GS Seeks to Resolve Fraud Charge - Analyst Blog

On May 28, the Wall Street Journal stated that

(

) intends to avoid fraud charges in any settlement that it reaches with the U.S. Securities and Exchange Commission (SEC).

On April 16, 2010, the SEC had filed a lawsuit in the U.S. District Court in New York against the company accusing it for misleading investors by misrepresenting facts in its mortgage-backed securities of over $1 billion. The SEC's complaint accuses the investment bank for creating a collateralized debt obligation (CDO), which was made up of mortgage-backed securities.

Goldman Sachs has repeatedly denied any wrongdoing. It is a usual procedure by the companies in order to negotiate a lesser charge in fraud in settlement talks with the SEC. The step taken by Goldman Sachs would indicate accepting a fine of hundreds of millions of dollars, but would restrict the commotion that has resolute the company since the Abacus scandal broke.

However, there has been no clear indication from the SEC responding to Goldman’s indications that the company hopes to reach a settlement.

Goldman Sachs was charged by the SEC in the U.S. for misstating facts and selling bad quality sub-prime investments to its customers in 2006, without disclosing the risk factors and the vital role of Paulson & Co., a prime hedge fund, in the portfolio selection process.

Goldman Sachs has been slapped hard by the SEC charges, given that the company misrepresented the fact that the hedge fund had taken a short position against the CDO. CDO typically repackages bonds and other assets into new securities.

These are not traded on a public exchange, allowing firms like Goldman Sachs to generate fees by brokering deals between buyers and sellers. However, CDOs have performed dismally since they were invested in securities comprising sub-prime mortgages, which are known to have larger-than-average risk of defaulting in the market. Eventually, the market downturn failed the investment banker’s expectations and led to huge losses for common investors.

Moreover, SEC has also charged Goldman Sachs of being involved with a hedge fund like Paulson & Co., who had picked most of the bad-quality securities for investment, taking a short position and betting on them to perform poorly in the open market. Paulson & Co. has reportedly earned around $1 billion through this deal. However, the SEC has yet to file a lawsuit against Paulson & Co.

Nevertheless, Goldman Sachs has been denying SEC's allegation by insisting that the company was just an intermediary in the whole process, and has done nothing wrong by concealing the betting done by Paulson & Co. on these bearish securities.  Besides, Goldman Sachs itself says it is incurring losses of about $90 million, but earned $15 million from fees in the venture.

A settlement would help Goldman Sachs rebound from the public-relations and the stock price might improve, which suffered since the lawsuit was filed.