Libya takes on Goldman Sachs

Euromoney magazine, February 14 2013

A year ago, Euromoney reported that the Libyan Investment Authority was preparing litigation against Goldman Sachs for disastrous trades the American bank had put the Libyan sovereign wealth fund into in early 2008. Nothing happens fast in Libya, and the top management of the fund has changed since our story. But on January 28, its lawyers lodged a claim at London’s High Court, accusing Goldman of “deliberately exploit[ing] the relationship of trust and confidence it has established with the LIA.”

Euromoney has seen the Particulars of Claim document lodged with the High Court by Simon Twigden, a partner and commercial dispute resolution expert at Enyo Law, on the LIA’s behalf. It makes savage reading for Goldman; it says that equity derivatives trades implemented by the bank lost the fund more than a billion dollars while earning Goldman $350 million in profits. Goldman Sachs told Euromoney: “We think the claims are without merit, and will defend them vigorously.” But it will not enjoy its behaviour in North Africa in 2008 being brought into public light.

The claim starts out by stressing the inexperience – innocence, you might say – of the fledgling LIA’s investment staff after its foundation in 2006. It says that two investment teams were established internally the following year: an equity or direct investment team led by former Libyan Foreign Bank manager Abdulfatah Enaami, and an alternative investment team led by Hatim Gheriani, a former Commerzbank banker who is now at HSBC. Between April 2007 and February 2008, these teams recruited six employees apiece, with the main criteria being that they should be Libyan nationals who spoke some English. “There was no requirement that the employees should have any legal or financial qualifications or experience,” the claim says, saying they were “very young, and had very little (if any) experience of financial markets.” In particular, none, including the LIA’s senior management, had any experience of complex derivative products.

Having presented the LIA as a wide-eyed ingénue, the claim then details the arrival on the scene of Big Bad Goldman Sachs, in the form of Driss Ben-Brahim, Goldman’s then-head of trading for emerging markets, and Youssef Kabbaj, an executive director who looked after Goldman’s business in Libya. Through 2007 Goldman had several meetings with the LIA, and in September put the fund in to two private equity funds managed by Goldman: US$150 million into the Petershill Fund, and $200 million into a the Mezzanine Fund. By the autumn, the relationship had developed into what Goldman called a partnership, through which it would train LIA employees and senior management.

“The relationship,” the claim says, “was heavily influenced by the disparity between, on the one hand, the LIA’s extremely limited in-house financial experience; and, on the other hand, Goldman’s considerable financial experience.” Kabbaj, in particular, sought to present himself as a trusted friend who would always be there for them. He would turn up with aftershave and chocolates for LIA employees, and called them his “team”.

In early 2008, Kabbaj began encouraging the LIA’s equity team to enter long-dated equity derivative transactions. Between January and April, it set nine of these trades, costing over $1 billion, over shares in Citigroup, Electricite de France, Banco Santander, Allianz, ENI and UniCredit. The claim not only attacks Goldman’s documentation of these trades, which involved no ISDA master agreement and for which trade confirmations took weeks or months to be supplied to the LIA, but also argues that the LIA board did not understand what they were buying.

By June, the LIA’s legal department had begun to realise they were in trades that they just did not comprehend. The following month, one of them was seconded to Allen & Overy, and an Australian lawyer, Catherine McDougall, came the other way in exchange. McDougall, who is now a senior lawyer at DLA Piper in Abu Dhabi and who did have experience of complex documentation, almost immediately found something amiss. She “was struck by how complex and one-sided the terms of the trade confirmations were,” the claim says. She explained the trades in detail to Mustafa Zarti, a board member and deputy executive director who had been hired by Colonel Gaddafi’s son, Saif. She told him the interests of LIA and Goldman were not aligned.

In July 2008, Zarti arranged a meeting with Kabbaj at the LIA’s Tripoli office. It did not go well. “Mr Zarti was dissatisfied with their attempted explanation, lost his temper, and threw Mr Kabbaj and Mr Pentreath [another Goldman banker] out of the LIA’s offices,” the claim says. Zarti’s mood was hardly improved by the trades moving against them through the financial crisis; they had lost almost all of their value by the end of 2008 and expired worthless during 2011. Someone involved in the LIA at the time tells Euromoney they remember Kabbaj bringing bodyguards to meetings around this time.

The tone of the filing suggests that the case will rest on proving that Goldman deliberately took advantage of the LIA’s lack of experience in order to generate extraordinary profits for itself while exposing the fund to a level of risk it simply did not understand. Goldman’s response, when it comes, will likely argue that everything was properly explained and documented.

And the Goldman litigation might be just the start. Last year Mohsen Derregia, shortly before being removed as CEO and chairman of the LIA, told Euromoney that “We basically identified four names… as potential litigation areas,” and was at the time looking for law firms that would represent the fund in seeking redress. He described them as “the investments that went bust very quickly, so Goldman, SG, Millennium.” Two KPMG reports on the LIA’s financial position in 2010, which made their way into the public eye the following year through the campaign group Global Witness, showed that in the space of a single quarter a strategic equity fund holding through SG fell from a market value of $566.3 million to $286.5 million, and said that the LIA had invested $100 million apiece in three Millennium Global Investments funds, one of which had gone bust completely.

That said, the LIA’s choice of lawyer is interesting. Twigden is an expert in international arbitration, not a cut-throat litigation lawyer, and Enyo Law’s motto is “disputes. No conflicts.” That suggests a willingness to strike an agreement without having to go through a lengthy court process, though what happens next will clearly depend on the banks’ responses.

The LIA today is chaired by AbdulMagid Breish, whose background is with the Arab Banking Corporation, which has long-standing links with the Libyan fund. His representatives were unable to arrange an interview before Euromoney’s deadline. But his mandate is considerable: the LIA has around $60 billion in assets and is ready to embark on a new investment strategy, one which will be vital both for Libyans today, who suffered decades of low income under Gaddafi and are now struggling to find their way in an uncertain post-revolutionary environment, and future generations. One imagines he is not going to let Goldman and the lost billion go without a fight.