The 1MDB Deals That Continue to Haunt Goldman Sachs

(Bloomberg) -- The three bond deals took place in 2012 and 2013, and the debt is more than halfway to maturity. Yet for Goldman Sachs Group Inc., the furor surrounding money it raised for a Malaysian state investment fund refuses to go away. The fund, known as 1MDB, is at the center of a global scandal involving claims of embezzlement and money laundering that triggered investigations in the U.S., Singapore, Switzerland and beyond. At least three senior current or former Goldman executives were implicated in the first charges against individuals by U.S. prosecutors. And in the first criminal charges against Goldman since it got embroiled in the scandal, Malaysia is seeking fines in excess of $3.3 billion.

1. What exactly did Goldman do?

The New York-based bank advised 1MDB on the acquisitions of Tanjong Energy Holdings, from Malaysian billionaire Ananda Krishnan, and domestic power plants from Genting Bhd -- financed by two separate bond offerings in 2012 worth $3.5 billion. In 2013, 1MDB issued an additional $3 billion in debt underwritten by Goldman to raise capital for "new strategic economic initiatives" with Abu Dhabi. (Those potential initiatives were to include a financial center built on 70 acres of prime Kuala Lumpur real estate and named for the father of then-Prime Minister Najib Razak, who is now facing dozens of corruption charges related to 1MDB. Najib denies wrongdoing.) For its work on the bonds, Goldman earned almost $600 million in fees.

2. What’s the problem with that?

Goldman’s lead banker for the bond sales, Tim Leissner, has confessed to U.S. law enforcement that he bribed officials to get Goldman hired for the bonds deals, and that he and others arranged the fundraising as debt offerings because that would generate higher fees for the bank. Leissner’s deputy, Roger Ng, and Malaysian financier Low Taek Jho -- the central figure in the scandal, according to U.S. prosecutors, who’s commonly referred to as Jho Low -- were charged with conspiring to launder billions of dollars embezzled from 1MDB. Malaysian and U.S. investigators are probing earlier deals carried out by Leissner in the country, according to Malaysia’s leader-in-waiting, Anwar Ibrahim. Two Abu Dhabi investment funds are also suing Goldman, claiming they suffered losses from the bank’s “central role” in the case.

3. What about the criminal charges?

Malaysia alleges that Goldman misrepresented to investors that the proceeds would be used for legitimate purposes, when the bank knew that the funds would be misappropriated, according to Malaysia Attorney General Tommy Thomas. Related charges were also filed against Leissner and Ng. Goldman will “vigorously defend” against the charges, spokesman Edward Naylor said in an email, calling the charges “misdirected.”

4. How high might this go?

Prosecutors assert that beyond Leissner, who left the bank in February 2016, a number of employees at Goldman knew about a bribery scheme but worked to hide it from the firm’s compliance and legal departments. While nobody has accused him of wrongdoing, Lloyd Blankfein, until recently Goldman’s chief executive officer, held a meeting in 2012 that was attended by Jho Low, the bank said in a statement. Blankfein “does not recall any one-on-one meeting with Mr. Low nor have we seen any record to suggest such a meeting occurred,” Goldman said.

5. What’s at stake for Goldman?

Beyond any damage to its reputation, money. Attorney General Thomas said Malaysia will seek fines well in excess of both the $2.7 billion of allegedly misappropriated funds and the $600 million in fees received by Goldman for the 1MDB deals. Malaysia Prime Minister Mahathir Mohamad had previously said he wanted to recoup some of the 1MDB funds and Goldman’s fees, which exceeded what banks typically make from government deals. The bank’s revenue from the 1MDB deals amounted to about 7.7 percent of the face value of the securities. Underwriters collected average fees of 1.32 percent in 2013 on comparable deals, according to Bloomberg data.

6. What is Goldman’s position?

Goldman officials have said for years that the bank raised money for 1MDB without knowing that it would be diverted from the development projects. The bank had been telling U.S. prosecutors it was deceived by Leissner during the deals with 1MDB, people familiar with the matter said. In a quarterly filing in early November, Goldman said it could face “significant fines" as a result of the U.S. investigation. As for the fees and commissions, Goldman said in 2015 that they “reflected the underwriting risks" it had assumed.

7. What happened to the 1MDB money?

The U.S. Department of Justice alleges Low and 1MDB officials diverted more than 40 percent of the net amount raised in the 2012 bond sales, or $1.4 billion, to a Swiss bank account belonging to a British Virgin Islands entity, and about $1.3 billion from the 2013 bond sales to accounts whose beneficial owner was an associate of Low’s. 1MDB -- full name, 1Malaysia Development Bhd. -- took shape in 2009 under Najib as a vehicle to drive investment into Malaysia and boost the country’s assets overseas. In all, it raised more than $8 billion via bond sales.

The 1MDB Deals That Continue to Haunt Goldman Sachs

The Reference Shelf

  • A QuickTake on the 1MDB scandal.
  • A Goldman settlement with U.S. authorities could cost the bank $600 million to $1.8 billion, according to Bloomberg Intelligence.
  • Jho Low, alleged Zelig of the good life.
  • A 2013 Bloomberg news report about the bonds.

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