Goldman Sachs' role as adviser to a politically connected Malaysia development fund resulted in years of lucrative business. It also brought exposure to an expanding scandal.
As part of a broad probe into allegations of money laundering and corruption, investigators at the Federal Bureau of Investigation and the Justice Department have begun examining Goldman Sachs’s role in a series of transactions at 1Malaysia Development, people familiar with the matter said.
The inquiries are at the information gathering stage, and there is no suggestion of wrongdoing by the bank, the people said. Investigators “have yet to determine if the matter will become a focus of any investigations into the 1MDB scandal,” a spokeswoman for the FBI said.
The widening scandal—investigators in five countries are now looking into 1MDB—highlights the sometimes risky path that Goldman has cut in emerging markets in search of faster growth.
A few years before the Malaysia deals, Goldman did a series of controversial transactions with the Libyan Investment Authority that also brought unwelcome attention. The Libyan sovereign wealth fund claimed in a lawsuit filed in 2014 in London that the bank took advantage of its unsophisticated executives to sell them complicated and ultimately money losing investments. Goldman has said the claims are without merit. A trial in the suit is scheduled to begin next year.
The bank earned $350 million for executing nine trades for Libya, according to the investment authority. It earned far more from the Malaysian fund. The bank was consulted during 1MDB’s inception, advised it on three acquisitions and arranged the sale of $6.5 billion in bonds that alone brought in close to $600 million in fees, according to people close to the bank.
1MDB is now entangled in accusations of billions of dollars of missing money, putting it at the centre of a political crisis for Malaysian Prime Minister Najib Razak, who oversees the fund. Malaysian government investigators earlier this year traced $700 million into Najib’s alleged bank accounts through agencies, banks and companies linked to 1MDB, The Wall Street Journal reported in July. Malaysia’s anticorruption agency later said the funds came from an unspecified Middle East donor.
The government investigation hasn’t detailed what happened to the funds that went into the prime minister’s alleged personal accounts. Transactions around the fund are under investigation by the FBI and Justice Department, as well as authorities in Malaysia, Singapore, Hong Kong and Switzerland.
1MDB and Najib didn’t reply to requests for comment. Najib has denied any wrongdoing or taking money for personal gain. 1MDB has said money was paid out properly to fulfill the fund’s financial obligations and that it would cooperate with any investigations.
Goldman Chief Executive Lloyd Blankfein has pushed the Wall Street bank to expand aggressively into emerging markets. In a presentation to investors five years ago, he outlined a strategy “to be Goldman Sachs in more places” and noted that 31% of the firm’s new hires in 2010 occurred in growth markets, compared with just 8% five years earlier.
“I believe we have less effective competition in a lot of these places,” Blankfein said at the time.
Malaysia was an early area of success for Goldman, which had strong relationships in the country. Tim Leissner, Goldman’s top banker in Southeast Asia who was close to Najib, according to people familiar with the matter, and Roger Ng, a Malaysian sales executive who has since left the bank, did deals for the government and companies throughout the last decade.
In 2009, when the sultan of the state of Terengganu, also Malaysia’s king at the time, was launching a fund to invest its oil wealth, Leissner was called to the royal palace to pitch the king for the business, according to people close to the bank. Goldman won the bidding to advise the fund, which would soon be taken over by the national government and named 1Malaysia Development Bhd.
A key arranger of the financing for 1MDB was Andrea Vella, an Italian-born senior Goldman banker, people familiar with the transactions said. He was also involved in structuring the Libyan deals, according to people familiar with the matter. This spring, Vella, 42 years old, was promoted to co-head of investment banking in Asia excluding Japan.
Vella led the new markets business in the bank’s London-based financing group at the time of the Libyan transactions. He provided a statement defending Goldman’s actions in response to a lawsuit brought by the Libyan fund, which referenced what the plaintiffs said were some of his emails.
In a January 18, 2008, email to colleagues, Vella wrote that a Goldman executive who worked with the Libyan fund “has a very impressive grip on these people,” according to a copy included in the lawsuit.
“I reckon that with some guidance we can channel the energy into creating less entropy and more added value,” he wrote. The plaintiffs pointed to the comments as evidence of their argument that Goldman had influence over the fund’s managers, an allegation Goldman denies.
In Malaysia, one of Goldman’s big assignments came in 2012, when it advised 1MDB on the acquisition of Malaysian conglomerate Genting’s domestic power generation business. The deal quickly turned into a loser for 1MDB, which paid 2.3 billion ringgit for the business, about $740 million at the time.
In its financial statements for the year, 1MDB booked an impairment charge of 1.2 billion ringgit, writing down part of the premium for the power assets it had bought from Genting and another Malaysian company. Genting, meanwhile, recorded in its financial statements a gain on the sale of 1.9 billion ringgit.
Genting didn’t respond to requests for comment. 1MDB has said the premium it paid reflected the experience of the staff of the Genting unit.
Goldman also helped 1MDB raise $1.75 billion in bonds to finance the deal with Genting. The Malaysian fund wanted to move quickly with the issuance and decided to do a private placement, instead of a public offering, people familiar with the matter said.
Vella, who had moved to Asia in 2010 to help build the bank’s debt and structured finance business in the region, arranged to do the financing via Goldman’s Principal Funding and Investment desk, a group that uses the bank’s own money to provide financing to clients. Goldman essentially wrote a check to 1MDB, took the bonds onto its balance sheet, hedged and sold over time for a profit, these people said.
The maneuver foreshadowed Goldman’s biggest transaction with the Malaysian fund: a $3 billion bond sale in early 2013 that the fund later said was to finance a huge real estate project aimed at turning Malaysia’s capital into a global financial hub.
Goldman’s bankers presented 1MDB with options, including a plain vanilla public bond or loan, people familiar with the matter said. Instead, the people said, the fund chose a more expensive option similar to that of the earlier power plant bond. Within two months, Goldman had underwritten the entire offering, essentially cutting a $3 billion check to meet its client’s demands for speed.
The scale of Goldman’s fees on the deal, which came to nearly $300 million, was controversial even within the bank, people familiar with the matter said. Goldman took the unusual and uncomfortable step of alerting the fund to its expected payday ahead of time to head off any recriminations down the road, the people said.
“As you can imagine, a trading desk like ours would like to keep its pricing close to its chest,” a former Goldman executive familiar with the trade said. “But given the size of the [profits], the determination was made.”
The bank said the fees were necessary to compensate it for the risk it took on to carry out the transactions. 1MDB has said the organisation “considered all of its options” in raising debt and chose the Goldman-led structure to “ensure the timely completion of this economic initiative.”
The real estate project, meanwhile, is stalled. The fund said half of the proceeds of the bond went into “various investment portfolios” and the remainder was used for working capital and debt repayment. - WSJ
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