The long awaited trial between Libya’s sovereign wealth fund, Libya Investment Authority (LIA), and Goldman Sachs started on Monday, and the Libyan fund is claiming the US Investment Bank exploited their financial naivety.
Equity derivatives trades
The cases centers around a number of derivative trades that the fund entered into in 2008. With Libya removed from the US sponsors of terrorism list in 2006, the fund was created to help manage the revenues from their oil fields. Being a nascent fund, it claims they were manipulated by the savvy US bank.
Morningstar Investment Conference: Using Annuities In A Portfolio For Added Stability
“Libya had been an international pariah for decades, cut off from much of the rest of the world and from international financial markets,” lawyers for the fund wrote in court documents. “In its isolation, Libya’s financial system was under-developed and unsophisticated, as were the individuals who worked within it.”
Between January and April 2006, the fund entered into nine large derivative transactions, but on expiry in 2011 the trades were almost worthless. The fund lost $1.2 billion and allege that Goldman made $222 million in fees.
LIA wants Goldman to repay the losses.
Goldman denies the charges completely, disputes the profit numbers suggested and declined to comment on the emails released courts.
“The claims are without merit and we will continue to defend them vigorously,” a Goldman representative stated.
Emails released to the court show how Goldman executives clearly sensed a opportunity. One email from 2008 shows an executive writing, “They are very unsophisticated—and anyone could ‘rape’ them,”.
On that topic, assuming the allegations are true, it is amusing that Libyan officials did not suspect any shady dealings even after Goldman tried to use prostitutes to persuade the fund to buy the Goldman securities. So did the naivety also extent to not knowing using hookers in order to secure a deal is probably illegal? But in defense of Goldman even if this practice is illegal (and assuming this happened) as Sage Kelly saga shows the practice is not unique to Goldman.
As The Guardian notes:
According to the skeleton argument presented to the court by the LIA: “Mr Kabbaj took Haitem Zarti on holidays to Morocco on various occasions. Mr Kabbaj also took him to Dubai for a conference, with the business class flights and five-star accommodation being paid by Goldman Sachs. Documents disclosed by Goldman Sachs show that during that drip Mr Kabbaj went so far as to arrange for a pair of prostitutes to entertain them both one evening.”
In a visit to a conference in Dubai in early 2008, there are allegations that a Goldman banker paid for prostitutes to entertain Zarti.
It is claimed that Goldman executives exerted ‘undue influence’ over staff at the fund. The younger brother of a executive working at the fund, Haitem Zarti was awarded a highly prized internship at the US bank, described as “bespoke and highly-coveted.” This was initially for three months, but this was extended a number of times.
The LIA has said of this internship, that it “has been and may still be the subject of investigation” by the SEC.
Meetings were held in five-star hotel and luxury yachts; all paid for by Goldman for the LIA staff to enjoy.
In a separate email conversation, an executive wrote, “you just delivered a pitch on structured leveraged loans to someone who lives in the middle of the desert with his camels.”
A Goldman executive, Youseff Kabbaj, was embedded into the nascent and encouraged to spend as much time as possible in Libya. “Stay a lot in Tripoli. It is important you stay super close to clients on a daily basis. Teach them, train them, dine them.” His appointment there was described by another as a once in lifetime opportunity.
Kabba is no longer with the firm and is not expected to give evidence. He received a large severance package that contained a strong confidentiality clause.
The case continues
The LIA’s argument is that this case is one of of “abuse of trust, undue influence and unconscionable bargain”.
It continued: “It most emphatically is not, therefore, as Goldman Sachs would have it, one of little more than ‘buyer’s remorse’; of a counterparty who like many others lost money as a result of the market crash in 2008 and now wants to rewind the clock.”
The case, being held in London, continues with Goldman lawyers due to address the court.