Goldman Sachs ignored 1MDB warning signs in pursuit of Asian business

  • Business
  • Tuesday, 18 Dec 2018

While there

GOLDMAN Sachs Group Inc.’s push for Asian business and lax oversight of partners led the bank to speed past warning signs in its dealings with a corrupt Malaysian investment fund, internal documents and interviews with people involved in the transactions show.

Notes for senior bankers at a 2012 meeting in Hong Kong summed up Goldman’s vetting of a bond deal now at the scandal’s center. Little attention was paid to whether the fund, 1Malaysia Development Bhd., was a bona fide vehicle, or why it had no track record. The first item: “Potential media and political scrutiny.” The third: How much money Goldman would make—nearly $200 million—and whether the sum would become public. They approved it anyway.

That deal has ensnared Goldman in one of the largest financial frauds in history and darkened the early days of its new chief executive, David Solomon, the former co-head of Goldman’s investment-banking division. On Monday, Malaysia filed criminal charges against the bank.

Goldman, which has blamed rogue bankers for its dealings with the fund, said it would fight the allegations. It added that it was misled by the Malaysian government and 1MDB about how the money would be used.

The U.S. government already has charged two Goldman bankers and is investigating the bank itself. A possible large fine looms, and the bank’s reputation has taken a hit.

Malaysia’s attorney general said the country would seek a fine well above Goldman’s $600 million in profit and the $2.7 billion allegedly stolen by two former Goldman bankers and a Malaysian financier named Jho Low.

Goldman shares fell 2.8% on Monday and are at their lowest level in more than two years. Since U.S. prosecutors unsealed criminal charges against a Goldman partner, Timothy Leissner, and a managing director, Roger Ng, in November, the bank’s shares have fallen around 27%, wiping out $20 billion in market capitalization and pushing its valuation to its financial-crisis low. Goldman is negotiating a possible penalty with the U.S. government; some analysts estimate it could approach $2 billion.

Goldman’s troubles crystallized with its first 1MDB bond deal, in 2012. The bank’s profit on that deal was nearly $200 million; a deal of its size would typically net a fee of several million dollars.

The Justice Department in November charged Messrs. Leissner and Ng with conspiring to steal from 1MDB. Prosecutors allege some of the cash went to bribe government officials to ensure Goldman kept winning business.

Mr. Leissner, who has admitted he stole $200 million, has pleaded guilty. Mr. Ng is under arrest in Malaysia.

Mr. Leissner, who was charged on Monday in Malaysia, didn’t respond to requests for comment. Mr. Ng couldn’t be reached.

A second partner, Andrea Vella, led the structuring of the 1MDB deals and was put on leave after Mr. Leissner’s guilty plea. Prosecutors allege he knew bribes were being paid and helped Mr. Leissner get around Goldman’s internal controls. He hasn’t been charged with a crime. An attorney for Mr. Vella disputed the allegations.

Gaps in the bank’s compliance systems and a postcrisis push to do more business in emerging markets put Goldman on a collision course with the scandal, according to interviews with current and former executives and other people familiar with the transactions, and a review of internal Goldman documents and the government’s allegations.

In Asia, some members of a committee designed to keep Goldman out of dodgy deals—and whose bonuses were tied to profit in the region—tipped off Mr. Leissner and others about questions that were likely to come up, people familiar with the matter said.

At a Nov. 13 dinner with clients, Michael Thompson, Goldman’s head of U.S. government affairs, was asked whether he thought congressional Democrats would investigate 1MDB. He said they would more likely focus on other scandal-plagued banks, citing Wells Fargo & Co. and Deutsche Bank AG , people briefed on his remarks said. Some attendees left thinking Goldman was underestimating how much trouble it was in.

The scandal has put pressure on Mr. Solomon two months into the job. He has pushed the bank’s lawyers to resolve the matter quickly, but negotiations with the government are likely to stretch into 2019, people familiar with the matter said.

Goldman’s involvement in the 1MDB scandal goes back to the years after the financial crisis, when the firm’s revenue fell by a third. CEO Lloyd Blankfein told shareholders in 2010 that the bank wanted to “be Goldman Sachs in more places.” The firm had identified $12 trillion held by Asian institutions, only 15% of which were Goldman clients, Mr. Blankfein told a ballroom of stock analysts in 2010.

He set out to change that. Goldman doubled its staff in Southeast Asia between 2006 and 2010, according to an investor presentation. One of them was Mr. Vella, a former aeronautical engineer who had designed complex derivatives at JPMorgan Chase & Co.

Mr. Vella teamed with Mr. Leissner and a group of credit traders to do the first 1MDB bond, a $1.75 billion offering to fund the purchase of power plants. Mr. Leissner had asked investment bank Lazard Ltd. for an independent valuation of the power plants, but Lazard declined, saying it believed 1MDB was overpaying and that the deal smacked of political corruption, a person familiar with the situation said. Goldman stepped in and said the plants were worth what 1MDB was paying.

1MDB soon wrote down the power plants by $400 million, and the owner of the plants donated $170 million to 1MDB’s charity arm, which Prime Minister Najib Razak used as a political slush fund, a person familiar with the matter said. Mr. Najib, who has been arrested in Malaysia on charges that include money laundering, has denied wrongdoing. Lazard didn’t respond to a request for comment.

Mr. Low, who has been charged in the U.S. with bribery and money laundering, is believed to be in China and couldn’t be reached for comment. He has denied wrongdoing.

The fund wanted Goldman to do the power-plant deal quickly and quietly, so the bank bought the bonds itself, justifying its $200 million profit as payment justified by the risk it was taking. But Goldman had already arranged for investors to buy up almost the entire offering, according to the offering document and a former Goldman executive involved in the deal.

The power-plant deal earned Goldman’s highest internal prize, the Michael P. Mortara Award. The selection committee congratulated bankers in four divisions for “solving an important client’s problem through outstanding firmwide cooperation,” according to an email reviewed by The Wall Street Journal.

Mr. Leissner was able to maintain a relationship with Mr. Low because of the wide latitude given to Goldman partners—a carry-over from the firm’s days as a private partnership. Mr. Leissner, based in Southeast Asia, traveled the region largely unsupervised. Colleagues so rarely saw him that some joked Mr. Leissner—who made it known he had earned a Ph.D. in business administration—was working for Doctors Without Borders, the medical charity.

Mr. Leissner left Goldman in 2016 after the firm found he had written an unauthorized letter on Goldman letterhead to help Mr. Low open a bank account in Luxembourg.

Mr. Vella remains on leave. At a town-hall meeting in Hong Kong in November, bankers were told not to communicate with him, people familiar with the matter said. - WSJ

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