- Goldman Sachs on Thursday reached a massive settlement with US authorities regarding a years-long financial scandal in Malaysia.
- The federal investigation involved the bank's work with Malaysia's 1MDB fund, and found bribes by Goldman executives in their underwriting of $6.5 billion in bond offerings.
- In a statement, CEO David Solomon admitted the bank's wrongdoing and said it had improved internal risk controls to prevent another incident.
- The bank also announced "clawback actions" for former employees that were implicated along with reductions in top executives' compensation, including CEO David Solomon.
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Goldman Sachs on Thursday agreed to pay nearly $3 billion to settle a probe into its role in Malaysia's 1MDB corruption scandal, and its Malaysia unit pleaded guilty to violating foreign bribery laws, drawing a line under a saga that has dogged the bank for years.
The settlement resolves a probe by U.S. authorities into the bank's role in underwriting three bond offerings in 2012 and 2013 that raised $6.5 billion for Malaysia's government.
Under the terms, Goldman has been slapped with a $2.3 billion penalty and about $600 million in disgorgement of ill-gotten gains.
The U.S. Department of Justice said the deal was the largest penalty ever levied on a U.S. company for breaching the Foreign Corrupt Practices Act and involved an unprecedented number of regulators across the globe.
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Brian Rabbitt, acting head of the Justice Department's criminal division, said the settlement reflected the bank's central role "in a massive global scheme to loot billions of dollars" from the state Malaysian fund."
Between roughly 2009 and 2014, Goldman paid more than $1.6 billion in bribes to foreign officials in Malaysia and Abu Dhabi to win 1MDB business, prosecutors said.
While the saga has proved a humbling and reputationally damaging episode for Wall Street's powerhouse investment bank, the settlement will allow Chief Executive Officer David Solomon to accelerate his plan to reshape Goldman as a more conventional bank, analysts said.
The move follows a $3.9 billion settlement the bank reached with Malaysia in July to settle all charges against the bank there related to the matter.
The scandal dates to the government of former Malaysian Prime Minister Najib Razak, which set up the 1MDB fund in 2009. The Justice Department estimated $4.5 billion was misappropriated by high-level fund officials and their associates between 2009 and 2014 to pay for real estate, art and other luxury items.
In November 2018, the U.S. Justice Department filed criminal charges against two former Goldman Sachs bankers tied to the scandal, Tim Leissner and Roger Ng.
Goldman has been investigated by regulators in at least 14 countries, including the United States, Malaysia, Singapore and others. British regulators fined Goldman 96.6 million pounds ($126 million) as part of global action.
According to the Justice Department, Goldman earned $600 million in fees for its work with 1MDB. Leissner, Ng and others received large bonuses in connection with that revenue.
"We recognize that we did not adequately address red flags and scrutinize the representations of certain members of the deal team," Solomon wrote in a memo to staff on Thursday, adding the bank had already made several compliance improvements.
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Goldman also announced "clawback actions" for former employees implicated in the scandal, along with reductions in the pay of its top executives, including Solomon.
"For those former employees implicated in the criminal scheme, the Firm has undertaken clawback actions to the full extent of its contractual entitlements with respect to three individuals: Tim Leissner, who has plead guilty to criminal charges; Ng Chong Hwa, who has been charged with the same crimes; and Andrea Vella, who has been prohibited by the Federal Reserve from participating in the banking industry," the bank wrote in a release. "The amounts the Firm is seeking to forfeit from these individuals total approximately $76 million, of which the Firm is currently holding approximately $24 million."
"In addition, we think it is appropriate that the current executive leadership team, the Chief Executive Officer, the Chief Operating Officer and the Chief Financial Officer, as well as the current CEO of Goldman Sachs International, have their overall compensation reduced by $31 million for 2020," it added. "These clawbacks, forfeitures and compensation reductions will total approximately $174 million in the aggregate."
The Goldman group has entered into an agreement with the department deferring prosecution for three years provided the bank meets certain conditions, including beefing up its compliance measures, the agency said.
The guilty plea by the bank's Malaysia subsidiary at a court hearing in Brooklyn was a major victory for prosecutors who rarely extract such concessions from corporate entities.
Since 2019, Goldman had set aside $4.39 billion to cover legal and regulatory matters. Some $2 billion was for matters it already resolved with the Malaysian government.
Goldman's shares were up 1% on the news, as investors anticipated that Thursday's deal should allow Solomon to accelerate his plan to reshape Goldman as a more conventional bank, less reliant on volatile trading venues, analysts said.
"Getting this overhang off the back of management and the company in general is a very big win," said Marty Mosby, an analyst at boutique brokerage Vining Sparks.
The settlement may also boost the bank's share price long term by removing pressure related to the probe, said Mosby. Goldman's stock lags its rivals, trading at just 0.8 times the value of its assets.
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