Goldman Special Relationship With LIA Fund Ends in Court

When the Libyan Investment Authority started out in 2007, it had about $60 billion, office space in Tripoli and a lot to learn. Goldman Sachs Group Inc., keen to do business with the sovereign wealth fund, offered to help.

Goldman Sachs bankers gave LIA staff training at its London office and spent time in Tripoli showing them how to monitor markets. The bank characterized it as a “special trusting type of relationship,” the LIA said in documents in a London lawsuit.

The relationship soured after the fund lost about $1 billion following the 2008 financial crisis. Lawyers for the fund, appearing for the first time at a London court hearing today, say Goldman Sachs abused its role to secure money-losing investment deals.

The lawsuit against the bank, which could go to trial as soon as next year, may hinge on how close Goldman Sachs bankers got to the fund, set up by former Libyan leader Muammar Qaddafi to manage the country’s oil wealth, and whether that relationship gave the New York-based bank undue influence over the LIA. U.S. agencies are also investigating banks’ dealings with sovereign wealth funds.

“What makes this case unique is the portrayal of what you might expect to be an expert investor, a sovereign wealth fund, as a completely unsophisticated party,” said Leigh Crestohl, a London lawyer with Zaiwalla & Co. Solicitors, who isn’t involved in the lawsuit. “The judge will have to consider what the LIA knew, and how well it was equipped to bargain with the bank.”

Derivatives Trades

The LIA said in court documents filed in January that its executives never understood 2008 derivative trades linked to shares in Citigroup Inc., Electricite de France SA and Banco Santander SA.

Goldman Sachs bankers entertained LIA employees on trips to Morocco and bought them gifts, according to the fund’s documents. It said the bank made profits of about $350 million on the trades.

The lender took “advantage of the LIA’s extremely limited financial and legal experience,” the fund said. George Prassas, a spokesman for the LIA, and Fiona Laffan, a spokeswoman for Goldman Sachs in London, declined to comment.

Goldman Sachs argues that the fund had plenty of experience.

“The key individuals within the LIA’s management were perfectly capable of understanding” the trades, the bank said in court documents filed last month. The two had an “arm’s length banker and client relationship” and any losses were caused by market turmoil.

Internship

The LIA said the bank tried to forge personal relationships with fund officials. Goldman Sachs offered an internship to the brother of then-LIA executive, Mustafa Zarti, in 2008, according to the LIA’s documents.

That role is the focus of an investigation by the U.S. Securities and Exchange Commission into several companies’ relationship with the LIA, the Wall Street Journal reported in September. The SEC is examining possible violations of the Foreign Corrupt Practices Act, the WSJ has reported.

The Goldman Sachs internship lasted about a year, according to Mustafa Zarti’s spokesman, Werner Beninger.

“This was unrelated to LIA and its business,” Beninger said in a statement.

The LIA is also suing Societe Generale SA in London for about $1.5 billion. It said the French bank paid bribes to a friend of the Qaddafi family to secure investment deals, according to court documents it filed in March. SocGen said in a statement when the suit was filed that the allegations were unsubstantiated and it wasn’t aware of any regulatory investigations into the deals. Saphia Gaouaoui, a spokeswoman for the bank, declined to comment when reached by phone.

Post-Qaddafi

In the background to the lawsuits, post-Qaddafi Libya has descended into chaos. Islamist militias seized control of Tripoli airport in August. That month Fatima Hamroush, a former Libyan minister, described how armed men threatened government officials and demanded cash.

“At present the LIA are doing whatever is going to play well with the domestic Libyan public not necessarily what will win them the lawsuit,” said Jason Pack, a Cambridge University academic specializing in Libyan history and founder of the consulting firm Libya-Analysis.com.

“It’s very popular in Libya to say that Western companies took advantage of Libya in the Qaddafi period and were making money hand-over-fist,” Pack said in an e-mail. In fact, LIA employees were “as sophisticated as most Western finance professionals and had access to world-class advisers.”

They “were aware how the game is played,” he said.

The case is: The Libyan Investment Authority v. Goldman Sachs International, case no. 14-310, High Court of Justice, Chancery Division.

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