Goldman Sachs ties to scandal-plagued 1MDB run deep

The Goldman Sachs & Co. logo is displayed at the company's booth on the floor of the New York Stock Exchange (NYSE) in New York, U.S., on Friday, July 19, 2013

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The bank earned its place through years of cultivating Najib and a state investment fund he founded. Goldman had raised $ 6.5 billion for the fund and earned nearly $ 600 million in fees, making the Malaysian client among its most lucrative.

Najib lavished praise on Goldman, said people familiar with the meeting. “Do you see any other bankers on this boat?” one recalls him saying.

Today Najib and the state fund, 1Malaysia Development Bhd., or 1MDB, are at the centre of what investigators consider one of the largest financial frauds in history. Investigators have said 1MDB was used by the prime minister as a political slush fund and by associates of his to buy more than $ 1 billion of real estate, art and other luxuries from London to Beverly Hills, Calif.

Among all the firms touched by the scandal, which include banks around the world, Goldman holds a unique position for its closeness to 1MDB and the principals.

When the Malaysian fund, which Swiss investigators have labelled a Ponzi scheme, ran into roadblocks in its quest to raise cash, Goldman helped keep the money flowing through bond sales.

US Justice Department investigators are trying to determine whether Goldman had reason to suspect that money it helped 1MDB raise was misused and, if so, whether the bank was obligated to report any concerns to authorities. The Federal Reserve, the Securities and Exchange Commission and New York state’s Department of Financial Services also are examining some of the bank’s actions, as are Singapore authorities, according to people familiar with the situation.

One point authorities are focusing on is Goldman’s relationship with Jho Low, a Malaysian financier and Najib confidant whom global investigators place at the centre of the scandal. Tim Leissner, formerly Goldman’s chairman for Southeast Asia, dealt for several years with Low. Investigators believe Low made key decisions at 1MDB, despite holding no official position there, and received hundreds of millions of dollars taken from the fund starting in 2009.

Although Goldman turned down Low as a private client, on concerns about the source of his wealth, the bank continued to interact with him on 1MDB business, according to people familiar with events in several countries and investigations of those events. This article is based on interviews with a wide range of these people as well as on documents that include US asset-seizure lawsuits filed in July.

Goldman has consistently said it did nothing wrong and had no way of knowing there might be fraud surrounding 1MDB. The bank has said its main role was raising money it thought would be used for the stated purposes. “We have found no evidence showing any involvement by Jho Low in the 1MDB bond transactions,” the firm said.

Low has denied any wrongdoing, as has Najib, and the prime minister has been cleared by the country’s attorney general. The 1MDB fund has denied it did anything wrong and pledged cooperation with investigations. Probes of the fund’s missing billions are under way in several countries.

Central to Goldman’s 1MDB dealings was Leissner, 47 years old, an outgoing German who was skilled at getting close to Asian businessmen, according to former colleagues. Some referred to Leissner, who is married to fashion designer Kimora Lee Simmons, as Dr. Tim, for a doctorate he had from now-defunct Somerset University in Britain.

Leissner met Low in 2009. That year, Low persuaded one of Malaysia’s states to establish an oil-wealth fund, to which Goldman became an adviser. The fund evolved into 1MDB when the prime minister gave it the broader goal of spurring economic development.

Leissner in 2010 recommended a Goldman internship for the daughter of a close aide to the prime minister, according to Goldman employees. Shortly after she started work in Singapore, 1MDB hired Goldman to review a possible acquisition.

By 2012, 1MDB was struggling with debt. Leissner advised the fund on a bid to buy some power plants that would provide cash flow.

To make the deal, 1MDB needed to raise $ 1.75 billion, but it didn’t have a credit rating. Goldman suggested the fund find an entity with strong credit to guarantee the issue.

Low, who had Middle East ties, introduced people from Goldman and 1MDB to officials of an Abu Dhabi sovereign-wealth fund, International Petroleum Investment Co., or IPIC.

Low was someone Goldman had twice declined to let open a private account, because of compliance concerns. The bank also declined to serve as an adviser on deals done by Low’s family investment arm, said people familiar with the matter.

In the 1MDB matter, some at Goldman seemed confused about Low’s role. Leissner assured them Low played no part on the bond deal. Executives at Goldman were aware, however, that Low had made the introductions in Abu Dhabi. One managing director described him as “the 1MDB Operator or intermediary in Malaysia” in a March 2012 email cited by the Justice Department in lawsuits seeking the forfeiture of assets allegedly bought with misappropriated money.

The Malaysian fund received a guarantee of its bonds from IPIC, which declined to comment.

Goldman then got the bonds issued quickly by agreeing to take them onto its own balance sheet, for later sale to investors. The bank has said the risk it assumed in doing things this way justified a high fee. According to the Justice Department asset-forfeiture suits, the bank charged 1MDB $ 192.5 million, or about 11% of the bond issue. The fee on a deal like that would typically be about $ 1 million.

Goldman proved able to sell the bonds quickly, limiting its risk.

Later in 2012, 1MDB sought to raise another $ 1.75 billion to buy more power plants. Goldman and IPIC played the same roles as before.

Both deals were approved by five Goldman committees that vet transactions posing financial or legal risk. In doing business with 1MDB, Goldman officials drew reassurance from its status as a state fund with the imprimatur of the Malaysian government and support of the prime minister.

Goldman’s fee for the second bond deal totalled about $ 114 million, according to the US lawsuits. David Ryan, then the bank’s Asia president, questioned why Goldman didn’t lower the fees more, since it had been able to unload the first batch of bonds so easily.

His objections were overruled by Goldman officials including president Gary Cohn, according to people familiar with the matter.

While Goldman worked on the bond deal, the firm appointed a strong defender of the 1MDB business to a post above Ryan in Asia.

Ryan, who had been considered a rising star, left the bank the next year. He didn’t respond to requests for comment.

Cohn is now President-elect Donald Trump’s pick as his top economic adviser. Through the firm, Cohn declined to comment.

Much of the money raised by this second 1MDB bond sale was siphoned off into a series of offshore shell companies, investigators have alleged.

In early 2013, Leissner and Michael Evans, who was a Goldman vice chairman, met with Najib at the World Economic Forum in Davos, Switzerland. Najib said 1MDB planned a joint venture with Abu Dhabi to build a financial centre in Kuala Lumpur and wanted to sell $ 3 billion more of bonds.

At the time, Najib faced a tough re-election fight, and concerns that he might be tapping 1MDB for money to help him win were discussed openly within Goldman.

Leissner commented to a colleague in early 2013 that he knew 1MDB was operating partly as a political slush fund, according to the now-former colleague.

A friend of Leissner described hearing the same thing from Leissner about a year later and added that Leissner also said he was worried some 1MDB money was being stolen for personal enrichment.

A person familiar with Leissner’s thinking said he didn’t hold those views or voice them, calling the notion “revisionist history”.

Proceeds from a $ 3 billion bond issue would typically go into a major international bank, but 1MDB wanted them deposited in a Singapore branch of a small Swiss private bank called BSI SA.

Outside counsel at Linklaters law firm alerted Goldman that the bond proceeds were headed to a private bank. Goldman compliance executives approved the destination, in part because Goldman had done business with BSI in the past and had lined up global financial firms as correspondent and clearing banks.

BSI compliance officials, however, also questioned why the 1MDB bond proceeds were being sent to their bank, given its small size and its focus as a manager of wealthy people’s money, said a former BSI banker.

To assuage their concerns, Low asked Goldman bankers including Leissner to meet BSI’s compliance staff, according to the former BSI banker. The banker said BSI management later cited the attendance of a senior Goldman executive at this meeting, held in a Singapore Chinese restaurant, to overcome the compliance department’s concerns. BSI declined to comment.

After Goldman wired the $ 3 billion to 1MDB’s account at BSI, more than a third of it immediately was sent into a web of offshore funds, before ending up in an entity controlled by a Low associate, according to the US Justice Department asset-forfeiture suits.

Singapore later charged three BSI executives with crimes linked to their dealings with 1MDB. Two pleaded guilty to forgery and failing to report suspicious transactions. The third was convicted on Wednesday of attempting to pervert the course of justice and is fighting charges that include money laundering.

Goldman bankers continued to court 1MDB business. Asia chairman Evans was among guests who dined with Najib after the July 2013 meeting aboard the yacht at Saint-Tropez. About two months later, Najib, in New York for a United Nations assembly, headlined a meeting that Goldman chief executive Lloyd Blankfein hosted for clients.

Leissner won praise at partner meetings for the business he brought in. During a late-2014 meeting focused on growth markets, Blankfein said, “Look at what Tim and Andrea [Vella, who structured the 1MDB bond deals] did in Malaysia.” He added, “We have to do more of that.”

Leissner earned more than $ 10 million a year at the height of the dealings with 1MDB, former Goldman executives said.

Leissner also did a personal business deal with Jasmine Loo , a former 1MDB official and associate of Low. Leissner received several hundred thousand dollars from Loo, to be co-invested with him. Leissner didn’t report her investment to Goldman, as required by the firm, said one person familiar with the matter. Loo couldn’t be reached for comment.

Goldman’s relationship with 1MDB began unraveling in 2014 when the cash-strapped fund sought a $ 1 billion loan from the bank. Goldman declined when 1MDB officials wouldn’t share information confirming the existence of the proposed collateral.

News of 1MDB’s debt struggles spread in 2015, with press reports linking Low to the fund’s problems. Pablo Salame, co-head of Goldman’s securities division, rejected an internal suggestion that the firm’s involvement in the mess could be blamed on the bankers and traders closest to 1MDB. Those people didn’t work alone, said Salame, who was recently named a vice chairman. “Goldman Sachs did these deals,” he said.

In June of 2015, Leissner wrote to Banque Havilland, a small Luxembourg private bank, vouching for Low, who wanted to open an account there. The letter said Goldman had done due diligence on Low and found no issues. Banque Havilland didn’t respond to requests for comment.

Goldman compliance executives learned of this in a January 2016 email search. The firm confronted Leissner about the letter, which violated its policies, and he resigned the next day.

Goldman refused to give Leissner some of his deferred compensation. The sides are negotiating the matter.

This month, Singapore’s Monetary Authority cited the letter in saying it planned to bar Leissner from doing business in the city-state for a decade. Leissner’s lawyer said his client has been invited by Singapore authorities to respond and plans to do so.

The Justice Department has classified Leissner as a “subject” of its Goldman inquiry, meaning someone whose “conduct is within the scope of a grand jury investigation” but who isn’t considered a target, people familiar with the matter said.

His attorney, Marc S. Harris, said, “Throughout his professional life, Mr. Leissner has conducted himself with integrity, dedication and with high ethical standards and we believe the various ongoing investigations will support these facts.”

Write to Justin Baer at justin.baer@wsj.com, Tom Wright at tom.wright@wsj.com and Ken Brown at ken.brown@wsj.com

This article was first published by The Wall Street Journal

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