Libyan Fund Accuses Goldman Sachs of Financial Exploitation

In the High Court in London, the trial in the lawsuit brought by the Libyan Investment Authority (LIA) against Goldman Sachs (GS) is under way. The sovereign wealth fund claims that in 2008 the Wall Street bank misled it about a number of derivatives transactions, causing it to lose $1.2B when the contracts matured five years ago. The transactions are tied to Citigroup (C) stock and other companies’ stmck.

Court filings state that LIA had wanted to buy stakes in global companies that it could potentially partner up with in the future for development. The sovereign wealth fund was set up in 2006 to manage money from the country’s oil fields after Libya was taken off the U.S. government’s list of states that were considered terrorist sponsors.

Goldman made over $200M on the transactions. Meantime, the Libyan fund lost its investment when the economic crisis caused stock prices to drop.

Goldman disputes the allegations made by the Libyan Investment Authority, which claims that it was an unsophisticated investor that the firm took advantage of, persuading it to invest in transactions that it didn’t want or understand. In court, a lawyer for the sovereign wealth fund accused Goldman of using gifts, trips to Morocco, London, and Dubai, training programs, and an internship for the brother of the deputy executive officer of the fund to get the fund to invest.

Meantime, Goldman is contending that the Libyan Investment Authority was sophisticated enough of an investor to understand what the investments were and what it was getting involved in. It denies wrongdoing. However, However, emails show firm executives acknowledging the fund’s lack of sophistication as an investor.

Also at issue are the actions of ex-Goldman Sachs banker Youssef Kabbaj who purportedly dined fund staff members during training trips to the U.K. The trips included stylish hotel accommodations, as well costly meals at some of the best restaurants in London.

Kabbaj purportedly spent $31,000 for just one of these trips. He also is said to have bought presents for fund staffers and treated them to a Moroccan vacation.

The Libyan fund’s legal team is accusing Kabbaj of “ghost writing” documents for the fund’s staff to help persuade its board to invest and on other occasions making presentations for Goldman Sachs to the fund. Kabbaj also is accused of flying Haitem Zarti, the younger sibling of the fund’s deputy executive editor, to Dubai, giving him 5-star accommodations, and arranging for him to be entertained by prostitutes. Zarti is the one who was given an internship.

The awarding of banking internships to individuals with ties to sovereign wealth funds has come under scrutiny before. In 2015, Bank of New York Mellon Corp. (BK) consented to pay $14.8M to resolve allegations that it gave internships to relatives of officials with connections with such a fund in the Middle East. The SEC accused the bank of violating U.S. antibribery laws in an attempt to keep the fund’s business. The bank settled without denying or admitting to the findings.

In an interview with the Wall Street Journal, Kabbaj said he never arranged for prostitutes for Zarti or any official from the fund. He also said that the Goldman’s partners approved the expenses he incurred for the fund.

Libyan Fund Claims Goldman Sachs Exploited Its Financial Naïveté, The New York Times, June 13, 2016

Libya’s Sovereign Fund Seeks Investment Probe, The Wall Street Journal, September 23, 2011

BNY Mellon to pay $14.8 million to settle intern bribery probe, Reuters, August 18, 2016