Malaysia sues Goldman Sachs over bond fraud

Malaysia is suing Goldman Sachs on charges of committing fraud. The nation alleges that the US bank misled investors when it sold bonds for the country’s state fund, 1 Malaysia Development Berhad (1MDB). The Asian country has maintained that the company knowingly misappropriated funds.

Goldman Sachs and 1MDB

The trouble with Goldman Sachs started when the bank started arranging bond deals worth $6.5 billion in 2012 for 1MDB, a development company owned by Malaysia. In 2016, the US Federal Bureau of Investigation (FBI) put the corporation under scrutiny and claimed that $2.7 billion was misappropriated by three bankers. Two US executives were charged with fraud, while a Malaysian employee was recently arrested.

Malaysia’s attorney general, Tommy Thomas, filed charges against Goldman Sachs, alleging that the bankers stole bond funds and advanced their careers after the theft. The nation is demanding $3.3 billion in repayment.

‘In addition to personally receiving part of the misappropriated bond proceeds, those employees and directors of Goldman Sachs received large bonuses and enhanced career prospects at Goldman Sachs and in the investment banking industry generally. Their fraud goes to the heart of our capital markets, and if no criminal proceedings are instituted against the accused, their undermining of our financial system and market integrity will go unpunished,’ wrote Thomas in his filing.

Did Goldman Sachs know about fraud?

The bank said that only a few executives committed fraud and Goldman Sachs acted in compliance with the deal’s terms. The company said that Malaysia lied about how it would spend the proceeds from the bonds.

‘Under the Malaysian legal process, the firm was not afforded an opportunity to be heard prior to the filing of these charges against certain Goldman Sachs entities, which we intend to vigorously contest,’ said Goldman.

While the bank denies that high-level officials knew about the misappropriation, a former employee said that Goldman Sachs knew about the bond embezzlement.

‘Anyone who's been there a long time knows you can't do big things without senior people knowing, period. No matter how senior you are, there's always somebody above you. So, a lot of people had to decide they were comfortable committing billions of dollars to this,’ said the ex-employee.

The incident has hurt the bank’s reputation over the past year, with shares falling downward. Even when Goldman Sachs stock rebounds, the bank must make many changes to regain customers' trusts in Malaysia after this latest scandal.