10% rate of return which of course is generally not available during a recession. On the other hand, many pipelines do pay a dividend in excess of 5% to holders of securities in what are known as Master Limited Partnerships or MLP’s. I currently own a few shares in an MLP that pays about 6.5 %. An MLP is different than a regular company in that the MLP is set up to return much of the revenue to investors rather than to keep most of the revenue for retained earnings for future expansion and sales promotions. There are also differences in how taxes are paid on an MLP for which you must consult an accountant to learn such details.

In the following case the accountants allegedly used a gas pipeline that had not been used for years as the basis of setting up a Ponzi scheme to pay old investors a large dividend based upon selling more securities to new suckers (investors). Please read the following excerpt from the SEC online site if you wish to know the details of this scheme:

“Washington, D.C., July 22, 2010 — The Securities and Exchange Commission today charged two certified public accountants with fraud and is seeking an emergency court order to freeze their assets after they sold phony securities to investors and then stole the money for personal use.
The SEC alleges that Laurence M. Brown and Ronald Mangini, who reside in Westchester County, N.Y., took the name of an inoperative company owned by a client of their accounting firm and sold investors fake promissory notes and common stock in what they purported to be a profitable company operating a gas pipeline in Tennessee. They falsely touted themselves as senior officers of the company, which they proclaimed to have a captive market in its area and a stable minimum rate of production with quality gas that could be sold well above market prices. What Brown and Mangini concealed from investors was that the pipeline had been inoperative for more than a decade. Behind the scenes, Brown and Mangini were instead operating a Ponzi scheme and diverting investor funds into their personal bank accounts and those of family members.

"Brown and Mangini not only deceived investors into making investments in a pipeline that was not producing any gas at all, but they stole the identity of a company owned by a client in order to do it," said George Canellos, Director of the SEC's New York Regional Office. "Brown and Mangini also victimized and betrayed the trust of other accounting clients who invested in their scheme."

According to the SEC's complaint, filed in federal court in Manhattan, Brown and Mangini began selling common stock and promissory notes of a company called Infinity Reserves-Tennessee Inc. as early as April 2008. They peddled the phony securities to clients of their accounting practice and other investors. Without authorization from the client who solely owned Infinity Reserves, Brown and Mangini used the company name to sell the stock and notes. Brown and Mangini falsely represented themselves as senior officers of Infinity Reserves with authority to sell the securities, calling themselves "president" and "secretary-treasurer" respectively. The phony notes promised investors a 10 percent annual return that would be paid semiannually on the principal amount of the investment.

According to the SEC's complaint, Infinity Reserves owns one principal asset — a gas gathering and trunk pipeline system located in Tennessee that it has not operated for more than a decade. The offering document that Brown and Mangini provided investors falsely portrays the investment as interests in an active system with an interconnect into the Duke Energy main east-west trunk line. The offering document falsely explained supposed merits of the investment and made various untrue statements while assuring investors that Infinity Reserves enjoyed a captive market in its area, a stable minimum rate of production, and quality gas that could be sold at a 20 percent premium over market prices. The offering document did not tell investors that the pipeline had been inoperative for years and thus in reality had no market for its gas and no minimum rate of production.

The SEC alleges that Brown and Mangini illegally obtained more than $2.1 million from investors. In classic Ponzi scheme fashion, they returned approximately $136,000 to certain investors in the form of interest payments. At least $1.6 million of investor funds were transferred to personal bank accounts controlled by Brown, Mangini, or family members including Mangini's wife and Browns's wife and daughter. The family members are named as relief defendants in the SEC's complaint for the purposes of recovering investor funds in their possession.

The SEC's complaint charges Brown and Mangini with violations of the anti-fraud provisions of the federal securities laws, Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934, and Exchange Act Rule 10b-5. In addition to the emergency relief, the SEC's complaint seeks permanent injunctions, disgorgement of the defendants' and relief defendants' ill-gotten gains plus prejudgment interest, and financial penalties from the defendants.

In addition to the SEC's charges, the U.S. Attorney's Office for the Southern District of New York today brought criminal charges against Laurence Brown concerning the same illegal activities alleged in the SEC's complaint.

Brown is a repeat securities law offender. In 1994, the SEC charged Brown with, among other things, violations of the antifraud provisions of the federal securities laws in connection with another offering fraud. Brown was enjoined from future violations of those provisions and barred from associating with any broker, dealer, government securities broker or dealer, investment company, investment adviser, or municipal securities dealer.”

I give two thumbs up to the SEC and to the U.S. Attorney’s office for the Southern District of New York. The SEC can only recover stolen money and implement fines but, there are others in government who can make stealing peoples life savings a real crime. But, of course there are many politicians who would disagree with what they call “making a business practice a crime” or “criminalizing business”.

SEC GOES AFTER PENNY STOCK FRAUDSTERS

When stocks are really low priced there is usually a reason for it. Many low priced companies either offer really new products which may not be accepted by the public or, the company could be one that is in bankruptcy or going into bankruptcy. Hence, the stock is selling at a very low price. In many cases this investing in low priced stocks is a bit of a gamble. However, sometimes this gamble can pay off big time as happened recently after the last big stock market meltdown.

One favorite way that many entrepreneurs make millions is to buy up a lot of stock in a really cheap company and then recommend that stock in news letters, on TV business shows or, in this case on Facebook and Twitter (the new technology for fraudsters). The following is an excerpt from the SEC web site regarding the case the Sec has brought against a Canadian couple and the companies they control.

“Washington, D.C., June 29, 2010 — The Securities and Exchange Commission announced today that it has obtained an emergency asset freeze against a Canadian couple who fraudulently touted penny stocks through their website, Facebook and Twitter. The SEC also charged two companies the couple control and obtained an asset freeze against them.
According to the SEC's complaint, the defendants profited by selling penny stocks at or around the same time that they were touting them on www.pennystockchaser.com. The website invites investors to sign up for daily stock alerts through email, text messages, Facebook and Twitter.
Since at least April 2009, Carol McKeown and Daniel F. Ryan, a couple residing in Montreal, Canada, have touted U.S. microcap companies. According to the SEC's complaint, McKeown and Ryan received millions of shares of touted companies through their two corporations, defendants Downshire Capital Inc., and Meadow Vista Financial Corp., as compensation for their touting. McKeown and Ryan sold the shares on the open market while PennyStockChaser simultaneously predicted massive price increases for the issuers, a practice known as "scalping."

"As alleged in our complaint, McKeown and Ryan used all the modern methods to communicate with investors including the PennyStockChaser website, e-mail, text messages, Facebook, and Twitter yet failed to adequately communicate that their rosy predictions for touted stocks were accompanied by their sales of those very same stocks." said Eric I. Bustillo, Director of the SEC's Miami Regional Office.

The SEC's complaint, filed in the U.S. District Court for the Southern District of Florida, also alleges McKeown, Ryan and one of their corporations failed to disclose the full amount of the compensation they received for touting stocks on PennyStockChaser. The SEC alleges that McKeown, Ryan and their corporations have realized at least $2.4 million in sales proceeds from their scalping scheme.

The SEC's complaint charges McKeown, Ryan, Downshire Capital Inc. and Meadow Vista Financial Corp. with violating Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder. The SEC's complaint also charges McKeown, Ryan and Meadow Vista Financial Corp. with violating Section 17(b) of the Securities Act of 1933. In addition to the emergency relief already granted by the U.S. District Court the Commission also seeks a preliminary injunction and permanent injunction, along with disgorgement of ill-gotten gains plus prejudgment interest and the imposition of a financial penalty, penny stock bars against the individuals and the repatriation of assets to the United States.

In the course of its investigation, the SEC worked with the Quebec Autorité des marchés financiers (AMF), which was also investigating this matter. As a result of both ongoing investigations, the AMF obtained an emergency order freezing assets and a cease trade order against McKeown, Ryan, Downshire Capital Inc. and Meadow Vista Financial Corp. The SEC appreciates the collaboration with the AMF.”

The SEC did well in this case. The one lesson that everyone should take away from this case is that when you invest money you must do the research. Nobody is out there to give you completely free advice on where to invest your hard earned dollars. Most real investors do not share with others what they are investing in until they have already completed their purchase. If some large investor announced that he was buying stock in a certain company before he started to buy it then, he would end up paying perhaps twice as much for the stock. On the other hand, many big investors are more than happy to disclose that they have purchased stock in a given company after the fact because then the public jumps in and the big investor’s stocks price increases dramatically and that big investor makes a lot of money in a hurry. The public that jumps in when they find out a big investor has taken a position in a certain company may find their returns to be a big disappointment.

THE SEC STOPS FRAUD IN BEVERLY HILLS

The following article was released by the SEC on January 11, 2010. It is in regards to a fraud scheme in Beverly Hills which targeted the Iranian Americans community.

“Washington, D.C., Jan. 11, 2010 — The Securities and Exchange Commission today announced that it has charged Beverly Hills, Calif.-based NewPoint Financial Services, Inc. and its co-owners and controller for conducting an unregistered offering fraud aimed at Iranian-Americans in the Los Angeles area. The SEC obtained an emergency court order to freeze their assets and preserve remaining funds that were collected from investors.
The SEC’s complaint, filed in U.S. District Court for the Central District of California, alleges that NewPoint, co-owners John Farahi and Gissou Rastegar Farahi, and its controller Elaheh Amouei targeted investors in the Iranian-American community by touting New Point on a daily finance radio program that John Farahi hosts on a Farsi language radio station in the Los Angeles area. The SEC alleges that the Farahis or Amouei would then make appointments with interested listeners to discuss investment opportunities offered by NewPoint, and misled more than 100 investors into purchasing more than $20 million worth of debentures that they falsely told them were low-risk. Many investors also were falsely told that they were investing in FDIC-insured certificates of deposit, government bonds, or corporate bonds issued by companies backed by funds from the Troubled Asset Relief Program (TARP). The SEC alleges that most of the money raised was instead transferred to accounts controlled by the Farahis to, among other things, fund construction of their multi-million dollar personal residence in Beverly Hills.

“They lured victims with false promises of investment safety while secretly enriching themselves and diverting investor funds for their personal use,” said Rosalind R. Tyson, Director of the SEC’s Los Angeles Regional Office.

The SEC’s complaint further alleges that investor funds were used to engage in risky options futures trading in the stock market in which the Farahis lost more than $18 million in 2008 and the beginning of 2009. Since approximately June 2009, John Farahi and Amouei have made further misrepresentations to investors in an effort to lull them into keeping their money with NewPoint, saying that their money is safe and that they are guaranteed to get the entirety of their investment back. According to the SEC’s complaint, NewPoint lacks sufficient funds to make all investors whole, and John Farahi has been paying back some investors on a selective basis while failing to return money to other investors asking for a return of their investment.

The SEC has obtained a court order (1) freezing the assets of NewPoint, the Farahis, and Triple “J”; (2) appointing a temporary receiver over NewPoint and Triple “J”; (3) preventing the destruction of documents; (4) requiring accountings from NewPoint, the Farahis, and Triple “J”; and (5) temporarily enjoining NewPoint, the Farahis, and Amouei from future violations of the registration and antifraud violations of the federal securities laws. The SEC also seeks preliminary and permanent injunctions and civil penalties against the defendants and disgorgement with prejudgment interest against NewPoint, the Farahis, and Triple “J.” A hearing on whether a preliminary injunction should be issued against the defendants and whether a permanent receiver should be appointed is scheduled for Jan. 15, 2010, at 10:00 a.m.”

GOLDMAN SACHS AGREES TO PAY $550 MILLION IN FINES

Considering all the things that Goldman has had it’s fingers into which led to the demise of the U.S. economy this is kind of an obscure case to bring Goldman Sacs up on charges. The way to think of it is that this is like bringing a gangster to justice not for murder but, for tax evasion. The following is an excerpt from the SEC web site which explains the case in some detail.

“Washington, D.C., July 15, 2010 — The Securities and Exchange Commission today announced that Goldman, Sachs & Co. will pay $550 million and reform its business practices to settle SEC charges that Goldman misled investors in a subprime mortgage product just as the U.S. housing market was starting to collapse.

In agreeing to the SEC's largest-ever penalty paid by a Wall Street firm, Goldman also acknowledged that its marketing materials for the subprime product contained incomplete information.

In its April 16 complaint, the SEC alleged that Goldman misstated and omitted key facts regarding a synthetic collateralized debt obligation (CDO) it marketed that hinged on the performance of subprime residential mortgage-backed securities. Goldman failed to disclose to investors vital information about the CDO, known as ABACUS 2007-AC1, particularly the role that hedge fund Paulson & Co. Inc. played in the portfolio selection process and the fact that Paulson had taken a short position against the CDO.

In settlement papers submitted to the U.S. District Court for the Southern District of New York, Goldman made the following acknowledgement:
Goldman acknowledges that the marketing materials for the ABACUS 2007-AC1 transaction 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.
"Half a billion dollars is the largest penalty ever assessed against a financial services firm in the history of the SEC," said Robert Khuzami, Director of the SEC's Division of Enforcement. "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."

Lorin L. Reisner, Deputy Director of the SEC's Division of Enforcement, added, "The unmistakable message of this lawsuit and today's settlement is that half-truths and deception cannot be tolerated and that the integrity of the securities markets depends on all market participants acting with uncompromising adherence to the requirements of truthfulness and honesty."
Goldman agreed to settle the SEC's charges without admitting or denying the allegations by consenting to the entry of a final judgment that provides for a permanent injunction from violations of the antifraud provisions of the Securities Act of 1933. Of the $550 million to be paid by Goldman in the settlement, $250 million would be returned to harmed investors through a Fair Fund distribution and $300 million would be paid to the U.S. Treasury.

The landmark settlement also requires remedial action by Goldman in its review and approval of offerings of certain mortgage securities. This includes the role and responsibilities of internal legal counsel, compliance personnel, and outside counsel in the review of written marketing materials for such offerings. The settlement also requires additional education and training of Goldman employees in this area of the firm's business. In the settlement, Goldman acknowledged that it is presently conducting a comprehensive, firm-wide review of its business standards, which the SEC has taken into account in connection with the settlement of this matter.

The settlement is subject to approval by the Honorable Barbara S. Jones, United Sates District Judge for the Southern District of New York.
Today's settlement, if approved by Judge Jones, resolves the SEC's enforcement action against Goldman related to the ABACUS 2007-AC1 CDO. It does not settle any other past, current or future SEC investigations against the firm. Meanwhile, the SEC's litigation continues against Fabrice Tourre, a vice president at Goldman.”

The interesting thing to note is that the above case settlement does not affect any ongoing or future investigations against Goldman for other crimes. The individual investigators at the SEC that brought these charges should be hailed as national heroes. They stood up against the most powerful organization in the world.