Goldman Sachs (GS) has announced that it has reached an agreement with the Government of Malaysia to resolve all the criminal and regulatory proceedings in Malaysia involving the firm relating to 1Malaysia Development Berhad (1MDB). This includes pending criminal proceedings against Goldman Sachs’ subsidiaries and directors.
The scandal involved GS raising $6.5 billion in bond sales for the 1MDB fund, earning an estimated $600 million in fees from 2012 and 2013. It was later discovered that two GS bankers, Tim Leissner and Roger Ng, and Malaysian government adviser, Jho Low, had been involved in the misappropriation of funds from 1MDB and bribery of the government.
According to GS, the agreement in principle would involve the payment to the Government of Malaysia of $2.5 billion and a guarantee that the Government of Malaysia receives at least $1.4 billion in proceeds from assets related to 1MDB seized by governmental authorities around the world.
Goldman Sachs revealed that based on a valuation analysis of the relevant assets, the guarantee does not present a significant risk exposure to the firm.
In addition, the Government of Malaysia agreed to withdraw the pending criminal charges and agreed that no further charges would be brought against Goldman Sachs, its subsidiaries, or any of their directors, officers and employees (excluding former employees Tim Leissner and Roger Ng) related to 1MDB.
As a result, Goldman Sachs noted that it expects to materially increase its provisions for litigation and regulatory proceedings for the second quarter of 2020, which will be reflected in its financial statements for the period ended June 30, 2020.
The agreement in principle does not resolve the other pending governmental and regulatory investigations involving the firm relating to 1MDB, Goldman adds.
Following the announcement, RBC Capital analyst Gerard Cassidy reiterated his hold rating on Goldman Sachs with a price target of $225 (12% upside potential).
In respect of a potential settlement with the Department of Justice (DOJ) he noted that the company has previously stated that it is cooperating with the DOJ regarding the 1MDB investigation but has not reached an agreement.
“According to a Bloomberg article from the beginning of July, a resolution is pending on the decision about whether a GS subsidiary in Asia must plead guilty. Once a resolution is made, the bank could receive a penalty up to $2 billion” Cassidy wrote on July 24.
However the analyst added: “A greater risk for shareholders is if banking regulators restrict the company’s ability to grow with a regulatory agreement, i.e., a cease-and-desist order.”
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