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Goldman in More Trouble, Now Embroiled in Abu Dhabi Funds Case

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U.S. investment bank Goldman’s (GS - Free Report) involvement has heightened in the scandal related to the multibillion-dollar 1Malaysia Development Bhd (1MDB) as two Abu Dhabi investment funds recently accused the bank for losses they suffered due to the bank’s “central role” in the case. Notably, two Abu Dhabi investment funds — International Petroleum Investment Co. and Aabar Investments — have filed a lawsuit, in the state court in New York, alleging Goldman for bribing former officials of the 1MDB fund.

The bank has been accused in the bribery case with the officials who “agreed to manipulate and mislead IPIC and Aabar, and to misuse the companies’ names, networks, and infrastructures to further the criminal schemes and to personally benefit.”

The Abu Dhabi funds have sought unspecified damages in the case. “We are in the process of assessing the details of allegations and fully expect to contest the claim vigorously,” a Goldman Sachs spokesman said in an e-mailed statement.

Background

Hit by the scandal, shares of Goldman have tumbled in the last few days on rising investors’ worries. Employees of the reputed bank are said to have "cheated" Malaysia in its dealings with state fund 1MDB, according to the nation’s Prime Minister Mahathir Mohamad.

Last week, Goldman’s shares took a hit, following Malaysia's Minister of Finance, Lim Guan Eng’s plan of recouping "full refund" of the fees earned by the bank from the 1MDB deals. Notably, nearly $600 million has been earned by the bank, including three bond offerings in 2012 and 2013, which raised $6.5 billion.

"The Malaysian government will want to reclaim all the fees paid, as well as all the losses including the interest rate differential," Lim told reporters. Per Lim, the rate paid by Malaysia was about 100 basis points above the market rate.

Goldman has been scrutinized for playing a role in raising funds through bond offerings for 1MDB — the fund entangled in corruption and money-laundering probes in nearly six countries. Notably, per the U.S. Department of Justice (DoJ), misappropriation of funds, worth nearly $4.5 billion, from 1MDB by top officials of the fund and their colleagues, from 2009 through 2014, also included funds which were raised through Goldman.

Therefore, earlier this month, criminal charges were levied against two former bankers of Goldman by the U.S. prosecutors, as well as on Low — a Malaysian financier who effectively had the control of the state-owned investment 1MDB. Low has been accused for routing the money out of 1MBD, and paying bribes and purchasing real estate, art, and jewelry. Nevertheless, the bond proceeds were meant for the state’s strategic investments.

Following this, Tim Leissner, one of the bankers, accepted the act of conspiracy for laundering money and plotting the violation of the Foreign Corrupt Practices Act. In his guilty plea, Leissner stated it was “very much in line of its culture of Goldman Sachs to conceal facts from certain compliance and legal employees.” Nonetheless, the other employee has not come with a plea.

However, Goldman has denied any wrongdoing and is cooperating with U.S. authorities.

Bottom Line

Although Goldman has resolved quite a few litigation issues, it still faces probes and queries from several federal agencies, and a few foreign governments for its businesses conducted during the pre-crisis period. As a result, the company’s legal expenses are expected to remain elevated, which may partially impede its bottom-line growth in the near term.

Shares of the company have lost around 19.5% in the past three months compared with the 14.5% decline of the industry.



Goldman currently carries a Zacks Rank #3 (Hold).

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