How far will Goldman Sachs’ apology to the “Malaysia people” for its role in the multi-billion dollar 1Malaysia Development Berhad (1MDB) sovereign fund scandal go to mitigate the investment bank’s rising litigation risk and potential future payout of massive fines?
David Solomon, Goldman’s chief executive officer, said on a conference call with analysts on Wednesday that Malaysia had been “defrauded by many individuals” and that Goldman’s ex-Southeast Asia managing director Tim Leissner “was one of those people.”
The Malaysian government filed a criminal case against Goldman in a local court on December 17, charging that the bank made false and misleading statements to misappropriate US$2.7 billion from three bond issuances worth $6.5 billion it underwrote for 1MDB in 2012 and 2013.
Solomon, speaking in his first earnings call since becoming Goldman’s chief executive officer in October, said the bank conducted considerable due diligence on the bond deals in question and that the fraud was caused by Leissner’s dishonesty.
He said the bank was cooperating with the US Department of Justice on the case, which is still under investigation.
Solomon’s comments represent Goldman’s latest attempt to separate the bank as a corporate institution from the behavior and actions of individual top executives, including Leissner, in connection with the 1MDB scandal.
Solomon’s acknowledgement that Malaysia was “defrauded” by his bank, however, won’t likely stop the Malaysian government’s pursuit of litigation against the firm, according to a person familiar with the government’s thinking on the case who spoke to Asia Times anonymously.
Attorney General Tommy Thomas did not immediately reply to Asia Times’ emailed request today (January 17) for comment on Solomon’s apology and whether it would impact the Malaysian government’s pursuit of criminal charges against the bank.
Asia Times, citing sources close to Attorney General Thomas, reported in November that the Malaysian government is also preparing to file a civil suit against Goldman in US courts in pursuit of as much as $4.5 billion in damages for the misappropriated funds.
Central to that potential charge, the same sources said, is that Goldman should be held liable as an institution because knowledge of the fraud allegedly reached the highest levels of the bank’s management, and was not limited to a couple of rogue executives as Goldman has claimed.
Thomas responded to Asia Times’ report on the pending lawsuit as “premature” when questioned by local reporters. He did not respond in time for publication to Asia Times’ request for clarification in an emailed request for comment for this report.
The US Department of Justice has estimated $4.5 billion was pilfered from the 1MDB sovereign fund and that the stolen funds were funneled through the global financial system using a complex network of intermediaries and shell companies.
It has filed charges against Leissner, who has pleaded guilty to money laundering and bribery, Roger Ng, his deputy at Goldman who is being held in Malaysia and resisting extradition to the US, and fugitive Malaysian financier Low Taek Jho, also known as Jho Low.
Leissner described his actions in an August 28 plea hearing at a federal court in New York City as being “very much in line of its culture of Goldman Sachs to conceal facts from certain compliance and legal employees [of Goldman Sachs].” The ex-executive acknowledged he and other Goldman employees concealed bribes and kickbacks to “obtain and retain 1MDB business.”
Subsequent reports that Goldman’s then CEO and now chairman Lloyd Blankfein met privately with Jho Low in 2012 have fueled speculation that complicity in the scandal may indeed have reached the highest level of the bank, as Malaysia’s criminal complaint contends without naming names.
Goldman’s share price collapsed by 7.5%, the largest single-day drop of its shares since 2011, when Malaysian Finance Minister Lim Guan Eng announced on November 12 that the government would seek the return of $600 million Goldman earned in fees from the 2012-13 bond sales in question.
The market, however, appears to be underpricing Goldman’s total litigation risks. Bloomberg estimates Goldman’s total US-based litigation risk at $2 billion, a figure which overlooks the high potential of a Malaysian government lawsuit in US courts that seeks as much as $4.5 billion in damages.
Goldman’s shares jumped a whooping 9.5% in trading on January 16, buoyed by higher than expected fourth quarter earnings. The bank’s one-year return, however, was down 21.2%, according to Bloomberg statistics.