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 immediately raised the 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 multibillion dollar fraud at 1MDB. Goldman Sachs is under fire for two issues: its work in raising funds that were later said to have been misused by conspirators and Malaysian officials; and for also charging fees of about $600m (£460m) for its efforts.
The US last week unveiled charges against two former Goldman Sachs bankers for conspiring to launder billions of dollars embezzled from 1MDB.
Malaysia's extraordinary 1MDB corruption scandal allegedly involved billions being stolen from the country's sovereign wealth fund and spent on everything from Hollywood films to handbags.
Former prime minister Najib Razak was arrested in the 1MDB corruption inquiry set up by his successor, which engulfed the ex-leader and his cronies and resulted in his loss at elections in May 2018.
1Malaysia Development Berhad (1MDB) is a state investment fund that Najib launched in 2009 shortly after becoming prime minister.
Its portfolio has included power plants and other energy assets in Malaysia and the Middle East, and real estate in Kuala Lumpur.
The fund was closely overseen by Najib.
Whistleblowers say Low Taek Jho, or "Jho Low", a shadowy, jet-setting Malaysian financier close to Najib but who has no official positions, helped set up 1MDB and made key financial decisions.
Jho has now been charged with conspiring to launder billions of dollars embezzled from 1MDB by the US Department of Justice, though he remains at large.
After the scandal emerged, Najib purged 1MDB critics from his government, curbed domestic investigations, enacted a tough new security law and generally lurched to the right.
But the issue exploded in July 2015, when the Wall Street Journal published documents showing Najib received at least $681m (£518m) in payments to his personal bank accounts.
The US justice department has piled on the pressure by filing lawsuits to seize some $1.7bn in assets it said were purchased with stolen 1MDB money.
Najib's dramatic election loss in 2018 left him facing the possibility of prosecution and imprisonment.
The election winner, 93-year-old Mahathir Mohamad, has pledged to investigate the scandal and try to recover stolen funds from 1MDB that have been sent abroad.
Tim Leissner, a former Goldman Sachs 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 $43.7m as a result of those crimes. Another former Goldman banker, Roger Ng, was arrested in Malaysia on 1 November on bribery charges. Meanwhile, the lender has reportedly put its former co-head of Asia investment banking, Andrea Vella, on leave.
News reports have also identified Blankfein as the executive who attended initial meetings with a key financier and middleman 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 Sachs, having retained his position as chairman.
Some $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 standards.
“It is obviously very distressing to see two former Goldman Sachs employees went so blatantly around our policies and so blatantly broke the law,” Solomon told Bloomberg TV.
“I feel horrible about the fact that people who worked at Goldman Sachs, and it doesn’t matter whether it’s a partner or it’s an entry level employee, would go around our policies and break the law.”
A Goldman Sachs representative declined to comment further but told the Guardian that “the firm continues to cooperate with all authorities investigating this matter”.
Goldman is now facing the prospect of sanctions by the DoJ, while Malaysian politicians look at clawing back some of the $600m fees.
The bank has reportedly defended the hefty bill, citing the risks involved. It has pointed to transactions including buying unrated 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 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 probes.
“Any proceedings by the DoJ or other governmental or regulatory authorities could result in the imposition of significant fines, penalties and other sanctions against the firm,” the bank said.
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 Sachs over the scandal.
Any details outlining Goldman’s involvement or complicity in the fraudulent behaviour would also put a black mark on its reputation just as Wall Street marks a decade on from the 2008 banking crash.
Solomon will be tested by how it copes with the fallout, having been tipped to engineer a cultural shift at the bank. He has already been noted for keeping a tighter grip on 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.
