SocGen Drawn Into Libya Saga

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Euromoney, April 1 2014

The Libyan Investment Authority’s efforts to redress the wrongs it feels it suffered from western investment banks during the Gaddafi era have now drawn in Societe Generale.

After two claims in recent weeks that have embarrassed Goldman Sachs – one directly against it by the LIA, another peripherally linked to it by a former employee of Amsterdam-based fund management Palladyne – a new complaint in London’s High Court accuses SocGen and its subsidiaries of paying $58 million in questionable fees to a Panamanian company linked to the Gaddafi regime. It also seeks more than US$1.5 billion in relation to four trades and one restructured trade executed between 2007 and 2009 – a higher sum than the $1 billion that is being claimed from Goldman over disastrous equity derivative transactions.

Just as with the Goldman case, the particulars of claim, which Euromoney has seen, provide a detailed account of the people and institutions involved with the investment of Libya’s oil wealth in the period following the LIA’s foundation, backed by Colonel Gaddafi’s son Saif, in 2006. A central character in the SG matter is a man called Walid Giahmi, a close friend of Saif. Giahmi was also closely linked to Elyes Jebali, who at the time was head of sales for structured investment for North Africa and Saudi Arabia at SocGen. Giahmi is also a defendant in the claim, as is a company called Leinada.

Leinada is one of those names that has been hovering around the story of the LIA for many years, without much clarity about what it was and how it was alleged to have behaved. This claim sheds light on the institution It is a Panama-incorporated company that was owned and controlled by GIahmi until it was dissolved in June 2010. It is alleged that Leinada received payments of at least $58.49 million from SG following a series of trades between 2007 and 2009.

The transactions were: a $300 million investment in EuroMTN notes issued by SGA, a SocGen subsidiary, linked to a Permal fund in November 2007; a $1 billion investment in Euro MTNs issued by SG Option Europe and linked to the share price of SocGen itself, a deal known as SG Optimizer, in March 2008; two other SG-related investments totaling US$800 million in May and October 2008; and a restructure of the SG Optimizer deal. All were sold to the LIA by Jebali. It is alleged that, following each of these, money was paid to Leinada sourced from the premium LIA paid SocGen for the trades.

“In fact,” the complaint says, “neither Leinada nor Mr Giahmi had provided any legitimate services to the SocGen defendants. Rather, the Leinada payments were made [with the intention of] influencing the LIA’s decision to enter into each and every one of the Disputed Trades through the payment of bribes, and/or the making of intimidatory threats, to representatives of the LIA.”

It adds that “Leinada was a Panamanian company, without an established pedigree, and with no discernible expertise in advising on or structuring financial derivative transactions.”

So there are two issues here. Firstly, the trades themselves were disastrous. The structures exposed the LIA to the performance of SG shares at the worst possible time: during their plunge in the financial crisis, and exacerbated by the fraudulent trading of Jerome Kerviel. The LIA describes the consequent losses as “significant” – apparently $1.5 billion – and wants them declared void or unenforceable, not on the grounds that they were bad investments (and in this respect the claim differs from the Goldman one, in which the LIA claims it didn’t understand what was sold to it) but because the payments to Leinada show the whole sale was corrupt and fraudulent.

Second, there is the question of just what SG knew about Leinada. The claim says: “The SocGen Defendants knew or at the very least suspected that the Leinada Payments were made for fraudulent and corrupt purposes… but chose not to make further enquiries.”

Someone who was close to the LIA at the time of the SocGen trades argues there are crucial differences between this and the Goldman claim. For a start, the SocGen trades, unlike the Goldman ones, are not believed to have expired, and indeed some SocGen investments did make money, although clearly the timing of the central SG Optimizer was disastrous. This person believes the fees paid into Leinada were for the introduction made between SG and the LIA; a central issue in court will be to determine whether this constitutes a bribe or not.

That said, in other respects the SocGen situation is worse than the Goldman one, since it appears that significant fees were paid by SocGen to Leinada, whereas Goldman is believed only to have discussed a $50 million payment to Palladyne, not actually paid it.

This, in turn, brings the case into the realm of the US SEC and Department of Justice. While Goldman is the name that has attracted the most attention for being investigated in the US over its behavior in Libya, it is actually not alone: others include the hedge fund Och-Ziff and, it has been reported, SocGen too (though the bank appears to deny this). The focus of the Justice department’s investigation is believed to be the role that fixers or intermediaries have paid – Palladyne in Goldman’s case – and clearly the role of Leinada, and what SG understood it to be, will be central to its investigations if it is looking into the French-owned bank.

SocGen responded to Euromoney: “The LIA’s allegations are unsubstantiated and Societe Generale will defend these proceedings vigorously. Societe Generale also wishes to make it clear that as far as it is aware, it is not under investigation by regulatory or law enforcement authorities in relation to its relationship with the LIA. Finally, Societe Generale wishes to underline the fact that it works occasionally with financial intermediaries in countries where it does not have local teams in place. Such arrangements are systematically disclosed to the bank’s client, and are reviewed in detail by its compliance department.”