As highlighted in this prior post, last week the DOJ and SEC announced a net $1.66 billion Foreign Corrupt Practices Act enforcement action (the largest ever) against Goldman Sachs in connection with the IMDB fund.
As highlighted below, in connection with the same core conduct, the Federal Reserve Board also announced that it had fined Goldman $154 million for engaging in “unsafe and unsound practices.”
In addition, as highlighted below, the SEC issued a temporary order granting Goldman affiliated entities an exemption from the Investment Company Act’s prohibition on serving or acting an investment advisor or depositor upon the conviction of a felony.
Federal Reserve Action
The Federal Reserve of course does not have authority to enforce the FCPA, but can use underlying conduct which may implicate the FCPA to pursue it own remedies.
For instance, in connection with the JPMorgan internship and hiring practices FCPA enforcement action, the Federal Reserve fined JPMorgan $61.9 million “for unsafe and unsound practices related to the firm’s practice of hiring individuals referred by foreign officials and other clients in order to obtain improper business advantages for the firm.” In connection with the same core conduct, the Federal Reserve also brought an enforcement action against two individuals associated with JPMorgan (see here for the prior post).
Likewise, in the aftermath of the 2012 FCPA enforcement action against Garth Peterson (a former managing director for Morgan Stanley’s real estate business in China) (see here for the prior post), the Federal Reserve issued this 2013 letter prohibiting Peterson from having various roles in the banking industry.
Prior to last week’s FCPA enforcement action against Goldman, the Federal Reserve announced in March 2019 (see here for the prior post) “that it is prohibiting Tim Leissner and Ng Chong Hwa, also known as Roger Ng, from the banking industry for their participation in a scheme to illegally divert billions of dollars from a Malaysian sovereign wealth fund. Leissner was also fined $1.42 million and consented to the permanent ban.”
In connection with the same core conduct alleged in the Goldman FCPA enforcement, the Federal Reserve Board fined Goldman $154 million for engaging in “unsafe and unsound practices.” This order to cease and desist, which Goldman agreed to without admitting or denying the any allegation made or implied by the Fed, states as follows:
“The Firm lacked adequate or failed to implement adequate governance, compliance risk management, and compliance policies and procedures to ensure that the 1MDB offerings complied with safe and sound practices and applicable internal policies;
The Firm’s review and approval processes failed to appreciate the significant legal, reputational, operational, and other risks associated with the 1MDB offerings and its policies and procedures and related controls were deficient and prevented it from detecting and addressing illegal and/or unsafe and unsound conduct by certain senior business personnel working on the 1MDB offerings;
While certain business personnel at times provided false, misleading or inadequate information to the Firm’s control functions and senior personnel responsible for assessing and approving the 1MDB offerings, such control functions and senior Firm personnel failed sufficiently to challenge the business line, address adequately red flags regarding the 1MDB offerings, insist on adequate information and documentation regarding key aspects of the offerings prior to execution, and effectively supervise a senior business employee about whom certain Firm personnel had expressed integrity concerns in the past;
Specifically, the Firm failed to:
1. adequately investigate the involvement of a suspicious intermediary, who participated in the scheme to divert proceeds and pay bribes to certain foreign government officials, instead relying overly on representations by business personnel of the intermediary’s non-involvement; the Firm failed in this regard despite internal reports that the intermediary had met with an official of the Foreign Fund in connection with the first offering and repeated efforts by personnel in Asia to do business with the intermediary after his rejection as a Firm client;
2. appropriately address issues regarding the Foreign Fund’s approval of the guarantees, including appropriate consideration of the risks of conducting two of the offerings absent customary evidence of, and a legal opinion from Foreign Fund’s counsel addressing, corporate authority, and the lack of appropriate involvement of the Foreign Fund’s management and legal counsel to vet the first offering;
3. adequately address or conduct due diligence concerning various red flags or other issues, including 1MDB’s and the Foreign Fund’s motivation for the offerings in light of the costs of fundraising and requests for unusual confidentiality and speed of execution; the removal, without a documented explanation, of a monetary fee for the Foreign Fund’s guarantee in the first offering; the use of a special purpose vehicle to receive call options for the Foreign Fund’s guarantee in the first offering; 1MDB’s conflicting or ambiguous statements concerning the use of offering proceeds; and 1MDB’s and the Foreign Fund’s failure to fund the joint venture related to the third offering; and
4. escalate or address allegations of bribery around the 1MDB offerings, which were communicated to certain senior business personnel following the completion of the 1MDB offerings;
E. In addition to the 1MDB offerings, in connection with a 2015 financing transaction, certain business personnel concealed the involvement of another intermediary from the Firm’s control functions;
F. As a result of deficient policies, procedures and controls described above, the Firm engaged in unsafe and unsound practices.”
SEC Order
The SEC order set forth the following relevant legal framework:
“Section 9(a)(1) of the Act provides, in pertinent part, that a person may not serve or act as an investment adviser or depositor of any registered investment company or as principal underwriter … if such person within ten years has been convicted of any felony or misdemeanor, including those arising out of such person’s conduct as a broker, dealer or bank
Section 2(a)(10) of the Act defines the term “convicted” to include a plea of guilty. Section 9(a)(3) of the Act extends the prohibitions of section 9(a)(1) to a company, any affiliated person of which has been disqualified under the provisions of section 9(a)(1). Section 2(a)(3) of the Act defines “affiliated person” to include, among others, any person directly or indirectly controlling, controlled by, or under common control with, the other person
Section 9(c) of the Act provides that: “[t]he Commission shall by order grant [an] application [for relief from the prohibitions of subsection 9(a)], either unconditionally or on an appropriate temporary or other conditional basis, if it is established [i] that the prohibitions of subsection 9(a), as applied to such person, are unduly or disproportionately severe or [ii] that the conduct of such person has been such as not to make it against the public interest or the protection of investors to grant such application.”
Upon considering Goldman’s application, which argued among other things that the conduct at issue “occurred primarily as a result of the actions of a few employees,” the SEC found that Goldman made “the necessary showing to justify granting a temporary exemption.”
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