WASHINGTON • You can add another headache into the mix for Goldman Sachs Group Inc.
The US Federal Reserve (Fed) is ramping up its investigation into how executives dodged the bank’s internal controls while helping Malaysian authorities raise billions of dollars that later went missing, according to people briefed on the matter. The probe examines the actions of Goldman Sachs as well as individuals, and has been gaining momentum in recent weeks, the people said, asking not to be identified because the inquiry is confidential.
Add a US Department of Justice (DoJ) probe already in an advanced stage, the Malaysian government’s push for fee refunds and a lawsuit from a pair of Abu Dhabi investment funds, and the bank’s troubles look far from a resolution. The stock has lost a quarter of its value this year after falling again last Friday, and another analyst cut his rating, saying the issue “could linger for a while”.
The Fed has previously interviewed current and former employees at the firm, prying into how easy it is to short-circuit compliance systems, the people said.
In recent weeks, representatives from Goldman Sachs met with the regulator and defended the bank’s controls, according to a person with knowledge of the matter. The central bank doesn’t have the powers of a criminal prosecutor, but it can and often does sanction people involved in banking scandals.
As Goldman Sachs’ main regulator, the Fed has broad authority to penalise the bank or impose other changes. Earlier this year, it capped Wells Fargo & Co’s size until the lender shores up internal controls.
“It is the Fed’s policy not to confirm or deny the existence of investigations,” the central bank said in an emailed statement.
“We refer criminal violations to the DoJ as necessary, and exercise our enforcement and safety and soundness authorities if the facts are warranted.”
The stock fell as much as 2.9% in New York trading. The risks surrounding 1Malaysia Development Bhd (1MDB) prompted Bank of America Merrill Lynch’s Michael Carrier to cut its recommendation on the stock last Friday.
“While we view the current valuation as discounting most of the potential negative scenarios related to 1MDB, we only have limited information and the uncertainty could linger for a while,” Carrier wrote.
He cut his recommendation on Goldman shares to Neutral’ from ‘Buy’ and slashed his price target to US$225 (RM940.50) from $280.
In a guilty plea unveiled last month, Goldman Sachs’ former head of South-East Asia, Tim Leissner, said he and others conspired to conceal facts from the firm’s compliance and legal staff. Leissner said he and his colleagues hid, for example, the involvement of controversial financier Low Taek Jho, while setting out to raise more than US$6 billion on behalf of 1MDB, a Malaysian state investment company that investigators say was plundered.
US prosecutors have accused Low of masterminding schemes to launder funds from 1MDB and pay kickbacks to Malaysian government officials. Low and a group of Malaysians allegedly diverted some of the money raised into personal accounts disguised to look like legitimate businesses. Low maintains his innocence.
Leissner pleaded guilty to US charges he conspired to launder money and violated the Foreign Corrupt Practices Act. He’s been ordered to forfeit US$43.7 million. He admitted to bribing officials in Malaysia and the United Arab Emirates to get bond deals for Goldman Sachs, and he said he and others arranged the 1MDB fundraising as debt offerings because it would generate higher fees for the bank. Malaysia seeks talks with Goldman to get fees back.
Goldman CEO said he’s “personally outraged” by scandal.
In a statement to the court, Leissner said his behaviour was “very much in line of its culture of Goldman Sachs to conceal facts from certain compliance and legal employees”.
The DoJ has also said in filings that the business culture at Goldman Sachs, particularly in South-East Asia, prioritised consummating deals ahead of the proper operation of its compliance functions.
Still, the DoJ filings said individual bankers knowingly circumvented controls the bank had in place and hid certain details about the deal to prevent compliance officers from seeking to block the firm’s involvement in the transactions.
Since prosecutors unveiled their indictments this month, analysts and investors have been trying to gauge what the financial fallout might be for Goldman. In behind-the scenes talks with authorities, the firm has presented information that isolates much of the blame on Leissner, people with knowledge of those exchanges have said. Yet, publicly, it has acknowledged it may spend significantly to resolve the case.
“The firm has received subpoenas and requests for documents and information from various governmental and regulatory bodies,” including the DoJ, the company wrote in a regulatory filing last month that didn’t specify the Fed’s interest.
Goldman said in the filing that it’s cooperating with investigators and that while it can’t predict the outcome, “any proceedings by the DoJ or other governmental or regulatory authorities could result in the imposition of significant fines, penalties and other sanctions”.