Libyan wealth fund sues Goldman Sachs

A Qaddafi-era Libyan sovereign wealth fund is suing Goldman Sachs over US$1 billion of trades that the bank executed and advised on.

The billion-dollar dispute involves an investment agency established during the years when Muammar Qaddafi ran Libya. Joseph Eid / AFP

Libyan Investment Authority, a sovereign wealth fund established in 2006 under Muammar Qaddafi, is suing Goldman Sachs over US$1 billion of trades that the bank executed on the LIA’s behalf in 2008.

The fund yesterday released documents that it has submitted to Britain’s High Court of Justice chancery division as part of its claim.

The LIA claims that Goldman Sachs exercised “undue influence” to persuade the fund to engage in transactions involving the purchase of derivative products, the structure, complexity, and risk involved in which were not fully understood by its management.

The fund said these transactions recorded almost total losses, and it estimates that Goldman Sachs, for its part, earned around $350 million from the trades.

The LIA also claims that Goldman Sachs only issued it with full details of the trade the bank had made on its behalf after the trades had been executed.

“We think the claims are without merit, and will defend them vigorously,” said a spokesman from Goldman Sachs. The bank refused to comment on the specifics of the claim.

The nine trades constituted bets on the stock prices of Citigroup, the French energy firm EDF, Allianz Insurance, ENI, Santander and UniCredit, according to the claim.

The LIA effectively bought call options from Goldman for a sizeable premium. If the value of the relevant stocks exceeded a strike price, the LIA would pocket most of the difference, minus Goldman’s fee.

The first two trades, comprising two tranches of 22 million Citigroup shares, earned Goldman $200m in fees, according to the claim.

The LIA argues that Goldman’s valuations of the trades, made within a short time of their execution, were significantly smaller than the premiums paid by the fund to Goldman.

The fund also argues that it lacked the skills to make sense of Goldman’s investments on its behalf.

The LIA’s legal team at the time of the trades “essentially comprised two individuals … who had little [if any] experience of English banking law”, the claim states.

Neither of the individuals who managed the LIA’s equity or alternative investments team at that time had knowledge of, or experience with, trades of derivatives, and the main requirement of new recruits to these two teams was that they be Libyan citizens who could speak passable English.

The suit alleges that Goldman Sachs was aware both that the LIA was a “nascent sovereign wealth fund with extremely limited in-house legal or financial experience” and that “[Goldman] was in a position to influence transactions which the LIA entered into.”

As evidence of the relationship of “trust” established between the LIA and Goldman Sachs, the fund claims that a Goldman executive referred to members of the LIA team as “friends”, and bought them gifts of aftershave and chocolates from Tripoli.

The LIA was founded in 2006 as an attempt to use the state’s export earnings to invest abroad, following the easing of sanctions on the country.

Goldman Sachs ceased trading with Libya after the reimposition of international sanctions on the country after 2011.