LONDON] Goldman Sachs Group Inc used Moroccan vacations and hired prostitutes to woo unsophisticated officials at the Libyan Investment Authority, influencing executives to make risky trades that led to a US$1.2 billion loss, lawyers for the US$60 billion fund said at the start of a widely anticipated trial in London.
One Goldman partner said the LIA was "very unsophisticated" in a 2008 e-mail disclosed for the trial that started Monday. Another note from a bank vice-president congratulated a co-worker for "a pitch on structured leveraged loans to someone who lives in the middle of the desert with his camels", according to documents. The attitudes are symptomatic of the bank's dealings with the fund, Roger Masefield, the LIA's lawyer, said in court.
Goldman is accused of exploiting its close relationship with LIA employees to sell inappropriately risky investments to the investment fund. That relationship broke down in 2008 when derivatives linked to bank stocks turned against the LIA, leading to the loss. The country has been ripped apart by the revolution that overthrew Muammar Qaddafi.
The trades gave Goldman a gross profit of US$367.7 million, according to an expert witness for the LIA. In response, Goldman said the actual profits are irrelevant because they depend on market movements over a three-year period, and its expert suggests that US$130 million of anticipated profits is "within a reasonable range".
The LIA's claim is "both unusual and ambitious", Goldman's lawyers said in court documents. The fund chose the underlying stocks with its own research conducted over a matter of months, they said.
"The credit crisis and its impact on global markets turned out to be far more prolonged than the LIA and the great majority of market participants had anticipated," the bank's lawyers said.
"The LIA was the victim of an unforeseen financial depression, not of any wrongdoing by" Goldman Sachs.
A Goldman employee "embedded" himself within the LIA early in the relationship and became "exceptionally close" to the fund. The banker, Youssef Kabbaj, organised "training" for LIA staff in London, paying for expensive entertainment and "stylish hotels", the fund said in the documents.
Mr Kabbaj claimed £22,000 (US$42,300) in expenses for one trip, according to filings.
The former Goldman employee also took members of the fund on holiday to Morocco where he "put them up and entertained them". Goldman also gave a man a "highly coveted" internship at the bank because he was the brother of a key decision maker at the LIA. Mr Kabbaj is alleged by the fund to have hired prostitutes on a trip to Dubai with the intern.
"Goldman Sachs or myself never paid for any LIA employee any improper entertainment," Mr Kabbaj said in an e-mail. "At the time of the event, I was one out of 5,000 vice-presidents of the firm. All my expenses relating to LIA have been reimbursed and signed off by at least two Goldman Sachs partners. I am under a strong confidentiality agreement but I expect Goldman Sachs to correct the facts and protect my reputation."
The "provision of training and corporate hospitality" are "unremarkable features of relationships between commercial counterparties", Goldman's lawyers said in court documents.
The internship started "long after" the last of the disputed trades and the LIA had sought similar job experience with at least five other firms, the bank said in documents.
Mr Kabbaj "undoubtedly worked hard to understand and meet the LIA's needs, to cultivate the LIA as a client and generally make himself useful", lawyers for the bank said. "However, there was nothing untoward or unusual about that."
"This case is therefore one of abuse of trust, undue influence and unconscionable bargain," Mr Masefield said in court documents. "It most emphatically is not, therefore, as Goldman Sachs would have it, one of little more than 'buyer's remorse'; of a counterparty who, like many others, lost money as a result of the market crash in 2008 and now wants to rewind the clock."
At the start of 2008, the "fledgling" fund lacked and sophistication in financial services and in particular its employees had no experience of equity derivatives, the fund said.
"When contrasted with Goldman Sachs, the LIA was at an extraordinary disadvantage and extremely vulnerable."
Goldman advised LIA between January and April 2008 on nine over-the-counter equity derivatives contracts - an area which was "entirely new territory" for the fund, lawyers said. The fund's team "didn't properly understand these huge transactions at the most fundamental level", lawyers for the fund said.
A dispute between rival factions over who now controls the LIA led a UK judge to appoint independent "receivers" to manage the litigation. The LIA is also suing Societe Generale SA over investment losses.
The case is: The Libyan Investment Authority v Goldman Sachs International, case no HC-2014-000197, High Court of Justice, Chancery Division.