Shareholders, led by a multi-billion dollar Swedish pension fund and supported by a new-found determination by the Department Of Justice of the United States, may have left the ‘world’s most powerful bank’ in a nowhere-to-turn-to bind.
Goldman Sachs stands evidenced of deliberately (potentially criminally) misleading their shareholders numerous times and of being fully aware and complicit in the corruption underpinning the lucrative loans they raised for 1MDB.
That criminal purpose was the explanation for the enormous commissions the bank charged 1MDB (200 times normal rates) claims the shareholder suit, because the bankers’ own frequent excuse that they charged for taking the risk on the bond sales has been exploded as a lie – in fact the bonds were already secretly placed in advance of the offer and there was no such risk, the suit explains.
The complaint, lodged with the US High Court of the Southern District of New York last week, squarely names the top people who signed off on the 1MDB deals despite being fully aware of the unusual and ‘highly suspicious’ nature of the bonds: these include the former CEO Lloyd Blankfein, the present CEO David Solomon and the former bank President Gary Cohn and the former COO Harvey Schwartz.
These men were aware of the numerous ‘Red Flags’ and objections raised by senior figures in their own bank and third party assessors, yet five committees of the bank including those on which they sat had bulldozed through the deals.
Worse, having personally scrutinised the circumstances of the bonds (which brought in more profits over 2012/13 than the rest of Goldman’s international bond business put together) these men were in a perfect position to know that a huge percentage of the cash raised by the bonds could not be legitimately accounted for. Hundreds of millions had immediatelybeen channelled into off-shore accounts and disappeared.
The reason Goldman had access to this information was that under “robust due dilligence protocols” brought in after the 2008 crash so-called ‘Post Transaction Monitoring’ had been put in place to counter fraud of this kind. These tough new measures had been flagged up to shareholders in all the bank’s corporate literature, making clear Goldman Sachs was entitled to dig further and demand evidence from its 1MDB regular client as to where the bond money had gone.
However, instead of doing just that, when asked to raise a second and third bond issue the bankers simply agreed to go ahead in return for the same exorbitant rates, despite the numerous Red Flags associated with its politically connected clients. For example, the complaint notes that at the very time that the bank was raising this money for Najib in the name of the public fund, hundreds of thousands of Malaysians were protesting government corruption on the streets of KL.
Yet later, when challenged about the monstrous thefts that eventually came to light, Goldman Sachs declared several times that the bank was NOT in a position to investigate where the money was going. The class action suit asserts that, to the contrary, under the terms of its due diligence and contract terms Goldman WAS in a position to investigate and determine the money trail, meaning the denials wer a lie:
Had Goldman actually engaged in the post-transaction monitoring that the BSC [Business Standards Committee] had mandated—and which bank President Cohn assured investors in 2013 had been “fully implemented”—more personnel at the bank would have discovered the corruption
Furthermore, senior bankers Andrea Vella and Tim Leissener are accused of being fully cogniscent and complicit over the payment of bribes to top Malaysian and Abu Dhabi officials and familiy (Najib, KAQ, Rosmah and staff in 1MDB) as part of the process of raising the loans backed by the bogus and meaningless guarantees supported by Aabar.
Instead of checking more closely into the actions of these top bankers over these loans which had been flagged as highly suspicious by colleagues, the most senior officals in the bank waived through the transactions, promoted both men into even more senior positions, lavished them with bonus payments and publicly urged others in the bank to follow their example.
Perhaps the most damning evidence of all to emerge from the 200 page complaint is the fact that Goldman Sachs’ most senior regional figure at the time, David Ryan, President of Goldman Asia, persistently warned his leading colleagues at the top echelons of the bank against engaging in the 1MDB bond deals.
However, Ryan’s advice and deep concerns were over-ruled by the very highest levels (namely Blankfein, Solomon, Cohn) on the three occasions that he sought to veto each of the 1MDB bond deals, pointing out that no legitimate good reason had been put forward for raising so much money in the first two deals and NO REASON AT ALL had been given for the raising of the final bond of $3 million dollars just before the GE13 election.
In order to quash their most senior man in Asia’s refusal to sign off the later loans Blankfein and Cohn recruited and appointed a new Asia official in a position over Ryan, in order to overrule him. Following this final outrageous flouting of proper practice and personal humiliation Ryan resigned from Goldman Sachs after the third 1MDB bond issue was pushed through against his advice, according to the legal dossier which implies Ryan will testify as such.
In detailing these flagrant and illegal breaches the lengthy indictment is peppered with anecdotes and information that signal how an arrogant and greedy cartel at the top of management in the powerful bank saw fit to flout all the rules they publicly boasted were in place to protect investors and avoid corruption.
It is indicated that there is plenty of email and witness evidence to prove that all concerned, including those at the very top suspected and in many cases knew there was massive corruption involved over 1MDB and that this was the reason they were able to take the extra money from the Malaysian fund and were given the secretive business without competition or tender on the loans.
Faced with arguing otherwise these named top bankers certainly have a hard task ahead of them, as they balance to what extent their explanations will have to rely on ignorance, stupidity, failure to consider the obvious, failure to follow their own rules and failure to listen to senior colleagues – as opposed to the alleged sharp practice based on the conventional judgement that Najib Razak and BN had the Malaysian electoral system sewn up.
Ultimately, five Goldman committees, including four powerful firmwide committees charged with reviewing important transactions—the Risk, Business Standards, Capital, and Suitability Committees—approved Project Magnolia in mid-May 2012. Among those who approved the deal were: CEO Blankfein; then-Head of Investment Banking and current CEO David Solomon; and then-Global Head of Financing, now CFO Stephen Scherr. In its rush to complete the deal, Goldman failed to obtain approval from IPIC’s board, the guarantor of the bonds. Instead, it relied on the approval of the two corrupt officials [Khadem Al Qubaisi and Mohammed Al Husseiny] with whom Low was conspiring, including the executive with a well-known reputation for demanding kickbacks [KAQ].
Like Najib, will the ‘Masters of the Universe’/ ‘Rocket Science Bankers’ be forced to rely on ignorance and stupidity as their excuse for pushing the deals through? The shareholder complaint refers to a critique by a Harvard Law School Forum which dubbed Goldman’s current reliance on blaming two “rogue employees” for everything that has gone wrong as:
“Goldman’s ‘Four Monkeys’ defense: see no evil, hear no evil, speak no evil and keep all the money.”
Just ten days after Goldman’s first ‘Project Magnolia’ closed, raising $1.75 billion for 1MDB to buy ‘power assets’ and “as its proceeds were being funnelled through shell accounts to pay off Low and officials at 1MDB and IPIC”, the complaint details how Goldman was approached once more to underwrite a second bond deal with 1MDB, what became “Project Maximus”, again without any competition from rival investment banks.
The fact the bank agreed to service the three bonds in such quick succession meant it was perfectly placed to scrutinise how money from the earlier levies had been spent and whether the claimed requirements for more money were in fact genuine (they were not).
It makes the denials by Goldman Sachs that it was in a position to know what had happened to the money all the harder to sustain:
“Given the razor-thin interval between the first and second offerings, the same red flags that existed when Project Magnolia was underway persisted at the outset of Project Maximus”
cites the claim, pointing out specifically that over half the money raised with a sense of such speed and urgency in these first two bonds had no stated purpose for the company.
Indeed, if half the $1.75 billion raised by the first Magnolia loan had not been diverted almost immediately into off-shore accounts and stolen there would still have been plenty available from the original loan for 1MDB to carry out the further investments cited in the second and third bond issues, rendering them totally unnecessary:
“the [Maximus] offering circular stated that of the approximately $1.63 billion in net proceeds that the offering was expected to be generate, only $692 million would be used to buy the second energy company. Over $1 billion of the second offering was allocated to “general corporate purposes.” This was itself a red flag, as there was no reason to rush an offering the purpose of which had been left largely undefined.
Furthermore, even the stated justification for the portion of the raise that was earmarked for a specific use was suspicious. As noted above, $744 million of the first offering was purportedly set aside for “general corporate purposes,” including future acquisitions. With only $692 million needed to buy the second energy company, the set-aside funds from the first offering would have sufficed—had they not already been funneled offshore for corrupt payments to Najib, officials at 1MDB and IPIC, and Low”
The action details how David Ryan, Goldman’s man in charge of Asia had raised just these blantant issues with his collegues, but was over-ruled:
“Asia President David Ryan Again Speaks Out But Is Overruled and Sidelined by President Gary Cohn:
In connection with Project Maximus, Goldman’s Asia President, David Ryan, again voiced strong reservations about Goldman’s investment banking work for 1MDB. Ryan was Vella’s and Leissner’s superior. He was also one of only 25 Senior Directors at the bank and served on Goldman’s Management Committee, according to its 2013 Annual Report.
Nevertheless, he received treatment similar to Turnbull, the Executive Director “b-tracked” and reprimanded by compliance personnel after objecting to the first offering several months before….
[t]he unusual no-bid contract struck Mr. Ryan and other Goldman executives as possibly too good to be true.” When the second offering popped up on the heels of the first, Ryan questioned why Goldman was not lowering its fees, given the ease with which it had offloaded the first round (indeed, lining up purchasers before closing).
Gary Cohn immediately silenced Ryan, rehiring Mark Schwartz, a former Goldman banker, and installing him as Chair of Goldman Asia, a post above Ryan.
Schwartz, who joined the firm’s Management Committee, was a proponent of the 1MDB relationship. Frozen out of the bank’s hottest business in his own region, Ryan was marginalized
With Project Maximus thus pushed through in November 2012 and half the money likewise stolen, Goldman found itself again approached for a third time, on this occasion by the Malaysian Prime Minister himself, who met with a senior Goldman banker, Michael Evans (who had previously been invited by Tim Leissner to party with Najib on a yacht off Monaco) on the fringes of the Davos Economic Summit in 2013, just as pressure was building on Najib to finally call the GE13 election:
In January 2013, Goldman Vice Chairman Evans met with Prime Minister Najib on the sidelines of the World Economic Forum in Davos, Switzerland. As one of only four vice chairmen among the bank’s executive officers, Evans was viewed as a potential successor to Blankfein. Evans had also served as one of two Co-Heads of the BSC [Business Standards Committee].
In Davos, Najib asked Evans if Goldman would raise an additional $3 billion for 1MDB—less than three months after it had raised $1.75 billion through Project Maximus. Najib added that he wished to raise the staggering sum quickly and quietly. Goldman, having already earned over $300 million from 1MDB over the prior nine months amid numerous red flags, readily agreed through Evans, who replied: “Of course, Goldman would be more than willing to help out.” The deal, which Goldman was again awarded without competition, was codenamed “Project Catalyze.” It would close just a few weeks later in March 2013, yielding Goldman its biggest payday in the relationship to date.
As they had with the prior issuances, Vella, Leissner, and others continued to work with Low as an intermediary between Goldman, 1MDB, Najib, and other government officials to bring the third round of 1MDB bonds to market.
Meanwhile, within days of being awarded the third bond deal, Leissner was again paying kickbacks. On January 17, 2013, he made two transfers of $1 million each to two high- ranking 1MDB officials.
The suit states that on this occasion there was NO specified reason given for the need for money, although it alleges there was open talk amongst the bankers about the purpose being for it to act as a slush fund for Najib.
If Post-Transaction Monitoring had taken place as advertised by the bank, Goldman Sachs would have known that within three days of the money being raised $681 million dollars of the funds raised by Project Catalyse was diverted into the prime minister’s personal AmBank account in KL to be dispensed over the coming weeks for numerous political and personal purposes:
“When Najib approached Evans in Davos in January 2013, he told the Goldman executive that speed and secrecy were of the essence. To justify the capital raise, Najib claimed that he had the opportunity to partner with an IPIC subsidiary to build a new financial center in Kuala Lumpur, the total cost of which would be $6 billion.
There was no explanation as to why financing for a massive $6 billion real estate development had to be raised in a matter of weeks.
Although it had already won the deal in Davos, Goldman made a presentation to 1MDB and the IPIC subsidiary, citing its client’s key objectives as “maintenance of confidentiality during execution” and “speed.”
Even Najib’s claimed justification for the raise—the $6 billion Kuala Lumpur financial center—vanished as the offering approached, as the offering circular for the bonds contained no stated purpose whatsoever for the use of funds. To the contrary, Goldman’s circular for the deal stated that the joint venture with the IPIC subsidiary “has yet to adopt a formal investment plan or establish investment criteria” and “does not have any specific investment, merger, stock exchange, asset acquisition, reorganization, or other business combination under consideration or contemplation….
Against this backdrop, Goldman bankers unsurprisingly engaged in internal discussions concerning the possibility that the bond money was being diverted to fuel political corruption. Indeed, The Wall Street Journal reported that at the time of the offering, “Mr. Najib faced a tough re-election fight, and concerns that [Najib] might be tapping 1MDB for money to help him win were discussed openly within Goldman.”Even Leissner raised the issue internally, commenting to a colleague in early 2013 that he knew 1MDB was operating as a political slush fund.”
As the complaint makes clear Goldman Sachs were in fact positioned to know exactly what was going on since it had a duty to track the money under its own lending protocols. Project Catalyse proved the last straw for one of the banks most senior personnel:
Goldman, as 1MDB’s principal investment bank and underwriter, had access to 1MDB’s financial records. It knew, therefore, that the offering was totally suspect and indefensible given the fund’s current capital structure. It also knew that, if recent history were any guide, the money from this third offering would disappear without the assets to show for it— which it had expressly covenanted would not happen.
Ryan Resigns After Cohn Silences Him a Third Time
For the third time, David Ryan, Goldman’s Asia President and member of the Management Committee, voiced suspicions about 1MDB and cautioned the bank against the bond issuance. Ryan was suspicious about the bank’s procurement of the massive bond deal through what appeared to have been a casual conversation, skipping entirely the usual process of detailed presentations, financial modeling, and negotiation that precedes deals of much lesser magnitude.
Again, bank President Gary Cohn and Mark Schwartz, the newly installed Chair of Asia, summarily overruled Ryan, short-circuiting the additional investigation and reporting to Legal and Compliance that the BSC had mandated. Only 43 years old and highly regarded at Goldman before his protests of the bank’s dealings with 1MDB, Ryan retired from Goldman in June 2013, partly because his concerns about the 1MDB deals were ignored.
Despite this history of events, the class action suit details a multitude of occasions where it says the bank blatantly lied about its position to know about the situation.
In a series of public statements and reponses to news organisations Goldman Sachs has claimed first that the exhorbitant fees it charged owed to a risk it took, now proven untrue; second that it had no way of monitoring where the money went and finally that the scam owed to the actions of a few “rotten apple” employees in the firm, whereas in fact the decisions came from the top after numerous warnings and objections had been raised both inside and outside the bank.
The bank continued to insist there had been no wrongdoing on the part of anyone at the bank with regard to the raising of the bonds (although Leissner had been suspended in 2016 owing to a seemingly unrelated matter of hiring the daughter of a politically connected Malaysian client) until the moment that Leissner was arrested and the Department of Justice filed its damning case last year.
Lloyd Blankfein, who till then had dominated the powerful institution, chose that moment to unexpectedly resign, whilst he said he was “still ahead”. Gary Cohn also quit to advise on ‘draining the swamp’ as Economics Advisor to President Trump.
Facing this suit brought by a series of immensely rich and powerful institutions, who placed their trust in the investment promises of Goldman Sachs and now feel cheated, they and their colleagues may find themselves unable to escape what they left behind.
Next: The Spotlight Also Needs To Fall On The Sarawak Loans From Goldman