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Goldman Sachs Didn’t Trick Libyan Fund, Judge Says Goldman Sachs Didn’t Trick Libyan Fund, Judge Says
(about 9 hours later)
LONDON — Goldman Sachs prevailed on Friday in a legal dispute with Libya’s sovereign wealth fund, with a court finding that it did not abuse its relationship and force the fund into a series of transactions that the fund claimed led to more than $1 billion in losses. LONDON — Libya, in the words of one lawyer, “was like the Wild West” in 2008, when Goldman Sachs bankers arrived in the capital, Tripoli.
The legal battle in a London courtroom turned on whether a Wall Street company known for its prowess and aggressiveness in deal making had taken advantage of an inexperienced sovereign wealth fund. The Libyan Investment Authority was created in 2006 to invest Libya’s oil wealth as the country began to emerge from years of isolation with the lifting of international sanctions against Col. Muammar el-Qaddafi’s regime. With the lifting of sanctions against Col. Muammar el-Qaddafi’s regime, the country was beginning to open to foreign companies after years of isolation. For banks like Goldman, the desert nation had a promising potential client: a newly created sovereign wealth fund backed by billions of dollars of oil wealth.
In arguments this summer, the fund accused Goldman of exerting undue influence over its employees, ultimately abusing its trust and pushing the fund into improper investments. What happened next was fought out in a London courtroom this summer.
Goldman argued that the Libyan fund was far more sophisticated than it had claimed and that it had entered into transactions with dozens of other banks and financial institutions, including Société Générale, which the fund is separately suing. In a trial that revealed tales of prostitutes and lavish spending on hotels and meals, the Libyans accused Goldman of exerting undue influence over its employees and pushing the fund into improper investments that led to more than $1 billion in losses. Goldman argued that the Libyan fund was far more sophisticated than it had claimed and was simply suffering from “buyer’s remorse.”
On Friday, Justice Vivien Rose of the High Court here found that the relationship between Goldman Sachs and the Libyan Investment Authority “did not go beyond the normal cordial and mutually beneficial relationship that grows up between a bank and a client.” On Friday, a London judge came down heavily in Goldman’s favor, sparing the Wall Street firm from paying a huge sum in damages. The ruling also provides some relief after several embarrassing overseas predicaments that have dogged Goldman and its reputation this year.
The judge also found that the fees that Goldman earned on the disputed trades were not excessive “given the nature of the trades and the work that had gone in to winning them.” The judge, Justice Vivien Rose of the High Court here, found that the relationship between Goldman Sachs and the fund, the Libyan Investment Authority, “did not go beyond the normal cordial and mutually beneficial relationship that grows up between a bank and a client.”
The judge also found that the fees that Goldman earned on the disputed trades were not excessive “given the nature of the trades and the work that had gone into winning them.”
Although the disputed trades may be regarded as unsuitable for a sovereign wealth fund, “there were other reasons why the L.I.A. wanted to enter into them and, if they were unsuitable, they were no different from many other investments that the L.I.A. made over the period in that regard,” the judge said in her 120-page ruling.Although the disputed trades may be regarded as unsuitable for a sovereign wealth fund, “there were other reasons why the L.I.A. wanted to enter into them and, if they were unsuitable, they were no different from many other investments that the L.I.A. made over the period in that regard,” the judge said in her 120-page ruling.
After the ruling, the Libyan Investment Authority said it was “disappointed” with the court’s decision.After the ruling, the Libyan Investment Authority said it was “disappointed” with the court’s decision.
“Time will be needed fully to digest the judgment and all options are being considered at this time,” the fund said in a statement. “Time will be needed fully to digest the judgment, and all options are being considered at this time,” the fund said in a statement.
In a statement, Goldman said, “We are pleased to win this case, with a comprehensive judgment in our favor.”In a statement, Goldman said, “We are pleased to win this case, with a comprehensive judgment in our favor.”
The trial, with its tales of prostitutes and lavish spending on hotels and meals, was one of a series of publicized predicaments that have dogged Goldman and its reputation this year. The Libyan Investment Authority argued at trial that it was improperly steered into a series of complicated derivatives transactions by Goldman — when it simply wanted to invest in the stocks of Western companies — and lost $1.2 billion after the financial crisis hit, while Goldman pocketed more than $200 million in fees.
This summer, the investment bank was dragged into the controversy surrounding the collapse of one of Britain’s best known retailers, BHS, over its role as an informal adviser to Philip Green, the chain’s former owner.
The department store chain, which employed 11,000 people, was liquidated after its collapse in April just a year after Mr. Green sold it to a consortium led by Dominic Chappell, a former racecar driver and businessman who had declared bankruptcy multiple times.
Goldman has also faced questions — and a lawsuit — over its relationship with the prime minister of Malaysia, Najib Razak.
United States authorities have accused Mr. Najib and people close to him of embezzling billions of dollars from Malaysia’s state investment fund, 1Malaysia Development Berhad, or 1MDB.
The Justice Department has sought to seize luxury properties believed to have been bought with the embezzled money by people close to Mr. Najib. Some of the money also was believed to have been used to buy artwork by Van Gogh and Monet and to fund the Martin Scorsese film “The Wolf of Wall Street.”
Tim Leissner, a former Goldman banker in the region, served as a close financial adviser to Mr. Najib’s administration and left Goldman this year after questions were raised about improper activity related to 1MDB.
The investment bank was separately fined $36.3 million by the Federal Reserve in August, relating to an episode in 2014 when a junior employee took confidential information from the Federal Reserve Bank of New York.
The employee, who was fired by Goldman, received the information from a New York Fed employee. Both men pleaded guilty to stealing government property, and Goldman paid a separate $50 million fine to New York State regulators.
In the Libyan Investment Authority case, the wealth fund argued that it had been steered into a series of complicated derivatives transactions by Goldman — when it simply wanted to invest in the stocks of Western companies — and lost $1.2 billion after the crisis hit, while Goldman pocketed more than $200 million in fees.
The nine derivatives transactions were tied to the stocks of Citigroup, the French utility EDF and other companies.The nine derivatives transactions were tied to the stocks of Citigroup, the French utility EDF and other companies.
The Libyan fund entered into the transactions in 2007 and in 2008 in the months before the financial crisis and lost its investment as the economic downturn weighed on the stock prices of the companies in the disputed transactions. The court heard testimony from fund officials claiming that there was considerable anger when they discovered how risky the derivatives were. A lawyer for the Libyan Investment Authority told of a fund official’s storming into a board room to scream obscenities at two Goldman bankers and telling them to leave Libya.
As part of its case, the Libyan fund leveled accusations that Youssef Kabbaj, a former Goldman Sachs banker, had tried to win influence by providing prostitutes on a lavish trip to Dubai, in the United Arab Emirates, and an internship to the younger brother of a top executive at the sovereign wealth fund. “I remember thinking that I had experienced the strangest meeting of my career between one of the largest sovereign wealth funds and one of the biggest international banks,” she said.
The bank is separately facing a Securities and Exchange Commission investigation related to the internship. Despite such colorful descriptions, the trial featured few documents — and no testimony — from the major decision makers at the center of the dispute.
“Instead of acting in a way deserving of the trust, confidence and reliance that Goldman Sachs placed in the L.I.A., Goldman Sachs (acting, in particular, but not exclusively, through Mr. Kabbaj) instead abused its relationship with the L.I.A., and abused the influence that it had over the L.I.A. as a result of that relationship,” Philip Edey, a lawyer for the fund, said in his written closing statement. Muhammad Layas, the chairman and chief executive of the Libyan Investment Authority, died in 2015, and Mustafa Zarti, the fund’s former deputy chairman, did not testify in the case.
The judge rejected that argument on Friday, saying that the main motivation between the offer of an internship to Haitem Zarti, the younger brother of Mustafa Zarti, the fund’s former deputy chairman, was that Goldman thought he might be chosen to lead the L.I.A.’s new office in London and it would be beneficial to establish a working relationship at an early stage. Many of the fund’s documents from before October 2013 were either destroyed or lost. One of Colonel Qaddafi’s sons used the building in Tripoli where the sovereign wealth fund has its offices as his base during the revolution that unseated the Libyan leader and led to his death.
Youssef Kabbaj, a former Goldman Sachs banker and an important contact for the wealth fund, also did not testify.
As part of its case, the Libyan fund leveled accusations that Mr. Kabbaj had tried to win influence by providing entertainment and gifts to members of the wealth fund’s staff, including iPods and chocolates.
The fund also claimed that Mr. Kabbaj provided prostitutes during a lavish trip to Dubai, in the United Arab Emirates, and an internship to Haitem Zarti, the younger brother of Mustafa Zarti, the wealth fund’s deputy chairman.
The judge rejected that argument on Friday, saying that the main motivation behind the offer of an internship to Haitem Zarti was that Goldman thought he might be chosen to lead the wealth fund’s new office in London and it would be beneficial to establish a working relationship at an early stage.
“Although the offer of the internship may have contributed to a friendly and productive atmosphere during the negotiation of the April trades, it did not have a material influence on the decision of Mr. Zarti and the L.I.A. to enter into the April trades,” the judge said in her ruling.“Although the offer of the internship may have contributed to a friendly and productive atmosphere during the negotiation of the April trades, it did not have a material influence on the decision of Mr. Zarti and the L.I.A. to enter into the April trades,” the judge said in her ruling.
For its part, Goldman argued that the Libyan fund was well aware of what it was doing and had no right to cancel its trades and recover the money it lost on the transactions. She also noted that there was no evidence that Mustafa Zarti knew the nature or extent of entertainment provided to his brother or that it had any influence on his investing decisions.
Like many investors in early 2008, “the L.I.A. thought that the underlying stocks had reached or were close to the bottom of the market and would recover strongly over the next three years, and that they therefore represented a significant buying opportunity,” Robert Miles, a lawyer for Goldman, said in his written closing statement. “Indeed it is not clear to me that he would have taken a positive view of what went on,” the judge said. “He may well have been less, rather than more, inclined to give Goldman Sachs more business if he had found out about what went on.”
“The L.I.A., like those other investors, did not predict the full extent of the financial crisis,” Mr. Miles added. “Its bullish view in early 2008 turned out to be wrong; but it is no part of the law of undue influence or unconscionable bargain to allow a buyer to escape a bargain it later repents.” The judge noted that other banks seeking to win the wealth fund’s business also purchased meals, provided trading and engaged in other corporate hospitality aimed at the fund’s staff, including providing tickets to sporting events.
“I do not accept that it necessarily shows any special relationship between these parties,” the judge said. “Indeed the perceived need to keep providing expensive entertainment in order to maintain the relationship rather negates the idea that the relationship had grown into one where Goldman Sachs could exercise undue influence.”
The judge also said the Libyan Investment Authority, in its arguments, placed too much weight on what were “effectively sales pitches” by the bank to the fund.
The judge also questioned the recollections of several junior members of the wealth fund’s staff in their testimony, saying she believed that they were “mistaken.”
“I also consider that the L.I.A. witnesses’ written and oral evidence shows that they now view the material events from a perspective that may have caused them to exaggerate the closeness of their relationship with Goldman Sachs and downplay the contacts they had with other banks with whom the L.I.A. is not in dispute,” the judge said.
The trial occurred during a somewhat challenging summer for Goldman. Questions have been raised — and the bank has been sued — about its relationship with the prime minister of Malaysia, Najib Razak.
United States authorities have accused Mr. Najib and people close to him of embezzling billions of dollars from Malaysia’s state investment fund, 1Malaysia Development Berhad, or 1MDB.
In Britain, Goldman was dragged into the controversy surrounding the collapse of one of country’s best-known retailers, BHS, over its role as an informal adviser to Philip Green, the chain’s former owner.