Goldman Sachs & Co has paid the US regulator more than $620 million (US$550 million), the largest penalty ever levelled against a financial firm, for allegedly misleading investors regarding the deals behind its sub-prime mortgage product.

Goldman Sachs & Co has agreed to settle with the SEC without denying or admitting to the allegations.

The charges were handed in April this year against Goldman and Fabrice Tourre, director of the sub-prime mortgage product ABACUS 2007-AC1, for allegedly not disclosing Paulson & Co's role in the ABACUS deal to investors.

It has been reported that in April 2007, a deal was closed for the collateralised debt obligation (CDO) called the ABACUS 2007-AC1, where prominent hedge fund Paulson & Co. Inc was involved in the portfolio selection process - yet it was alleged that the hedge fund manager shorted the product.

Six months later, 83 per cent of RMBS within the ABACUS 2007-AC1 portfolio had been downgraded and 17 per cent were on negative watch. By 29 January 2008, 99 per cent of the portfolio was downgraded.

The downgrade resulted in investors losing over $1 billion while Paulson & Co. pocketed almost $1 billion, the SEC noted.

This has led to the more than half a billion dollar settlement, the largest penalty ever assessed against a financial services firm in the SEC history, said Robert Khuzami.

"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," he said.

Around $280 million or half of the monies will be returned to the affected investors through a Fair Fund distribution and the rest will go to the US Treasury.

According to Bloomberg, the $620 million sum amounts to 14 days of Goldman's group earnings, based on first-quarter results this year.

Meanwhile, Tourre's case against the SEC continues.