Libya ruling to cast fresh light on Goldman

Goldman Sachs will find out today whether it has defeated a $1bn lawsuit brought against it by the Libyan Investment Authority in a case that is set to once again shine a spotlight on the US bank’s activities.

The ruling from the UK’s High Court brings to a close a trial in which it was claimed Goldman exploited the LIA’s limited financial experience while its bankers sought to win lucrative business from the sovereign wealth fund by offering its officials lavish corporate hospitality — and in one case procuring prostitutes.

The case revolved around LIA’s claims that it was a fledgling wealth fund that was enticed by Goldman into risky derivative trades from which the bank made $200m in profits but the LIA lost its entire $1.2bn investment. The bank denied the allegation and claimed that the LIA was suffering from a classic case of “buyer’s remorse”.

The wealth fund’s case focused on the activities of Youssef Kabbaj, a Goldman banker and would-be rainmaker, in his attempts to cement Goldman’s relationship with the wealth fund, which was set up by Muammer Gaddafi, the former Libyan dictator, with $65bn of assets. The LIA claimed that Mr Kabbaj procured prostitutes for officials and that Goldman paid for staff from the LIA to stay in five-star London hotels as well as offering them tickets to Champions League football matches and musical productions of Chicago and Lord of the Rings.

The LIA claimed that Mr Kabbaj “crossed the line” in deliberately blurring “professional and personal relationships” in locations ranging from Tripoli to Dubai. It heard allegations that Haitem Zarti, the brother of an LIA executive who had previously run nothing more substantial than a video club, was flown business class to Dubai and put up at the five-star Ritz-Carlton hotel to attend a Goldman conference. He was later offered a prestigious 11-month internship at Goldman in the bank’s hope that he would one day become an important LIA official, the court heard.

The LIA alleged that Mr Kabbaj “procured” the services of two prostitutes for himself and Mr Zarti while in Dubai. Text messages were exchanged between Mr Kabbaj and a prostitute called Michella where the banker haggled over her $600 fee, the court heard. Mr Kabbaj racked up a £22,000 expenses bill for hotels and entertaining for one LIA trip and bought iPods, chocolates, medicines, books and other gifts for the LIA, in contravention of Goldman policies.

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The LIA claimed that Goldman had taken advantage of its lack of sophistication, with one witness describing Goldman bankers descending “like a swarm” to win LIA business. At the time, the LIA claimed that its management team were political appointees and its investment team of graduates were recruited simply because they could speak English. They were vulnerable to overtures by Goldman, which virtually became an “in-house” bank, the LIA claimed.

The High Court also heard of “deeply offensive” emails from Driss Ben Brahim, a Goldman banker who called the LIA “very unsophisticated”, suggesting anyone could “rape” them. Another Goldman employee allegedly described the bank’s presentation to the LIA team as being a pitch “to someone who lives in the middle of the desert with his camels”.

The relationship between the US investment bank and the sovereign wealth fund ended in acrimony in 2008. Mustafa Zarti, the LIA executive director, “really went berserk” in a meeting when he discovered the nature of the lossmaking trades. He was said to have threatened Mr Kabbaj and another Goldman banker who feared for his life and asked to be taken out of the country by a foreign intelligence agency, the trial heard.

Goldman denied any wrongdoing, claiming that the LIA were sophisticated investors and the lawsuit was a case of “buyer’s remorse” because the trades “turned out badly” because of the 2008 financial crisis.

$1.2bn

Amount the LIA lost on the trades in question, from which Goldman made $200m

Goldman claimed the case was “both unusual and ambitious” and added that the lack of contemporaneous documents and key witnesses presented a “formidable barrier” to the LIA’s arguments. The bank said the LIA had “an evidential black hole” and had “destroyed or lost relevant documents”.

It said the wealth fund did not bring legal action until 2014 well after the trades had matured and the LIA knew they were lossmaking. The LIA had also entered into complex and large transactions with banks and other financial institutions other than Goldman.

Whilst the LIA relied on colour and details to argue its case during the trial, Goldman’s presentation was more focused on picking apart the LIA’s unusual legal arguments that it had entered into an “unconscionable bargain “ and faced “undue influence” — a claim that required the LIA to establish there was an unusually close relationship between the bank and the LIA.

Mrs Justice Rose, ruling on Friday, is likely to have been complicated by how few figures central to the events on either side have testified. The High Court did not hear from Mr Kabbaj or Mr Brahim, who have now left Goldman, nor from key LIA figures at the time, including Mustafa Zarti.

Her ruling and any comments on Goldman’s approach to business with the LIA will be closely scrutinised at what is a delicate time for the bank. It is facing criticism for its work for 1MDB, the Malaysian government’s scandal-stricken investment fund, and has been tarnished by its involvement in BHS, the UK retail chain that collapsed with 11,000 job losses.

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