Abu Dhabi Fund Sues Goldman As 1MDB-Inspired Client Exodus Begins

As volatility plunged during the QE era, sapping capital markets desks of badly needed brokerage revenues, Goldman Sachs started desperately searching for new clients to help make up the revenue hole. And for a while there, the investment bank thought it had found them in sovereign wealth funds. In a push to expand its sovereign wealth fund business, Goldman reorganized its network of bankers last year to better meet the needs of these politically sensitive funds, even hiring former White House foreign policy advisor Dina Powell to help oversee these relationships.


Now, with the long-simmering 1MDB scandal blowing up in the Vampire Squid's face, it appears all of the work that Goldman put in to try and court sovereign wealth funds could go to waste. In a sign that Goldman clients are taking their business elsewhere, Abu Dhabi-based International Petroleum Investment Co. and Aabar Investments PJS filed a lawsuit against Goldman in a New York court seeking unspecified damages over the bank's "central role" in 1MDB, according to the Wall Street Journal. 

Both IPIC, a UAE sovereign wealth fund, claim they were harmed by Goldman when the bank bribed former managing director Khadem Al-Qubaisi and former Aabar Investments CEO Ahmed Badawy Al-Husseiny to help set up IPIC as an investment partner to 1MDB.

"Goldman Sachs conspired with others to bribe IPIC’s and Aabar’s former executives," the court filing said, referring to IPIC’s subsidiary Aabar Investments PJS.

As WSJ pointed out in its reporting about the new lawsuit, which followed a petition filed by Malaysia asking the DOJ to help it recoup all of the $600 million in fees (plus an interest-rate differential) that it paid Goldman for the bond issues that helped seed 1MDB, the reputation damage could inspire sovereign wealth funds run by some of the UAE's neighbors to take their business elsewhere as well.

The move is a sign that the 1MDB scandal, a reputational black eye for Goldman, could spill over into its banking business. IPIC and its successor, Mubadala Investment Co., are longtime investment-banking clients, having hired Goldman for years to advise on and raise money for deals.

Any moves by Abu Dhabi to shift business away from Goldman could influence other governments in the Middle East, especially Saudi Arabia, where it has a strong voice, according to people familiar with the bank’s regional business.

Even before news of this lawsuit broke, Goldman's shares were already the worst-performing US banking stock of the year, and questions about the involvement of senior executives (including former CEO Lloyd Blankfein) raised the possibility that the DOJ's prosecution could go well beyond the two bankers that have already been arrested and charged (one of whom, Goldman's former Southeast Asia chief Tim Leissner, has agreed to cooperate). Given that Goldman (and most of the big investment banks) rarely face this level of public backlash over their misdeeds, it's hardly surprising that the bank's biggest rival Morgan Stanley indulged in some well-deserved schadenfreude when its equity analysts downgraded Goldman's shares and cut their rating to equal weight (with a price target of $226 a share, representing a nearly 20% upside to where Goldman's stock is currently trading). In its analysis, Morgan warned about other potential lawsuits related to 1MDB, according to CNBC.

"It is unclear how long the issue will take to resolve, what the fines and penalties could be, and what costs Goldman Sachs will subsequently incur to satisfy any demands from regulators," wrote Morgan Stanley analyst Betsy Graseck. "These risks, coupled with potential headline risks in the coming months (additional lawsuits, additional regulatory probes, internal reviews), drive our Equal-weight rating."

Indeed, with so many parties involved (investors in 1MDB's bonds were left holding the bag when the fund defaulted), it's unlikely that Goldman's legal troubles will end here.