Libya And Goldman: The Secret Memo

Euromoney, April 30 2014

There are recruitment ads out at the Libyan Investment Authority. Libya’s sovereign wealth fund, seeking to regain direction after the country’s revolution, has employed consultants for a few key roles. There’s the CEO. And the CFO. And the chief investment officer.

And the head of risk, the head of internal audit, and the chief operating officer.

Oh, and the deputy CEO. And the head of legal.

There are revamps, and then there’s the LIA. Founded by Colonel Gaddafi’s second son, Saif Al Islam Gaddafi, in 2006, the fund has already gone through more drama and upheaval than most of its sovereign wealth peers have endured in their combined history. Waves of executives and managers have come and gone, foreign banks and fund managers have sold it extraordinary duds that soured during the financial crisis, the country has undergone painful revolution which saw Saif jailed and his father killed, its funds have been frozen by the UN (and remain so, at the fund’s own insistence, today) and at the end of it all it finds itself with a glut of legacy headaches and an empty management bench.

And, as it seeks to move forward, it must also look back. This year it has launched a raft of litigation against some of the biggest names in global banking, seeking to recover billions of dollars for deals those banks put them into during the Gaddafi regime. And no matter how much any Libyan executive seeks to paint themselves as a breath of fresh air, correcting the sins of the past, they must inevitably face scrutiny for just what their role in the bad old days really was.

To see this article as it ran at Euromoney.com, click here, here, and for Palladyne’s denial, here

Abdulmagid Breish, the chairman and acting CEO of the LIA, is an urbane and confident presence. Absolutely fluent in English, his thick glasses and swept-back hair give him something of the appearance of a mid-career Kissinger.

Breish has plenty of ideas for the future, but this year he’s been in the news for taking on the transgressions of the past, launching litigation to claim more than US$2.5 billion from Goldman Sachs and SG for instruments those banks sold to the LIA between 2007 and 2009. (See box on how to access Euromoney’s previous coverage story online. Related stories are here, here, here and here).

Today, flanked by a lawyer who never feels a need to rein him in, Breish is adamant the LIA is in the right on both cases. On Goldman – a case that rests on demonstrating that Goldman abused the trust it had built with the fledgling and somewhat wide-eyed sovereign fund, selling structures that they could not understand – he says: “It was very clear and evident that there was a breach in trust. They abused that confidence that was built, and the inexperience of individuals.

“I wouldn’t say it was a con job, but it was very near to it, where people were taken on holidays and bought gifts and things. The trust element was there and they totally took advantage of it, and sold LIA complicated transactions with complicated documents that they couldn’t understand, at a moment when the whole world was going south, and they knew that.” (Goldman Sachs, which has applied for summary dismissal of the case before trial, tells Euromoney: “We think the claims are without merit, and we will defend them vigorously.”)

The SG case is less about mis-selling and more about over $58 million of payments SG made to a third party called Leinada, a Panama-registered vehicle owned by a man called Walid Al-Giahmi who was close to the Gaddafi regime, payments that the law suit describes as bribes.

“Then, SocGen did not disclose how much was being paid. They did not disclose the identity. It was like pulling teeth. Only months and months later we found out what was going on. SocGen itself was one of the prime banks in the world, at the forefront of derivative trading. They bring in a party who is not even literate in financial affairs to advise them on structures and derivatives? Hard to understand.” SG tells Euromoney the allegations are unsubstantiated and says it “works occasionally with financial intermediaries in countries where it does not have local teams in place.”

One can’t fault the LIA for boldness, but some are puzzled that this should be heading for court at all. The LIA’s legal representatives in the cases are Enyo Law, specifically partner Simon Twigden, who is considered a lawyer of the highest calibre, but look what he and his client are up against: the most powerful bank in America and all its Wall Street legal advisors (although, these being London-heard cases, both Goldman and SG are being represented by Herbert Smith). Many observers think the Goldman litigation in particular has no realistic chance of success. So did the LIA try to negotiate first?

“I personally did not have any discussions with Goldman Sachs,” says Breish.

Why, then, is litigation the right way to go rather than engagement? “We’ve been preparing ourselves for some time,” he says. “We’ve been analyzing our documents, reviewing our strategy, talking to our legal counsel, and a lot of this has come out and about in the market. If Goldman Sachs wanted to come and talk, they had ample time to do so. It wasn’t as if we were working under cover: people knew what was going on.”

Indeed, Euromoney reported the LIA’s intention to sue both Goldman and SocGen back in April 2013 (interestingly, the third institution that then-CEO Mohsen Derregia named then, Millennium Capital, no longer appears to be on the LIA hit list, though Breish says “we are looking at around another five and investigating the documentation.”)

With SocGen, he goes further, saying that he did write to SG’s chairman before going to court, “inviting him to establish a direct line to sit and discuss this. I’m ready to meet with him and talk to him about this and see if we can settle some issues.” He says he didn’t hear back for two months. “And when we pressed their office I received an answer which was composed of half a page which didn’t say anything really: not even a willingness to meet, just ‘we’ve done nothing wrong’.”

“I find it perplexing,” Breish says, “that people at that level don’t even think of their reputational risk.”

And how realistic is it that the LIA can win in court?

“Our objective is to regain all the money that we lost that belongs to the Libyan people. That is what we will do. We feel very strongly about the principle of it, and we’re ready to go until the very end: it doesn’t really matter how much it is going to cost.”

But is that really what it’s about? Is litigation, Euromoney asks, also about sending a message, not just to international banks but to Libyans as well?

“Definitely. There’s a whole new message being sent.”

*

For Goldman in particular, its Gaddafi-era headaches go well beyond the LIA litigation. Its subsequent attempts to make amends for its losses have now put it in hot water with the US Department of Justice. In the end, the efforts to make things right may hurt Goldman much more than the original mistakes did.

A confidential memo dated March 9, 2010, prepared by Goldman Sachs for the Libyan Investment Authority, sheds light on Goldman’s negotiations to move on from those disastrous trades.

The memo, titled “Unwind of Trades and Collateralized Bond Obligation Transaction”, outlines a proposed deal through which Goldman would pay $50 million, agree to unwind its trades, and pay additional expenses of up to $2 million, in order to draw a line under the deals from 2008 (which, the document says, carried an initial premium of $1.3 billion between them but by then were worth just $25 million). But this is not a straight compensation deal from Goldman to the Libyan fund, because two additional layers are featured between them.

One is a special purpose vehicle called Tiber Bond Investment Ltd, a Cayman Islands entity. And the other is a group referred to as the “investment advisor” in the memo – Palladyne International Asset Management. Under the terms outlined in the memo, the LIA would instruct Goldman to pay the amount directly to Tiber. Tiber would then issue a limited recourse note to LIA as its sole investor. Libya would then buy a $5 billion unlisted 6% note due 2030 at a price of 74%, meaning it would put $3.7 billion (74% of $5 billion) into Tiber, which would invest it in a portfolio of dollar-denominated investment grade and high yield bonds under Palladyne’s management.

Regular readers of Euromoney’s online edition will be familiar with Palladyne, an institution that first came to public light when a leaked internal LIA document drawing on a KPMG audit referred to it as having received $300 million from the LIA and having lost 17% of it in less than two years, despite having been paid $19 million in fees. (It also received $200 million apiece from two other Libyan institutions.) Palladyne then turned up in another law suit earlier this year. Filed in a US District Court in Connecticut on behalf of a former Palladyne employee called Dan Friedman, and compiled by the noted ex-Jones Day international litigator Alan Kaufman, who has something of the bearing and charisma of George C Scott, it shows a boisterous turn of phrase. It describes Palladyne as “a kickback and money-laundering operation for the former dictatorial Gaddafi regime in Libya, operating under the public pretense of a hedge fund,” and goes into detail about Palladyne’s provenance: Dutch-incorporated, headquartered in Amsterdam, and run by Ismael Abudher, who is the son-in-law of Shukri Ghanem. Ghanem was head of Libya’s National Oil Company (and former Libyan Prime Minister) whose oil revenues fed the LIA, until the revolution; he was found dead in the river Danube in Vienna in April 2012. (Palladyne calls the claims “entirely untrue and ludicrous”, presenting them as bad blood from a bitter former employee. In turn, Kaufman tells Euromoney: “We investigated this for 18 months on four continents before filing, and are fully confident that we will prove these claims.”)

The case claims that Palladyne had absolutely no investment capability, which begs the question why it was initially entrusted with $700 million of Libyan money. One person familiar with the matter says “the $300 million [from the LIA] was given to Palladyne without a single piece of paper to document it or explain their investment plans”.

It also raises the question of why such an institution should be appointed as the broker to resolve Goldman’s problems with the LIA, or why it would be entrusted with a new portfolio intended to hold $3.7 billion of assets. “At the time they were appointed investment advisor, they had already lost more than 17% of the money they had been given in a short period of time, including the rising market that followed the 2008 crash,” says a source familiar with the matter. “The whole thing is just ludicrous. The LIA, which has already lost money through Palladyne, is solving the problem by investing 10 times more money with Palladyne. Justice [the DOJ] looks at this, and says: this is nuts, there is no innocent explanation for this and no business terms that could explain it.”

The Goldman memo suggests the bank knew how this looked – paying $50 million to an institution with allegedly no capability to do anything with it but receive it – because it appears to try to head off some gnarly complications from the outset. The memo specifically refers to the Foreign Corrupt Practices Act, in a bullet point in a section about payments, saying that GSI (Goldman Sachs International)  “will only accept this instruction” (to pay the money to the SPV) if the LIA delivers that payment instruction, and to the satisfaction of FCPA representations by LIA as set out in the terms of a separate letter. Euromoney has not seen this additional letter.

The memo also specifically points out that although Goldman did preliminary due diligence on Palladyne, it “did not provide a basis for Goldman to determine that Palladyne” is an “appropriate” investment advisor, or about the “services” rendered by Palladyne to the LIA. Finally it insists that both the LIA and Palladyne are responsible for determining whether the transaction is suitable for them, and that they “cannot rely on Goldman for any determination” as to whether it’s a good idea. This section proceeds to sever Goldman from whatever happens to that money next. It is saying, in essence: now you’re on your own, and you decide whether or not it’s a good deal. And in aggregate, the memo infers: for our $52 million of payments, we will be released of all liability from our old trades. It’s odd, though, that only $2 million of that appears to go to the LIA, when the liability in the recent lawsuit against Goldman is put at more than $1 billion.

But lawyers are also puzzled about why the memo goes into such great detail about what will happen to the money after it is transferred to Palladyne. “It should be none of Goldman’s business,” says one. “They should care less about what the LIA is going to do. You don’t care if it goes to pay for ice cream cones for every person in Bangladesh. If I’m unwinding my trades that I did for you, and giving a little cash to you, that’s the end of it: a release of liability. All of the detail about Tiber would never have been in a settlement and liability release.”

Euromoney understands that this was the fifth proposal that Palladyne, Goldman and the LIA (two sets of lawyers, Nabarro and the Libyan firm Bakhnug, are also mentioned) had discussed, and the last, following considerable negotiation.

It is understood that events were then overtaken by revolution and that the payment was never made, although this commonly accepted version of events is slightly problematic: the memo, which suggests an arrangement approaching finality, is dated March 2010, and the first street protests in Benghazi did not get underway until February 2011. But Palladyne itself, in a rare communication with the outside world, cites this version to Euromoney. “Our expertise in finance and asset management was sought several years ago in the negotiation of a potential resolution between the LIA and Goldman Sachs,” a spokesperson says. “That process was halted with the rise of the Arab Spring in Libya in 2011.” Euromoney offered to come to Amsterdam to see for ourselves what Palladyne actually is. Palladyne declined, but sent a statement claiming it had “a team of around 30 professionals working with a wide variety of clients.”

The lawsuit by Palladyne’s former employee specifically mentions the Goldman negotiations. “Defendant Abudher was inserted directly into the Goldman-LIA dispute by his father-in-law, and Abudher immediately proceeded to propose five distinctive ways for Goldman to ‘make right’ with the LIA, with the coincidence that under each option, Palladyne would be the asset ‘manager’ and collect fees and payments,” the suit alleges. Because no legitimate bank, fund or investment company would partner with Palladyne, the complaint says: “Abudher’s proposals were a transparent effort by his father-in-law to take a major loss for Libya and turn it into profit for the Ghanem-Abudher family.”

The suit openly refers to “an alleged attempt to launder a bribe to Libya” and says that funneling the alleged bribe of $50 million through Palladyne would “show ‘good faith’ by Goldman that it would undertake to rectify the losses.”

Breish agrees with the claim’s depiction of Palladyne as a front. “It is an accurate description,” he says. “No investment capability.” He says the LIA now wants its money back. This is likely to be the next litigation we see. “Our lawyers are looking at this also,” he says. “It’s the same story: funds being assigned to someone who’s been close to the regime.” That is likely to mean going through the Dutch courts, and there might be a queue: Palladyne was raided by the Dutch Openbaar Ministerie (public prosecution service) and Fiscal Information and Investigation Service in simultaneous actions on June 21 2013. The officers were heavily armed.

There is another point of view. One former LIA employee says: “At the time for us Palladyne was a legitimate counterparty. It was supposed to be a mixed portfolio though they seemed to keep most of it in cash, and charged us 3%.” And since Goldman apparently didn’t make the payment, its sins do not look particularly egregious. But under the FCPA, even the discussion of a payment is enough for penalty, if that payment can be construed as a bribe.

*

Then there are the LIA’s attempts to move on. Thanks to exhaustive efforts by Deloitte – at least the fourth major advisory name to work for the LIA, following Ernst & Young, Mercer and KPMG – Breish can now state with confidence that the fund has $66 billion in assets, roughly half of it in a legacy of direct equity stakes in some 550 companies worldwide, and the other half in a mixture of equities, alternatives, bonds and cash.

Breish’s first priority is to find the staff to manage this money properly. The CEO must be Libyan, “for obvious reasons,” he says, though not everyone agrees with that caveat. “If we have a highly successful Spanish coach of the national football team [Javier Clemente, who just helped Libya win the African Nations Championship, their first international title], why can’t we have a foreign head of the LIA?” asks one Libyan banker. “Why can’t we just get the best person?”

For the many other roles, “those do not have to be Libyan,” Breish says. “If they are, that’s OK, but we are looking for quality and skill base and experience.”

In order to help them attract the “really high-calibre people” Breish says he wants, the LIA is about to open a new office in Malta to go with the one it already has in London. The idea is that if the right people can be found but they don’t want to live in Tripoli for reasons of family or schooling or security, they can be based in Malta and commute back and forth as needs be. Meanwhile London, Breish says, will be “the kitchen for the LIA. Most of the discussions with the asset management industry will occur here, and all the top skills and executives we can’t house in Libya.” London will be the centre for disaster recovery, too, and will provide the IT platforms and much of the training.

Next: to get the funds unfrozen. Like Derregia before him, Breish is keen to point out that the funds are frozen at the say-so of the Libyans themselves, not, any more, because of the UN. Both men are wary of funds being released before there is a clear framework for their subsequent investment. “We were asked about a year ago whether we would want to unfreeze. The answer was no. When I was nominated in June I was asked the same question by the Prime Minister and I said no. We’ve missed a lot of opportunities along the way to readjust our portfolio. But I think the practical way is to unfreeze when we have the logistics, the infrastructure and the skill base.”

Once that’s done, a clear investment strategy will be set, very possibly along the lines of the four-inch-thick Mercer document that was shelved after its delivery back in 2009, to the considerable annoyance of people who worked there at the time. Asked if the Mercer study could be revisited, Breish says: “Definitely, yes. Previous administrations brought in a lot of consultants that did a lot of hard work and produced a lot of pamphlets; I’m not sure these were read or followed through. We intend to use best of class expertise, be it consultants, asset managers, lawyers, custodians or whathaveyou. We aspire to bring Lia back into the international fold like the rest of the sovereign wealth funds: the same line of thinking, the same corporate governance, the same transparency and methodology. There shouldn’t be any reason we can’t do that.”

Asked for a role model among existing SWFs, Breish says, “from a corporate governance standpoint, we would want to emulate… the New Zealand to the Australian to the Canadian to the Norwegian, that depth of disclosure.”

The likely structure will be a Future Generation Fund, which will look like somewhat like ADIA or the KIA, with a certain percentage of oil proceeds going to it every year; then a Budget Stabilization Fund, within which excess reserves can be placed to assist the government in funding the budget deficit, with the approval of Congress; and a local fund that will act as a catalyst to private sector development in Libya, particularly in infrastructure.

And in good news for the world fund manager community, who have been watching Libya with increasing curiosity for some time, Breish says: “LIA would not be following the previous model of investing on its own and managing assets on its own. We would be investing and managing assets through external fund managers. Decisions are going to be made by committee, and no decisions are going to be made by one person or one investment analyst or fund manager or whatever was the case before.” Gone, it seems, are the days of Saif Gaddafi directing the fund to invest into Juventus football club because it seems like a good idea at the time.

BOX – Is Breish an old hand or a new broom?

Life and logistics are still not simple in Libya. A lot of damage has been done that cannot be fixed overnight. “Everything in Libya, every apartment building or inch of asphalt for a road, involved corruption and fees,” says one – proud – Libyan. “In every sector  – oil, construction – there is a cloud of doubt hanging over it, not just the LIA, and there is no sense in singling out that one institution.

“Libya was an unjust society, with a small regime-backed elite making millions in public sector jobs, whilst the rest of the population had to make do on a pittance under law 15 of 1981 [which froze wages for several decades]. There was no meritocracy and no market mechanism to determine how people were rewarded for their efforts.”

Engaging with the country is not straightforward for the foreigner either.  Euromoney’s British Airways flight into Tripoli is cancelled for “operational reasons”, a somewhat elastic term which in this case turns out to mean “someone fired two missiles into the runway last week.” We take a circuitous route via Tunis instead.

Then, when it comes time to leave, the hotel’s Hertz transfer service refuses to attempt the drive, and when Euromoney heads off in a taxi instead, it quickly becomes clear why. Militias have blocked the airport road overnight, sometimes with bricks and sometimes with pro-Gaddafi slogans on banners slung across oil drums, and in one case with fortified barricades; a family of four are trying to dig out an earth embankment with their hands in order to create a navigable path to get their car over. Instead Euromoney’s driver takes to a pitted dirt road, bouncing along among half-built houses and the shattered wreckage of cars illuminated by a massive dust-frayed sunrise. The driver repeats, like an incantation, “Fucking Gaddafi. Fucking Gaddafi.” The roadblocks, he says, are built by people still loyal to the Colonel years after his undignified death. No matter: Libyan Arab Airlines, a carrier upon which no travel agent in Europe appears to be able to issue a ticket, is running an hour late anyway as a matter of unremarked routine.

Upon landing, Euromoney learns that during the time we have been in the air the entire Libyan government has resigned. It is that sort of a day.

The tension between those who want change and those who thrived in the old guard is important to understand when assessing the changes taking place at the LIA itself. One Libyan explains: “There was, and is, a feud between the old and new guard.”

So where does Abdulmagid Breish fit into this picture? For all his new-broom rhetoric it is illuminating to note that, according to documents acquired by Euromoney, he was a member of the LIA’s Board of Trustees at the outset back in 2007. Decree 130 of that year names that board in full, and it is quite a list: The then-prime minister, Baghdadi Mahmudi, as chair (the document bears his odd right-angled slash of a signature), the deputy prime minister as deputy chair, and people including the planning minister, finance minister, central bank governor and some of Gaddafi’s bankers as members, along with Breish and the former CEO of the LIA, Mohammad Layas. Mahmudi, for one, was extradited from Tunisia to Tripoli in 2012 to face trial on misuse of public funds, among other things. It’s a list that appears to put Breish at the heart of the old regime.

For this reason, some in Tripoli despair of ever really moving on from the old days, and see Breish’s appointment as emblematic of a system in which the same people end up in power regardless. “There are 30 years or more of roots, experience and networks,” one Libyan says. “We haven’t been able to progress. The same people are coming back and calling themselves heroes.”

Is this fair?

Asked about his history on the LIA board of trustees, Breish is open about it. He was there “at the outset,” he says. “At the very beginning, 2006-7, I attended two meetings and then I was replaced.” So his involvement was brief? “Very brief. The problem was they called for meetings the next day. And I wasn’t living in Tripoli, I was in Bahrain.” At ABC? “Exactly. So I never made most of the meetings, only two, and I found it very difficult to follow through and half of the time I wasn’t there.”

This stacks up: Breish was indeed at Arab Banking Corporation at that time (Mohammad Layas, the LIA’s then-head, was chairman of the ABC at the time).

But ABC is an interesting institution in its own right, having employed many staff who have gone on to the most senior positions in Libya: central bank governor Saddek Omar Elkaber, his predecessor Farhat Bengdari, and former LIA chief executive Sami Rais among them. Bahrain-based but Libya-backed, it is an institution whose arrangements puzzle Libyans. “Since its inception, ABC was an elite club, and nobody could get in,” one banker says. “They would do business together and look after each other.”

Be that as it may, it’s true that Breish was in Bahrain, not Libya, in those early days of the LIA.

Was Breish in any position to see the deals that were going through at the time?

“No, no. As a matter of fact, I was the one who suggested to the administration to pick up Mercer, to advise them on risk.”

And should he be seen as a part of Libya’s old guard?

“Not exactly,” he says, apparently neither offended nor alarmed. “We were all technocrats.” He was outside Libya, chiefly at ABC, from 1980 to 2009, he says, and certainly worked with Libyan institutions such as the central bank throughout. “Of course, being Libyan, yes I did assist some of these institutions. I advised them and they saw merit in my experience and they asked my advice, but it didn’t mean that I agreed with their policies or was one of the inner circle. So I don’t think it has any connection.”

Breish is not the only familiar face at the new LIA. Ali Baruni, a long-term advisor and a member of the LIA Advisory Committee, is said to be back as an advisor, and Sami Rais is believed to have applied for the CEO job and to be the front-runner for a treasury role. Bitterly-ousted Derregia is understood to be in the frame for his old CEO job barely a year on from losing it.

Asked about the prospect of former employees coming back again, he says: “Well, it’s open. They’ve spoken to me, I know Sami Rais well, I know Derregia, I know a lot of other people. They can put their name in. We have a process, we have specialist interviewers who will interview them, we’ve got psychometric and in-depth analysis.”

He smiles. “Let the best man win.”

BOX: FOLLOW THE LIBYAN INVESTMENT AUTHORITY SAGA ON EUROMONEY.COM

Euromoney has been leading coverage of the row over the LIA’s assets for more than a year.

See how the full story by going to our website and visiting our special LIA in Focus page. Among the highlights:

April 2013: The battle for the Libyan Investment Authority – why CEO Mohsen Derragia was kicked out

April 2013: What the leaked KPMG reports tell us

February 2014: LIA claims Goldman Sachs implemented trades it did not understand, costing it $1 billion

March 2014: Libyan plot thickens for Goldman with Palladyne ‘money laundering’ suit

April 2014: Société Générale drawn in to LIA saga

AUTHOR’S NOTE 

Palladyne subsequently denied several elements of this story. Their statement is carried in full on Euromoney.com and can be accessed here