By Liz Hoffman and Dave Michaels
Goldman Sachs Group Inc. on Thursday admitted it broke U.S. corruption laws, agreed to pay billions of dollars to global regulators and financially punished its top executives, resolving one of the biggest scandals in Wall Street history.
Goldman took $174 million in compensation from executives and agreed to pay nearly $3 billion to officials in four countries to end a yearslong investigation into its dealings with a Malaysian investment fund at the heart of a global bribery ring. Its check to the U.S. government is the largest such fine ever paid.
All told, Goldman's dealings with the fund, known as 1MDB, will cost it more than $5 billion in financial penalties and a reputational black eye. The fund launched a decade ago with grand plans to jump-start the Malaysian economy, but instead, prosecutors say, it became a piggy bank for government officials, investment bankers and an international cast of high-rolling hangers-on.
In New York federal court Thursday, a Goldman subsidiary pleaded guilty to conspiring to violate antibribery laws. A deal cut with authorities allows the bank itself to avoid prosecution on the same charge, which could have crippled its business and further sullied a reputation the bank has worked hard to shine up in recent years.
Brandon Garrett, a Duke University law professor who studies corporate enforcement, said it isn't clear why Goldman got as much credit for cooperating with investigators as it did.
Goldman's fines could have been as high as $5.1 billion under federal sentencing guidelines, according to its agreement with the government. The bank got some credit for cooperating with investigators but not the full amount because it "significantly delayed in producing relevant evidence," the agreement says.
"Foot-dragging cooperation does not sound like an adequate reason to discount a fine in such a serious case," Mr. Garrett said. "Nor did the agreement call for a monitor to ensure compliance going forward."
As a salve to shareholders, Goldman said Thursday it would cut bonuses for Chief Executive David Solomon and three top lieutenants and claw back millions of dollars in past pay from his predecessor, Lloyd Blankfein, and other departed executives. "We must always remain open to improvement, learn from our mistakes and accept the consequences when we fail," Mr. Solomon said in a statement.
The Justice Department on Thursday laid out a case it has spent years building, detailing a corruption ring that stretched from Southeast Asia to Hollywood and passed through one of Wall Street's titans. Prosecutors allege that billions of dollars was stolen from 1MDB and more than $1.6 billion in bribes were paid -- the most ever in a U.S. corruption case -- to government officials in Malaysia and the Middle East.
Two Goldman bankers have been criminally charged in the scandal. Prosecutors alleged that senior executives at the bank, enamored by the fees that poured in from 1MDB, ignored warning signs of fraud.
"This case is also about the way our American financial institutions conduct business," said Seth DuCharme, the acting U.S. Attorney in Brooklyn. "It's about reminding people about where the boundaries to fair play are."
Goldman will pay $2.9 billion to the U.S. Justice Department and other global regulators, on top of the $2.5 billion it agreed in July to pay Malaysia's government. The Federal Reserve, Goldman's main financial regulator, levied its own fine and said the bank had failed to supervise its employees.
In 2012 and 2013, Goldman helped raise $6.5 billion for 1MDB by selling bonds to investors. Prosecutors say much of that money was stolen by an adviser to the fund named Jho Low, aided by the two Goldman bankers and associates in the Malaysian and Emirati governments. Nearly $700 million ended up in the bank account of the Malaysia's prime minister, who was later convicted of abuse of power.
Goldman had long portrayed the bankers -- Timothy Leissner, who has pleaded guilty and is awaiting sentencing, and Roger Ng, who has maintained his innocence and is set to stand trial next year -- as rogue employees who hid their activities and Mr. Low's involvement from their bosses. Mr. Low, who has denied the allegations against him, is on the run from U.S. law enforcement.
The Justice Department said in court papers that Goldman's compliance staff accepted Mr. Leissner's statements and ignored red flags. After articles in The Wall Street Journal and other publications raised questions about the 1MDB deals, Goldman failed to investigate the bond deals or why Mr. Low, who had already been rejected by the bank as a private client, was involved, the Justice Department said.
Company officials talked about alleged bribes on recorded Goldman lines, including one conversation in which an employee told an unnamed senior executive that he was disturbed by information that a deal involving 1MDB was being delayed because a participant was seeking a bribe, court papers say. "What's disturbing about that? It's nothing new, is it?" the senior executive replied, according to the Justice Department.
As officials built their case against Goldman last year, the bank withheld deferred pay that was owed to top executives and reserved the right to reduce bonuses going forward. On Thursday it acted on that warning.
Four current executives -- Mr. Solomon, President John Waldron, Chief Financial Officer Stephen Scherr and the head of Goldman's international business, Richard Gnodde -- will forfeit $31 million in pay this year, the bank said, about one-third of what they were paid in 2019.
The firm is also clawing back bonuses previously paid to Mr. Blankfein, former CFO David Viniar, and two senior executives at the time of the 1MDB deals who have since retired. It is in also discussions to recoup money from Gary Cohn, a former executive whose future bonuses were paid out when he joined the Trump administration in 2017, a person familiar with the matter said. (Mr. Cohn left his role as White House economic adviser the next year.)
Mr. Blankfein, in a statement, said, "It goes with the responsibility of leadership to accept some consequences for things that go wrong on your watch." The other former executives couldn't be reached.
The financial moves are a concession to shareholders who will shoulder the financial cost of the scandal and employees whose own bonuses this year are likely to shrink because of it. They also are an admission of sorts that the crux of the government's case against Goldman -- that it failed to properly oversee its senior bankers and fostered a win-at-all-cost culture -- has some merit.
Bonuses are companies' handiest tool to reward and punish executives. Wells Fargo & Co. withheld $135 million from two top executives in the wake of the firm's fake-accounts scandal.
The moves could help placate Goldman's partners, who have been griping about declining pay, particularly after Mr. Solomon received a substantial raise earlier this year.
Critics of the government's efforts to rein in Wall Street excesses may question why the bank itself wasn't forced to plead guilty, despite its admissions of wrongdoing.
Because firmwide indictments have the potential to cripple a company's ability to operate, federal prosecutors carefully consider how and when to charge a corporation. Still, some big banks, including JPMorgan Chase & Co., have weathered guilty pleas in recent years.
Brian Rabbitt, the acting assistant attorney general, on Thursday called the outcome "a serious and significant resolution that imposes serious and significant consequences."
Write to Liz Hoffman at firstname.lastname@example.org and Dave Michaels at email@example.com
(END) Dow Jones Newswires