Goldman Sachs is leading the drop in US bank stocks, thanks to its deepening legal troubles in Malaysia. In the latest development, Malaysia filed criminal charges (pdf) today against subsidiaries of the New York bank and two of its former employees.
The charges stem from allegedly false or misleading statements related to the misappropriation of $2.7 billion of bond proceeds by 1MDB, a state-run fund. The debt, from three bond issues with a total face vale of $6.5 billion, was underwritten and arranged by Goldman Sachs in 2012 to 2013, according to a government statement (pdf).
“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 Malaysian attorney general Tommy Thomas.
Goldman Sachs has said it didn’t know about embezzlement and bribery at the fund. US prosecutors, meanwhile, claim 1MDB was looted after the investment bank helped the state-backed fund raise money.
US authorities say billions of dollars were embezzled from the state fund to buy assets from art and property to a private jet. Najib Razak, Malaysia’s former prime minister and the founder of the fund, is accused of taking $700 million from 1MDB.
Although Goldman has been hardest hit, all bank stocks are under pressure right now. Since its peak in late January, the S&P 500 financials index has fallen more than 20%—typically considered the threshold for the start of a bear market. Financial company shares have fallen amid concerns about economic growth and the increasing cost of borrowing money.
Goldman Sachs, whose renowned trading unit has at times been lackluster in recent years, has sought to revamp its business by diversifying into new arenas like consumer lending. It has also shuffled its executive ranks, as David Solomon took over from Lloyd Blankfein as CEO in October. Those efforts have recently been overshadowed by the 1MDB allegations.
Anwar Ibrahim, seen as the likely future prime minister of Malaysia, has demanded reparations amounting to more than the $600 million that Goldman Sachs gained in fees from 1MDB, according to an interview last month with the Financial Times (paywall).
Malaysia’s attorney general says the fees from underwriting and arranging the debt issuance were several times more than prevailing market rates. Employees and directors at the investment bank also benefitted from the alleged misappropriation through large bonuses and “enhanced career prospects,” according to the statement. Former 1MDB employees Jho Low and Jasmine Loo Ai Swan were named in the charges, as were former Goldman Sachs employees Tim Leissner and Roger Ng.