Goldman defence lifts veil on LIA relationship
Taxis pass 55 Baker Street, the building housing the offices of Brevan Howard Asset Management LP, in London, U.K., on Friday, April 15, 2011. Brevan Howard Asset Management LP hired three Goldman Sachs Group Inc. employees to trade for its biggest hedge fund, according to a person briefed on the matter. Photographer: Chris Ratcliffe/Bloomberg©Bloomberg
It is a fiercely contested $1bn lawsuit over disputed derivatives transactions and has pitted Libya’s Investment Authority against investment bank Goldman Sachs.
But behind the dry subject matter, the suit has thrown up colourful allegations that the bank offered training programmes, gifts, overseas trips and even a much coveted internship as it sought to win business from the sovereign wealth fund set up to invest the country’s vast oil wealth.
In its lawsuit filed earlier this year, the LIA had alleged that unsophisticated LIA staff were given aftershave and chocolate and were offered training programmes by Goldman, which provided and paid for extensive hospitality to LIA employees including a trip to Morocco.
The LIA alleges in its claim form that Youssef Kabbaj, the bank’s former head of north Africa, took LIA employees to Morocco and paid for extensive expenses for them on his Goldman credit card.
But Goldman Sachs recently filed its defence and paints a picture of key LIA management as being experienced and “perfectly capable” of understanding the nature of nine complex trades which are now the subject of a dispute, and the bank alleges that the LIA “was not, as it now contends, financially illiterate”.
Goldman’s defence documents provide a fascinating glimpse into a sovereign wealth fund that was advised by City blue bloods and courted by some of the world’s biggest financial institutions.
On the LIA’s advisory board sat Lord Jacob Rothschild, scion of the famous banking dynasty, and Sir Howard Davies, the former regulator who had to resign as director of the London School of Economics in 2011 when an independent report found that £1.5m in donations the university accepted may have been the proceeds of bribes paid to the Gaddafi family by companies seeking “business favours” from the regime.
A particularly detailed paragraph in Goldman’s documents refers to a 2007 email sent by “Sofia Wellesley of the LIA”, which describes LIA visitors who were staying at the Corinthia hotel that year. Fifteen western financial institutions are named, including Deutsche Bank, the Carlyle Group, JPMorgan and UBS.
Ms Wellesley, who recently married pop star James Blunt, is the granddaughter of the Duke of Wellington and went on to work for Cherie Blair’s Omnia Partners.
Goldman admits in its defence document filed at the High Court that “certain LIA employees visited Morocco with Mr Kabbaj” and on a number of occasions the LIA “confirmed in writing that it was aware of, and consented to, the defendant providing accommodation and entertainment”. Mr Kabbaj left Goldman Sachs in 2009 and joined hedge fund GLG Partners.
The investment bank claims that it “absorbed certain expenses in connection with training programmes, including any LIA employees attending such training programmes”, and that Mr Kabbaj “occasionally bought LIA employees small gifts, but it is denied this happened frequently, that it would be unusual in any commercial client relationship context, or that it is of any significance”.
Goldman also admits that there were discussions over whether it could accommodate an internship for Haitem Zarti, the brother of Mustafa Mohamed Zarti who was the LIA’s deputy executive director. Mr Zarti was appointed to the LIA at the suggestion of Colonel Gaddafi’s son Saif Al Islam Gaddafi.
Goldman claims discussions over his internship lasted a number of months and “he was not offered the position until after the last disputed trade was concluded”. The bank claims he started work in June 2008 and remained for 10 months and “the internship was viewed by the defendant as part of the training programmes it offered to the LIA”.
Top graduates from the world’s most prestigious universities compete fiercely each year for much-prized internships at Goldman Sachs.
The bank also claims in its defence that LIA employees including Mr Zarti were in communication with Mr Kabbaji in 2008 who provided informal feedback to Mr Zarti on the performance of LIA employees. LIA also sent a number of employees to attend Goldman training programmes on a range of topics, including in relation to derivatives and options, with such training specifically at the request of Mr Zarti.
However, Goldman Sachs stresses in its defence document that the relationship between LIA and itself did not go beyond “an arm’s-length one between banker and client” and rejects any claims by LIA that the relationship grew into one of trust and confidence as “vague and ambiguous”.
The lawsuit centres around nine disputed trades made after it was taken on as a client of Goldman Sachs after 2007.
In its claim form, the LIA alleges that it entered into a number of equity derivative transactions collectively costing $1bn which the investment fund alleges were “complex” and “carried a high degree of risk”, and also alleges the trades were “unusually large transactions” and “were poorly documented by Goldman”.
Goldman Sachs in its defence papers claims the transactions were “relatively straightforward and easy to understand” and the LIA “stood to make very substantial returns if the price of the shares in the companies which the LIA had selected rose sufficiently”.
It adds that in the majority of the disputed shares the potential return to the LIA was “unlimited” and says the “risks were clearly explained” in various presentations given to the LIA. It denies that the disputed trades were “poorly documented” or that they were “unusually large transactions” and claims that “all the disputed trades were sufficiently described to the LIA”.
It also denies that Goldman “encouraged” the LIA to enter into the disputed trades and that the LIA “was in any position of vulnerability or that the defendant took advantage of any such position”, or “took advantage of the LIA’s position of vulnerability to make substantial profits”.
Goldman also claims that whilst the LIA ultimately made losses on the disputed trades those losses “were the result of adverse market movement in the stocks which the LIA selected”.
Had the market price of the stocks in question increased, the amount by which the LIA could have profited from the transactions was “dependent on the extent to which the stocks increased in price, and was potentially unlimited”, the bank alleges.
Goldman has filed a counter claim against LIA claiming damages if it is established that representations made by the wealth fund are false.