What was settled this week?
Goldman Sachs agreed a settlement worth a combined $2.9 billion with four regulators in four jurisdictions worldwide. Numerous regulators are involved: the US Department of Justice (DoJ), US Securities and Exchange Commission, US Federal Reserve, New York’s Department of Financial Services, the UK’s Financial Conduct Authority and Prudential Regulation Authority, the Hong Kong Securities and Futures Commission (SFC) and various regulatory arms of Singapore.
The settlement follows a $3.9 billion agreement with Malaysia in July, which involves $2.5 billion of payments to the Malaysian government, and a commitment to recover and return $1.4 billion of assets.
How important are these numbers?
It depends how you look at it. Numerous unwelcome records were set. The $350 million fine levied by the HK SFC was the largest ever. So was the $122 million in Singapore.
Brian Rabbitt, the DoJ’s acting assistant attorney general, said the settlement includes the largest monetary penalty ever paid to the US government in a corporate criminal foreign bribery case.
Looked at another way, if Goldman ends up paying or forfeiting $5.4 billion, that is equivalent to 63.8% of 2019’s net earnings of $8.47 billion, or around eight months of profit.
The share price barely flickered on the news.
Did Goldman admit to criminal wrongdoing?
Yes, through its Malaysian unit, Goldman Sachs (Malaysia) Sdn Bhd. It is the first criminal settlement in Goldman’s history.
Specifically, the DoJ says Goldman and its Malaysia unit “have admitted to conspiring to violate the Foreign Corrupt Practices Act in connection with a scheme to pay over $1 billion in bribes to Malaysia and Abu Dhabi officials to obtain lucrative business for Goldman Sachs.”
Karen Seymour, Goldman’s general counsel, entered the guilty plea in federal court in New York.
However, part of the deal appears to be that the bank will avoid prosecution on the same charge. So, it’s a criminal settlement without a separate criminal prosecution for the bank; instead there is a series of deferred prosecution agreements around the world, discussed below.
How much did Goldman actually make from 1MDB?
The precise figure depends on what exactly you’re looking at: just the fees on the three bonds in 2012/13, or any related business?
For example, the HK SFC speaks of $581.5 million in fees, and the US DoJ $606 million.
Either way, the absurdity of those fees was problematic for Goldman throughout.
HK’s SFC said that the revenue the bank made from the fees was “more than double the total revenue it generated from acting as an arranger and/or underwriter in 213 other Asia ex-Japan bond offerings in the five years between 2011 and 2015”.
This, and the fact that Goldman was appointed three times in a row without any sort of beauty parade – except one instance where Goldman asked for one – is what HK SFC head Ashley Alder is talking about when he says: “The penalty in this case … reflects our findings that Goldman Sachs Asia failed to deal properly with numerous suspicious circumstances surrounding the 1MDB bond offerings.”
So, is that it? Is 1MDB over for Goldman?
In headline terms, yes: settlements have been reached with all five affected jurisdictions and their regulators (US, UK, Malaysia, Singapore, Hong Kong).
The DoJ thanked a host of others for their assistance, from France to Guernsey to Luxembourg, but none of those is thought to be seeking redress in its own right.
However, some hangovers remain. The most obvious is that Goldman Sachs Group, at the parent level, has entered into a three-year deferred prosecution agreement with the DoJ.
The experience has been nothing but damaging for Goldman, in terms of time, money and reputation
Similar undertakings exist elsewhere, too: for example, Singapore’s commercial affairs department has served Goldman with a 36-month conditional warning in lieu of prosecution for three counts of corruption offences, while the Monetary Authority of Singapore has directed the Singapore unit of Goldman Sachs to appoint an independent external party to conduct a review of its remedial measures.
There are also trials of former Goldman Sachs employees to come, which won’t now impact the bank in any legal sense, but will still keep the matter in the news.
For example, Roger Ng, who worked closely with Tim Leissner on 1MDB, faces trial in the US next year, after which he will be extradited to Malaysia.
Goldman can expect to be named and discussed in various trials and appeals involving former Malaysian prime minister Najib Razak, who was sentenced to 12 years in jail in July.
Again, none of this will have legal consequences for Goldman.
Oh, and still nobody knows where Jho Low is.
What has Goldman had to say about this?
Goldman published a message to all staff from chief executive David Solomon, saying, among other things: “This has been a long process and we are pleased to be putting these matters behind us. But we are not putting the lessons learned from this experience behind us.”
It also published a statement from the board, which refers to “an institutional failure”.
A clawback of up to $174 million of executive pay is under way, looking to the past and the present.
Previous executives Lloyd Blankfein, Gary Cohn, David Viniar, Michael Sherwood and Mike Evans between them will give back $67 million.
Of the current crop, Solomon, COO John Waldron, CFO Stephen Scherr and Goldman Sachs International head Richard Gnodde will find a total of $31 million deducted from their 2020 compensation.
The bank also seeks the repayment of $76 million in bonuses paid to Leissner, Ng and Andrea Vella.
Where can I read the underlying documents?
Read the Goldman Sachs statement: https://www.goldmansachs.com/media-relations/press-releases/current/goldman-sachs-2020-10-22.html
The US DoJ press release: https://www.justice.gov/opa/pr/goldman-sachs-charged-foreign-bribery-case-and-agrees-pay-over-29-billion
Court documents with details of USA against Goldman Sachs Group: https://www.justice.gov/criminal-fraud/file/1329911/download
Court documents with details of USA against Goldman Sachs (Malaysia) Sdn Bhd: https://www.justice.gov/criminal-fraud/file/1329901/download
Hong Kong SFC statement: https://apps.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=20PR103
HK SFC statement of disciplinary action: https://apps.sfc.hk/edistributionWeb/api/news/openAppendix?lang=EN&refNo=20PR103&appendix=0
Singapore joint statement: https://www.mas.gov.sg/news/media-releases/2020/agc-cad-and-mas-take-action-against-goldman-sachs-singapore-pte-on-1mdb-bond-offerings
So now what?
Now, Goldman finally moves on.
It is hard to imagine it being front and centre for, say, a Petronas bond issue anytime soon. However, in the rest of Asia, particularly northeast Asia, it is doing well.
There will also be widespread relief at being able to talk about something else for once.
Clients do tend to be remarkably forgiving of reputational scandal, provided they’re not personally hit; they want the best advice.
However, the experience has been nothing but damaging for Goldman Sachs, in terms of time, money and reputation.
