Malaysian attorney general charges Goldman Sachs over 1MDB

Chris Hamblin Editor London 17 December 2018

Malaysian attorney general charges Goldman Sachs over 1MDB

Tommy Thomas, the attorney general of Malaysia, has pressed criminal charges against subsidiaries of Goldman Sachs Investment Bank, its senior employees Tim Leissner and Roger Ng Chong Hwa, a former employee of 1Malaysia Development Berhad called Jasmine Loo Ai San and fugitive financier Low Taek Jho, commonly known as Jho Low, for offences against the Capital Markets and Services Act 2007.

The prosecutor says that the charges arise from the commission and abetment of false or misleading statements by all of the accused in order to dishonestly misappropriate US$2.7 billion from the proceeds of three bonds issued by subsidiaries of 1MDB, which were arranged and underwritten by Goldman Sachs. HNW investors were among the purchasers. Goldman Sachs is presenting itself as a victim of the dishonesty of others and has told the press that it will 'vigorously contest' the charges. The US Department of Justice has already indicted Jho Low in absentia.

The three bonds with a total face value of US$6.5 billion are: (i) US$1.75 billion bonds issued by 1MDB Energy Ltd through an offering circular dated 18 May 2012 with an interest rate of 5.99% per annum and redeemable in 2022; (ii) US$1.75 billion bonds issued by 1MDB Energy (Langat) Ltd through a private placement memorandum dated 17 October 2012 with an interest rate of 5.75% per annum and redeemable in 2022; and (iii) US$3 billion bonds issued by 1MDB Global Investments Ltd through an offering circular dated 16 March 2013 with an interest rate of 4.4% per annum and redeemable in 2023.

Tim Leissner and Roger Ng Chong Hwa of Goldman Sachs allegedly conspired with Jho Low, Jasmine Loo Ai Swan (then General Counsel of 1MDB) and others to bribe Malaysian public officials in order to procure the selection, involvement and participation of Goldman Sachs in these bond issuances. The slightly disorganised press release not only states that Leissner and Roger Ng have been charged, but that they will be charged shortly - indeed, the contradictory second assertion comes in brackets after Ng's name, so it may apply only to him; readers must draw their own conclusions.

Goldman Sachs allegedly benefited by receiving underwriting and arranging fees of approximately US$600 million - a figure apparently several times higher than the prevailing market rates and industry norms. The Malaysian attorney general avers that, in addition to receiving part of the misappropriated bond proceeds personally, those employees and directors of Goldman Sachs received large bonuses and better career prospects at Goldman Sachs and in the investment banking industry generally.

The offering circulars and private placement memorandum for the bonds were sent off to (the attorney general's phrase is 'filed with') the Labuan Financial Services Authority, the financial regulator of Labuan, Malaysia’s offshore banking jurisdiction, and allegedly contained statements which were false, misleading or from which there were material omissions. Thomas says that they untruthfully told investors that the proceeds of the bond issuances would be used for legitimate purposes, when in fact the proceeds were corruptly and fraudulently misappropriated. The prosecutor's office has written: "Offering circulars and private placement memorandum [sic] are serious documents, intended to be relied on, and in fact were relied on, by purchasers of the bonds."

Thomas goes on: "The scheme designed and crafted by the accused to fraudulently structure the bonds for ostensibly legitimate purposes when they knew that the proceeds thereof would be misappropriated and fraudulently diverted by the accused themselves was planned and executed in order to defraud the Government of Malaysia and the purchasers of the bonds. Their scheme to defraud is a contravention of Malaysia’s securities laws, particularly s179 Capital Markets and Services Act 2007 [Act 671]."

According to the charge sheets that the attorney general has presented to a Kuala Lumpur court, his main target is reportedly Goldman Sachs International (UK), which had arranged the sale of the three bonds. Goldman Sachs (Singapore) Pte and Goldman Sachs (Asia) LLC were also charged with abetting Goldman Sachs International by means of misinformation and omissions, according to a website called theedgemarkets.com.

Prosecutors will seek criminal fines against the accused well in excess of the US$2.7 billion allegedly misappropriated from the bonds proceeds and US$600 million in fees received by Goldman Sachs, along with custodial sentences for all the people whom they have accused, the maximum term of imprisonment being ten years.

Thomas' press release ends on a queasy, timorous note that no prosecutor would ever strike if he were charging defenants who were less politically powerful than his present targets: "Their fraud goes to the heart of our capital markets, and if no criminal proceedings are instituted against the accused, their undermining of our financial system and market integrity will go unpunished. Having held themselves out as the pre-eminent global adviser/arranger for bonds, the highest standards are expected of Goldman Sachs. They have fallen far short of any standard. In consequence, they have to be held accountable."

In on the act?

Some of the investors - HNW or not - may have been accomplices of Jho Low's, according to The Edge Markets, which wrote earlier this month: "Millions were made by unknown parties on the first bond issuance of 1MDB in 2009. Within a space of two weeks, one investor garnered 45 million ringgit [US$10.8 million] and the other 50.1 million ringgit [$12 million] at the expense of the public. It is time for Malaysian regulators to investigate the issue."

Enforcement action elsewhere

Others been held to account in the last two weeks or so. Former Malaysian premier Najib Razak, who established the fund in 2009, has pled not guilty to yet another criminal charge. As of 23 November, he had 25 corruption charges against him, to which he has also pled not guilty. Arul Kanda, 1MDB's former CEO, has been detained and, according to reports, is also to be charged. He used to work at Barclays and Credit Agricole. The reformist Malaysian government, meanwhile, has terminated Shukry Salleh's three-year contract as chairman at the state-owned Bank Rakyat after he was accused of trying to conceal Jho Low's involvement in 1MDB by tampering with an audit report in 2014.

The Vampire Squid

Goldman Sachs has earnt the soubriquet of the 'Vampire Squid' because its tentacles seem to be everywhere, not least in government. Former partner Steve Mnuchin is now the 77th Secretary of the United States Treasury. Hank Paulson was the CEO of Goldman Sachs before he became President George W Bush's Treasury Secretary for the period 2006-09. Joshua Bolten worked at Goldman Sachs' London office in 1999 before he became the policy director for Bush's presidential campaign in 2000. Gary Gensler, who became a Goldman partner at the tender age of 30, left to become assistant secretary of the Treasury for financial markets in 1997 and later helped draft the Sarbanes Oxley Act 2002. Malcolm Turnbull, the recently ousted prime minister of Australia, was once a partner. Olusegun Olutoyin Aganga worked for the bank's hedge funds division in London before a spell as Nigeria's minister of finance in 2010-11.

Goldman has spawned regulators and central bankers as well. William Dudley was Goldman's chief economist in 1997-2007 and is now the president of the New York Federal Reserve. Stephen Friedman, who chaired the New York Fed in 2008-9, had been the chairman of the Goldman board in the early '90s. Mario Draghi, the head of the European Central Bank, was Goldman Sachs International's vice-chairman and managing director in 2002-5 and Mark Carney, the Governor of the Bank of England, is also a veteran of the banking giant.

Lloyd Blankfein, 64, the recently-departed CEO of Goldman Sachs, was one of the few main dramatis personae in the credit crunch of 2008 to remain in his position, despite Goldman securitising sub-prime loans on an epic scale. Bloomberg recently published a story entitled "Blankfein's final days at Goldman clouded by 1MDB scandal," but he appears not to have been involved, save for a Wall Street Journal report that he met Jho Low, the fugitive financier at the heart of the corruption scandal, on two occasions (in 2009 and in 2013) despite the compliance department's attempt at one point to warn him off.

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