New boss faces ma­jor chal­lenge af­ter charges against bankers

Gold­man Sachs scan­dal

The Guardian - - FINANCIAL - Ka­ly­eena Mako­rtoff

The new chief ex­ec­u­tive of Gold­man Sachs, part-time DJ David Solomon, was prob­a­bly hop­ing to give his im­age a more pro­fes­sional sheen when he stepped into the top job at the world’s most fa­mous in­vest­ment bank. The in­sti­tu­tion’s deep­en­ing en­tan­gle­ment in a ma­jor cor­rup­tion scan­dal is cer­tainly a se­ri­ous mat­ter that will limit his leisure time.

The Wall Street gi­ant’s work for Malaysia’s state in­vest­ment fund – known as 1MDB – was not a se­cret, but a re­cent US De­part­ment of Jus­tice in­ves­ti­ga­tion and sub­se­quent charges against for­mer Gold­man bankers have put pres­sure on Lloyd Blank­fein’s suc­ces­sor.

Gold­man’s le­gal team is pre­par­ing for a meet­ing with the DoJ next week, as Gold­man faces the prospect of rep­u­ta­tional and fi­nan­cial dam­age from the al­leged multi-bil­lion dol­lar fraud at 1MDB. Gold­man is un­der fire for two is­sues: its work in raised funds that were later said to have been mis­used by con­spir­a­tors and Malaysian of­fi­cial; and for also charg­ing fees of around $600m (£460m) for its ef­forts.

The US last week un­veiled charges against two for­mer Gold­man bankers for con­spir­ing to laun­der bil­lions of dol­lars em­bez­zled from 1MDB. Tim Leiss­ner, a for­mer Gold­man part­ner in Asia, has pleaded guilty to con­spir­ing to laun­der money and breach the For­eign Cor­rupt Prac­tices Act by brib­ing Malaysian and Abu Dhabi of­fi­cials and sidestep­ping in­ter­nal ac­count­ing con­trols. He has been or­dered to hand over $43m as a re­sult of those crimes. An­other for­mer Gold­man banker, Roger Ng, has been ar­rested in Malaysia on bribery charges. Mean­while, the lender has re­port­edly put its for­mer co-head of Asia in­vest­ment bank­ing An­drea Vella on leave.

Re­ports have also iden­ti­fied Solomon’s pre­de­ces­sor, Lloyd Blank­fein, as the ex­ec­u­tive who at­tended ini­tial meet­ings with a key fi­nancier Jho Low – also charged by the DoJ but still at large – and the now-ousted Malaysian prime min­is­ter, Na­jib Razak. Blank­fein re­mains a se­nior fig­ure at Gold­man as chair­man.

Around $4bn even­tu­ally van­ished from 1MDB, with US pros­e­cu­tors claim­ing the di­verted cash was used by con­spir­a­tors to buy lux­ury real es­tate in the likes of New York, pricey art­work, and fund the pro­duc­tion of Hol­ly­wood films in­clud­ing The Wolf of Wall Street.

When pushed to re­spond to the US in­dict­ments, Solomon char­ac­terised the for­mer Gold­man bankers as rogue em­ploy­ees who breached the lender’s own stan­dards. Solomon told Bloomberg TV: “It is ob­vi­ously very dis­tress­ing to see that two for­mer Gold­man Sachs em­ploy­ees went so bla­tantly around our poli­cies and so bla­tantly broke the law.”

A Gold­man rep­re­sen­ta­tive told the Guardian that “the firm con­tin­ues to co­op­er­ate with all au­thor­i­ties in­ves­ti­gat­ing this mat­ter.”

The bank has re­port­edly de­fended the hefty bill, cit­ing the risks in­volved. It has pointed to trans­ac­tions in­clud­ing buy­ing un-rated bonds from 1MDB in an ef­fort to gen­er­ate quick cash for the fund while it con­tin­ued to search for out­side in­vestors.

A hit from a prospec­tive DoJ

‘It is very dis­tress­ing to see two for­mer Gold­man Sachs em­ploy­ees went so bla­tantly around our poli­cies and bla­tantly broke the law’ Gold­man chief

set­tle­ment or any move to­wards resti­tu­tion on be­half of the Malaysian gov­ern­ment could risk dent­ing the bank’s earn­ings, which have man­aged to beat an­a­lyst es­ti­mates so far this year.

The US bank warned in its third quar­ter re­sults this month that it was “un­able to pre­dict the out­come” of the DoJ in­ves­ti­ga­tions.

“Any pro­ceed­ings by the DoJ or other gov­ern­men­tal or reg­u­la­tory au­thor­i­ties could re­sult in the im­po­si­tion of sig­nif­i­cant fines, penal­ties and other sanc­tions,” the bank ex­plained.

Malaysian politi­cian and prime min­is­ter-in-wait­ing, An­war Ibrahim, said ear­lier this month that it would be “in­ex­cus­able” if Gold­man was found to have been com­plicit to the “ex­cesses and crime” while “the coun­try and the peo­ple suf­fer”.

That was af­ter the coun­try’s fi­nance min­is­ter, Lim Guan Eng, sug­gested in June that the coun­try’s gov­ern­ment would also be ex­plor­ing whether to seek claims from Gold­man over the scan­dal.

Any de­tails out­lin­ing Gold­man’s com­plic­ity in the fraud­u­lent be­hav­iour would also put a black mark on its rep­u­ta­tion as Wall Street marks 10 years since the crash.

Solomon will be tested by how copes with the fall­out, hav­ing been tipped to en­gi­neer a cul­tural shift at the bank. He has been noted for keep­ing a tighter grip on the Gold­man’s in­ner cir­cle, hav­ing anointed the small­est num­ber of new part­ners in decades ear­lier this week. But only when he puts the ques­tion of the bank’s mis­con­duct around 1MDB to rest will Solomon be able to shift fo­cus back to his DJ decks.

David Solomon


US pros­e­cu­tors said cash di­verted from 1MDB helped fund films such as The Wolf of Wall Street, with Leonardo DiCaprio. Right: Lloyd Blank­fein

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