Will Goldman Fight the Government Over 1MDB?
After the financial crisis, Goldman Sachs sought to expand into Southeast Asia. Unfortunately, that effort was caught up in a scandal at an investment fund in Malaysia.
The firm initially tried to shake off the charges by claiming that any misconduct was the work of a few rogue employees, but reports that Goldman’s former chief executive Lloyd C. Blankfein met with a key figure in the fraud have undercut that defense.
Goldman’s chief executive, David M. Solomon, has offered a full-throated defense of the firm. In a message to employees, he wrote: “We believe our culture and our processes around our due diligence and compliance was strong at the time, and is even stronger today.”
An American corporation can be prosecuted for the acts of its employees, so Goldman does not have many defenses if prosecutors decide to file charges
Goldman raised more than $6 billion for that fund, called 1Malaysia Development Berhad, or 1MDB. The money was supposed to benefit the Malaysian public but ended up enriching Goldman and those close to Najib Razak, who was prime minister. In December, the Malaysian government filed criminal charges against Goldman, accusing the firm of violating securities laws there.
Those charges come on top of a Justice Department investigation of violations of the Foreign Corrupt Practices Act, which bars corporations from bribing foreign officials to gain a business advantage. Goldman’s former top banker in Asia, Timothy Leissner, pleaded guilty in August, describing his role in concealing bribes and kickbacks. Charges were also filed against Roger Ng, Mr. Leissner’s former deputy, who is being held in Malaysia pending extradition.
Although Goldman has pledged its cooperation, the firm has also claimed that it is innocent of the Malaysian charges and may well be girding for a fight with the Justice Department to limit its liability. Goldman also will have to deal with the Securities and Exchange Commission, which shares jurisdiction over the bribery law, and the Federal Reserve, Goldman’s chief banking regulator.
Goldman has little choice but to reach a settlement. The key question is how much its entanglement with 1MDB may cost the firm. Disgorging the $600 million fee it earned for arranging the bond deals is the likely starting point for any resolution in the United States.
How much a potential fine could be on top of that is anyone’s guess. One possibility is that it will be a multiple of Goldman’s profit on the transaction. That could push the penalty over a billion dollars, with the possibility of even more if Goldman has to reach an agreement with the Malaysian government.