By Sarah N. Lynch and Noor Zainab Hussain
WASHINGTON (Reuters) - Goldman Sachs Group Inc on Thursday said it was clawing back $174 million in executive compensation and had agreed to pay $2.9 billion over its role in Malaysia’s 1MDB corruption scandal, lifting a cloud that has hung over the bank for years.
The settlement with the U.S. Department of Justice and other U.S. and overseas regulators resolves a probe into the role Goldman Sachs bankers played in helping to steal cash, which Goldman helped raise, from the Malaysian state fund.
While the scandal has proved a humbling and costly saga for the Wall Street giant, the long-awaited settlement should allow Chief Executive David Solomon to accelerate his plans to turn the bank around after a decade of under-performance, analysts said. Goldman's shares were up 1.4% on the news.
“Getting this overhang off the back of management and the company in general is a very big win,” said Marty Mosby, an analyst at boutique brokerage Vining Sparks.
Under terms of the deal, Goldman agreed to pay a $2.3 billion fine for breaking anti-bribery laws and to disgorge $600 million of ill-gotten gains as part of a deferred prosecution agreement, which also requires it to improve its compliance controls.
The bank also agreed for its Malaysia subsidiary to plead guilty in a U.S. federal court on Thursday, in a victory for prosecutors who rarely extract criminal guilty pleas from corporate entities.
Brian Rabbitt, acting head of the Justice Department's criminal division, said the penalty was the largest ever levied for a breach of the Foreign Corrupt Practices Act and that the settlement reflected the "seriousness" of the bank's role "in a massive global scheme to loot billions of dollars" from 1MDB.
The scandal dates to the government of former Malaysian Prime Minister Najib Razak, which set up the 1MDB fund in 2009.
Between 2009 and 2014, Goldman bankers paid more than $1.6 billion in bribes to foreign officials in Malaysia and Abu Dhabi to win 1MDB business, including underwriting $6.5 billion in bond sales, for which it earned $600 million in fees.
But billions of the fund's money were later stolen by high-level fund officials and their associates to pay for real estate, art and other luxury items, with the help of the Goldman bankers, the Justice Department said.
In 2018, the Justice Department filed criminal charges against two of the former Goldman bankers, Tim Leissner and Roger Ng. Leissner pleaded guilty to the charges last year, while Ng's case is pending in a New York court.
"While many good people worked on these transactions and tried to do the right thing, we recognize that we did not adequately address red flags and scrutinize the representations of certain members of the deal team," Solomon wrote in a memo to staff on Thursday, adding the bank had already made several compliance improvements.
He said that the bank would be clawing back compensation from the three bankers involved, and its former executive team "in acknowledgement of the Firm’s institutional failures."
He and other senior executives would also have their compensation for 2020 reduced, bringing the total of clawbacks and pay reductions to $174 million.
Thursday's deal follows $3.9 billion the bank paid in Malaysia in July to settle charges there related to the matter.
Since 2019, Goldman had set aside $4.39 billion to cover legal and regulatory matters. Some $2 billion was for matters it already resolved with the Malaysian government. On Thursday, it said it would increase its provisions for litigation and regulatory proceedings for the third quarter by $250 million.
Odeon Capital analyst Dick Bove scolded Goldman’s management teams for allowing the 1MDB bond deals and commended the board for the clawbacks. He said he expects the financial penalties to affect fourth-quarter results despite Goldman’s existing reserves.
“Every person that participated in the decisions to proceed with these offerings needs their bonuses recaptured by the company. It is very positive to hear that Goldman may actually do this," he added.
Despite the costs, analysts anticipated that Thursday's deal should allow Solomon to accelerate his plan to reshape Goldman as a more conventional bank and be less reliant on volatile trading venues. Some investors and analysts viewed the 1MDB probes as an obstacle to Goldman doing transformative deals, since U.S. regulators will often bar banks from making big acquisitions while they're being probed for serious misconduct.
With clarity over how much the bank needs to pay and a clean slate with regulators, Goldman may be able to be more aggressive on that front, said Mosby.
“When they had this over their heads they didn’t have that opportunity, they had to take a pause. This is a green light to say they can go ahead and do that.”
(Reporting by Noor Zainab Hussain in Bengaluru, Sarah N. Lynch in Washington and Matt Scuffham in New York; Writing by Michelle Price and Anirban Sen; Editing by Bernard Orr, Cynthia Osterman and Nick Zieminski)