Goldman Settles With SEC for $550M

Updated with Goldman Sachs statement

NEW YORK (TheStreet) -- Shares of Goldman Sachs(GS) surged late Thursday after the bank agreed to pay $550 million to settle civil fraud charges related to subprime mortgages that were brought against it by the Securities and Exchange Commission in mid-April.

In its announcement of the settlement after Thursday's closing bell, the regulator said Goldman has acknowledged that its marketing materials for the synthetic CDO in question "contained incomplete information."

Goldman Sachs CEO Lloyd Blankfein

Goldman shares rose more than 4% during regular trading on Thursday to close at $145.22, and the rally continued in after-hours action. The stock was recently quoted at $152.90, according to Yahoo Finance, up another 5%. The shares haven't traded above $150 since the end of April.

The SEC said the settlement also requires Goldman to take "remedial action" with regard to its "review and approval of offerings of certain mortgage securities."

"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."

The bank itself is settling the charges "without admitting or denying the allegations" brought by the SEC. Of the penalty, $250 million is to be returned to what the SEC termed "harmed investors" while the remaining $300 million will go to the U.S. Treasury.

Prior to the initial announcement of the SEC's charges, the stock was comfortably above $180, and the tumble from those heights over the past three months has reflected uncertainty created by the overhang of the SEC's case as well as macroeconomic and industry issues, like financial reform. But judging by the stock's reaction to the news, investors seem to believe the bank got off easy.

Anton Schutz, President and portfolio manager at Mendon Capital, who does not own shares of Goldman, but owns shares of Morgan Stanley(MS), Citigroup(C), Bank of America(BAC) and JPMorgan Chase(JPM), says he had been uncomfortable about owning Goldman shares while the fraud charges were hanging over the firm.

"I'm not uncomfortable now," he says, "by many metrics they're very cheap." He says he will see how the shares open Friday, and if he doesn't see a chance to buy the shares then, he may wait to see if the shares pull back when Goldman announces earnings on Tuesday.

Goldman was hit with the civil fraud charges by the SEC on April 15. The charges alleged the bank failed to properly disclose information related to the now infamous ABACUS 2007-AC1 synthetic CDO. The language of the settlement includes Goldman's broad acknowledgment of the "incomplete information" but also specifically mentions the firm's omission of the role that hedge fund Paulson & Co. played in putting together the CDO.

"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," the settlement reads. "Goldman regrets that the marketing materials did not contain that disclosure."