This shareholder derivative action against the board of directors and certain officers of The Goldman Sachs Group, Inc. (“Goldman” or the “Company”) arises from a historic scandal that The Wall Street Journal called “one of the largest financial frauds in history.” In 2012 and 2013, Goldman raised $6.5 billion in three bond offerings for Malaysian sovereign wealth fund 1MDB that was nothing more than a fraudulent sham through which Malaysia’s corrupt former prime minister and his associates looted the vast majority of the investment proceeds. Goldman arranged these offerings despite myriad prominent red flags that were utterly disregarded by the senior-most officers and directors of the Company. After the scheme was revealed, the fallout was profound: two senior Goldman executives have been indicted or entered guilty pleas to date, and the Company faces numerous international investigations and legal proceedings, with potential liability exceeding $7 billion. On October 22, 2020, the United States Department of Justice announced that Goldman entered into a Deferred Prosecution Agreement whereby the Company admitted to wrongdoing and agreed to pay more than $2.9 billion in new fines, penalties, and disgorgement. The Company also agreed to pay the government of Malaysia $3.9 billion to settle a variety of pending criminal and regulatory matters.
The central figure in the 1MDB scandal was Jho Low, a mysterious Malaysian financier with connections to Malaysian Prime Minister Najib Razak. Jho Low conspired with two Goldman bankers to underwrite three bond offerings for 1MDB in the total amount of $6.5 billion, the funds of which were purportedly to be used for Malaysian energy and infrastructure projects. Instead, more than $4.5 billion was siphoned from the bond offerings through wire transfers to shell companies and corrupt associates of the conspirators. These funds were used for, among other things, bribes to foreign officials, luxury real estate, a yacht, private jet expenses, a 22 carat pink diamond for the Prime Minister’s wife, and financing for the movie The Wolf of Wall Street.
The red flags regarding 1MDB were obvious from the onset of Goldman’s relationship with the funds. As early as 2010, Goldman had rejected Low as a private wealth management client, citing “significant adverse information” along with “questionable sources of wealth”—often tell-tale signs of criminal activity. The bond offerings were also suspicious on their face. First, Goldman structured the first bond offering as essentially a private placement rather than a traditional bond offering, with Goldman purchasing the entire issue and then quickly selling it to investors that the Company had already lined up, thereby providing an immediate payday for 1MDB officials. Second, Goldman received an abnormally high fee of $192.5 million for the offering—a stunning 11% take that dwarfed the customary 0.5% fee and that, as a Bloomberg article stated, “should have been a bright warning to its highest executives.” Third, Goldman obtained the engagement on a no-bid basis despite the fact that the Asian bond underwriting market was highly competitive, which strongly indicated that Goldman obtained the business through bribery or other malfeasance. Fourth, when Goldman asked investment bank Lazard to provide a valuation of power plants 1MDB was supposed to purchase with funds from the offering, Lazard refused because “the deal smacked of political corruption.” Fifth, the offering included a guarantee on the 1MDB debt from an Abu Dhabi government fund with ties to Low, even though Goldman’s Middle Eastern headquarters “found the idea preposterous and declined to get involved,” and despite the fact that the managing director of the Abu Dhabi fund “had a reputation for taking kickbacks.”
Despite the litany of red flags plaguing 1MDB that were publicly reported at the time of the first offering, Goldman’s senior officers and directors consciously disregarded the Company’s widespread corporate governance deficiencies that enabled the deal. This was a remarkable violation of their fiduciary duties, especially considering the Company’s recent history of numerous catastrophic scandals and illegal behavior, including 34 major legal and regulatory actions that resulted in Goldman paying out nearly $10 billion in fines and settlements since 1998. This shareholder derivative action seeks to hold Defendants accountable for their conscious disregard of their oversight obligations, breaches of fiduciary duties and other misconduct related to Goldman’s participation in this massive fraud, which has significantly damaged the Company and its shareholders.