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Libyan Investment Authority loses battle with Goldman Sachs over trades losses

Published 14/10/2016

The Libyan Investment Authority accused Goldman Sachs of exploiting the wealth fund's limited experience
The Libyan Investment Authority accused Goldman Sachs of exploiting the wealth fund's limited experience

A billion-dollar claim against Goldman Sachs over Libya's sovereign wealth fund has been thrown out by a High Court judge in London.

The Libyan Investment Authority (LIA) accused the investment bank of exploiting the wealth fund's limited experience and duping officials into risky derivative trades with disastrous results.

It was alleged that lavish corporate hospitality and foreign trips were laid on, and there was a case of procuring prostitutes.

The bank denied any wrongdoing, arguing there was nothing unusual about the trades and the LIA was suffering from "buyer's remorse".

Dismissing the LIA claims, Mrs Justice Rose ruled there had been no undue influence from Goldman.

Roger Masefield QC, for the LIA, told the High Court at a hearing this summer that, in 2008, Goldman had made "eye-watering profits" by taking advantage of the LIA's financial naivity and "lack of sophistication" on nine disputed so-called "jumbo" derivative trades.

The bank was accused of making profits of more than 200 million US dollars in a four-month period, while the vulnerable LIA lost its entire 1.2 billion dollar investment in the 2008 financial crisis.

The 67 billion dollar sovereign wealth fund was set up by Colonel Gaddafi, who was toppled from power in 2011.

The court heard that Driss Ben Brahim, a Goldman banker who has since left the company, described LIA in one of his emails as "very unsophisticated - and anyone could 'rape' them".

Denying claims that it was liable for LIA losses, Goldman Sachs said in its defence that the lack of contemporaneous documents and key witnesses were a "formidable barrier" to the LIA claims.

The loss or destruction of relevant documents had resulted in "an evidential black hole".

Mrs Justice Rose said in her judgment: "I dismiss the LIA's claim that the disputed trades were the result of undue influence exercised over it by Goldman Sachs."

The judge said there were no grounds for concluding that the level of profits earned by Goldman on the trades was excessive "given the nature of the trades and the work that had gone in to winning them".

Although the trades may have been regarded as "unsuitable" for a sovereign wealth fund "there were other reasons why the LIA wanted to enter into them".

The judge declared that if they were unsuitable "they were no more different from many other investments that the LIA made over the period in that regard".

The claim that the trades were "unconscionable bargains" must also fail, ruled the judge.

Goldman said in a statement: "We are pleased to win this case, with a comprehensive judgment in our favour."

After the ruling, the LIA said it would continue to fight to "return Libya's wealth to the people of Libya".

The president of the LIA interim steering committee, Dr Ali Mahmoud Hassan, said: "The Libyan Investment Authority undertook a strategy to secure its assets and grow their market value.

"The leadership of the LIA has always been clear that it would do all it could to pursue those who exploited the fund in the late 2000s.

"As a first step, the LIA embarked in the end of 2013 to pursue court cases against Goldman Sachs and Societe Generale.

"Today's ruling will not break our resolve and we remain focused on the other litigations raised by the previous board of directors to put right the wrongs suffered elsewhere in the past. Libya's wealth must be returned to the people of Libya."

LIA had called evidence that Goldman banker Youssef Kabbaj procured prostitutes as he attempted to build relationships with the wealth fund.

Goldman was also alleged to have paid for staff from the LIA to stay in five-star London hotels, as well as offering them tickets to Champions League football games and to musical productions of Chicago and Lord Of The Rings.

The judge focused in her summary on allegations that Haitem Zarti, the younger brother of LIA executive Mustafa Zarti, was offered a prestigious 11-month internship at Goldman in the bank's hope that he would one day become an important LIA official.

She was told of an exchange of text messages between Mr Kabbaj and a prostitute called Michella, in which they haggled over the price for her and a friend to join the banker and Haitem Zarti in Dubai.

The judge said: " I find that Mustafa Zarti was keen for his younger brother to work as an intern, though there is no evidence as to why he thought this was important."

She ruled that, although the offer may have contributed "to a friendly and productive atmosphere" during the negotiation of trades, it did not have "a material influence" on the decision of Mr Zarti and LIA to enter into the trades.

The relationship between Goldman and LIA "did not go beyond the normal cordial and mutually beneficial relationship that grows up between a bank and a client" and "Goldman Sachs did not become a trusted adviser or a 'man of affairs' for the LIA".

The judge said: "I fully accept that the extent of the entertainment offered by Mr Kabbaj to Haitem was inappropriate and in flagrant breach of Goldman Sachs' policy on entertaining clients.

"However, it does not seem to me relevant to the matters I have to decide.

"There is no evidence that Mr Zarti knew the nature and extent of the entertainment provided to his brother, or that it influenced his behaviour - indeed it is not clear to me that he would have taken a positive view of what went on.

"He may well have been less, rather than more inclined, to give Goldman Sachs more business if he had found out about what went on."

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