The Grinch, Tim Leissner and the SEC – The Schemes

Thomas Fox - Compliance Evangelist
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It looks like it is turning into a holiday-themed blog post week. OK, The Rise of Skywalker is not exactly a holiday movie but it is cause for joyous celebration but it does allow us to move if not to the dark side, certainly a dark place. I refer of course to Dr. Seuss’ How the Grinch Stole Christmas. Most particularly the cartoon version voiced by the incomparable Boris Karloff and directed by Chuck Jones no less. Everyone knows the story of how the Grinch is annually discombobulated by the Whos in Whoville and their interminable singing in celebration of Christmas Day. Yet eventually the Grinch sees the error of his ways and sleds back into Whoville to bring Christmas cheer to the ever-singing Whos.

The Grinch is certainly a title that could be an allegory with disgraced Goldman Sachs Group Inc.’s former partner Tim Leissner about now. He was the lead Goldman Sachs banker who facilitated the firm’s work on bond offerings for the Malaysian Sovereign Wealth Fund, 1MDB. Leissner had previously pled guilty to conspiracy to violate the Foreign Corrupt Practices Act (FCPA) and engagement in money laundering in a criminal complaint and a civil settlement with the Federal Reserve Bank. Today, I begin a two-part blog post series on Leissner’s settlement with the Securities and Exchange Commission (SEC) for his role in the facilitation of bribery and corruption in the 1MDB saga.

According to the SEC Cease and Desist Order (Order), “Leissner knowingly circumvented those internal accounting controls that Goldman Sachs had in place and caused the company’s books, records and accounts to be falsified through the misrepresentations that he made to Goldman Sachs’s executives and committees. Leissner’s conduct caused Goldman Sachs to improperly record in the 1MDB Bond Documents payments that it made in connection with the bond deals.” The actions of Leissner were summarized in the Order.

 Jho Low

The financier and architect of the massive 1MDB scandal was Jho Low. Early on in the formation of 1MDB, Low began working with Leissner, Roger Ng and others at Goldman Sachs. Leissner put forward Low to be a Goldman Sachs client but the three attempts to do so were all rebuffed by Goldman Sachs compliance group and legal function. The “refusal was based, in part, on concerns that these groups had concerning the source of Low’s wealth. Personnel within the Compliance Group and the Intelligence Group communicated the rejection of Low’s application to Leissner and others within Goldman Sachs.” Thereafter, during the times when Leissner was working on behalf of Low to have Goldman Sachs make bond offerings to raise funds for 1MDB, “Low also specifically requested that Leissner, Ng and others conceal his involvement in Goldman Sachs’s business.”

The Bond Deals

Goldman Sachs evaluated each potential bond by requiring  “bankers who submitted transactions to GS Committees for approval, such as Leissner, to broadly disclose information relevant to the matters at issue, including “a full assessment of the transaction risks.”” During the entire time “Leissner selectively concealed from other employees of Goldman Sachs, including the GS Committees and their members, that he was working with Low as an intermediary to secure the deals. Leissner did this in an effort to avoid potential heightened scrutiny of the bond deals by the GS Committees, the Compliance Group or the Intelligence Group.” There were three bonds deals which Leissner facilitated through Goldman Sachs, each time circumventing the firm’s internal controls through both the withholding of and supply of false and misleading information to the appropriate approval groups within Goldman Sachs.

Project Magnolia

The bond offering was allegedly to facilitate the purchase of a Malaysian energy company. To secure the bond offering, Goldman Sachs required it be guaranteed by a third party. Low proposed an Abu Dhabi sovereign wealth fund but explained “that in order to secure the guarantee from the Middle Eastern Sovereign Wealth Fund discussed at the prior meeting with Leissner and others, they would have to pay bribes and kickbacks to government officials, including to certain officials in Malaysia and Abu Dhabi. After the February 2012 meeting, Leissner discussed this information with other senior executives of Goldman Sachs.”

The bond deal went ahead and was funded to the tune of $1.75bn. Interestingly, when it came time for actual funding “Goldman Sachs’s documentation of the wire transfer – including a signed payment authorization and instruction, an executed agreement between Goldman Sachs and its client, and the Project Magnolia offering circular (collectively, the “Magnolia Bond Documents”) – falsely stated that the proceeds would be used only to pay for the acquisition of Malaysian Energy Company A or for “general corporate purposes.” Leissner knowingly caused these records to be false.” Part of the proceeds were funneled to shell companies which paid bribes to corruption Malaysian and Abu Dhabi officials.

 Project Maximus

This bond offering was designed to raise funds to purchase a Malaysian power generation company. This bond deal was structured similarly to Project Magnolia only with an indirect guarantee from the Middle Eastern Sovereign Wealth Fund. Although the Middle Eastern Sovereign Wealth Fund did not provide a direct financial guarantee of the Project Maximus bonds, as it had with Project Magnolia, it nevertheless agreed to privately secure the bonds on a bilateral basis with Goldman Sachs.

Of course, as with Project Magnolia, Leissner and others continued to work with Low to acquire this business for Goldman Sachs. But Leissner took his internal misrepresentation to a new level. As part of the internal approval process, in a meeting specifically convened to consider Project Maximus, “Leissner was directly asked whether Low was involved in Project Maximus. Leissner told the GS Committee affirmatively that Low was not involved in Project Maximus, though Leissner and other senior executives of Goldman Sachs knew at the time that this statement was false.” Once again when it came time to transfer the proceeds from the bond sale, which totaled nearly $1.75bn, the sign off documents “falsely stated that the bond proceeds would be used solely to pay for the acquisition of Malaysian Energy Company B or for “general corporate purposes.”  Leissner knowingly caused these records to be false.”

Project Catalyze

This was a bond offering designed to fund 1MDB’s portion of a joint venture (JV) with a Middle Eastern Investment Firm. Leissner was now directly in on the bribery schemes from the prior projects as the Order noted, “although required by internal compliance policies of Goldman Sachs, Leissner failed to disclose that (a) he had received a portion of the funds diverted from the prior bond transactions via Low and (b) that Leissner, Low and others paid bribes and kickbacks to 1MDB officials and others who were involved in the transactions.” Once again when it came to funding the bond offering, “Goldman Sachs’s documentation of the transaction – including a signed payment authorization and instruction, an executed agreement between Goldman Sachs and its client, and the Project Catalyze offering circular (collectively, the “Catalyze Bond Documents”) – falsely stated that the bond proceeds would be used solely to fund Malaysia’s contribution to a joint venture investment vehicle with Abu Dhabi or for “general corporate purposes.”  Leissner knowingly caused these records to be false.”

We will conclude tomorrow with Leissner’s specific legal violations and what a Chief Compliance Officer (CCO) can do when confronted with a lying, cheating and stealing partner who knowingly engages in bribery and corruption or is even a Grinch who tries to steal Christmas. 

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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