Libya plot thickens for Goldman with Palladyne “money-laundering” suit

Euromoney magazine, March 28 2014

Goldman Sachs’ embarrassments in Libya took a new turn on Tuesday when a lawsuit was filed in a US district court against a host of people and institutions, including Palladyne International Asset Management – a Dutch firm whose dealings with Goldman are believed to be under investigation by the SEC and the US Department of Justice.

The suit, on behalf of a Connecticut financial services executive who worked at Palladyne and says his career was wrecked by having done so, paints a damning picture of the mysterious Palladyne, an institution whose role and relationship with the Libyan Investment Authority (LIA) has long been subject of serious questioning.

The complaint, which has been seen by Euromoney and went before the US District Court for the District of Connecticut, pulls no punches, describing Palladyne as “a kickback and money-laundering operation for the former dictatorial Gaddafi regime in Libya, operating under the public pretence of a hedge fund”.

“Contrary to its fabricated image as the ‘world’s pioneering asset management firm’, defendant Palladyne’s primary purpose was and is the laundering and concealment of funds illicitly siphoned from the Libyan national patrimony,” the complaint says. It also brings claims against headhunting firms SThree and Huxley.

The plaintiff, a Dan Friedman, who claims to have given his CV to Huxley, which in 2010 and 2011 allegedly proposed a position in Amsterdam at a financial services house, as head of risk.

The client turned out to be Palladyne, and after contorted negotiations Friedman arrived in Amsterdam in November 2011. Once he got there, he got a shock, discovering, according to the complaint, “that Palladyne was the asset management company equivalent of a Potemkin village, fronting for a kickback and money-laundering scheme relating to funds out of Libya”, rather than legitimate funds from the broader Middle East as he had been told to expect.

Goldman Sachs declined to comment. A spokesperson for Palladyne said: “These entirely untrue and ludicrous allegations have been made by a former employee who has repeatedly tried to extort money from the company. He worked with us for just two months before being dismissed for gross misconduct. “The fact that he has now filed a suit demanding damages of $500 million demonstrates the absurd nature of his claims, and we are taking legal action to protect the company.” (The $500 million appears to be an amalgamation of figures mentioned in several separate counts; the base claim is $44.91 million.)

The spokesperson added: “As has been widely reported, 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. That process was halted with the rise of the Arab Spring in Libya in 2011.”

Palladyne has been attracting attention for some time, particularly after it appeared in a leaked internal audit of the LIA – compiled with the input of KPMG – which made it into the public eye through the advocacy group Global Witness in July 2011. One of the documents, which showed the LIA’s asset position in September 2010 with a series of damning annotations and including a page on an institution called Palladyne, stated that $300 million had been invested with the manager, it was already down 17% on the investment amount and had incurred $19 million of fees.

“To date,” a note on the document stated, “we have paid in excess of $18 million in fees, for losing us $30 million.” A slide contained within the leaked internal audits included a graph showing the MSCI World Index relative to the Palladyne fund, and the two appeared to track each other closely, suggesting it was little more than an index process – the only difference being that it was underperforming the benchmark by almost 40%.

Losses like that were nothing new in 2010, but what stuck out about Palladyne was that nobody knew anything about it. Other slides in the same document referred to Permal, BNP, Credit Suisse – household names of investment. So who was Palladyne?

Though Dutch, it was founded and run by Ismael Abudher, whose father-in-law Shukri Ghanem was head of the Libya’s National Oil Company, one of the most powerful positions in Libya. (Ghanem did not fare well when the revolution came: he was found dead in April 2012 in the Danube river in Vienna. At the time, he was under an Interpol red notice for alleged crimes including “fraud of public money”.)

Palladyne’s real purpose, the new suit alleges, was to launder money defalcated from Libyan government oil revenues by the family and friends of Muammar Gaddafi, and to serve as a recipient and guardian of potential bribes and kickbacks from companies doing business with the Gaddafi regime.

More specifically, according to Friedman, Palladyne did not have, as he had been told, $1 billion under management and another $8 billion in advisory assets. He says it had $700 million under management, all of it from the LIA, Libyan African Portfolio and the Libyan Foreign Bank. It did not have clients around the world, and even the assets it did have were frozen by State Street under orders of the US government and the European Union. There were, he alleges, no funds to invest, no risk to manage – and there was no investment management department to do so anyway.

What has all of this to do with Goldman? Well, regular readers will recall our recent article regarding a lawsuit by the LIA alleging Goldman lost the fund $1 billion on equity derivatives while pocketing $350 million in profit. By 2011, Goldman was under investigation by the SEC – and, subsequently, the US Department of Justice – for violations of the Foreign Corrupt Practices Act. It is alleged that, to try to clean up the mess it had caused with the LIA, Goldman discussed various remedies with its client, and that one proposed solution was for Goldman to make a $50 million payment to help settle some of those losses – and would do so through Palladyne.

Euromoney understands the payment was never made, but apparently even the discussion of such a payment, if it appears to be a bribe, is sufficient for penalty under US law.

The new lawsuit specifically mentions the discussion, and sheds new light on it. According to the suit: “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.”

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 alleges some of the proposals were made directly to Goldman CEO Lloyd Blankfein. The suit also says the alleged bribe to be funnelled through Palladyne was “to show ‘good faith’ by Goldman that it would undertake to rectify the losses”.

Since then, Palladyne has been 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.

The only reason this has all come to light is because Friedman’s employment was terminated in February 2012 allegedly after confiding his concerns about criminal exposure to a colleague. Consequently, the suit simply seeks redress for an allegedly wronged employee. Without his dismissal, there would have been no suit or such a strongly worded allegation about what went on at Palladyne. As things stand, it is likely the SEC and Goldman, among others, will be reading this complaint closely.