Goldman-1MDB Probe Zeroes In on Bond Deals

Bradley Hope, Justin Baer and Tom Wright
The Wall Street Journal
March 21, 2016

Investigation focuses on whether Wall Street firm misled investors when it sold securities issued by Malaysian fund

U.S. authorities are investigating whether Goldman Sachs Group Inc. misled bondholders when the firm sold securities issued by a Malaysian government-investment fund that is at the center of a corruption scandal, according to a person familiar with the matter.

As part of an inquiry being examined by a U.S. grand jury, investigators are trying to determine if Goldman’s employees had reason to believe that some of the proceeds from bond deals done for the fund, 1Malaysia Development Bhd., known as 1MDB, weren’t being used for their intended purpose, the person said. Federal authorities also are exploring whether Goldman’s hiring practices in the region violated U.S. anticorruption laws, the person said.

The Wall Street Journal has previously reported that Goldman was part of a broad probe by the Federal Bureau of Investigation and the Justice Department. The investigation remains in its early stages, and neither Goldman nor 1MDB has been accused of wrongdoing.

Investigators have subpoenaed Goldman’s former top banker in Southeast Asia, Tim Leissner, who left the firm last month after being suspended for allegedly violating firm policies. Mr. Leissner, who is cooperating with investigators, has been told by authorities that he isn’t the subject of the U.S. government investigation at this stage, said another person familiar with the matter. The grand jury is scheduled to meet again next month, this person said.

Mr. Leissner hasn’t been accused of wrongdoing in connection with the 1MDB deals.

Goldman profited handsomely from its dealings with 1MDB. Mr. Leissner helped counsel the fund from its inception, laying the foundation for a series of lucrative assignments. Goldman advised the fund on three acquisitions and arranged the sale of three bonds valued at a total of $6.5 billion that brought in $650 million for the firm.

Goldman’s biggest, and last, transaction with 1MDB came in early 2013 when it sold $3 billion in bonds that the fund said would finance a real-estate-development project in the center of Kuala Lumpur designed to spur economic development.

1MDB officials directed the Wall Street firm to wire the proceeds from the deal to the fund’s account at BSI SA, a small Swiss private bank, according to people familiar with the matter.

Private banks don’t typically receive transfers of that size, and the unusual step caught the attention of lawyers at Linklaters, Goldman’s legal counsel on the transactions. Kevin Wong, a partner at the law firm, sent a note to bankers at Goldman alerting them to the fact that the money was being sent to a private bank, according to a person familiar with the matter.

Goldman executives approved the transaction and believed they were contractually obligated to send the money to the account their client had specified, according to people familiar with the matter. Linklaters ultimately signed off on the transaction, said the person.

Goldman underwrote the entire offering, buying all $3 billion up front at a slight discount to the face value. It then resold the securities to other investors at higher prices. Goldman made nearly $300 million in fees from the bond sale, an outsize figure that raised eyebrows across Wall Street and compelled Goldman to tell its client how much it stood to earn on the deal ahead of time.

The bond ostensibly was meant to fund the construction of a new financial center in Kuala Lumpur to be named after the father of Malaysian Prime Minister Najib Razak, but little building has occurred. 1MDB moved half of the money raised into overseas mutual funds and used the remainder to pay down debt and for working capital, according to its financial accounts.

The Journal reported this month that global investigators believe at least $681 million—of a total of $1 billion deposited in the personal accounts of Mr. Najib—originated with 1MDB. Investigators in two of the countries probing 1MDB, while agreeing with Malaysia’s attorney general that most of the money transferred to Mr. Najib’s account ultimately was returned, believe the money was transferred from 1MDB through several intermediaries, according to people familiar with the probes.

Mr. Najib has denied wrongdoing or taking any money for personal gain. The 1MDB fund has said that it “has not paid any funds to the personal accounts of the prime minister.”

Malaysia’s attorney general said the money that went into Mr. Najib’s account was a legal donation from a member of Saudi Arabia’s royal family, and most was returned. The attorney general said there was nothing improper and that it was time to stop scrutinizing the deposits, a notion echoed by Mr. Najib.

U.S. investigators also are looking into Goldman’s hiring practices in relation to 1MDB. Goldman hired the daughter of a close aide to Mr. Najb and explored bringing the prime minister’s own daughter to the firm as well, people familiar with the matter said.

Mr. Leissner recommended Goldman hire both women, and when his Goldman colleagues shot down the idea of hiring the prime minister’s daughter, Mr. Leissner recommended Nooryana Najwa Najib to private-equity firm TPG, these people said. She went through a normal interview process and worked at TPG in a low-level marketing position from 2011 to 2014, in both London and Hong Kong, the people said.

—Ken Brown
contributed to this article.