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Goldman Sachs worked with Windhorst despite compliance alert

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By Silas Brown
13 Dec 2018

Goldman Sachs International conducted business with Lars Windhorst, the colourful German financier, despite warnings from its compliance department that he was a high risk counterparty.

The relationship between Goldman and Windhorst came to public notice in early December as part of the scandal surrounding Goldman’s work with 1MDB, the Malaysian sovereign wealth fund alleged to have been the target of embezzlement and money laundering on a grand scale. Lloyd Blankfein, then Goldman’s CEO, has been reported to have met Jho Low, the financier at the centre of the 1MDB scandal, twice.

In 2012 and 2013 Goldman solely arranged three bond issues totalling $6.5bn for 1MDB.

Central to the 1MDB scandal is Falcon Private Bank, a Swiss bank owned by Abu Dhabi’s sovereign wealth fund International Petroleum Investment Co (Ipic), which has since been merged into Mubadala Investment Co.

Windhorst introduced Falcon Private Bank and other parties to Goldman in early 2016, leading to Goldman broking a securities trade among those parties, Bloomberg has reported, quoting Windhorst’s spokesman as having confirmed the introduction.

Two former directors of Falcon were Khadem Abdulla Al-Qubaisi, former managing director of Ipic, and Mohamed Ahmed Badawy Al Husseiny, former CEO of Ipic’s subsidiary Aabar Investments.

They are in custody in Abu Dhabi and have been charged with money laundering and taking bribes. Ipic and Aabar are suing Goldman Sachs in New York, seeking redress for losses.

Falcon has also been found by Swiss and Singaporean regulators to have breached money laundering regulations in connection with 1MDB.

The fact that Goldman had done business with Windhorst has led to further questions about the strength of its compliance controls, already under the spotlight because of the 1MDB affair.

Advice disregarded

But evidence suggests that in the case of Windhorst, compliance executives at the bank did recommend that he be avoided, but that their advice was disregarded.

People familiar with the situation said GSI’s compliance desk, headquartered in London, was asked, between the late summer of 2015 and early 2016, to conduct enhanced due diligence on Mr Windhorst.

A compliance report was drawn up which “counselled for a decline for his extremely patchy record,” said a source with knowledge of the situation. “The flag was definitely raised in compliance… Lars was given a clear decline.”

A second source also said a report had recommended a decline.

However, after this report Goldman Sachs participated in a series of transactions with companies Windhorst was affiliated with.

In July 2016, Windhorst’s investment fund Sapinda Invest Sarl sold its 18.6% stake in Buwog, the Austrian-German home builder and asset manager, for €375.5m, in a public equity block trade lead managed by Goldman Sachs International.

In September 2015 Goldman was a bookrunner on a $500m bond issued by a funding vehicle (EA Partners I BV), set up by Abu Dhabi-based Etihad Airways and its affiliates. The other bookrunners were ADS Securities and Anoa Capital. Windhorst’s investment firm Sapinda was a shareholder in Anoa, which had structured the deals.

A second $500m deal, EA Partners II BV, followed in May 2016, with the same three bookrunners plus Shuaa Capital.

Anoa Capital has tried to make its mark as an investment bank, and has had Sapinda as a shareholder since 2013. But some of its high profile hires stayed only a short time at the firm. Its staff has dwindled and in January 2018 it was renamed Dare Holdings. Its accounts for 2017 show it making €2.9m of revenue and a €4m loss.

Both the EA Partners deals have defaulted.

“The crux is compliance were either over-ruled, or talked, at a high level, into approving Lars Windhorst and Sapinda,” said the first source.

A third source, however, maintained that the compliance reports had not said Goldman should not do any business with Windhorst and Sapinda, but that doing business with him would require enhanced compliance reviews.

An easy decision

Goldman compliance officers in London concluded that the bank should avoid working with Windhorst on the basis of publicly available documents, which showed his track record as chequered and involved highs and lows.

Heralded a child genius by Helmut Kohl, Windhorst was invited on an official trip to the Far East by the then German chancellor, at the age of 18, in 1995. But in the course of the next 15 years, several of Windhorst’s companies have fallen into insolvency, while Windhorst himself suffered a personal bankruptcy and received a suspended jail sentence in Germany in 2009 as part of a plea bargain, in which fraud charges were dropped and he repaid €2.5m to an alleged victim of breach of trust.

But after this, Windhorst consolidated his business activity around Sapinda, which has invested in public and private companies since 2009.

“A lot of people thought he may have changed his ways — he was actively trying to change his reputation, opening swanky offices in Savile Row,” said a source with knowledge of the situation. “This is perhaps why some people were fine with bypassing compliance.”

Whistle-blower complaint

GSI compliance reports on Windhorst are also referred to, indistinctly, in a legal complaint made to the US district court for the Southern District of New York by Christopher Rollins, whom Goldman Sachs fired in summer 2016 for working with a European businessman.

From the details of the transactions described in the lawsuit, it is clear the businessman is Windhorst.

Rollins, formerly managing director and co-head of execution services for cash equities and listed derivatives at Goldman Sachs in London, sued the bank for unfair termination in August 2018.

The burden of his complaint is that other senior bankers at Goldman also knew of and approved of the work with the financier. He calls his firing “an unlawful campaign of retaliation” against him, after he “blew the whistle on the Firm’s concealment of anti-money laundering (“AML”) compliance failures associated with a notorious European businessman”.

Rollins’ suit claims senior Goldman Sachs bankers Michael Daffey and John Storey met the businessman on his “200-foot superyacht in the Mediterranean” in August 2015, and that around this time the financier was claiming to have $1bn to invest.

Between September 2015 and August 2016 Daffey, Storey and Michael Sherwood, former co-chief executive of Goldman Sachs International, who retired in 2017, “used their influence within the firm, and knowledge of its risk management systems, to steer a series of transactions linked to the financier past AML controls”, the suit alleges.

When one of the trades went wrong, putting Goldman at risk, Rollins was blamed, and first suspended under investigation and then, in February 2017, fired by a disciplinary hearing chaired by James Esposito, now global co-head of the securities division.

Rollins claims he was blamed for having breached compliance restrictions on working with the financier, but that these were never specified, and that privately the firm had “admitted that the compliance restrictions cited by Esposito in the decision he signed to terminate Rollins, do not exist”.

Compliance reports

Although Rollins refers to compliance officials in London having “pushed back on Daffey’s efforts to open a second account in London” for the financier’s fund, Rollins does not appear to have been directly aware of a compliance decline order against the businessman.

He stated that in September 2016 he “wasn’t aware of any compliance restrictions relating to the financier. He always understood that compliance had thoroughly vetted the financier and his affiliates before opening accounts in New York and London”.

Daffey is now global co-chief operating officer of Goldman’s equities franchise. Storey is head of EMEA equity sales.

Richard Gnodde, now sole CEO of GSI after Sherwood’s departure, also approved one of the financier’s trades, the suit says.

Daffey, Gnodde and Esposito are all members of Goldman’s management board.

The deals Goldman was involved in with “the financier”, after the meetings Rollins says happened in summer 2015, were, first, the EA Partners I deal in September 2015; second, the opening of a client account for “the financier’s fund” at Goldman in New York, so that he could invest money in stocks and derivatives. The New York account was opened in December 2015, apparently with the support of the Goldman Sachs Co New York compliance department.

This account has never been used, GlobalCapital understands.

Third, in May 2016 the second EA Partners bond was issued.

Fourth, in July 2016 a second account for the fund was opened at Goldman in London, using “expedited” diligence, “to execute a single trade worth more than $400m”.

This corresponds with the Buwog block trade for Sapinda in July 2016.

The financier called Rollins to offer him the trade if Goldman would do it immediately, Rollins’ testimony said. Daffey and Storey were enthusiastic to do the deal. The process of beginning to open a London account for Sapinda, to facilitate the block trade, began on July 18, Rollins said.

The Firmwide Commitments Committee initially turned the trade down, he said, for reasons unknown to him. But after discussions with Sherwood and Gnodde, the trade was approved.

The whole process was finished the following day, when the block trade was carried out.

“Daffey and Sherwood were ecstatic and Sherwood personally called Rollins to thank him for his role in apparently bringing the trade into the firm,” Rollins’ evidence says.

Trade comes to grief

Fifth, in July-August 2016, came the deal in securities of “company B” that failed and led to Rollins’ suspension. The details of this correspond with the Falcon Private Bank trade reported by Bloomberg.

Goldman said in a statement: “By Mr Rollins’ own admissions, Goldman Sachs had concerns about doing business with the ‘Financier’ when we decided to not approve an execution account. Also, for the one transaction involving the ‘Financier’ which was eventually cleared [i.e. the Buwog trade], additional due diligence and senior management and committee approvals were required before the transaction could proceed — all of which Mr Rollins was well aware of based on his direct involvement. Mr Rollins’ failure to disclose the ‘Financier’s’ involvement in subsequent transactions was central to the decision to terminate his employment.”

The third source said enhanced due diligence had been carried out for the EA Partners bonds — even though on those Goldman was only working alongside Anoa Capital, not for it — and for the Buwog trade. The latter was approved as a single trade, partly because Buwog had requested that Goldman do it. This approval did not mean there was a blanket approval to do business with Sapinda. In the case of the “company B” trades, the correct checks were not followed, which was the subject of the lawsuit, the source said.

According to Rollins, the “company B” trade was first proposed, as one of a number of possible transactions, by the financier to Daffey and Storey on July 27 when they were celebrating the Buwog trade with drinks at his office.

Rollins’ evidence states that the financier called him on August 3, 2018, wanting to do the “company B” trades. He then informed Steven Hadermayer, a compliance official, of all the details, and Hadermayer told him to go ahead.

He and other Goldman salespeople conducted eight trades in “company B” shares and convertible bonds between August 3 and 18.

It was only after that, when one of the counterparties failed to make an $85m payment, that Goldman management raised questions. It began to suspect that other side transactions carried out by “the financier” had caused this client not to make the payment.

In September, it suspended Rollins and began to investigate him for having been responsible for the “company B” trades.

In early December 2016, Rollins filed an internal report of potential violations of US and UK law to Goldman Sachs’ legal departments in the US and UK, reporting the “massive compliance failures and use of a sham investigation and disciplinary process in an attempt to conceal them.” Rollins was fired in February 2017.

Tim Leissner, Goldman’s former chairman of Southeast Asia, in pleading guilty to US federal prosecutors in November to concealing certain activity from the bank’s compliance teams in relation to 1MDB, stated that his actions were “very much in line [with the] culture at Goldman Sachs to conceal facts from certain compliance and legal employees.”

Sources familiar with the Windhorst matter said they were astonished to discover, when the “company B” trade came to grief, that Goldman had gone ahead in dealing with Windhorst, despite the negative compliance reports made on him.

Timeline of events

2009                    Lars Windhorst admits breach of trust and settles with German prosecutors in plea bargain, is given suspended prison sentence

2012-13               Goldman Sachs lead manages $6.5bn of bonds for 1MDB, the Malaysian sovereign wealth fund

2013                    Windhorst’s Sapinda fund invests in investment boutique Anoa Capital

August 2015        Michael Daffey and John Storey of Goldman Sachs visit Windhorst on his yacht, according to Christopher Rollins, a former Goldman managing director

Summer 2015 to early 2016   Goldman Sachs International’s London compliance department is asked to do due diligence on Windhorst and advises against working with him

September 2015  Goldman lead manages EA Partners I bond alongside Anoa

Autumn 2015      Goldman’s New York office conducts onboarding process for Sapinda, then opens trading account for it in December

Early 2016           Windhorst introduces Falcon Private Bank to Goldman

May 2016            Goldman lead manages EA Partners II bond alongside Anoa

July 17, 2016       Media report Falcon Private Bank being investigated by Singapore authorities for money laundering in connection with 1MDB

July 18, 2016       Goldman in London starts opening account for Sapinda, so it can conduct €376m block trade to sell Buwog shares. Trade approved after involvement of Michael Sherwood and Richard Gnodde, according to Rollins. Account opened and trade takes place on July 19

July 27, 2016       Windhorst suggests a trade in “company B” securities to Daffey and Storey, according to Rollins

August 3-18, 2016      Goldman brokes a series of trades in “company B” securities, between counterparties including established Goldman clients, according to Rollins. The counterparties reportedly included Falcon

Late August 2016       A client fails to pay Goldman for one of these trades, leaving the bank with temporary exposure of $85m, “nearly a 10% stake in Company B equity and convertible bonds”, according to Rollins. Goldman came to believe the settlement failures were the result of dealings made by Windhorst

September 2016  Goldman’s financial crimes compliance division investigates Rollins for the “company B” transaction and suspends him

October 2016       Falcon Private Bank sanctioned by Swiss regulator Finma for money laundering failures concerning $3.8bn of 1MDB-linked assets, between 2012 and summer 2015

December 2016   Rollins files internal report alleging “massive compliance failures”

February 2017     Rollins fired for allegedly failing to obtain suitable approvals for the company B trades

November 2018   Two former board members of Falcon Private Bank charged with money laundering and taking bribes in the 1MDB scandal

By Silas Brown
13 Dec 2018