Low Taek Jho and an official from 1MDB had hired Goldman Sachs Group to underwrite the US$1.75 billion bond offering.
SINGAPORE: In a private dining room at Singapore's Taste Paradise restaurant, over a meal of abalone and suckling pig, two Goldman Sachs Group Inc bankers were explaining a US$1.75 billion bond offering to six executives of a Swiss bank.
It was early 2012, and joining Goldman bankers Roger Ng and Tim Leissner that day were a young Malaysian financier named Low Taek Jho and an official from state investment fund 1Malaysia Development Bhd, known as 1MDB, which had hired the New York bank to underwrite the bond sale.
Now, people familiar with the matter say, investigators from Singapore to the United States are looking more closely at the roles of Mr Ng and Mr Leissner, who have both left Goldman. And they're asking what happened in that private
dining room named after the first emperor of a unified China, Qin Shi Huang.
In particular, they're examining how US$577 million in proceeds from a bond sale that May ended up a day later in an account at BSI SA in Switzerland - the same bank whose executives were at the Taste Paradise.
The lunch, previously unreported, brought together the key parties in
what has become the biggest financial scandal in Malaysia's history,
involving the alleged misappropriation of US$4.5 billion of 1MDB funds.
It was the culmination of numerous conversations as BSI bankers and
compliance officials sought clarity on the deal.
The BSI account belonged to a British Virgin Islands entity known as
Aabar Investments PJS Ltd., which US court documents say was used to
siphon off about US$1.4 billion from two 2012 bond sales, including the
offering discussed at the lunch.
The man who led BSI bank into the abyss
Mr Leissner, Goldman's former chairman of South-east Asia and lead
banker for three 1MDB bond sales, is now barred from the world of
finance in Singapore and the US.
Prosecutors in Malaysia and Singapore are turning their attention to
Mr Ng, Mr Leissner's junior, who introduced several parties central to
the scandal, the people said. Malaysian authorities are said to be
preparing a warrant for Mr Ng's arrest, people familiar with the matter
said earlier this month.
Mr Ng couldn't be reached for comment. A lawyer for Mr Leissner, Mr
Marc Harris, declined to comment, as did Mr Edward Naylor, a Hong
Kong-based spokesman for Goldman Sachs, and an official at EFG
International AG, which acquired BSI in 2016. A representative for Mr
Low did not reply to emails.
Recouping fees
The 1MDB investigation has quickened since Malaysian Prime Minister
Mahathir Mohamad returned to power in May. Tun Dr Mahathir has called
former premier Najib Razak, who set up the fund in 2009, a thief and
made resolving the case one of his priorities. Several arrest warrants -
including one for Mr Low, described by prosecutors as a key figure in
the plot - have already been issued.
Dr Mahathir said in a June 22 Bloomberg Television interview that
Malaysia is also seeking to recoup some of the almost US$600 million in
fees Goldman made from the three deals, which were arranged by the
bank's London-based unit.
"What we earned from the debt transactions reflected the risks we
assumed at the time, specifically movement in credit spreads tied to the
specific bonds, hedging costs and underlying market conditions," Mr
Naylor, the Goldman spokesman, said last week in response to Dr
Mahathir's comments.
Datuk Seri Najib has repeatedly denied wrongdoing and called the probe "political revenge."
Genteel banker
Mr Ng, a well-connected Malaysian banker, joined Goldman in 2005 from
Deutsche Bank AG, where he won mandates for several bond deals. He
provided an introduction to lawmakers in the state of Terengganu, which
in 2009 hired Goldman to advise it on the creation of the Terengganu
Investment Authority (TIA), the people said.
Mr Ng was promoted to managing director that year. At TIA, which
eventually became 1MDB, Mr Ng crossed paths with Mr Low, a Malaysian
dealmaker and adviser to the fund.
As Goldman won deals from 1MDB, Mr Ng and Mr Leissner forged a
friendship, which extended to their wives, according to the people.
Investigators are now also looking at a transfer shortly after the May
2012 bond sale of US$17.5 million to Mr Ng's wife, Malaysian lawyer Lim
Hwee Bin, from Mr Leissner's former wife Judy Chan, who runs a vineyard
in China, the people said. Ms Lim and Ms Chan did not reply to emails
and phone calls.
Mr Ng is described by those who know him as the antithesis of a Wall
Street investment banker - genteel, valuing personal ties and averse to
asking hard questions. He was content letting his boss champion the 1MDB
deals. Mr Leissner, who arrived late at the 2012 lunch and left early
to catch a flight, made most of the presentation, leaving Mr Ng and Mr
Low to fill in the gaps, according to the people familiar with the
meeting.
While Mr Ng played an important role facilitating the US$1.75 billion
bond deal, dubbed Project Magnolia, he wasn't involved in the two other
bonds Goldman underwrote for 1MDB, the people said. Mr Ng left the bank
in 2014, a few months before the missing 1MDB funds became public.
Now managing director for Asia at energy-drinks company Celsius
Holdings Inc, where Mr Leissner and his current wife Kimora Lee are both
investors, Mr Ng has been barred from travelling by the Malaysian
Anti-Corruption Commission, the people said.
He and his wife live in a gated community in Damansara Heights in
Kuala Lumpur, where houses sell for RM5 million (S$1.7 million) to RM25
million.
Mr Ng joined Boca Raton, Florida-based Celsius in 2016, the same year
Mr Leissner became co-chairman of the board. Mr Leissner resigned in
May 2017, though he remains one of Celsius' largest shareholders. Hong
Kong billionaire Li Ka Shing and Mr Russell Simmons, the former husband
of Mr Leissner's current wife, are also investors.
Ms Megan Bell, a spokesman for Celsius, declined to comment.
Hedge funds are crowding into U.S. Treasuries, and that has bond traders bracing for more turbulence.
While the Federal Reserve doesn’t break out hedge-fund ownership, a group seen as a proxy increased its holdings to a record $1.27 trillion in the past year, according to a quarterly report released by the central bank this month. That came as foreign central banks and finance ministries, the biggest buy-and-hold owners in recent years, culled their investments for the first time on an annual basis since 2000.
The surge of hedge funds into U.S. government debt is a worrying sign to Societe Generale SA and Commerzbank AG.
They say the firms, which often use borrowed money and jump in and out of trades at a moment’s notice, will boost the chances of sudden shocks in the world’s de facto haven market. That may compound swings in Treasuries, which by some measures have reached record levels as concerns about China, the global economy and diverging central-bank policies whipsaw bond traders. The Treasury Department is already looking into whether the market isn’t running as smoothly as it should.
Volatility Risk
Foreign central banks’ “market share is being replaced by private investors who take a much more active approach,” Rob VandenAssem, the head of investment-grade fixed-income for developed markets at PineBridge Investments, which oversees $85 billion, said in an e-mail. “Hedge funds in particular pose a risk to volatility.”
The potential that hedge funds will amplify Treasury swings adds to questions about the resilience of the $13.3 trillion market, especially as the Fed considers whether to raise interest rates this year. And because yields are so low, sudden shifts in momentum could lead to big losses, especially for less nimble investors.
Ten-year Treasuries yielded 1.89 percent today, more than a half-percentage point below their June peak of 2.5 percent.
In the Fed’s quarterly reports, domestic hedge funds are categorized under “households and non-profit organizations.” Most analysts consider it an accurate gauge of Treasuries held by those high-powered firms, and to a lesser degree, ownership by households and other groups like private-equity shops and personal trusts. The latest data released March 10 showed they were the largest buyers of Treasuries last year, adding $398 billion. That’s the biggest increase on an annual basis since 2009.
Hedge funds are also signaling their presence in the U.S. bond market in other ways. Since the end of 2013, investors domiciled in the Caribbean, a popular legal home for hundreds of hedge funds seeking lower taxes, have increased their holdings of Treasuries by 43 percent to $352 billion, Treasury Department data show. As a group, they’re now the third biggest overseas creditors, behind only China and Japan.
At the same time, foreign investors, who still hold 40 percent of America’s bonds, were the only net sellers in 2015 as central banks in China and other emerging markets raised cash to support their currencies. And Treasury Department figures showed they kept selling at the start of the year.
The rise of hedge-fund ownership may already be making fluctuations in Treasuries worse. This year, daily swings in 10-year yields exceeded one standard deviation -- equal to 0.043 percentage point -- about 39 percent of time, according to TD Securities. That eclipses last year’s figure of 34 percent, which was the highest for any year going back to 1975, the data show.
“This will likely add volatility” said Bruno Braizinha, a fixed-income strategist at SocGen in New York.
Treasury Review
Concerns over abrupt swings, whether it’s because of a lack of liquidity or an increase in high-volume traders, have already caught the attention of the U.S. government. Spurred by a 12-minute plunge and rebound in yields on Oct. 15, 2014, the Treasury Department is conducting its first comprehensive review of the market’s structure since 1998.
Some say hedge funds aren’t the problem, but a potential solution.
By stepping in to take the place of traditional Wall Street banks, whose bond-trading businesses have come under pressure from regulations and shifts in technology, hedge funds may actually increase liquidity. And their use of leverage, or borrowed money, means they have the wherewithal to trade vast quantities of securities.
Leverage, Liquidity
At least that’s the view of Ronin Capital LLC, a Chicago-based proprietary trading firm. When U.S. officials asked for comments on liquidity and market structure earlier this year, the firm wrote in a March 19 letter that “leverage and liquidity in the U.S. Treasury market go hand in hand.”
“If the only entities willing to hold positions in U.S. Treasuries are ‘buy and hold,’ meaningful liquidity in the U.S. Treasury market will be nonexistent,” the firm said.
Some sophisticated investors have also started to trade on Treasury platforms previously reserved for bond dealers, according to an October report from financial-services consulting firm Greenwich Associates. Christian Hauff, the co-founder of Quantitative Brokers LLC, says many of those funds now look a lot like Wall Street’s proprietary bond-trading desks from years ago.
“You’re seeing those that used to trade on Wall Street transition to working at hedge funds,” he said.
Even if hedge funds provide more liquidity, it doesn’t necessarily ensure the ride won’t be bumpy. That’s because while traditional dealers often served as buffers for their clients during times of stress, hedge funds have no such incentive.
When volatility picks up, hedge funds can “jump on another ship,” said David Schnautz, a London-based rates strategist at Commerzbank. - Bloomberg
What is a hedge fund? - MoneyWeek Investment Tutorials
