Catching Up on Libya’s Case Against Goldman & SocGen

Note to readers: as a new feature to the blog, student researchers at the Moritz College of Law will periodically write and comment on important cases and legislation involving public investors.  This first piece comes from Sheri Kindel, research assistant, rising 3L, and incoming president of the Business Law Society.

 

The Libyan Investment Authority, a $60bn fund is suing Goldman Sachs and Societe Generale in the high court in London for profiting on the LIA’s investment losses. Goldman Sachs Group Inc., according to the Libyan Investment Authority, exploited the sovereign wealth fund’s inexperience in 2008 when it sold the LIA risky derivatives and caused investment losses of more than $1bn. LIA claims its employees were lavished with wild nights abroad, including heavy drinking and girls in Morocco, to induce trades they did not fully understand. Goldman argues that the trained staff knew the risks of the trade as they are “highly experienced banking professionals.”

The fund argues that Goldman made approximately $350m in upfront profits, which is substantial and unusually high for deals involving the LIA. When Goldman refused to admit or deny the profits, Judge Vivian Rose in the high court’s chancery division ordered Goldman to disclose how much it made on the deal and provide documentation proving the profits and how they were calculated. Goldman also effectively lost 98% of the LIA’s investment in option contracts involving multiple currencies and six stocks.

In 2010, Goldman offered Libya various investment and stock options in an attempt to fix the relationship and make up for these losses. Additional offers of preferred shares, unsecured debt, investments in credit default swaps, and a special purpose vehicle in the Cayman Islands were also proposed in meetings, but no deal was ever formed.

The LIA also claims that Societe Generale, France’s second largest bank, lost half of the $1.8bn entrusted to it by the fund when it smoothed over trades in 2007-2009. According to the LIA, SocGen paid approximately $58m to a Panama-based company named Leinada to secure investments. The payments to the company, owned by Walid Giahmi, a friend of Muammar Qaddafi’s son, were claimed to be for advisory services, but no advisory fees were reported. The LIA claims the payments were bribes to influence the LIA’s decision to enter into certain trades. However, SocGen called the lawsuit “groundless.”

Under Libyan ruler Muammar Qadaffi, the LIA was established to invest Libya’s oil wealth in 2006 and grew to be Africa’s second- largest sovereign wealth fund in 2011. In the same year, civil war erupted in Libya and Qadaffi refused to step down. The U.S. government seized approximately $37m in Libyan funds and the Department of the Treasury blocked Qadaffi’s holdings in the United States. Swiss and British governments also froze Qadaffi’s assets, loosening his control in Libya until he was deposed and killed in 2011.

Enyo Law, a London-based firm acting on behalf of the LIA in London court, recently walked away from the Goldman case, causing a major setback and questions as to whether the case will continue. No new lawyers have yet been appointed, but the Libyan fund hopes to set a trial for summer 2016. The LIA claims it will pursue the litigations against Goldman Sachs and is finalizing arrangements for a new firm to take on the case. However, Goldman continues to dismiss the claim as a “paradigm of buyer’s remorse” brought about by the global financial crisis in 2008.

The LIA seeks to have the Societe Generale trades voided to recover the money paid to Leinada and to be awarded damages for the alleged fraud. SocGen underwent a thorough investigation by Swiss, British, and American regulators, but the investigations were closed when no corruption was found. The SEC is currently investigating SocGen.

Meanwhile, the LIA has hired law firms and advisers to handle an internal investigation into corruption. It will also undergo a restructuring plan in which $11bn of its assets will be managed by external companies. In the U.S., based on an SEC investigation of payments to sovereign wealth funds, the U.S. Justice Department is investigating financial firms, including Goldman Sachs, which sought business from LIA to ensure proper payments were made to secure investments.

If these cases go further, it will be interesting to see how the court responds. A decision in favor of LIA might cause other companies to bring suit of lost investments or the legislature to impose additional regulation to ensure acceptance of risks or knowledge of trades. Alternatively, payment of LIA’s investments could significantly impact the operations of Goldman Sachs and Societe Generale in the future.

The cases are: The Libyan Investment Authority v. Goldman Sachs International, case no. 14-310, High Court of Justice, Chancery Division and The Libyan Investment Authority v Societe Generale SA, High Court of Justice, Queen’s Bench Division Commercial Court, 14-260.

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