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Devastating indictment by shareholders raises pressure on top dogs at ‘world’s most powerful bank’

November 8, 2019

* Goldman Sachs “lied” and “denied” over 1MDB’s billion dollar thefts
* Another bank sucked into 1MDB laundromat scandal (along with US Commerce Secretary)

A new court case lodged in the United States has raised the most threatening allegations so far against the very top echelons of what was once considered the world’s most powerful bank.

The class action by shareholders brings a slew of new accusations and evidence that includes new senior witnesses from within the bank willing to testify that top office holders knew about the problems over corruption at 1MDB but pushed the deal because of the money it made.

The filing also reveals information about further meetings, as yet unknown about, directly between Jho Low and the CEO of the bank Lloyd Blankfein (now retired) in direct defiance of several warnings to Blankfein about the suspicious nature of 1MDB and the ‘Red Flag’ status of Jho Low himself.

Right after the “highly suspicious” third bond deal, which the bankers openly suspected was raised as a slush fund for GE13, Blankfein met Jho Low at least “for the third time to “discuss how the bank could do more business with 1MDB.”

And, perhaps most damningly of all, the indictment reveals brand new information about a fifth highly suspect deal between Goldman Sachs and Jho Low previously not known about (following the earlier engagement of the bank over the issue of bonds for the Terengganu Investment Fund, plus the three bond issues for 1MDB), which involved the bank’s most senior officials in the Middle East.

If the shareholders win their case, the future of Goldman Sachs and indeed its banking licence could well be in doubt: here Sarawak Report provides the first report and analysis of the court filing in this case:

Deadly new indictment against Goldman Sachs

They once basked in the title of Masters of the Universe, bragged how they could solve all the world’s problems and tossed themselves multi-million dollar bonuses like confetti.

However, the bankers of Goldman Sachs are now facing a crumbling house of cards as 1MDB unravels, with more damaging revelations heaped this week by a damning 200 page court indictment unleashed by its own shareholders.

The class action is being led by the Philladelphia law firm Kessler Topaz Meltzer & Check, LLP and represents several major shareholders headed by a Swedish public pension fund with $50 billion worth of assets under management. They are suing over what they say was negligence and corruption by the bank, which put profit before compliance and as a result caused the value of their investments to plunge after the truth over 1MDB finally emerged.

The court filing, which was entered 28th October, accuses the top bank of keeping up a farrago of lies right until 2018, despite the issues over 1MDB becoming publicly apparent by 2014:

Throughout the Class period from February 28, 2014, through December 20, 2018, Goldman lied to and misled its shareholders about its true role in the 1MDB fraud. Once public scrutiny of 1MDB and Low started to mount in 2014, Defendants falsely portrayed Goldman’s work for both while denying all wrongdoing. Furthermore, Defendants repeatedly touted Goldman’s supposedly robust risk management framework and internal controls. When facts demonstrating Goldman’s central role came to light, its shareholders suffered huge losses, as the bank’s stock price fell precipitously on the market’s astonishment that Goldman had actively facilitated – and handsomely profited from – the unprecedented global fraud.”

[Case 1:18-cv-12084-VSB Document 63 Filed 10/28/19 – United States District Court Southern District of New York]

Effectively, it concedes that it was the decision of Malaysian voters to kick out the Najib government that ended the cover-up and has brought the bank to book.

As the shareholders point out there are a swathe of other damaging 1MDB related cases that are also threatening fines and criminal prosecutions against the bank internationally. How are the mighty fallen:

Today, one of Goldman’s most powerful bankers awaits sentencing in federal court for paying bribes and laundering money to generate business for the bank; a senior Managing Director stands accused of the same; and Goldman’s Head of Investment Banking in Asia has been identified in court papers as a co-conspirator. Seventeen current and former Goldman managers, along with three subsidiaries, have been criminally charged overseas. Intense media coverage since the scandal broke has implicated executives at the highest level of the bank, including former CEO Lloyd Blankfein and former President of the bank Gary Cohn.”

Could 1MDB Be The Case That Brings Bankers To Book?

 

The attack launched by the bank’s own shareholders is regarded by those linked to the action as being especially deadly to the bank. There is a white collar complacency amongst major bankers that the law rarely if ever catches up with their transgressions, since they are always able to reach an agreed pay-off with law enforcers.

However, with shareholders refusing to play ball this time, individual decision-makers at the bank could for once face the threat of criminal punishment for criminal actions. Certainly, the content and tone of this shareholder indictment goes for the jugular as far as the bank’s most senior management are concerned and reveals several accusations of misconduct not yet made public before.

Setting out their case, the litigants explain that the scandalous conduct over 1MDB had its roots in the 2008 crash, for which Goldman was largely blamed but escaped lightly as governments prioritised shoring up economies.

As a sop to justified global criticism the bank brought in a swathe of due diligence and compliance reforms to cover the way it did business, say the shareholders, which were presented by President Gary Cohn (later Economic Advisor to Donald Trump) and CEO Lloyd Blankfein as a ‘remaking’ of the bank:

Cohn issued a letter to Goldman’s shareholders representing that these measures had been “fully implemented” no later than February 2013. A remade Goldman was born, publicly chastened and newly committed to effective compliance and risk controls.”

Yet, less than a month later, the last of three highly flawed and illegal bond deals was pushed through raising $3 billion for 1MDB by the bank, from which most of the money would soon be stolen, largely thanks to the negligence and/or knowing assistance of Goldman executives, many of whom were paid bonuses and some of whom took millions in bribes:

“… during a ten-month period beginning in May 2012, Goldman underwrote $6.5 billion of 1MDB debt in three rapid-fire bond offerings that it was awarded without any bidding process, netting the bank an astronomical $600 million in fees – 200 times the typical sum for such deals. Goldman did so amid a sea of red flags, including repeated protests from both within and outside the bank, which included explicit warnings about the very type of potential fraud that ultimately occurred.

After each offering, hundreds of millions of dollars in proceeds – several billion in total – were siphoned away to, among other things: (i) fund the corrupt Malaysian Prime Minister, Najib Razak, who created 1MDB; (ii) pay off co-conspirators in Malaysia and the Middle East; and (iii) finance the playboy lifestyle of the key architect of the sprawling fraud, Low Taek Jho …”

The reason, the shareholders argue, is that top bankers Cohn and Blankfein sought to off-set the profit slump caused by these sober new restrictions in the west by opening up profitable new businesses in ’emerging economies’ where they thought scrutiny would be far less burdensome whilst the percentages could be in return far higher.

This line of argument confronts head on the attempts by Goldman to put the blame for 1MDB on a relatively lowly couple of rotten apples (namely Singapore head Tim Leissner and the Malaysian Roger Ng) by bluntly naming the two top men at the bank as responsible for the new strategy that particularly targeted the massive sovereign wealth funds of oil producing countries:

Seeking new fee opportunities, Blankfein pushed his bankers to “be Goldman Sachs in more places” – namely, in emerging markets, particularly Asia. Building on Blankfein’s pivot, Cohn rolled out a plan to tap sovereign wealth funds in these growth economies to serve as a new source of advisory and underwriting fees for the firm’s core Investment Banking Division. Cohn called the initiative Goldman’s drive to “monetize the state.

The case then lays out its first new bombshell disclosure, shattering attempts to limit any criminal involvement to just Leissner and Ng, by claiming the direct and deliberate involvement of another very senior bank official, namely the Head of Investment Banking for the Middle East, in the money laundering of cash stolen from the third bond by Jho Low:

“… after the last offering closed, Goldman’s Head of Investment Banking for the Middle East structured a transaction to clean some of Low’s stolen money, fully aware that the transfer of several hundred million dollars to Low lacked any legitimate business purpose.”

The shareholders also point out that 1MDB was by no means the only victim of this deliberate decision by the bank to exploit and profit hugely from sovereign funds in under-sophisticated markets.

They raise the earlier scandal over the Libyan Investment Authority (from which Goldman managed to escape punishment after a British court found in its favour) as a “test run,” where the bank took advantage of “their client’s “zero-level” financial sophistication” to make vast profits from lousy investment advice.

Citing the Libyan scandal leads the complaint neatly on to another of the central characters linked to 1MDB, the Goldman partner in charge of Tim Leissner’s Singapore operations, Andrea Vella, whom the bank placed on leave around the time of Leissner’s arrest, whilst refusing to comment why:

The Libyans piled into trades that the bank recommended, and Goldman earned between $200 million and $350 million in fees. The trades proved disastrous for Goldman’s client, with the Libyan state fund losing $1.2 billion. Nevertheless, Goldman sent the banker overseeing the Libya account team, Andrea Vella, to Hong Kong as part of Blankfein’s focus on emerging economies. Vella was twice promoted, rising to Goldman’s Co-Head of Investment Banking for all of Asia ex-Japan.

In his new post in Hong Kong, Vella worked with another star Goldman banker, Tim Leissner, then the Head of Investment Banking for Southeast Asia. Like Vella, Leissner had a reputation for skirting internal controls well before the 1MDB scandal, including dolling out favors to drum up business that exposed the bank to FCPA violations in the Far East. Leissner’s transgressions were tolerated, however, because he generated large fees for the bank.”

The complaint then details how Goldman became involved in 1MDB, saying that Roger Ng introduced Leissner to Jho Low as the latter had started to work with Najib Razak to set up the enterprise. “Najib viewed 1MDB as a political slush fund, while Low viewed it as a font of wealth that would put him on par with the fund managers that he had encountered in the Gulf,” the document claims damningly.

As for Leissner, 1MDB was “precisely the sort of client that the bank was seeking for new revenue streams in Cohn’s drive to “monetize the state.”

It was for this reason, the claimants say that despite the formal rejection of Jho Low as a client by the bank, the parallel operations in this emerging market region continued to do business with him:

Goldman’s Global Compliance Department rejected Low over concerns about his unexplained source of wealth. It was the first of at least three instances that various Goldman departments charged with maintaining internal controls rejected Low as a compliance risk, concluding, “we have pretty much zero appetite for a relationship with this individual.”

Explosive Claim – CEO Lloyd Blankfein met Jho Low two more times!

 

The litigants then reach far further than the present case brought by the Department of Justice in implicating the top Goldman executive of the time in these dealings with Jho Low, in defiance of the due diligence department of his own bank, by claiming Blankfein had two further meetings with the Red-Flagged Jho Low subsequent to the initial meeting already revealed by the FBI in the Tim Leissner case:

Despite these unequivocal warnings, senior investment bankers and high-level executives at Goldman sought instead to deepen the bank’s relationship with Low. Indeed, only two months after Low was first flagged as an intolerable compliance risk, Blankfein met privately with Low, Najib, and Leissner at the Four Seasons in New York in November 2009 to discuss how Goldman could do business with 1MDB. The meeting laid the groundwork for a half-decade of lucrative deals – as well as at least two more in-person meetings between Blankfein and Low.

The shareholders’ version of events then becomes even more starkly accusatory towards top bosses of Goldman at the time. Paragraph 15 accuses Andrea Vella of being wholly complicit in a criminal plot to steal money and bribe officials, in the full knowledge that billions already having been stolen by the crippled fund. The top men Blankfein and Cohn, they say, signed off on the deal:

15. In 2012, with $1.4 billion in debt and virtually no assets to show for it, 1MDB looked to tap the international capital markets, and Low approached Goldman for help. The bankers met with Low and determined that, with no credit rating, 1MDB would need a guarantor. Low suggested the International Petroleum Investment Company (“IPIC”), a sovereign wealth fund in Abu Dhabi whose managers had an equal penchant for corruption. After traveling together to the emirate, Low informed Leissner and Ng that, to secure the guarantee, they would have to pay kickbacks to government officials in Malaysia and Abu Dhabi. Ng relayed the message to Vella, who agreed. Goldman, through Vella, Leissner, and Ng, and with the approval of other senior executives, including Blankfein and Cohn, then exclusively underwrote three bond offerings for 1MDB at Low’s behest, raising $6.5 billion for the fund in only ten months. For its work, Goldman received a staggering $600 million in fees – 200 times the $1 million per offering that banks would typically receive for such transactions in the region.

There was a reason for this surfeit of riches: Low and 1MDB did not offer other investment banks an opportunity to bid on any of these deals, and paid Goldman to lend its name and prestige to large debt raises riddled with red flags from start to finish, as described below. Goldman proved happy to oblige, disregarding the following warning signs while quashing those within the bank who dared to call attention to the obvious.

They sanctioned all this say the shareholders despite extensive knowledge by the top men at the bank about the pivotal role Jho Low, a red flag individual, held at 1MDB. Not only did Blankfein meet privately with Low “at least three times before, during, and after the bond deals to discuss how the bank could do more business with 1MDB,” claims the indictment, but Leissner explicitly informed Goldman’s Head of Global Compliance and the Capital and Suitability Committees that Low was a key intermediary for 1MDB.

The proof is in the internal documents also, including Goldman emails, they say which discussed Low’s importance to the 1MDB account, with one Managing Director writing that Low was “the 1MDB Operator or intermediary in Malaysia” just before the first bond offering came to market.

So, the charge is that everyone from the top down at Goldman Sachs knew that Jho Low was behind 1MDB, as well as knowing that he was a highly compromised individual who could not account for the hundreds of millions he was spending around the globe any more than 1MDB could account for its missing assets or produce its long overdue accounts.

Yet in those offerings Goldman Sachs described 1MDB as having a “robust” and “independent” three-tier management structure.

There are more revelations – the charge continues without providing details that “Goldman bankers traveled openly with Low and included him in 1MDB – related meetings with third parties across Asia, the Middle East, and the United States” and that “the 1MDB deal team repeatedly alerted compliance-related functions and other Goldman business units that they were working with Low and considered him an important client.

Rosmah Demanded Goldman Give $300,000 To Her Charity!

 

There are plenty more shocking revelations in the jaw dropper of a law suit, which goes on to tick off the bank for dealing with the Najib regime which gave off indicators that “reflected a strong likelihood of corruption” not least with regard to the notorious profligate spending of his wife Rosmah.

Yet, far from avoiding the dodgy couple, the shareholders reveal “Rosmah, whose ostentation was a frequent subject of controversy in Malaysia, had demanded a $300,000 contribution from Goldman to a “charity” that she controlled, which the 1MDB deal team sought to make through Goldman’s charitable arm.”

It appears the money was not paid in this case, however the claim goes on to damningly claim it has evidence that just before the 3rd bond was raised days before GE13 Goldman bankers openly discussed the likelihood that Najib was diverting 1MDB funds for political gain,meaning they knew the money looked to be stolen to buy the election but raised it anyway.

Eight Highly Suspicious Features

 

The shareholders then go on to cite over half a dozen highly suspicious features of the deal that ought to have concerned the heads of Goldman Sachs. These suspicious features had indeed been raised publicly by Sarawak Report several times from as early of 2013, yet these highly senior and experienced bankers ignored the glaring red flags, say the shareholders, preferring to take the profits instead.

They list the suspicious features as:

1MDB’s willingness to pay Goldman nearly 200 times the typical fee was a strong indicator that misconduct was afoot.”
The guarantee came from fund manager Khadem Al Qubaisi who had “
a reputation for demanding kickbacks.”
The offerings were awarded without competition and with “extreme secrecy with a Goldman employee being told to keep all discussion of the bonds off of email.”
There was no clear reason for raising the money “
the stated intent of the offerings was frequently shifting and consistently inadequate … with the offering circular for the third and largest round disclosing that the fund had no investment prospects.”
“Goldman structured the deals as private placements, shrouding them from public view”
but then lied and justified the fees by saying it had bought the bonds itself at higher risk. In fact, it had placed the bonds with customers already.
“the bonds’ yields were unusually high, as much as 2 1⁄2 times that of comparable securities, again raising the question of why 1MDB was willing to pay so much to bring these offerings to market.” Given the percentage was so high the bogus argument that Goldman had taken a risk over getting buyers was even more unbelievable.
The extreme and unexplained speed of the bond deals “
was suspicious, with the three deals occurring in quick succession with little justification for the speed.”
“1MDB insisted on using a tiny Swiss private bank called BSI Ltd. to receive the mammoth proceeds of each bond offering a selection designed to avoid the more rigorous compliance of a global financial institution.”

All the above ought to have alerted any management reviewer or indeed observer of the situation, says the claim. Instead, Goldman continued to insist there was nothing wrong with its conduct in the deals with 1MDB in the face of concerns about the above raised by Sarawak Report and other critics in Malaysia (although there was little said by the wider media, fearful of criticising a powerful bank).

Bosses Over-ruled Compliance – New Deadly Witnesses?

 

The extreme seriousness of the situation keeps coming back to the leadership and culture of the bank in a way that threatens its very right to operate, given the evidence alleged in this indictment.

The shareholders claim there were ample and persistent warnings against taking part in 1MDB by compliance and due diligence sections of the bank, yet this internal dissent was ignored by greedy bosses.

In particular they cite a senior banker David Ryan and the son of the former Prime Minister of Australia, Alex Turnbull, who now loom as a dangerous potential witness against Goldman in the case:

Within Goldman were executives and senior bankers who saw how dubious the 1MDB deals were and sensed the reputational damage that they could bring. Yet when they spoke out, as the BSC reforms had both encouraged and required, Goldman silenced them. For example, David Ryan, President of Goldman Asia and member of Goldman’s Management Committee, expressed misgivings during each of the three offerings about the deals’ suspect terms, the bank’s unwarranted profits, and the fund’s willingness to award Goldman the unusually lucrative underwriting business without soliciting competing bids. Rather than heed the concerns of one of the bank’s senior-most executives, Cohn sidelined Ryan, overruled his repeated warnings, and installed a pro-1MDB chairman above him. Another banker in Southeast Asia, Alex Turnbull, faced similar treatment after sending an email to colleagues expressing disbelief about the first offering’s terms, including its pricing and the lack of transparency about how the funds would be used. Turnbull was reprimanded by Goldman’s own Compliance Department for questioning the deal and “b-tracked” until he left the bank two years later.”

There were also outside warnings from independent professionals, according to the filing. Investment bankers Lazards were engaged by Goldman to value the power purchase assets that supposedly under-pinned the raising of the Abu-Dhabi bond deals.

Finding that the valuation sought by Goldman was far too high, Lazards pulled out, concluding that the deal “smacked of political corruption.”

The litigants say that Lazards were soon proven correct:

After the deal closed, the seller made $170 million in donations to a “charity” arm of 1MDB for Najib to use as a slush fund, while 1MDB wrote down $400 million of the assets’ value, admitting it had overpaid.”

None of this stopped Goldman from engaging in the third of these bond issues a few months later, despite the suspicion openly aired amongst these bankers that the purpose of the money was to act as a slush fund at GE13, even though another professional third party, the law firm Linklaters warned them also:

Linklaters LLP., Goldman’s own outside counsel on the third offering, also voiced concern about relying on BSI as the custodian bank. Goldman shrugged off the warnings and went ahead with the issuance anyway, earning its biggest payday to date.

Even BSI Bank itself asked why it had been engaged for such a huge offering, the filing says. Of course, that small private bank has long since been disbanded thanks to its role over 1MDB. The question is whether this far larger and more powerful bank is also now in serious trouble?

After all, continues the shareholder complaint:

“… hundreds of millions of dollars disappeared from 1MDB’s account almost immediately – just as it had with the $1.4 billion Islamic bond offering for 1MDB’s predecessor fund on which Goldman had earlier advised. Then, within days or weeks, Low and Najib would return to Goldman to ask for another massive capital raise, providing no explanation as to where the hundreds of millions earmarked for “general purposes” in the last deal had gone. Goldman would immediately agree and begin work preparing the next offering. Yet even a cursory look into 1MDB’s financial records during the due diligence that such preparation required would have revealed the enormous holes in 1MDB’s balance sheet and explained why the fund needed more cash so soon.

Goldman, however, was driven by the prospect of more fees from what had become one of its most lucrative clients. Indeed, soon after the third offering closed, Blankfein met with Low for a third time to discuss how the bank could do more business with 1MDB.

It was after this third alleged and as yet unheard of meeting between Blankfein and Jho Low that the most stunning newly revealed transactions transpired:

Blankfein lauded Vella’s and Leissner’s work with 1MDB, and boasted to a gathering of Goldman investment bankers, “Look at what Tim and Andrea did in Malaysia. We have to do more of that….”

details the filing. However, Goldman’s next dealing with Malaysia did not involve those two bankers, rather the bank dealt directly with Jho Low.

The shareholders’ complaint details for the first time that Goldman was involved in a highly suspicious transaction highlighted by Sarawak Report back in 2014 namely the buy-out of the Houston based oil company Coastal Energy together with Aabar in a deal conducted together with the now jailed Khadem Al Qubaisi (the man behind the bogus ‘guarantees’ for the 1MDB bond issues).

It was acknowledged and announced at the time that Goldman Sachs acted as advisor to Aabar in its multi-billion dollar acquisition of the US oil asset. Sarawak Report at the time also flagged up that Jho Low’s Jynwell Capital had at the same time engaged with Aabar obtaining an ‘option’ on the deal in return for injecting a relatively small sum of cash, which was hard to explain given that the Abu Dhabi sovereign wealth fund was plainly able to conduct the deal itself.

Now, the shareholder indictment squarely accuses one of Goldman Sachs’ top executives of being a secret advisor also to Jho Low in the transaction, knowingly facilitating in the process his laundering of money stolen from the third 1MDB bond it had previously negotiated both with Aabar and Jho Low.

Since 2012, Goldman’s Head of Investment Banking for the Middle East and North Africa, Hazem Shawki, had been advising Low on a proposed takeover of Houston-based Coastal Energy – one of many means by which Low sought to turn his stolen 1MDB funds into assets that appeared legitimate. Learning of the deal as it approached fruition in 2014, Goldman compliance personnel, who had rejected Low as a client on three separate occasions, wrote in an internal document, “Jho Low’s appearance is not welcome. But if he is in a very minor role … then we may be able to live with it.” With this encouragement, Shawki nominally changed clients to advise Low’s partner in the acquisition, a subsidiary of IPIC, the Abu Dhabi fund whose corrupt executives had been taking kickbacks to guarantee 1MDB’s bonds. Then, within days of the acquisition’s closing, the IPIC subsidiary paid Low $350 million, supposedly to buy out the shares in Coastal Energy that Low had acquired with only $50 million a week before – a 600% return on investment. The transfer to Low was textbook money laundering, and Shawki knew of the transfer at the time.

If the shareholders are able to prove this deception in a court of law then the outlook for the reputation and future of Goldman Sachs is bleak indeed. As the outline to the case concludes, the bank in its formal announcements has lied time and again over the nature of its relationship to Jho Low, whilst having conducted all these deals. For example:

Responding to an October 2014 article in the Malaysian outlet The Edge, Goldman stated: “Other than legal and accounting firms providing professional services, no fees or commissions were paid by 1MDB or Goldman Sachs to external third parties in connection with these transactions, nor have we ever been asked by 1MDB or others to pay such fees or commissions.” Yet Goldman’s own senior bankers had agreed to pay kickbacks to government officials in Malaysia and the Middle East, and it is beyond dispute that 1MDB paid billions to conspirators in the scheme.”

Likewise:

In December 2016, Goldman claimed publicly: “We have found no evidence showing any involvement by Jho Low in the 1MDB bond transactions” Of course, Blankfein himself had personally met with Low before, during, and after the 1MDB bond offerings to discuss how Goldman could do business with the fund, and a mountain of other evidence, including internal Goldman emails, confirmed the bank’s contemporaneous knowledge that Low was a key intermediary.”

Given that during this period of extreme risk taking and facilitation of illegal behaviour, the bank was assuring shareholders in each of its annual and quarterly filings with the SEC that its strong risk-management and compliance safeguards were so improved after the financial crisis, the shareholders believe they have a right to full compensation for the enormous drop in share price that inevitably occurred once the truth about its involvement in 1MDB started to emerge with the Department of Justice and other proceedings against the bank.

That share drop was as much as 40% at one point, wiping out billions in market capitalisation. The court and prospective jury may choose to agree with the shareholders who lost out as a result, which is why Goldman Sachs the ‘Teflon Bank’ may at last have met its match over 1MDB.

[Watch for Updates with more details from the complaint]

LINK [Click to go read COMMENTS]

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