James Titcomb | TheTelegraph | 19 Sept 2014
Goldman Sachs has hit back at allegations that the Wall Street giant duped Libya’s $60bn sovereign wealth fund into trades that lost the country vast sums of money while making the bank hundreds of millions in profits.
In court documents filed this week, Goldman denied that the Libyan Investment Authority (LIA) had been “financially illiterate” when entering into trades that proved worthless, and rejected claims that its bankers had cosied up to LIA officials. It is also claiming unspecified damages against the LIA.
The LIA is gearing up for separate London court battles against Goldman and the French bank Societe Generale, claiming they raked in huge fees and abused the fund’s trust during the Muammar Gaddafi era.
The LIA, created in the mid-2000s as the West gradually lifted sanctions on Gaddafi’s Libya, planned to grow to a $100bn wealth fund, but lost billions in trades executed by the banks when the financial crisis struck.
A $1.2bn investment in derivatives linked to the share prices of major banks and energy firms made by Goldman on the LIA’s behalf became almost worthless in 2008 as stock markets crashed around the world. The bank is said to have made a $350m profit on the deal.
However, in its response, Goldman says: “The LIA was not, as it now contends, financially illiterate, and nor did it have extremely limited financial experience.
“The key individuals within the LIA’s management were perfectly capable of understanding, and [Goldman] believed that they did in fact understand, the nature of the trades.
The fund argues that Goldman engaged in a charm offensive with those in charge of the LIA, who “had extremely limited legal and financial expertise”, and says the bank showered officials with gifts of aftershave and chocolate and trips abroad, building up a personal relationship with the Libyans.
Replying to claims that bankers developed an inappropriately close relationship with LIA officials, Goldman says it did provide gifts, but that these were “occasional” and not out of the ordinary.
The bank argues that the trades it made “reflected the LIA’s suggestions, preferences and selections from the alternatives presented to it”: “While the LIA doubtless regrets its decision to enter the disputed trades, the risk/reward profile of [them] was such that had the price of the relevant underlying shares performed differently, the LIA would have stood to make very substantial profits,” the documents say.
“The LIA, with $65bn worth of assets to invest and access to numerous professional advisers when it deemed it necessary to engage them, was not dependent on [Goldman], nor was it improperly encourage or influenced by the defendant to enter into the disputed trades.”
Goldman says the officials in charge of the LIA, Mohamed Layas and Mustafa Mohamed Zarti, could not be unaware of what they were investing in, given their extensive backgrounds in business and finance before joining the LIA.
The case is set for its first public hearing next month, when witness statements will be given at a case management conference. Goldman dropped its application to have it thrown out of court in August, meaning the case will be heard in public.
Separately, an email from a Goldman employee to Youssef Kabbaj, the bank’s North African head at the time, has emerged, appearing to indicate that a particular currency trade executed by Goldman on behalf of the LIA was in fact not fully understood by the fund officials.
According to the email, when Mr Layas was told about the potential losses that could derive from the trade, he said that “he didn’t open a casino”. Subsequently, the trade was restructured to limit the LIA’s potential losses, while the trades mentioned in the lawsuit were not.