(Repeats Sunday story, text unchanged)
* Judge found in favour of Wall Street giant, LIA may appeal
* Stormy meeting "stage managed" for maximum impact - judge
* LIA exaggerated the extent to which its staff were naïve
By Claire Milhench
LONDON, Oct 16 The outcome of a
two-and-a-half-year legal battle between Goldman Sachs and
Libya's $67 billion sovereign fund is a triumph for the Wall
Street giant, which was vindicated despite embarrassing
revelations about how some of its bankers conducted business.
The London High Court found in favour of Goldman Sachs on
Friday, with Judge Vivien Rose dismissing the fund's arguments,
made over the course of a bruising seven-week trial.
While the Libyan Investment Authority (LIA) is likely to
appeal, according to a source with knowledge of the matter, the
lurid details spilling out of the case mesmerised observers
because of the profile of the parties involved and the glimpse
they offered into the secretive world of multi-billion-dollar
sovereign wealth fund (SWF) investments.
The dispute centred on the $1.2 billion the LIA paid to
Goldman to invest in nine equity derivatives trades, all of
which ultimately turned out to be worthless.
In the course of the trial, observers were treated to tales
of lavish hospitality involving football matches, nightclubs,
London West End musicals, and in one instance prostitutes.
At stake was access to some of the $35 billion that the LIA
had available to invest as Libya emerged from political
isolation. Not surprisingly, it quickly became a magnet for
foreign banks and fund managers.
One witness appearing for the fund, Ali Baruni, who was
acting as an adviser for the LIA at the time, described a July
2007 meeting with Goldman Sachs at which he was "inundated" by
the potential investments presented to him.
But Goldman Sachs was not alone in courting the fund. In the
first two years of its life, the LIA invested heavily in
alternatives such as private equity, hedge funds and mezzanine
debt, including structured derivatives, according to a report
prepared by LIA's expert witness on suitability.
Judge Rose noted this in her ruling, saying that although
the nine disputed trades may have been regarded as unsuitable
for a SWF, they were no different in that regard from many other
investments that the LIA made over the period.
She said LIA managers had been tasked with generating a much
higher return than they could hope to make on plain vanilla
trades - offering a potential explanation for their choice of
Goldman had also asserted in its court filings that the LIA
was under political and internal pressure to make large
investments in order to generate returns quickly. It argued that
"an unforeseen financial depression" caused the losses, not any
wrongdoing by the bank, and it was simply a case of "buyer's
BONE OF CONTENTION
A key bone of contention at trial was whether the fund's
employees actually understood what they were investing in.
Although lawyers for the LIA argued that Goldman Sachs had taken
advantage of the fund's lack of sophistication, Judge Rose said
the LIA had greatly exaggerated the naivety of its staff.
The LIA made much of the fact that Goldman had wined and
dined its employees, plying them with gifts such as iPods, as
well as offering a prestigious internship to Haitem Zarti, the
younger brother of Mustafa Zarti, a key decision-maker at the
The provision of such highly sought-after internships has
come under scrutiny by U.S. regulators since 2008 as part of
broader moves to shine a light on how banks go about securing
business in less transparent emerging markets.
But Judge Rose said she did not think the internship had a
material influence on Mustafa Zarti's decision to enter into
trades with Goldman Sachs. She also ruled that the main
motivation behind the offer was the bank's belief Haitem might
be chosen to lead the LIA's new office in London.
Even the salacious details relating to how former Goldman
Sachs sales executive Youssef Kabbaj went about building a close
relationship with the LIA were given short shrift by the judge.
The LIA had alleged that Kabbaj flew Haitem Zarti from
Morocco to Dubai at Goldman Sachs' expense, paid for
accommodation at a five-star hotel and arranged for two
prostitutes to spend the evening with them at a cost of $600.
Kabbaj, who did not appear as a witness, and remains bound
by a strict confidentiality agreement with Goldman, denied
paying for "improper entertainment".
Judge Rose said that whilst the extent of the entertainment
offered by Kabbaj to Haitem was "inappropriate, and in flagrant
breach of Goldman Sachs' policy on entertaining clients", it was
GOING THE EXTRA MILE
The LIA argued that the trades were secured through "undue
influence" and "unconscionable bargaining". This meant the LIA
had to show it had only entered into the trades because it was
shorn of the ability to make free and independent decisions, and
that the terms of the transactions were "overreaching and
To this end, lawyers argued that Goldman had "crossed the
line" and abused its position as a trusted adviser to the fund.
Goldman contended that it was always clear the two were
dealing with each other as commercial counterparties, and that
it had maintained an arm's length relationship with its client.
Once again, Judge Rose found in favour of Goldman: "The fact
that Goldman Sachs were prepared to go an extra mile when
competing for this business by installing Mr Kabbaj in Tripoli
to help the LIA does not mean that they were in a different
relationship from the relationship that existed between the LIA
and its other counterparties," she said.
The relationship came to a head at a stormy meeting at the
LIA's offices on July 23, 2008, in which Mustafa Zarti, the
fund's then deputy chief, swore at Goldman's representatives and
threatened to "come after their families", a witness, Catherine
McDougall, told the court.
According to a witness statement by McDougall, a former
Allen & Overy lawyer who was seconded to the LIA in July 2008:
"His curses were along the lines of 'fuck your mother, fuck you
and get out of my country'."
Zarti's explosive rage was corroborated by Kabbaj's report
of the same meeting, as related in a letter seen by the court.
Kabbaj said Zarti had called Goldman Sachs "a bank of
Mafiosi", that Goldman had lied to him, and that when someone
behaved like a bandit with him, he could "become himself a
But Judge Rose said there was something "stage managed"
about this stormy meeting. "The meeting seems to have been
conducted so as to have maximum impact by turning on a dime from
'chit chat' to explosive and frightening abuse," she said.
Goldman described Friday's ruling as "a comprehensive
judgment in our favour", while the LIA expressed its
disappointment and said all options were being considered.
The fund is potentially an important source of finance for
rebuilding Libya after years of war and chaos, but some of its
assets have been under U.N. sanctions since the overthrow of
ruler Muammar Gaddafi in 2011. A power struggle over the fund is
The LIA is also pursuing French investment bank Societe
Generale for some $2.1 billion in relation to trades
entered into between 2007 and 2009. SocGen is contesting the
case, which is only expected to come to trial in April 2017.
(Reporting by Claire Milhench; Editing by Mark Trevelyan)