New criminal charges for Goldman Sachs deepen crisis

New York

SINCE becoming a symbol of Wall Street greed during the financial crisis, Goldman Sachs has tried to recast its image as an investment bank that cares as much about ethics as it does its bottom line.

Now, that makeover is being undone by the bank's work for an obscure investment fund in Malaysia, which has entangled it in civil and criminal investigations around the world. Goldman recently received subpoenas from New York regulators, held talks with federal prosecutors and is likely to incur billions of dollars in penalties. It is one of the most serious crises in the bank's 149-year history.

The international legal assault on Goldman intensified on Monday, with prosecutors in Malaysia filing criminal charges against the bank, accusing it of defrauding investors by raising more than US$6 billion for the fund, which was supposed to benefit the Malaysian public but ended up enriching Goldman and others.

And that is just the start of the bank's troubles. Lawyers for Goldman met recently with federal prosecutors in what appeared to be an early step in settlement negotiations, according to three people familiar with those talks. Two of its senior employees have been charged.

The bank and some of its employees recently received subpoenas from regulators in New York, who are investigating the circumstances in which Goldman netted about US$600 million in fees through its no-bid work for the fund, 1Malaysia Development Berhad (1MDB), according to two people with knowledge of the subpoenas.

1MDB was supposed to finance infrastructure and other development projects to benefit the Malaysian public. Instead, according to prosecutors in the United States and Malaysia, it became a font of corruption for people close to Najib Razak, who was then the prime minister.

Goldman helped the fund raise US$6.5 billion from investors in 2012 and 2013. The money paid for an enormous spending spree by executives and public officials that included the purchases of diamonds, Birkin bags, Picassos and a Monet, as well as financing for the Hollywood film The Wolf of Wall Street.

Michael DuVally, a Goldman spokesman, said that the bank would fight the Malaysian charges, which he said "do not affect our ability to conduct our current business globally". He said that officials with 1MDB and the Malaysian government lied to Goldman about how they planned to use the money that the bank raised.

Goldman has previously said that it was cooperating with law enforcement and that it might incur "significant fines" from investigations into 1MDB in the United States and elsewhere.

While the charges filed by Malaysia's attorney general on Monday represent the first time that the bank itself has been criminally charged, the biggest threat to Goldman comes from the United States, where multiple law enforcement and regulatory agencies are building cases.

The US Justice Department is leading the investigation. In court filings, prosecutors have described an elaborate scheme by Goldman employees to cover up kickbacks and fees to secure business that involved shell companies in different jurisdictions. Each of the three times that Goldman issued bonds for 1MDB, the financier accused of directing the fraud, Jho Low, provided directions on whom to bribe in order to secure contracts, according to filings.

In internal e-mails disclosed by prosecutors, Goldman bankers referred to their 1MDB work under the code name Project Tiara. When Malaysian authorities seized assets that they said had been bought with stolen 1MDB money, they found 14 diamond tiaras. They also tracked down a US$250 million yacht, a US$35 million Bombardier jet and a see-through grand piano that is in the living room of supermodel Miranda Kerr.

The Justice Department has filed criminal bribery and money-laundering charges against two former Goldman bankers, Timothy Leissner and Roger Ng. Leissner, who managed Goldman's relationship with 1MDB, pleaded guilty in August. Ng is in Singapore and intends to fight extradition to the United States.

A few days after those charges were announced on Nov 1, Goldman's legal team met with prosecutors from the Justice Department's criminal division, according to the people familiar with the talks. Goldman's lawyers outlined their defence against possible charges - apparently an early step towards a potential legal settlement.

Then, at a Dec 11 meeting in Washington, prosecutors met with the former New Jersey governor, Chris Christie, and other representatives for Low, who has been criminally charged in the United States and Malaysia.

At that meeting, Low's lawyers wanted to discuss the federal government's efforts to seize their client's assets, and they noted that Low could offer the prosecutors information about Goldman's role in the scandal. The prosecutors rebuffed that idea, noting that their investigation of Goldman was largely complete, according to three people familiar with that meeting.

A final settlement is still months away. It is unclear whether Goldman itself will face criminal charges in the United States. Any settlement is likely to include a penalty stretching into the billions of dollars, likely making it one of the biggest corporate penalties imposed during the Trump administration.

In a sign of how seriously Goldman is taking the investigation, the bank has retained lawyers from firms including Akin Gump to represent employees who have been questioned by federal authorities, according to people with knowledge of the hirings.

The Federal Reserve, the Securities and Exchange Commission and the New York state Division of Financial Services are also moving forward with separate investigations of Goldman's role in the 1MDB fraud. NYTIMES