Wall Street bank set to reach favorable but controversial US settlement in multi-billion dollar Malaysia scandal
ByNile Bowie, Singapore- Asia Times
When Mahathir Mohamad returned to power last year, the world’s oldest prime minister vowed to claw back billions of dollars plundered in a globe-spanning corruption scandal involving 1Malaysia Development Berhad (1MDB), a state fund co-founded by his ousted predecessor Najib Razak.
The 94-year-old Malaysian leader recently said he was hopeful that an out-of-court settlement could soon be reached with Goldman Sachs, the Wall Street investment bank now under global scrutiny for its role in underwriting three bond issuances that raised US$6.5 billion for 1MDB in 2012 and 2013.
But while Malaysian prosecutors continue their pursuit, US authorities are said to be close to resolving separate criminal and regulatory probes into the scandal, with a settlement on the cards that could see Goldman pay up to $2 billion in penalties.
If so, it would be a much smaller punitive amount than many analysts anticipated. That, at least for now, isn’t likely to compel Mahathir to scale back his separate $7.5 billion demand of Goldman, but a lesser US settlement than expected would set a certain benchmark.
“We would like to avoid having to go to the courts, but if they come up with a reasonable sum I think we will agree [to a settlement]. But at the moment their offer is too small,” Mahathir said in an interview with Reuters on December 10. “We’re continuing to talk with them to explain why they should pay what we demand.”
Malaysia has leveled criminal charges against thee Goldman units, as well as 17 current and former directors at the bank. Though Malaysian authorities have hinted at flexibility in accepting a lower figure, Mahathir’s administration rejected a past settlement offer from Goldman of less than $2 billion.
David Solomon, Goldman’s chief executive officer, has said the bank hopes to resolve the 1MDB case as quickly as possible. The firm maintains that its senior management was unaware of criminal activity undertaken by certain “rogue” employees. Two of the bank’s former senior executives have so far been arrested in connection with the scandal.
While Goldman’s exposure to potentially huge financial penalties remains in Malaysia, its 1MDB-related liability in the US is coming into clearer view, though not without new controversy.
1MDB logo pictured on a bus window in Kuala Lumpur, February 17, 2017. Photo: AFP via NurPhoto/Chris Jung
Last week, Bloomberg reported that the US Department of Justice (DoJ) is weighing penalties of between $1.5 billion and $2 billion against Goldman for its role in raising funds for 1MDB bond sales.
Prosecutors claim much of those proceeds were siphoned by fugitive Malaysian financier Low Taek Jho, who then allegedly set up a political slush fund for Najib.
Low, better known as Jho Low, has denied all and any wrongdoing but is currently a fugitive from justice in the US, Malaysia and Singapore. Najib, currently on trial in Malaysia, has also denied wrongdoing.
The Bloomberg report, citing anonymous sources familiar with the negotiations, said the settlement has yet to be finalized but could be announced as early as next year.
It also claimed US Attorney General William Barr has “directly immersed himself in the case” after obtaining an ethics waiver from the White House allowing him to participate in and oversee the investigation.
The waiver was required because Barr’s former law firm, Kirkland and Ellis LLP, is currently representing Goldman in the case.
With the DoJ’s probe into the sprawling 1MDB scandal widely seen as a test of the Donald Trump administration’s approach to top-level corporate wrong-doing, some observers have rung alarm bells about a potential conflict of interest.
Brian Benczkowski, a former partner at the same Kirkland and Ellis law firm who Trump appointed to head the DoJ’s criminal division, also obtained a waiver to participate in the 1MDB case and would likely be among the key architects of a DoJ settlement with Goldman.
To complicate matters, Benczkowski’s former boss Mark Filip, joined Goldman’s legal team earlier this year. Filip, a senior partner at Kirkland and Ellis, served as deputy attorney-general in 2008-09 with Benczkowski serving as his chief of staff.
Goldman’s hiring of Filip – who the Financial Times reported is “close friends” with Benczkowski – had earlier prompted speculation that the criminal division chief would recuse himself from leading investigations into the bank’s 1MDB activities, though that didn’t happen.
Amid expectations of a final settlement with the DoJ, it remains unclear whether Goldman will be forced to plead guilty to criminal charges at the parent company level, the toughest penalty the DoJ could bring against the Wall Street bank.
The Nikkei Asian Review reported in April that senior career DoJ prosecutors were in favor of seeking a guilty plea in exchange for a settlement. Political appointees such as Barr and Benczkowski, however, could opt for a less onerous deal.
Fugitive businessman Low secured a milestone settlement with the DoJ in November allowing for the recovery of an accumulated $1 billion in pilfered assets. Though the 38-year old conceded to hefty asset forfeitures, he was not obliged to admit guilt or liability as part of the agreement.
Last month’s deal also controversially allowed Low to pay his legal fees using a portion of the settlement, amounting to around $15 million.
Chris Christie, a former New Jersey governor, has reportedly taken a direct role in negotiating the settlement with the DoJ on Low’s behalf, alongside lawyers from the international litigation firm Kobre and Kim.
Apart from being represented by Christie, a candidate for the Republican 2016 presidential nomination who served as head of Trump’s transition team, Low previously engaged Elliot Broidy, a top Republican Party donor and Trump ally, to persuade the DoJ to drop its 1MDB-linked civil asset forfeiture lawsuits.
A separate DoJ probe into whether Low illegally engineered a $100,000 donation to a political fundraising committee that is helping to re-elect Trump in 2020 is ongoing.
The fugitive Malaysian was indicted in the Eastern District of New York in October 2018 on money laundering and bribery charges and now also faces campaign finance violations.
At least one former federal prosecutor, Renato Mariotti, has called on Barr to recuse himself from the 1MDB investigation in lieu of his “highly questionable handling” and controversial characterization of Special Counsel Robert Mueller’s report on Russian interference in the 2016 US presidential election at a briefing in April.
Critics widely interpreted a four-page memo and press conference by the attorney-general, which was unusually scheduled ahead of the Mueller report’s public circulation, as political spin, giving rise to what Mariotti called “appearance issues” whenever Barr “supervises an investigation involving Trump,” according to a Politico news report.
The ethics waiver obtained by Barr to participate in the 1MDB investigation should theoretically allow him to oversee the Eastern District of New York’s probe into the Trump Victory political action committee, the fundraising group linked to the Republican president’s re-election campaign to which Low is suspected to have contributed.
Clare Rewcastle-Brown, editor of the whistleblower website Sarawak Report that is widely recognized for its role in uncovering the byzantine money trail and political machinations behind the 1MDB scandal, believes Barr had no reason to get involved in the 1MDB case.
“The rules he waived are there for a reason: to prevent conflicts of interest. The fact that his ex-law firm is representing the fattest client in the US on its biggest case has everything to do with him being AG,” she told Asia Times. “Justice not only ought to be done but seen to be done and blatant conflict of interest is not the way to achieve that.”
Mayra Rodriguez Valladares, a bank and capital markets regulatory consultant at MRV Associates, said she wouldn’t be surprised if Goldman clinched a settlement between US$1.5 to $2 billion, given the Trump administration’s “very bank-friendly” orientation.
That sum “represents around 6% of their revenues and a little over 20% of their 2019 earnings,” she said. “If authorities in the U.S. were serious, the fine should be much higher and bank regulators should curb senior executives’ bonuses until the bank learns to really take risk management and controls more seriously.”
“The revolving door between Goldman and government has been long documented. And the Trump administration’s deregulatory behavior has helped banks significantly,” Valladares opined. “Barr really should have stayed away to avoid even the appearance of any conflict of interest. In this administration, that is unfortunately too much to ask.”
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