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Goldman Sachs Group

Case Details

Date Filed: February 19, 2019
Case Number: 1:19-cv-1562
Jurisdiction: Southern District of New York
icon-casetype Case Type: Derivative Shareholder Case

Case Summary

This shareholder derivative action against the Board of Directors and certain officers of The Goldman Sachs Group, Inc. arises from an 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.

The Second Amended Complaint incorporates recent developments, including resolution of various worldwide civil and criminal investigations. To settle the many government actions arising from the scandal, Goldman has agreed to pay the astronomical sum of nearly $7 billion in fines and disgorgement, which included entry into a Deferred Prosecution Agreement (“DPA”) with federal prosecutors in the United States. Pursuant to the DPA, Goldman agreed to pay $2.9 billion and admitted to criminal misconduct. Goldman, through its current Board, which includes a majority of the Defendants in this action, was forced to stipulate to the truth surrounding the fraudulent scheme and red flags that should have alerted to wrongdoing yet were utterly ignored. Defendants filed their motion to dismiss on January 15, 2021. Plaintiff filed an opposition to the motion to dismiss on March 19, 2021. Defendants filed their reply on May 7, 2021.

After extensive, arm’s-length negotiations, including a two-day mediation on February 2 and 3, 2022 before two nationally recognized mediators—the Hon. Daniel Weinstein (Ret.) and Jed D. Melnick—the parties agreed to settle the action. The proposed settlement contains two components. First, Goldman’s insurers, on behalf of the Defendants, will pay $79.5 million to Goldman, to be used entirely for the Company’s compliance activities, including but not limited to funding the compliance measures referenced below. See Stipulation of Settlement (the “Stipulation”), §B(1). Second, Goldman will adopt and/or continue to maintain the significant corporate governance reforms detailed in Section B of the parties’ Stipulation. See Stipulation, §B(2). Specifically, for a period of three years (unless otherwise indicated):

  1. Extension of the Corporate Compliance Program Provisions. Goldman shall extend the provisions of the DPA’s Corporate Compliance Program (detailed in Attachment C to the DPA) for one year following the expiration of the DPA on October 22, 2023. The Corporate Compliance Program requires the Company to enhance its internal controls and compliance programs to, among other things, maintain: (i) an effective system of internal accounting controls; and (ii) a rigorous anti-corruption compliance program.
  2. Enhancements to Authority of the Chief Compliance Officer. Goldman’s Chief Compliance Officer (“CCO”) shall report to the Board (or the Audit Committee of the Board) on a periodic basis (but at least quarterly) and shall also have the necessary resources to hire a dedicated internal investigatory staff and be empowered to hire external investigators where, in the CCO’s discretion, it is appropriate to do so.
  3. Maintenance of an Anonymous Hotline with Reporting to the CCO. The Company shall maintain an anonymous hotline that employees may use to report matters to the CCO, which will be managed by the Company’s Compliance Department.
  4. Maintain an External Monitoring Channel. The Company shall designate an outside party to monitor public media and industry reports that may raise compliance concerns involving Goldman, and that external party shall report any such issues directly to the CCO on a periodic basis.

Furthermore, in connection with the settlement, Plaintiff conducted discovery to confirm its assessment that the settlement is fair, adequate, and reasonable, including the review and analysis of over 667,000 pages of confidential Goldman documents. After Plaintiff completed this discovery and confirmed its assessment, the parties negotiated the stipulation finalizing the terms and conditions of the settlement, which was executed on May 13, 2022.

Plaintiff filed its unopposed motion for preliminary approval of settlement on May 13, 2022, and on September 16, 2022, the Court entered its order preliminarily approving derivative settlement and providing for notice, along with a related opinion & order. Significantly, in granting preliminary approval of the settlement, the Court found that “the settlement is fair, reasonable, and the result of good faith negotiation,” and specifically highlighted that the $79.5 million monetary component “is one of the largest settlements of a shareholder derivative action in the Second Circuit’s history, and is therefore highly favorable.” The Court further noted that “the corporate governance reforms in the Settlement Agreement are reasonable and would likely be unachievable through litigation.” The Court also stated that Lead Counsel’s anticipated attorneys’ fees and expense request “appear reasonable” at this stage of the litigation and were in line with standard fees in complex cases like this one.

Plaintiff’s briefs in support of final approval of the settlement and its application for attorneys’ fees were filed on December 9, 2022; no objections to final approval, which were due on December 23, 2022, were filed.

A final settlement hearing was held on January 13, 2023, and the Court issued its final judgment and dismissal of the case, approving the terms of the settlement, on January 20, 2023.

The Court’s orders and related documents can be found on this web page.