Since becoming a symbol of Wall Street greed during the financial crisis, Goldman Sachs Group Inc. has tried to recast its image as an investment bank that cares as much about ethics as it does its bottom line.
Now, that makeover is being undone by the bank’s work for an obscure investment fund in Malaysia, which has entangled it in civil and criminal investigations around the world. Goldman recently received subpoenas from New York regulators, held talks with federal prosecutors and is likely to incur billions of dollars in penalties. It is one of the most serious crises in the bank’s 149-year history.
The international legal assault on Goldman intensified Monday, with prosecutors in Malaysia filing criminal charges against the bank, accusing it of defrauding investors by raising more than US$6-billion for the fund, which was supposed to benefit the Malaysian public but ended up enriching Goldman and others.
And that is just the start of the bank’s troubles.
Lawyers for Goldman met this fall with federal prosecutors in what appeared to be an early step in settlement negotiations, according to three people familiar with those talks. Two of its senior employees have been charged.
The bank and some of its employees recently received subpoenas from regulators in New York, who are investigating the circumstances in which Goldman netted about US$600-million in fees through its no-bid work for the fund, 1Malaysia Development Berhad, or 1MDB, according to two people with knowledge of the subpoenas.
The scandal surrounding 1Malaysia Development Berhad, or 1MDB, is one of the most serious crises in Goldman Sachs' 149-year historyOlivia Harris/Reuters
1MDB was supposed to finance infrastructure and other development projects to benefit the Malaysian public.
Instead, according to prosecutors in the United States and Malaysia, it became a font of corruption for people close to Najib Razak, who was then the prime minister. Goldman helped the fund raise US$6.5-billion from investors in 2012 and 2013. The money paid for an enormous spending spree by executives and public officials that included the purchases of diamonds, Birkin bags, Picassos and a Monet, as well as financing for the Hollywood film The Wolf of Wall Street.
Michael DuVally, a Goldman spokesman, said the bank would fight the Malaysian charges, which he said “do not affect our ability to conduct our current business globally.” He said officials with 1MDB and the Malaysian government lied to Goldman about how they planned to use the money that the bank raised.
Goldman has previously said it was co-operating with law enforcement and that it might incur “significant fines” from investigations into 1MDB in the United States and elsewhere.
While the charges filed by Malaysia’s Attorney-General on Monday represent the first time the bank itself has been criminally charged, the biggest threat to Goldman comes from the United States, where multiple law-enforcement and regulatory agencies are building cases.
The U.S. Justice Department is leading the investigation. In court filings, prosecutors have described an elaborate scheme by Goldman employees to cover up kickbacks and fees to secure business that involved shell companies in different jurisdictions. Each of the three times that Goldman issued bonds for 1MDB, the financier accused of directing the fraud, Jho Low, provided directions on whom to bribe in order to secure contracts, according to filings.
In internal e-mails disclosed by prosecutors, Goldman bankers referred to their 1MDB work under the code name Project Tiara. When Malaysian authorities seized assets they said had been bought with stolen 1MDB money, they found 14 diamond tiaras. They also tracked down a US$250-million yacht, a US$35-million Bombardier jet and a see-through grand piano that is in the living room of supermodel Miranda Kerr.
The Justice Department has filed criminal bribery and money-laundering charges against two former Goldman bankers, Timothy Leissner and Roger Ng. Mr. Leissner, who managed Goldman’s relationship with 1MDB, pleaded guilty in August. Mr. Ng is in Singapore and intends to fight extradition to the United States.
A few days after those charges were announced on Nov. 1, Goldman’s legal team met with prosecutors from the Justice Department’s criminal division, according to the people familiar with the talks. Goldman’s lawyers outlined their defence against possible charges – apparently an early step toward a potential legal settlement.
Then, at a Dec. 11 meeting in Washington, prosecutors met with the former New Jersey governor, Chris Christie, and other representatives for Mr. Low, who has been criminally charged in the United States and Malaysia.
At that meeting, Mr. Low’s lawyers wanted to discuss the federal government’s efforts to seize their client’s assets, and they noted that Mr. Low could offer the prosecutors information about Goldman’s role. The prosecutors rebuffed that idea, noting that their investigation of Goldman was largely complete, according to three people familiar with that meeting.
A final settlement is still months away. It is unclear whether Goldman itself will face criminal charges in the United States. Any settlement is likely to include a penalty stretching into the billions of dollars, likely making it one of the biggest corporate penalties imposed during the Trump administration.
Investors are paying attention. The bank’s shares fell 2.7 per cent Monday, after news of the charges broke, but increased 2 per cent on Tuesday. Its shares are down by more than one-third since last year, reflecting both its troubles and the overall souring sentiment on Wall Street.
In a sign of how seriously Goldman is taking the investigation, the bank has retained lawyers from firms including Akin Gump to represent employees who have been questioned by federal authorities, according to people with knowledge of the hirings.
The U.S. Federal Reserve, the Securities and Exchange Commission and the New York State Division of Financial Services are also moving forward with separate investigations of Goldman’s role in the 1MDB fraud.
The New York regulator, which oversees Goldman’s state-chartered banking unit, recently sent subpoenas to Goldman and a number of its employees asking them to appear for interviews early in 2019, according to the two people familiar with the subpoenas. The regulator plans to interview about eight Goldman employees who sit on the bank’s capital committee.
In those interviews, the regulators will likely focus on the decision by the capital committee to temporarily take on US$300-million in debt from the 1MDB bond offerings and to charge the fund fees that were unusually high, the two people said.
The stakes are especially high for Goldman because some of its top executives were connected to the 1MDB deals. Lloyd Blankfein, who stepped down as chief executive in October, met privately with Malaysian officials, including Mr. Low.
Mr. Blankfein, who is Goldman’s chairman, told The New York Times last month that the scheme was the work of rogue employees who “evaded our safeguards and lie.”
In Malaysia, Attorney-General Tommy Thomas filed criminal charges Monday against three subsidiaries of Goldman, including Goldman Sachs International, the London-based unit that houses much of the bank’s international operations.
Mr. Thomas said the government would seek more than US$2.7-billion in penalties.
Malaysia also charged Mr. Leissner and Mr. Low. Low’s lawyers said in a statement that he was innocent. “It is clear that Low cannot get a fair trial in Malaysia, where the regime has proven numerous times that they have no interest in the rule of law,” the statement said. Mr. Low is believed to be in China, although his exact location is not known.
Mr. Thomas said Monday that Goldman misled potential investors in the marketing materials it provided as it prepared to sell bonds for 1MDB, in violation of Malaysian securities laws. Goldman received fees from the government fund that were “several times higher than the prevailing market rates,” he added. Those fees in turn led to fat bonuses and increased the bank’s prominence in Asia.
Goldman has “fallen far short of any standard,” Mr. Thomas said. “They have to be held accountable.”