By Dave Michaels, Liz Hoffman and Bradley Hope 

Goldman Sachs Group Inc. will pay the U.S. government about $2.8 billion and admit wrongdoing in a Malaysian bribery scandal, settling charges stemming from its work with a corrupt government investment fund.

A Goldman subsidiary tied to the misconduct in Asia is expected to plead guilty this week, according to people familiar with the matter. The bank's parent company will admit fault but won't face prosecution under the agreement, the people said, avoiding a guilty plea that could have crippled its ability to do business.

The arrangement, known as a deferred prosecution agreement, would allow the U.S. Justice Department to pursue charges later if Goldman errs again during a specified time period.

The settlement caps a yearslong scandal that stretched from Southeast Asia to Hollywood, the Middle East, Las Vegas and London. In July, Goldman agreed to pay Malaysia $2.5 billion for its role in the alleged theft of billions of dollars from the investment fund, known as 1MDB.

The deal with the Justice Department calls for Goldman to pay a penalty of about $2.2 billion plus about $600 million in ill-gotten gains, although the firm will be able to offset some of that with fines paid to other authorities and agencies, the people said.

The deal won't require Goldman to install a compliance monitor, the people said, a costly undertaking that law enforcement officials sometimes order to fix corporate misconduct. These arrangements can last for years: Goldman is still making quarterly updates to the monitor it was forced to hire in the wake of the 2008 mortgage crisis. The Wall Street Journal reported late last year that prosecutors were pushing for a monitor in the 1MDB case.

All in, the 1MDB scandal will cost Goldman more than $5 billion, wiping out about two-thirds of a year's profits. But the firm will avoid the harshest penalties that prosecutors have sought, and it has already accounted for the cost in its financial reports to shareholders.

Bloomberg News earlier reported that the settlement was imminent.

The 1MDB scandal was a distraction for Goldman as its new chief executive, David Solomon, tried to push the bank in profitable new directions. And to Goldman's critics, it reinforced the bank's reputation as a ruthless money-spinner willing to serve unscrupulous clients in pursuit of fees.

It is an image Goldman has worked to shed since the 2008 financial crisis, when it paid $550 million to settle criminal allegations that it duped investors about a particularly noxious mortgage bond. That episode tarnished the firm's reputation and cast a long shadow over the tenure of its then-CEO, Lloyd Blankfein.

Since then Goldman has sought to reinvent itself as a friendlier place. It opened a Main Street bank, introducing itself to a broad swath of the public. It launched a lobbying and education effort to small businesses and entrepreneurs. And when market volatility this spring caught trading clients wrong-sided and triggered thousands of margin calls, it ordered its traders to take a softer tack.

The 1MDB scandal, and the admissions Goldman will make as part of a formal settlement later this week, show that its past can't be so easily outrun. While the conduct occurred years ago, it was centered in a division that Mr. Solomon ran at the time. Both Messrs. Solomon and Blankfein, as well as other current and former top executives, still face a potential clawback of bonuses they were paid in prior years, according to regulatory filings.

Goldman began courting Malaysian officials more than a decade ago, as the 2008 crisis was crimping earnings back in the U.S. The Asian country had just launched a government fund to spur economic development, called 1 Malaysia Development Bhd., or 1MDB, and Goldman in 2012 and 2013 helped sell $6.5 billion in bonds for the fund.

Most of that money went missing and was allegedly stolen by an adviser to the fund, Jho Low, and his associates, according to prosecutors. Nearly $700 million ended up in the bank account of the country's prime minister, who was later convicted of abuse of power for his role in the scandal. Mr. Low allegedly spent much of the rest on luxury condos in New York and London, fine art, a giant yacht, private jet, huge parties in Las Vegas and to fund the film "The Wolf of Wall Street."

Goldman for years blamed the 1MDB scandal on rogue employees, a pair of senior bankers who were criminally charged in the matter and, according to prosecutors, tried to hide the worst of their criminal conduct from superiors. When the scandal began to unravel in 2015, Goldman defended itself, saying the deals were vetted by internal committees and that the bank paid appropriately for the risks it took.

The two bankers were lauded by Goldman's top executives for their work with 1MDB, and the first bond deal in 2012 won an internal firmwide award. Critics have said that the size of the fees Goldman earned from 1MDB, which were far higher than is typical for the kind of work it did, should have been a clear warning sign that something wasn't right.

"This case is a modern twist on the oldest and most destructive form of criminality, individuals who have power using their position in society for purposes of evil and greed rather than for good," said William McMurry, who retired from the FBI this year to join the firm 5 Stones Intelligence after helping to oversee the 1MDB investigation since 2015.

Prosecutors investigated whether Goldman failed to supervise its top banker on the deal, Timothy Leissner. Mr. Leissner admitted in 2018 to violating money-laundering and bribery laws in working closely with Mr. Low to engineer the theft. Mr. Leissner received $200 million during the scandal and paid out millions of dollars of bribes, including in jewelry for Malaysia's then-first lady. He agreed to forfeit $43.7 million and has been cooperating with the U.S. government.

Write to Dave Michaels at dave.michaels@wsj.com, Liz Hoffman at liz.hoffman@wsj.com and Bradley Hope at bradley.hope@wsj.com

 

(END) Dow Jones Newswires

October 20, 2020 12:22 ET (16:22 GMT)

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