Yesterday I paid homage to Dr. Z, Paul Zimmerman, long-time National Football League (NFL) chronicler for Sports Illustrated. Today, I want to honor another sportswriter we lost last week, Frank Litsky, who wrote about an almost endless variety of sporting events. Litsky wrote for the New York Times (NYT) for 50 years and during that time covered 44 major sports. His NYT obituary noted, “The depth of Litsky’s knowledge was staggering, from precise statistical notes culled from years with sports such as track and field and swimming to more than 300 obituaries he wrote for The Times, many brought to life by his infinite knowledge and fraternity of friends, local and international.” The breadth of sports he covered was from Super Bowls, the Melrose Games, Olympics, women’s sports to “luge, lacrosse, cricket and softball.”
Litsky was encyclopedic, “not quite obsessive compulsive, but so detailed and driven by his commitment to history, organizational accuracy and fairness that any writer would gladly attest to the notion that “In God We Trust” might have applied to him. After all, how many people amass a college football file, spread over multiple folders, of 15,000 outstanding players that dated to 1934 or an immaculate reference card file with more than 50,000 entries?” So with the passing of Dr. Z and Dave Anderson (also of the NYT) last month, we now add the name of Frank Litsky. How much would you like to listen to those three guys on long winter’s night?
Today, I continue my exploration of the new developments in the long-running 1Malaysia Development Berhad (1MDB) scandal. Last week the US Department of Justice (DOJ) announced one guilty plea, one arrest and one indictment. The guilty plea came from former Goldman Sachs Group Inc. (Goldman Sachs) banker in Southeast Asia, Timothy Leissner, who was the client relationship manager for the Malaysian sovereign wealth fund, the country’s former Prime Minister Najib Razak and the person alleged to have looted the fund Jho Low. As was laid out in a two-count Criminal Information, (Information) Leissner pled guilty to both money laundering and violations of the Foreign Corrupt Practices Act (FCPA). He was ordered to forfeit $43.7 million in ill-gotten gain from his illegal activities. The three-count Indictment, named Goldman Sachs Managing Director, Roger Ng, who was charged with conspiracy to violate the FCPA and money-laundering. Ng was arrested in Singapore and will presumably be transported to the US to stand trial or more likely plead guilty. Also named in the Indictment was international fugitive Jho Low.
Today I want to discuss the schemes to loot 1MDB in the Indictment and Information. These documents provided a level of detail which demonstrate how companies must remain vigilant with their anti-corruption compliance program. For even though Goldman Sachs has started a campaign to claim Leissner, Ng and perhaps others were rogue employees who lied, cheated and obfuscated, the reality is that Goldman Sachs allowed key internal compliance controls to be over-ridden or simply avoided and there was no manner to check on what were clearly red flags raised through the relationship between Leissner, Ng, Low, 1MDB and corrupt politicians in several countries.
The Information laid out that Leissner and Ng had tried to get Goldman Sachs to take on Low directly as a client. However Low could not pass the company’s own due diligence requirements regarding the sources of his funding as far back as 2009. “Between in or around September 2009 and in or around March 2011, the defendant TIM LEISSNER and others, including Co-Conspirator #2 [Ng], supported at least three attempts to make Co-Conspirator #1 [Low] a formal client of U.S. Financial Institution #1. LEISSNER and Co-Conspirator #2 supported these efforts because, in part, they believed that Co-Conspirator #1 would work to deliver lucrative business deals, including from 1MDB, for the ultimate benefit of U.S. Financial Institution #1, [Goldman Sachs] LEISSNER, Co-Conspirator #2 and others. These attempts were unsuccessful because certain personnel within U.S. Financial Institution #1’s Compliance Group and Intelligence Group [Law Department] refused to approve the business relationship with Co-Conspirator #1 based, in part, on concerns that they had about the source of Co-Conspirator #1 ‘s wealth.”
Nonetheless, “Notwithstanding their knowledge of the concerns that had been raised about Co-Conspirator #1 not being a suitable client for U.S. Financial Institution #1, LEISSNER and other employees and agents of U.S. Financial Institution # 1, including Co-Conspirator #2, continued to conspire with Co-Conspirator # 1 based upon their belief that Co-Conspirator #1 would help ensure that government officials within 1MDB, the Malaysian government and Abu Dhabi would deliver lucrative business deals to U.S. Financial Institution #1.” The bottom line is that Goldman Sachs was aware that Low did not meet its own due diligence requirements but either turned its eyes away when he brought $6bn+ in deals or its internal controls somehow failed.
These failings on the transactions seem even more particular when considering the three main deals outlined in the Information and Indictment. They were Project Magnolia for approximately $1.25 bn, alleged for funds to purchase an energy company; Project Maximus for approximately $1.75 bn for the purchase of a power plant and Project Catalyze for a stunning $3bn to fund a joint venture with an Abu Dhabi company. For this over $6bn in bond offerings, Goldman Sachs was paid $600,000.
Even though Low had been rejected as client for Goldman Sachs, Leissner and Ng knew he was behind the bond offerings, but “As with Project Magnolia, while the defendant TIM LEISSNER, Co-Conspirator #2 and others continued to work with Co-Conspirator # 1 to acquire this business for U.S. Financial Institution #1 and to execute the second bond issuance, they concealed Co-Conspirator #1 ‘s involvement in the transaction from the Compliance Group and Intelligence Group at U.S. Financial Institution #1 for the same reasons that they concealed his involvement with Project Maximus.” Somehow neither Goldman Sachs compliance or legal functions were ever aware of Low’s involvement.
One reason might be, because the Financial Times (FT) reported “A second person with knowledge of the deal’s approval process confirmed that more than 30 people at the bank reviewed it. “There was no concern that the money was going to be stolen”. The internal Goldman Sachs reviewers included former CEO Lloyd Blankfein and the current CEO David Solomon, “who was head of Goldman’s investment banking division from 2006 to 2012, as well as Gary Cohn, then chief operating officer of the bank.”
Goldman Sachs also filed a Quarterly Report (10-Q) after the guilty plea and indictments were released. It stated, in part, the following:
“[T]he plea and charging documents indicate that Leissner and Ng knowingly and willfully circumvented the firm’s system of internal accounting controls, in part by repeatedly lying to control personnel and internal committees that reviewed these offerings.
The indictment of Ng and Low alleges that the firm’s system of internal accounting controls could be easily circumvented and that the firm’s business culture, particularly in Southeast Asia, at times prioritized consummation of deals ahead of the proper operation of its compliance functions.
In addition, an unnamed participating managing director of the firm is alleged to have been aware of the bribery scheme and to have agreed not to disclose this information to the firm’s compliance and control personnel. That employee, who was identified as a co-conspirator, has been put on leave.”
Goldman Sachs has said it is cooperating with authorities. The FT reported that 10Q noted that “possible losses related to litigation proceedings could run as high as $1.8bn above its total reserves for such matters. Previously, Goldman estimated an excess of $1.5bn.” It will be interesting to see how all this plays out going forward.
Tomorrow I conclude with some lessons for the compliance professional.