Goldman Sachs is under potentially punitive new legal pressure after Malaysian prosecutors filed criminal charges against 17 of its current and ex-executives, raising the stakes and new questions of institutional culpability in the multibillion dollar 1Malaysia Development Berhad (1MDB) corruption and money-laundering scandal.

Malaysian Attorney General Tommy Thomas said last week that custodial sentences and criminal fines would be sought against the accused, all of whom held key leadership positions across three of the bank’s subsidiaries. The charges were filed under a Malaysian law that holds senior executives responsible for any offenses that may have been committed during their tenure.

Those indicted “occupied the highest executive positions in those three Goldman Sachs subsidiaries, and exercised or ought to have exercised decision-making authority over the transactions of those corporate bodies,” which, Thomas said, were involved in the “fraudulent misappropriation of billions in bond proceeds.”

The newly accused include Richard Gnodde, chief executive of the US investment bank’s international subsidiary, Michael Evans, an ex-Goldman executive who is now president of Chinese e-commerce giant Alibaba, and 15 other current and former directors from the bank’s international divisions including in London and Singapore.

The charges significantly widen the dragnet to include executives not previously named in ongoing probes into the bank’s alleged role in the scandal. Goldman said the charges, announced on August 9, were “misdirected” and would be “vigorously defended.”

Analysts see the new charges as aimed at pressuring Goldman into a massive settlement that would allow Malaysian authorities to recoup funds pilfered from 1MDB, a state development fund created under the previous Najib Razak administration.

A signboard for the 1Malaysia Development Berhad state fund in Kuala Lumpur. Photo: AFP

The Wall Street investment bank is under scrutiny for its role in arranging and underwriting three bond issuances in 2012 and 2013 that raised US$6.5 billion for 1MDB, transactions that earned Goldman above-market fees topping $600 million.

Malaysian authorities have already asked Goldman for $7.5 billion in compensation. Reparations sought by Malaysia are equivalent to the full principal of the bonds, in addition to fees.

Thomas explained that, under Malaysian law, the burden of proof falls upon the defendants to prove they didn’t consent to acts of wrongdoing and adhered to full due diligence. If convicted, the accused face possible 10-year prison sentences and fines of at least one million ringgit ($239,000).

Goldman has consistently denied any institutional wrongdoing and argues that misconduct was limited to a small number of “rogue” employees that went to great lengths to hide their scheme from senior management and compliance officers, who the bank insists were unaware of any criminal activity.

“Certain members of the former Malaysian government and 1MDB lied to Goldman Sachs, outside counsel and others about the use of proceeds from these transactions. 1MDB, whose CEO and Board reported directly to the prime minister at the time, also provided written assurances to Goldman Sachs for each transaction that no intermediaries were involved,” a Goldman spokesperson said in a recent statement.

That, however, may or may not be the case if the concerns detailed in a letter sent in May on behalf of two Goldman institutional investors to the bank’s board of directors have merit.

Tim Leissner, an ex-managing director at Goldman who was once the bank’s Southeast Asia chairman, and Roger Ng, a former bank employee, were named in November 2018 along with Malaysian financier Low Taek Jho, also known as Jho Low, as the first defendants to face 1MDB-related criminal charges brought by the United States Department of Justice (DoJ).

Ex-Goldman Sachs executive Tim Leissner in a file photo. Photo: Twitter

Leissner pleaded guilty to a separate two-count criminal indictment for laundering money embezzled from 1MDB and other charges last August. Ng was extradited to the US in May after being jailed in Kuala Lumpur since last November on a temporary surrender warrant permitting him to remain in American custody for up to 10 months.

Click here for an Asia Times investigative report on how Ng’s extradition facilitated the return of 1MDB assets recovered by US authorities.

Ng, a Malaysian citizen, pleaded not guilty to the three charges based on alleged violations of the US Foreign Corrupt Practices Act, which, if convicted, could see him serve up to 30 years in prison. US prosecutors have described the two Goldman bankers as playing a crucial role in enabling fugitive financier Low’s alleged plunder of the fund.

In contrast to the legal cases against Leissner and Ng, some observers believe that the latest charges are more tenuous because no new evidence or fresh allegations directly tying the 17 accused to 1MDB dealings have been made publicly available by prosecutors.

“Things [are] not good in Malaysia,” said a source from Malaysia’s governing coalition who spoke exclusively to Asia Times. “The government has to show progress on 1MDB, the local Najib trial is taking too long,” the source, who requested anonymity, said in reference to the ongoing corruption hearings against the ex-premier.

The latest charges brought by Malaysian authorities “may be motivated to show progress, and to drive a bigger compensation settlement from Goldman,” the source said. “It’s a wide net, hoping to catch someone. There is the issue of collective liability. [But] for criminal charges, it has to be direct involvement and test of beyond reasonable doubt.”

Though none of the individuals recently charged by Malaysia have been named by international investigators in their 1MDB probes ongoing in at least six countries, other stakeholders have suggested that Leissner’s influence over Goldman executives was deeper than publicly acknowledged or understood.

Calls to investigate Gnodde and Claes Dahlback, a Goldman board member also indicted by Malaysian authorities, were made in a letter sent to Goldman’s board of directors from Delaware-based law firm Grant & Eisenhofer on behalf of two institutional shareholders, who demanded the bank launch an independent probe into its 1MDB dealings.

The 27-page correspondence accuses current and former officers and directors of the New York-based bank and its subsidiaries of having “consciously disregarded their duties and failed to act in good faith to promote compliance with anti-money-laundering and bribery laws” and raises the prospect of shareholder derivative action.

Legal recourse by institutional investors can come in the form of a shareholder derivative suit, which permits a shareholder to initiate a suit against a third party such as an executive officer or director when management has failed to do so. It is unclear what such a suit could entail or seek in penalties, or whether it will be pursued at all.

Chief executive of Goldman Sachs’ international subsidiary Richard Gnodde in a file photo. Photo: Twitter

Leissner previously served as Gnodde’s chief of staff after being promoted in 2000, two years after he joined Goldman as an executive director, which the firm deemed as sufficient grounds to investigate “whether the relationship between the two men caused Gnodde to improperly approve the 1MDB deal and thereby violate his fiduciary duties” to the bank.

Gnodde, the letter noted, served as a member of the Company’s Firmwide Risk Management Committee, which reviewed and approved the 1MDB bond deals. The document also cites a Malaysian securities regulator source to claim that “Goldman UK committed securities fraud in connection with the 1MDB deals” under Gnodde’s watch.

It is unclear whether the hitherto unreported claim of securities fraud cited in the letter is among the evidence compiled by Malaysian authorities to substantiate the recent charge against Gnodde or the result of an in-house investigation conducted by the law firm. According to communications officers at Grant & Eisenhofer, the bank has established a committee to consider the contents of its letter but has not yet issued a reply.

Leissner “operated with a virtually free hand” due to his successes in bringing in deals, the letter claims, adding that Goldman board members missed “conspicuous red flags.”

The correspondence also states that Goldman now expects to spend $1.9 billion more than it had initially reserved to defend legal matters related to the 1MDB scandal, a revelation that would add substantially to the bank’s known legal liabilities and could have negative implications for its valuation and share price.

“As these charges pile on, Goldman Sachs will be compelled to do everything it can to settle this case,” said Mayra Rodriguez Valladares, a bank and capital markets regulatory consultant at MRV Associates. “If not, it runs the risk that more adverse news will be coming out if it gets embroiled in litigation.”

“The longer this goes on, Goldman Sachs will have to increase its reserve to pay for legal costs. In addition, the more that this scandal drags out, bank regulators in Malaysia and the US are likely to send in bank examiners to conduct specialty exams to compel Goldman Sachs to improve its risk management and its controls,” she told Asia Times.

Malaysia's Prime Minister Mahathir Mohamad salutes the royal guard of honor during the opening ceremony of the parliament in Kuala Lumpur on July 17, 2018. Photo: AFP/Mohd Rasfan
Malaysia’s Prime Minister Mahathir Mohamad salutes the royal guard of honor during the opening ceremony of the parliament in Kuala Lumpur on July 17, 2018. Photo: AFP/Mohd Rasfan

In June, Goldman offered Malaysia a one billion-ringgit ($239.13 million) compensation scheme to settle its involvement in the 1MDB affair. “We wanted to settle in-house if possible, but it seems that they are not willing to offer a reasonable sum of money,” said Malaysian Prime Minister Mahathir Mohamad, calling the proposed sum “peanuts.”

According to Binoy Kampmark, a senior lecturer in legal and dispute studies at Melbourne’s RMIT University, Goldman Sachs is “the culmination of a cultural and institutional problem.”

“While it gives the public impression of being a good banking citizen, it deploys highly sophisticated backchannel measures to secure deals with governments and other clients that might well fall foul of anti-corruption measures,” he said. “Then comes that familiar defense: They did not know the actual financial circumstances of the Malaysian government at the time and that they were lied to in terms of what the raised money would be used for.”

Kampmark believes the bank hopes to “limit their role in the entire 1MBD case by suggesting that much of this can be laid at the feet of Najib and his cronies, if not on errant employees.”

“Such levels of inappropriate behavior (alleged or otherwise) must have elements of knowledge if not outright collusion,” the academic claims. “Any effectual investigation will have to go to the top of senior management in Goldman, but it should be noted that the efforts against 1MDB risk becoming more political matters than structurally relevant ones.”

Nile Bowie reported from Singapore. Matt Mulberry reported from New York City.