US bank Goldman Sachs has agreed to pay $550m to settle civil fraud charges made against the firm by US regulators.
Goldman faced charges filed by the Securities and Exchange Commission (SEC), which accused the company of defrauding investors about a financial product based on subprime mortgage-backed securities.
"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," Robert Khuzami, the SEC's director of enforcement said on Thursday.
"Half a billion dollars is the largest penalty ever assessed against a financial services firm in the history of the SEC."
The SEC had claimed Goldman allowed a prominent hedge fund - Paulson & Co. Incorporated - to help put together a package of subprime mortgages that were sold to clients, but which the fund was at the same time betting against.
The deal calls for Goldman to pay the SEC fines totalling $300m. The rest of the money will go to compensate those who lost money on their investments.
Goldman executives had vigorously denied allegations of fraud, but in a statement, the firm acknowledged "that the marketing materials for the ABACUS 2007-ACI transaction contained incomplete information".
"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."
|The settlement size is small compared to the company's multi-billion dollar profits [AFP]
The settlement amounts to less than five per cent of Goldman's 2009 net income of $12.2bn after payment of dividends to preferred shareholders.
But the charges were the most significant legal action related to the mortgage meltdown that pushed the US into recession.
It dealt a blow to the reputation of Goldman Sachs, a Wall Street giant that had emerged relatively unscathed from the financial crisis.
The settlement will also have sweeping legal implications for future securities fraud cases.
"Even if the penalty was lower than the market expected, the fact that Goldman admitted that it made misleading and incomplete disclosures to its clients vindicates the SEC's legal theory for the future," John Coffee, a securities law professor at Columbia University, told the Associated Press
"You have to understand that the defendant almost never makes such a concession in SEC settlements."