Qaddafi’s Money Man in Vienna Loses Funds With London Friends

Photographer: Rene van Bakel/Bloomberg Markets via Bloomberg

Mustafa Zarti, former financial advisor of Muammar Qadaffi of Libya, poses in Vienna, Austria, March 15, 2011. Close

Mustafa Zarti, former financial advisor of Muammar Qadaffi of Libya, poses in Vienna,... Read More

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Photographer: Rene van Bakel/Bloomberg Markets via Bloomberg

Mustafa Zarti, former financial advisor of Muammar Qadaffi of Libya, poses in Vienna, Austria, March 15, 2011.

As Muammar Qaddafi’s forces strafed crowds of protesters in Tripoli with automatic gunfire on Feb. 21, the dictator’s money manager fled the city in a car to the airport to escape the violence.

With phone lines and Internet connections down, Mustafa Zarti, vice chairman of Libya’s $65 billion sovereign-wealth fund, couldn’t buy an airline ticket in advance. As mobs of travelers at the airport jostled for seats on packed flights, Zarti scored a spot in business class on Austrian Airlines and flew to Vienna, Bloomberg Markets magazine reports in its June issue.

“It was catastrophic that day,” Zarti says. “I’m very sad for Libya.”

In helping run the world’s 11th-biggest sovereign-wealth fund, Zarti strove to make money in global markets three decades after sanctions relegated Libya to the sidelines. He moved in the most-exclusive corners of the financial world, enlisting as his advisers Lord Jacob Rothschild, the London-based financier, and Sir Howard Davies, director of the London School of Economics and Political Science.

Stephen Schwarzman, chairman of Blackstone Group LP, attended Zarti’s 2008 wedding in Tripoli. As a close personal friend of one of the dictator’s sons, Saif al-Islam Qaddafi, Zarti also had a direct line to an heir of the Qaddafi regime.

Those connections are now causing him nothing but grief. Zarti quit his job at the Libyan Investment Authority three days after fleeing the country, saying in his resignation letter that the government’s violence against political protesters was unjustified.

Undisclosed Location

“May God have mercy on the souls of the martyrs of Libya who sacrificed their lives for reform,” he wrote.

A Tripoli native and citizen of Austria, he’s now living in Vienna in a location he refuses to divulge, with his wife and young child, and without access to at least some of his accounts.

Austria’s central bank on March 4 froze two of Zarti’s accounts that held more than 1 million euros ($1.4 million), citing his work at the LIA and close ties to the Libyan regime. Six days later, the Council of the European Union put a block on the same accounts. The council didn’t list Zarti among Libyans it accused of violence against demonstrators and dissidents.

“He is very close to the Qaddafi family,” says Peter Launsky-Tieffenthal, a spokesman for the Austrian Foreign Ministry.

The EU, U.K. and U.S. have frozen the LIA’s assets as part of an effort to cut off the regime’s access to funding after its forces killed hundreds of unarmed civilians.

Unjust Actions

Zarti, 41, is now fighting to restore his reputation and regain access to his money. In early March, an unshaven Zarti, wearing jeans and a charcoal-colored sweater, sits at a long white table in his publicist’s office in Vienna. While sipping coffee, puffing on Philip Morris cigarettes and fidgeting with his lighter, he explains in English how the stress from the uprising has made him physically sick and says that the government actions against him are unjust.

Zarti says his lawyer filed a lawsuit in the constitutional court in Vienna, demanding Austria free his accounts. The attorney also submitted a complaint to the EU body in April. Zarti says Austrian officials violated his rights by not interviewing him before imposing the freeze. He says the frozen money is his own, not the regime’s, and that he didn’t have access to the LIA’s accounts.

Zarti says the freeze threatens his ability to provide for his wife and child and that he’s now being supported by other family members.

Befriending Qaddafi’s Son

“It’s very, very tough,” says Zarti, who has a Master of Business Administration from Webster University in Vienna. “I’m responsible for other people. I’ve been treated very unfairly.”

Zarti says he owes his job at the LIA in part to Qaddafi’s son Saif, who was the driving force behind the creation of the fund in 2007. Saif, 38, is now at the center of a scandal at the London School of Economics over the authorship of his doctoral thesis and the role of Davies as an adviser to the LIA.

Saif, who befriended Zarti when they were both students in Vienna, recommended him for the LIA post. Hired in January 2007, Zarti helped lead the sovereign fund from the time of its birth, working with Chairman and Chief Executive Officer Mohammed Hussain Layas, a banker for the Qaddafi government for more than 35 years. Saif couldn’t be reached for comment.

Deripaska, Schroeder

Zarti, a former investment officer at the OPEC Fund for International Development, says he aimed to build a professionally run organization. He says he travelled the globe and met with executives such as Russian aluminum billionaire Oleg Deripaska and politicians who included former German Chancellor Gerhard Schroeder to scout where to invest Libya’s proceeds from sales of oil and natural gas.

“Zarti is a professional,” says Schroeder, honorary chairman of the German Near and Middle East Association, a Berlin-based trade group. “He was active in the debates. He’s more a technocrat than a politician.”

The LIA has about 70 employees housed in its head offices in Tripoli’s 25-story Al Fateh Tower -- a modern high-rise with a revolving restaurant at the top. The LIA was part of Saif’s effort to create new sources of income for a country almost completely dependent on hydrocarbons for cash.

That shift became possible because of a decision made in Washington. In 2004, President George W. Bush eased the last of the international sanctions against Libya for its involvement in terrorist attacks, including the 1988 bombing of Pan Am flight 103. Libya could now attempt to do openly what it had done furtively during the sanctions era.

Rothschild’s Role

The LIA’s predecessor, Libyan Arab Foreign Investment Co., was skilled at taking ownership stakes in European corporations that were too small to trigger the strictures. Lafico also gave generic names to its holding companies to avoid detection. The LIA absorbed Lafico as a unit and started operating in January 2007 with ambitions to be a transparent sovereign-wealth fund much like Norway’s.

Zarti courted top-tier advisers to help the LIA achieve its goal of 8 percent annual returns. The fund recruited Rothschild and Marco Tronchetti Provera, chairman of Italian tiremaker Pirelli & C. SpA, to its international advisory board.

Rothschild met twice a year with the LIA’s executives and other board members, including the LSE’s Davies, according to a person familiar with the meetings. Davies was part of the U.K. effort led by then Prime Minister Tony Blair to boost economic ties with the North African nation. Davies, Rothschild and Tronchetti Provera quit the board and declined to comment. A spokesman for Schwarzman, who didn’t serve as an adviser, declined to comment on his attendance at Zarti’s wedding.

McKinsey, Mercer

The LIA hired global consulting firms for guidance on particular deals. New York-based McKinsey & Co. provided counsel on the restructuring of Oilinvest BV, a holding company owned by the fund, and Mercer LLC in London gave the LIA’s mostly Libyan staff asset allocation guidance, according to Zarti. Ernst & Young was the auditor for the LIA’s 2008 earnings, an Ernst & Young spokesman says. McKinsey and Mercer declined to comment.

“We’ve been advised by the top firms in the world,” Zarti says.

Even with all of this Western expertise at its disposal, the LIA operated much like its secretive predecessor, Lafico. The fund never disclosed detailed information about its holdings or returns, although Zarti says he had planned to eventually release an annual report. Asked during the interview in Vienna about the returns, Zarti said he couldn’t provide the numbers because he had left the necessary documents in Libya.

“I wish that I had papers with me when I left,” he says.

Teenager in Vienna

Zarti says the fund held about the same amount of money around the time it started operations in 2007 as it possessed in February 2011. A flat return in that time span, which included the global financial crisis, would have matched the performance of the Standard & Poor’s 500 Index.

Zarti has a long association with Vienna. When he was 13 years old, in 1983, his father moved the family from Tripoli to the Austrian capital, where the Organization of Petroleum Exporting Countries is based. His father took a job as a director in the personnel department of the OPEC development fund, where Zarti would later manage investments. The fund invests money from member nations to provide loans and grants to developing countries.

“I spent my most wonderful teenaged years here in Vienna,” says Zarti, who also speaks German and Arabic.

Chance Meeting

Zarti returned to Libya for college, earning a degree in mechanical engineering in 1994 from Al Fateh University in Tripoli. He then rejoined his family in Vienna and enrolled in the MBA program at Webster University, an overseas campus of the St. Louis-based private school founded in 1915. While studying for his master’s, Zarti met Saif, who was in an MBA program at Vienna’s private Imadec University, at an OPEC fund reception.

“We met by chance in Vienna,” Zarti says. “I did not know him in Libya. We met there and developed our relationship.”

With his graduate degree in hand, Zarti made his first foray into investing and management in 2001. He became chairman and CEO of a Tripoli-based tuna fishing company, Ras Al Hilal Marine Services, in exchange for a minority stake. Zarti says he oversaw the restructuring of the company, which today has about seven fishing boats along with canning and freight operations.

Two years later, Zarti stepped down as CEO, retaining his chairman title and moving back to Vienna to join the OPEC fund as an investment officer. At the fund, which has given about $13 billion in aid since 1975, Zarti says, he helped provide financing for private-sector investments in developing countries.

‘Kept Our Cash’

Zarti joined the LIA as its deputy CEO a few months before credit markets began to tighten in 2007. The money manager says he mostly stuck with a cautious investing approach through his four-year tenure, keeping the majority of the fund -- about $35 billion -- in money markets and mostly cash accounts, with $20 billion in bonds and $8.5 billion in equities.

“We tried to be very conservative,” Zarti says. “We kept our cash. Like the Arabic saying: ‘Put your money where you can touch it.’”

The LIA suffered when it turned to Wall Street for help to manage the cash heap. The fund needed to offset an inherent deficiency in its operation: Because Libya got its oil income in dollars, the LIA was overexposed to the U.S. currency, Zarti says. In 2007 and 2008, the fund purchased currency and commodity derivatives from firms such as Goldman Sachs Group Inc. (GS), the fifth-biggest U.S. bank, a person familiar with the investments says.

Derivatives Losses

The bets went wrong partly because the dollar rose in the middle of 2008 as confidence in credit markets collapsed in the runup to the Lehman Brothers Holdings Inc. (LEHMQ) bankruptcy, spurring demand for dollar assets such as U.S. Treasuries. The appreciation left Zarti’s fund with losses on paper that may exceed $4 billion, the person says.

“I cannot comment on these issues,” the LIA’s Layas says. “We are discussing and we cannot reveal information at this stage.” A Goldman spokeswoman in London declined to comment.

In another move that backfired, the LIA invested $300 million in December 2007 in a five-year “capital-protected” security built by Lehman Brothers, according to the fund’s filing in the firm’s bankruptcy. The note’s value was based on an interest-bearing cash fund with an additional layer linked to the performance of a basket of stock indexes.

Lehman Bonds

The LIA also bought $27 million of Lehman bonds denominated in U.S. dollars, Japanese yen, Swiss francs and British pounds. These investments became losers when Lehman Brothers filed the biggest-ever U.S. bankruptcy in September 2008. The LIA is seeking in bankruptcy court to recover at least $327 million.

“The LIA, like other oil funds, accumulated massive funds and was unprepared on how to spend it,” says Gawdat Bahgat, professor at the National Defense University in Washington and an editor of “The Political Economy of Sovereign Wealth Funds” (Palgrave Macmillan, 2010).

Zarti says he made a few good bets, such as in London real estate. In December 2008, the fund bought 14 Cornhill, a 16,220- square-meter (175,000-square-foot) office building located opposite the Bank of England, as the city’s property market neared the bottom of a slump. Since then, the commercial-real- estate market has rebounded, with office prices in Britain’s capital gaining 9.9 percent through February, according to London-based Investment Property Databank Ltd.

Zarti, who was promoted to vice chairman in 2009, says he followed Warren Buffett’s lead, picking stocks based on fundamentals such as profit outlook. The LIA was the second- biggest subscriber in the January 2010 Hong Kong listing of United Co. Rusal, the world’s largest aluminum producer.

Schroeder Meeting

Zarti says the fund spent $300 million for 1.43 percent of Moscow-based Rusal. The LIA invested in Rusal partly because the company’s use of hydroelectric power gave it a cost advantage over competitors.

“You can still make a profit if aluminum prices go down,” Zarti says.

The LIA also explored investments in alternative energy. At a meeting in London in March 2010, Zarti and Layas sought the advice of Gerhard Schroeder about investing in solar power.

“They were really at the beginning of this analysis,” Schroeder says. “They wanted to know more and diversify.”

In March of this year, as Libya escalated its military assault on the rebels, an adviser to Qaddafi’s fund became part of the collateral damage.

LSE Investigation

Davies quit as LSE director on March 3, saying in his resignation letter that the school’s reputation had suffered in light of developments in Libya and his role as an LIA adviser. The LSE also announced on the same day that it was investigating the authenticity of Saif’s doctoral thesis but didn’t allege that Davies had any role in this issue.

Davies, a former chairman of Britain’s financial markets regulator, the Financial Services Authority, wrote that he took the LIA post at the encouragement of the British government, which supported Libyan moves to invest in London. Davies told the BBC in March that he had the LIA pay his advisory fee of $50,000 into an LSE scholarship fund.

“There was nothing substantive to be ashamed of in that (modest and unpaid) work,” Davies wrote. His resignation from the LSE is effective in May.

At his publicist’s office in Vienna, Zarti says the Austrian government should free his accounts and let him get on with his life. While Zarti has been close to Saif, he says, he isn’t an ally of the regime and has criticized its military actions against Libyans.

“The Austrian government says a lot of things that are harming my reputation,” Zarti says.

Over the last four years, the money manager has gone from mingling in the elite world of finance to standing in near isolation -- much like his native Libya.

To contact the reporters on this story: Vernon Silver in Rome at vtsilver@bloomberg.net; Elisa Martinuzzi in Milan at emartinuzzi@bloomberg.net; Boris Groendahl in Vienna at bgroendahl@bloomberg.net

To contact the editors responsible for this story: Melissa Pozsgay at mpozsgay@bloomberg.net; Edward Evans at eevans3@bloomberg.net

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