Billion Dollar Whale

by Tom Wright

  So far, Low had diverted most of the money meant for the 1MDB-PetroSaudi joint venture. He’d paid off the family of Najib Razak with real estate and promises of funding for Red Granite. The prime minister would soon start receiving hundreds of millions of dollars in political funds. Mahony and Obaid, as well as Prince Turki, also had received their cuts. But some of the 1MDB money did eventually go to buy two aging oil-drill ships, which the joint venture leased to Venezuela’s state oil company. This business wasn’t going to generate enough profits to fill the hole of the diverted funds, and so the principals sought out a bigger investment.

  Patrick Mahony, the investment director of PetroSaudi, also was visiting Low in the clinic. In the Malaysian’s private room, Mahony discussed with Leissner and Low the possibility of investing in a U.S. oil refinery. To do so, however, would require another infusion of cash into the fund. Mahony wanted Low to get Najib to agree for 1MDB to invest even more state money into the joint venture. Leissner suggested bringing TPG, a large California-based private-equity firm, into the deal. The head of TPG in Asia, Tim Dattels, was a former Goldman banker and close friend of Leissner.

  The refinery acquisition did not happen, and neither did the TPG investment, but Low and Mahony continued to strategize about other possible deals. Even in the absence of a firm plan for their next moves, Low persuaded Najib to invest more money in the joint venture, arguing it was necessary to keep Prince Turki happy and ensure friendly ties with Saudi Arabia. Evidently pleased with the benefits his family derived from 1MDB, the prime minister gave the green light to send even more government cash to the PetroSaudi joint venture.

  In 1MDB documents pertaining to the new lending, Najib argued it was valid “in consideration of the government relationship between the Kingdom of Saudi Arabia and Malaysia.” On July 24, 2010, in a meeting of 1MDB’s board, one member questioned whether the prime minister was backing this further investment. Chief Executive Shahrol Halmi replied that Najib was fully on board. In the end, 1MDB sent over a further $800 million, almost doubling the amount the fund had pumped into the joint venture.

  The 1MDB fund, like most schemes, needed to be continually fed with fresh funds. It wasn’t just that Low was spending so much money; he also had to find cash to pay off an ever-increasing group of people involved in or with knowledge of the fund’s doings, among them Taib Mahmud, the Sarawak chief minister. Taib felt duped by Low in the early deals involving the Iskandar land and was demanding a payback. To pacify Taib, Low persuaded PetroSaudi to use some of the fresh 1MDB cash to buy out one of the Chief Minister’s companies at a rich price.

  With the new cash infusion into the joint venture, the perpetrators went looking for investments to generate profit that would pay 1MDB back. But they seemed to underestimate that regenerating nearly $2 billion was no easy task. The group agreed Low would persuade Prime Minister Najib to write off hundreds of millions of dollars of 1MDB’s investment as a loss. Low acted as if this was make-believe money, debt that Najib could erase with a magic wand, without any cost to taxpayers or society. The Malaysian had promised Mahony that they only needed to pay back $1 billion.

  “Jho agreed that when we repay the $1b, we dissolve the venture and walk away,” Mahony wrote, perhaps in a moment of wishful thinking, to Tarek Obaid in an email on August 7, 2010.

  But the plan for the oil refinery was a long shot, and unlikely, even if it did come off, to make enough profit to fill a $1 billion hole. Mahony had another strategy ready: to throw Low under the bus.

  In the email, Mahony suggested a plan. Obaid should tell the prime minister that PetroSaudi had a bunch of deals in the pipeline, but lost out to rivals because Low had been distracted by partying. “I think saying delays have cost us helps us because we can then blame them for the losses later,” he wrote.

  The prime minister knew 1MDB was being used partly as a political slush fund and that Low was making his family very comfortable. But Najib did not realize the size of the financial losses at the center of the fund, and Mahony urged Obaid to hide the problem from him.

  “I think the PM thinks we are making good investments,” he wrote.

  When Low got wind of the fact that Obaid had been in contact directly with the prime minister, he was apoplectic.

  “We all know best how to manage our ends. If anyone starts to think they can ‘openly’ express or deal direct with my end, that is when issues will start,” Low snapped to Mahony in a BlackBerry message on August 8, 2010.

  The Malaysian said that he would never directly contact Prince Turki, the co-owner of PetroSaudi, and had even stopped Rosmah from doing so.

  “We will never go around you,” Mahony promised in his reply, but he admonished Low.

  “Do work on the party thing as it can hurt us all. Last thing we need is publicity given what we are doing.… Just keep your nonsense to yourself and out of the news. Doesn’t help that I see you partying again last night and dj keeps yelling ‘malaysia’…”

  PetroSaudi and Low were caught in an increasingly unhappy marriage.

  Troubles continued to pile up. Back in Kuala Lumpur, many of the fund’s bright employees had left, disconcerted by the lack of progress on deals. The PetroSaudi joint venture had achieved little, and plans for a new financial center were going nowhere. Those who remained, led by Chief Executive Shahrol, wondered why 1MDB had so little to show for the billions of dollars in investment. But they questioned little, taking comfort from Prime Minister Najib’s involvement.

  The fund’s management in Kuala Lumpur was looking to post its first-ever financial results, for the year to March 31, 2010, but late into the year the accounts still hadn’t been released. Ernst & Young, 1MDB’s accountants, did not agree with how the fund’s management was attempting to book profits. The fund’s interest costs, coupled with a lack of significant investments, meant it was heading for a net loss.

  To avoid this, the fund’s management wanted to undertake some tricky accounting. The idea was to turn 1MDB’s investments in the joint venture with PetroSaudi into loans due in 2020, effectively kicking the can down the road. If it worked, the fund could promise future profits—and gain years before it actually had to produce them. Perhaps fearful of the whole scheme unraveling, Low and PetroSaudi had agreed to turn the initial $1 billion investment into a loan of $1.2 billion, and 1MDB wanted to book the difference as profit.

  Ernst & Young didn’t like it one bit. Its auditors were skeptical of the loan’s value, and they told the fund they had concerns about whether the joint venture would ever be able to pay back the money. Ernst & Young wasn’t going to risk its reputation by signing off on these accounts. Time ticked on without any financial statements coming out. The 1MDB board began to fret, noting in its minutes that the fund was “perceived as a secretive cloak-and-dagger setup with sinister motives to benefit cronies and not the Malaysian people.” It recommended spending more money on charity, and advertising the fact widely—along with another drastic step.

  To get around the auditor problem, why not just get rid of Ernst & Young and find another auditor? To keep investors and markets happy, accounts of big companies need to be audited by one of the “Big Four”—Ernst & Young, KPMG, Deloitte Touche, and PricewaterhouseCoopers. The problem with the system is that clients pay for the auditing services, and when Ernst & Young made trouble, the fund could go looking for a replacement.

  So 1MDB’s management turned to KPMG. The firm also had concerns about what was going on at the fund, but they were willing to take on the job as long as 1MDB could guarantee that the business with PetroSaudi was sanctioned by governments in both countries. PetroSaudi was a private company, with a Saudi prince holding only a half share, while 1MDB was controlled by a young Malaysian who held no official positions. But with official sanction, KPMG was willing to move ahead with its audit.

  “At the very least, KPMG requires a document to confirm that PSI is related to the Saudi royal family,” 1MDB’s board noted in September 2010, referri
ng to PetroSaudi.

  The participants provided a document, playing up Prince Turki’s role in the company, and, on September 16, Prime Minister Najib signed a directive to remove Ernst & Young as the fund’s auditors. The board noted Ernst & Young’s “unprofessional conduct” even though the firm simply had been doing its job. The fund promptly hired KPMG, whose auditors allowed 1MDB to book the value of the loan to PetroSaudi and keep the cash spigots open.

  Eventually, KPMG signed off on the accounts for the financial year to March 31, 2010, but was worried enough to cover itself with an “emphasis of matter” paragraph, a section of an audited account meant to underline a potential future problem to investors. The auditor noted that 1MDB’s management “believes” that PetroSaudi was in good financial standing. For anyone following closely, this was a very lukewarm approval of the fund’s financial stability.

  There was one person, though, who didn’t need to comb through 1MDB’s financials to sense a fraud. And that person was Jordan Belfort.

  Chapter 20

  Belfort Smells a Scam

  Cannes, France, May 2011

  On the beach just off La Croisette, Cannes’s most iconic street, Kanye West and Jamie Foxx were performing a rendition of their hit “Gold Digger.” “Whad’up France,” yelled West, who was dressed in a white suit, as a crowd of celebrities and film-industry executives watched from a cordoned-off part of the French Riviera town’s main beach. Earlier, Pharrell Williams had opened the night with a twenty-minute set under an opulent display of fireworks. In the crowd, Leonardo DiCaprio, swimwear model Kate Upton, and Bradley Cooper danced. Among the guests was disgraced investor turned best-selling author Jordan Belfort, and the onetime “Wolf of Wall Street” could not believe what he was seeing.

  This was the biggest party of the week-long Cannes Film Festival, and it was a multi-million-dollar coming-out event for Red Granite. A few days earlier, the fledgling firm had made a big announcement. It had reached an agreement to adapt Belfort’s memoir into a movie. Leonardo DiCaprio would star as Belfort, with Martin Scorsese directing—quite a coup for a new outfit in the industry like Red Granite. To celebrate, the company had flown Belfort out with his girlfriend, Anne, for the party.

  As with 1MDB, Low never took a formal position at Red Granite and stayed out of day-to-day operations, but he was a behind-the-scenes force. He organized a first batch of funding for the film company in April 2011, a wire transfer of $1.17 million from Good Star, the Seychelles company he controlled, to Red Granite’s account at City National Bank in Los Angeles. The notation on the wire transfer referred to “INVESTOR ADVANCES.” It had then embarked on its first modest production, the $10 million comedy Friends with Kids starring an ensemble cast including Kristen Wiig and Jon Hamm, the rights to which Red Granite had acquired from another studio.

  Some in Hollywood were already asking questions about Red Granite. Sure, people come out of nowhere in Hollywood. But who the hell are Riza Aziz and Joey McFarland? The staggering amount of money an unknown firm had paid for this launch party stirred disbelief. The rumor was that West alone earned $1 million to perform. The rapper peppered his stage banter with weirdly positive statements including: “Red Granite will change the way films are made forever.”

  “People thought the company was a real enigma,” said Scott Roxborough, a reporter for the Hollywood Reporter who attended. “A huge party, with so much money and no real films under their belt, seemed very suspicious.”

  Himself no stranger to fraud, Jordan Belfort thought something wasn’t right about this setup. The event must have cost at least $3 million, Belfort calculated, as he nibbled on canapés and watched the A-list entertainment. And the movie hadn’t even gone into production!

  “This is a fucking scam—anybody who does this has stolen money,” Belfort told Anne, as the music thumped. “You wouldn’t spend money you worked for like that.”

  A few months later, Low would offer Belfort $500,000 to attend an event in Las Vegas with DiCaprio. Red Granite had paid him handsomely for the rights to his memoir. But Belfort was starting to distrust this group. Eager to stay out of trouble, focusing instead on his new career as a writer and motivational speaker, Belfort turned them down, but DiCaprio and his costar Margot Robbie went along.

  “Leo got sucked in,” Belfort later told Swiss journalist Katharina Bart. “Leo’s an honest guy. But I met these guys, and said to Anne, ‘These guys are fucking criminals.’

  “I was like, ‘I don’t need these fucking people.’ I knew it, it was so obvious.”

  For a week during the film festival, Low and Red Granite each had a superyacht moored in the Mediterranean waters just off Cannes, Low’s slightly more impressive than that occupied by Riza Aziz, the Malaysian prime minister’s stepson. As well as the film company’s launch, Low had arranged for Pharrell to record a number of songs in a makeshift recording studio on his yacht. Not content with setting up a major Hollywood film company, Low also wanted to launch himself into music ventures.

  A few months earlier, Low had arranged for legendary music producer Jimmy Iovine, cofounder of Interscope, to throw a Grammys after-party on the roof of L’Ermitage. Interscope wasn’t hosting its own party, and so Low approached Iovine with an offer to organize one for him.

  The cream of the music world came out for it. Lady Gaga, Snoop Dogg, and Dr. Dre performed to a crowd that included Beyoncé and Jay-Z, as well as Busta Rhymes, Nicole Scherzinger, Eminem, and others. Low’s usual group was there, too: Jamie Foxx and Paris Hilton among them. Under Arabian-style tents, DiCaprio, wearing an Irish cap and smoking a cigar, chatted with Bar Refaeli, his model girlfriend. Low brought along Elva Hsiao, the Taiwanese pop star he had feted in Dubai. The New York Post, referring to Low as a billionaire, speculated the event must have cost him $500,000. To Low, it was an investment, as he continued to build his name around town.

  Low wasted no time after the party to leverage his new contacts. He took steps to form a music-production company called Red Spring and set about hiring the best musical talent to help produce an album for Elva Hsiao. She was big in the Chinese-speaking world, but Low wanted to make her a star in the United States. He agreed to pay $3 million to Pharrell to come up with three songs for Hsiao, and to appear in the music videos with her. He also reached terms with Alicia Keys and her hip-hop producer husband, Swizz Beatz, paying them $4 million to oversee the album and the launch of Hsiao’s career in the United States. Despite Low setting aside a $12 million budget, she never made it.

  Swizz Beatz, whose real name was Kasseem Dean, became one of Low’s closest allies and would remain with him even when things started going awry. Born and raised in the Bronx to an Eritrean father and a Puerto Rican mother, Swizz Beatz had worked on tracks for DMX, Jay-Z, Drake, and Beyoncé, among others. He was intensely ambitious, with a goal of becoming a business mogul, not just a record producer, and he saw potential in his connection with Low. (“The sky’s not the limit, it’s just a view,” he liked to say.) Reebok hired him as a creative executive, an attempt to gain credibility in the hip-hop world. Before he met Low, however, Swizz Beatz’s business endeavors had pretty much been limited to celebrity endorsements; Low represented a source of funding to take his career to the next level. What’s more, Swizz Beatz owed hundreds of thousands of dollars to the Internal Revenue Service for unpaid taxes. The IRS put liens on his accounts.

  The producer became Low’s conduit into the music world. As part of the production deal, Swizz Beatz, rapper Lil Jon, and Jho Low recorded a song entitled “V” at a studio in the Palms Casino Resort in Las Vegas, a kind of party anthem. Low’s contribution was to repeat the words “very hot” over and over in the background. It was never commercially released.

  Swizz Beatz and Alicia Keys entered Low’s trusted circle, attending his end-of-year ski holidays with Joey McFarland and Riza Aziz, Jasmine Loo of 1MDB, and other close associates. The producer was a collector of modern art, including paintings by Jean-Michel Basquiat, and he
acted as Low’s cultural tutor, schooling him on galleries and auctions. The Malaysian began to wear a cap with “Basquiat” written on the front, and talked of building his own collection.

  To make The Wolf of Wall Street, Low knew he was going to need access to a bigger pot of money. Red Granite had agreed to pay DiCaprio and Scorsese multiple millions each for the movie, and added to the costs of production, the overall budget was set to top $100 million. By this point, the summer of 2011, Low and his allies had taken control of almost $2 billlion from 1MDB, but much of that had been spent on mansions, hotels, gambling, and partying, as well as to pay off conspirators. Low needed new deals, both to plug the hole at 1MDB and to give him the financial muscle to dominate in Hollywood.

  His relations with PetroSaudi fraying, the Malaysian looked around for other partners. Distracted and always on the move, he didn’t seem willing to put in the legwork to pull off a complicated acquisition, such as the plan to buy the U.S. oil refinery that Patrick Mahony had pushed. He lacked Mahony’s banking skills and had no ability to value companies in the oil-and-gas sector. Low wanted to quickly flip assets and forge alliances with partners who could help him make a fast dollar.

  Around this time Low read a news story about a battle to take over a group of hotels that included London’s famed Claridge’s. One of the bidding groups included a wealthy British property magnate called Robert Tchenguiz. The fifty-year-old had salt-and-pepper hair, which descended in waves to his shoulders, and he was often seen in white shirts with a few buttons undone. Talking in a deep, gravelly voice, Tchenguiz hailed from an Iraqi Jewish family that had moved to Iran and later settled in London after being driven out during the Islamic Revolution. He was always involved in some property deal or another, and his latest was a heated contest with the Barclays brothers, among Britain’s wealthiest individuals, for control of Coroin Limited, which owned Claridge’s. For his bid, Tchenguiz had teamed up with a Middle Eastern fund called Aabar Investments.