Before there was the BP oil well blow out in the gulf, the greatest US environmental disaster was the Exxon Valdez, which ran aground on a reef in Prince William Sound in southern Alaska, some 27 years ago on this date. According to estimates, approximately 11 million gallons of oil eventually spilled into the water. Attempts to contain the massive spill were unsuccessful, and wind and currents spread the oil more than 100 miles from its source, eventually polluting more than 700 miles of coastline. Hundreds of thousands of birds and animals were adversely affected by the environmental disaster.
Exxon itself was condemned by the National Transportation Safety Board (NTSB) and in early 1991 agreed under pressure from environmental groups to pay a penalty of $100 million and provide $1 billion over a 10-year period for the cost of the cleanup. However, later in the year, both Alaska and Exxon rejected the agreement, and in October 1991 the oil giant settled the matter by paying $25 million, less than 4 percent of the cleanup aid promised by Exxon earlier that year.
I thought about this environmental disaster as I have continued to read about the burgeoning scandal in Malaysia around its state owned sovereign wealth fund, 1 Malaysia Development Bhd., known as 1MBD. There have been allegations that the Prime Minister (PM) of Malaysia, Najib Razak, and his cronies looted the fund for their own personal gain. They have all denied any such allegations. Of course there was the $681MM which was deposited into the PM’s personal account that he claimed was a gift from the deceased King of Saudi Arabia. Of that amount, $620MM has been returned leaving a piddling $61MM not accounted for, but, hey, what is $61MM between friends.
Yet another chapter in this ongoing saga presented itself when Bradley Hope, Justin Baer and Tom Wright, reporting in a Wall Street Journal (WSJ) article, entitled “U.S. Probes Goldman 1MDB Deals”, wrote about Goldman Sachs Group Inc. (Goldman) in connection with a $3 bn bond transaction which Goldman underwrote for 1MDB. They reported, “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.”
As a part of an ongoing Grand Jury investigation, “investigators 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 piece also noted, “Mr. Leissner hasn’t been accused of wrongdoing in connection with the 1MDB deals.”
The transactions at issue provided quite a financial gain to Goldman, who “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.” The final of these three deals was for funds, which were designated to “finance a real-estate-development project in the center of Kuala Lumpur designed to spur economic development.” Goldman bought all $3bn of this final offering up, underwriting the entire offering and then resold the securities for higher prices.
In what can only be termed an unusual twist “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.”
Apparently not only has the construction not gone through but there are questions about this transfer of funds to the private bank in Switzerland. Indeed Swiss authorities are investigating at their end. However, the WSJ piece also noted, “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. Najib 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.”
As we now know from the Bank of New York Mellon and Qualcomm Foreign Corrupt Practices Act (FCPA) actions the hiring of a close family member of a foreign government official or an employee of a state owned enterprise can be a FCPA violation. Further, since it is the mere offer of anything of value that invokes the FCPA, offering a job could well be a FCPA violation. Additionally, if such violation came in through an accounting provision violation, either through the books and records or violations of internal controls, it could lead to the Securities and Exchange Commission (SEC) remedy of profit disgorgement. As the WSJ piece noted, Goldman made $650MM for its work on the three bond offerings.
Exxon took the lessons it learned from the Exxon Valdez incident and used them to completely change its culture around safety. Many energy companies followed Exxon’s lead (although sadly not all) and made safety priority number 1. The ongoing 1MDB scandal may well lead to a similar change in dealings with sovereign wealth funds.
The ongoing 1MDB scandal may well lead to a change in compliance in dealings with sovereign wealth funds.Click to tweet
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© Thomas R. Fox, 2016