Goldman Sachs’s Malaysia fraud and bribery scandal intensified Wednesday after two Abu Dhabi investment funds claimed in a lawsuit they suffered losses from the bank’s “central role” in the case.
International Petroleum Investment Co. and Aabar Investments alleged in a court filing that Goldman Sachs Group Inc. paid bribes to former fund officials, who in exchange “agreed to manipulate and mislead IPIC and Aabar, and to misuse the companies’ names, networks, and infrastructures to further the criminal schemes and to personally benefit.”
The furor surrounding Goldman Sachs’s role in raising money for the Malaysian state investment fund, known as 1MDB, has weighed on the bank’s shares, which fell the most in seven years on Nov. 12 after Malaysia’s finance minister said he would seek a full refund of all the fees it paid for 1MDB deals. At least three senior current or former Goldman executives were implicated in the first charges against individuals by US prosecutors.
“I would expect to continue to see headline risk around this at least until they can resolve the matter with US authorities,” Alison Williams, an analyst at Bloomberg Intelligence, said in an interview.
Betsy Graseck, an analyst at Morgan Stanley, cut her recommendation on the shares to the equivalent of hold from buy on Wednesday, saying it’s unclear how long the 1MDB investigation will take, how much in fines and penalties may be imposed or what costs Goldman Sachs will incur to satisfy regulatory demands.
Graseck also said there may be additional lawsuits, probes and internal reviews yet to come. She doesn’t see the bank’s shares rallying until those concerns are answered.
The Abu Dhabi funds are seeking unspecified damaged in their complaint, which was filed in state court in New York. The funds outlined their claims in a summary that was less than two pages long. A more substantiate complaint will be filed in two to three weeks.
“We are in the process of assessing the details of allegations and fully expect to contest the claim vigorously,” a Goldman Sachs spokesman said in an emailed statement.
The US alleges that a small group of Malaysians diverted money from 1MDB into personal accounts disguised to look like legitimate businesses, and kicked back some of those funds to officials. Goldman Sachs made $593 million working on three bond sales that raised $6.5 billion for 1MDB in 2012 and 2013, dwarfing what banks typically make from government deals.
Tim Leissner, Goldman Sachs’s former chairman of Southeast Asia, admitted in a plea that he bribed officials to get bond deals and said a culture of secrecy at the investment bank led him to conceal wrongdoing from compliance staff.
“I think the biggest concern is the Justice Department investigation and potential fines,” Elliott Stein, an analyst at Bloomberg Intelligence, said in an interview. The Abu Dhabi funds’ allegations aren’t particularly strong, but negative publicity “may linger for a while because you can’t just dismiss a lawsuit super quickly,” he said.
1MDB, set up by former Prime Minister Najib Razak to attract foreign investment, accumulated billions of dollars of debt after its 2009 inception and is at the center of multiple investigations in relation to alleged corruption and money laundering.
The case is International Petroleum Investment Co. V. The Goldman Sachs Group Inc., Supreme Court of the State of New York, County of New York (Manhattan). – Bloomberg