Goldman Sachs to Pay $2.8 Billion, Admit Wrongdoing to Settle 1MDB Charges -- 3rd Update

By Dave Michaels, Liz Hoffman and Bradley Hope 

Goldman Sachs Group Inc. will pay about $2.8 billion and admit wrongdoing to end a bribery probe that stretched from Southeast Asia to Hollywood and reinforced a reputation for scandal that the Wall Street firm has spent years trying to shed.

The settlement with the Justice Department, expected as soon as this week, would resolve an investigation into Goldman's work for a corrupt Malaysian government fund known as 1MDB, people familiar with the matter said. Prosecutors have accused an international cast of characters -- including two Goldman bankers -- of embezzling billions of dollars from the fund, and U.S. officials had been preparing a case that the bank ignored signs of fraud in pursuit of fees.

The settlement caps one of the biggest stains in Goldman's 151-year history. All in, the 1MDB scandal will cost the firm more than $5 billion to resolve, about two-thirds of a year's profits. But Goldman will avoid the harshest sanctions that prosecutors had sought and has already accounted for the penalties in its financial reports to shareholders. Its shares rose 1.1% Tuesday.

Under the deal ironed out in recent days with the Justice Department, Goldman will pay a roughly $2.2 billion penalty and give up about $600 million it earned in fees from its work for 1MDB, people familiar with the matter said. In July, the bank agreed to pay the Malaysian government at least $2.5 billion to resolve a parallel investigation there.

A Goldman subsidiary tied to the misconduct in Asia is expected to plead guilty but the parent company won't face prosecution, the people said, avoiding a felony mark that could have crippled its ability to do business. The arrangement, known as a deferred prosecution agreement, would allow officials to pursue charges later if Goldman errs again.

The bank will also escape without a government-appointed monitor to oversee its compliance department, which The Wall Street Journal reported had earlier been a priority for prosecutors. Bloomberg News earlier reported that a settlement was imminent.

The 1MDB scandal has dogged Goldman's chief executive, David Solomon, who took over in 2018, as he tried to push the bank in profitable new directions. And to the firm's critics on Wall Street and in Washington, it reinforced the bank's reputation as a money-spinner willing to serve even unscrupulous clients if the fees were good enough.

It is an image Goldman has worked to shed since the 2008 financial crisis, when it was a central player in the mortgage meltdown and paid $550 million to settle criminal allegations that it duped investors about a particularly noxious bond. That episode tarnished the firm's reputation and cast a long shadow over the tenure of its then-CEO, Lloyd Blankfein.

Since then Goldman has sought to reinvent itself as a softer place. It launched a Main Street bank and an institute to support small businesses. When market volatility this spring caught its trading clients wrong-sided and triggered thousands of margin calls, the firm ordered its traders to take a more forgiving tack.

The 1MDB scandal shows that its past can't be so easily outrun. While the conduct is years old, it occurred in the division that Mr. Solomon ran at the time. Both Messrs. Solomon and Blankfein, along with other current and former top executives, still face a potential clawback of past bonuses pending a resolution of the investigation.

Goldman began courting Malaysian officials more than a decade ago, as the 2008 crisis was crimping earnings back in the U.S. The Asian country had just launched a government fund to spur economic development, called 1 Malaysia Development Bhd., or 1MDB, and Goldman in 2012 and 2013 helped sell $6.5 billion in bonds for the fund.

Most of that money went missing and was allegedly stolen by an adviser to the fund, Jho Low, and his associates, according to prosecutors. Nearly $700 million ended up in the bank account of the country's prime minister, who was later convicted of abuse of power for his role in the scandal. Mr. Low allegedly spent much of the rest on luxury condos in New York and London, fine art and a giant yacht, throwing huge parties in Las Vegas and bankrolling the film "The Wolf of Wall Street."

Goldman for years blamed the 1MDB scandal on a pair of senior bankers who were criminally charged in the matter, Timothy Leissner and Roger Ng. When the scandal began to unravel in 2015, Goldman defended itself, saying the deals were vetted by internal committees and that the bank paid appropriately for the risks it took. Prosecutors have acknowledged that Messrs. Leissner and Ng tried to hide the worst of their alleged wrongdoing from superiors.

Critics have said that the fees Goldman earned from 1MDB, which were far higher than is typical for the kind of work it did, should have been a warning sign that something wasn't right. In any event, Goldman was hungry for the kind of deals Messrs. Leissner and Ng were drumming up: A 1MDB bond deal in 2012 won one of Goldman's most prestigious internal awards, praised for its "spirit of creativity and entrepreneurial thinking."

"This case is a modern twist on the oldest and most destructive form of criminality, individuals who have power using their position in society for purposes of evil and greed rather than for good," said William McMurry, who retired from the FBI this year to join the firm 5 Stones Intelligence after helping to oversee the 1MDB investigation since 2015.

Mr. Leissner, the former head of Goldman's Southeast Asia business, pleaded guilty in 2018 to his role in the scandal and is scheduled to be sentenced in January.

Mr. Leissner received more than $200 million from 1MDB and paid bribes to government officials, including gifts of jewelry for Malaysia's then-first lady. He agreed to forfeit $43.7 million and has been cooperating with the U.S. government.

Mr. Ng has pleaded not guilty and is awaiting trial. He was extradited to the U.S. from Malaysia last year.

Write to Dave Michaels at [e-mail], Liz Hoffman at [e-mail] and Bradley Hope at [e-mail]

(END) Dow Jones Newswires

October 20, 2020 17:31 ET (21:31 GMT)

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