Euromoney: Goldman Offers its Libya Defence

Euromoney, October 2014

Regular readers of Euromoney will recall the colourful and angry filing that the Libyan Investment Authority made against Goldman Sachs (followed by another against SG) earlier this year. Goldman has remained resolutely silent on the subject, declining every opportunity to comment. But now, Euromoney has obtained a copy of Goldman Sachs’s defence before the High Court of Justice Chancery Division in London.

It’s a 68-page document that could be summarised thus: buyer beware.

The essence of the LIA’s complaint against Goldman – which put the Libyan sovereign wealth fund into a range of equity derivative transactions in 2007 and 2008 that ended up costing it at least a billion dollars – is that the Libyans were inexperienced investors who trusted Goldman to do the right thing by them, and were therefore not aware of the risks of the structures that Goldman was putting them into. The central thrust of Goldman’s defence is that this is rubbish.

“The LIA was not, as it now contends, financially illiterate, and nor did it have extremely limited financial experience,” says Goldman’s defence, in a draft dated September 5 2014. “The key individuals within the LIA’s management were perfectly capable of understanding, and the Defendant believed that they did in fact understand, the nature of the 9 trades [which caused the losses]… and the risks and rewards to which they gave rise.”

Goldman says that the LIA’s management was given potential pay-off tables spelling out both potential returns and losses. It also stresses the previous experience of many of the LIA’s executives.

The LIA went to considerable lengths in its Particulars of Claim earlier this year to stress just how close the relationship between their young staff and Goldman executives – particularly Driss Ben-Brahim, who was the head of trading for emerging markets at the time, and Youssef Kabbaj, who was Goldman’s main man in Libya – became over time. There were claims of gifts, of paid foreign trips and even of anxiety among the LIA’s in-house staff if Kabbaj went too long without calling them.

The Goldman defence tries to put a bit of distance back into things, saying it was “an arm’s length banker and client relationship” conducted under written terms. “The allegation that the relationship between the LIA and the Defendant ‘grew into’ one of ‘trust and confidence’ is vague and ambiguous,” the defence says. It does admit, though, that Kabbaj took several LIA employees to Morocco in April 2008, although it’s not clear from the defence documents who paid.

At no stage in the defence does Goldman deny losing its client a billion dollars of its oil wealth; specifically the defence admits that the total cost of entering the trades was “in excess of US$375 million and Eu528 million”. (Goldman does, however, deny that it made US$350 million of aggregate profit from the trades.) The closest it gets to an acknowledgement of the pain of these losses is this masterpiece of understatement: “The LIA doubtless regrets its decision to enter the Disputed Trades.” In the same paragraph Goldman points out that if the LIA had purchased the shares directly it would have lost even more, which is probably not much comfort to the Libyans. Nor is Goldman’s contention that if the shares had performed differently, “the LIA would have stood to make very substantial profits.”

But the losses themselves are not at issue, and not what the court will have to decide upon; it’s really all about the relationship between the two institutions and the question of who understood what, and who should have understood what, as the trades were put in place. It will be a strange case, assuming it does make it into court as expected in October, as in order to win, the LIA will have to paint itself as having been a wide-eyed ingénue with no idea what it was doing; Goldman, in turn, will have to present the Libyans as adept and sophisticated investors. To simplify it further, one side will be saying: “I was stupid”, and the other, “No you weren’t.” It is believed that some former employees of the LIA are unhappy with the whole tone of the filing, since it rests on demonstrating their incompetence.

There is one illuminating paragraph in which Goldman tries to demonstrate that it was not unusual in pitching in Gaddafi-era Libya, and, quoting an internal LIA email, lists a number of banks whose staff visited the LIA and stayed in Tripoli’s Corinthia Hotel between May and October 2007. UBS, Raiffesen bank, RBS, Commerzbank, Barclays Capital, Carlyle, Clariden Leu, Deutsche and JP Morgan are among them. There were no sanctions in place at that time, so none of these institutions was acting illegally, but it’s clear that there was no squeamishness among the world’s biggest investment banks in dealing with the Gaddafi family and its state interests as their regime drew to a close.