Libyan Fund Alleges Goldman Made $222 Million From Disputed Trades

Libya's sovereign-wealth fund alleged Goldman Sachs Group Inc. abused a relationship of trust to earn about $222 million from it through several complex trades arranged in 2008, according to documents for a long-awaited trial that started in London on Monday.

The $67 billion Libyan Investment Authority, or LIA, which is suing the New York-based bank in the High Court in London, wants Goldman Sachs to repay $1.2 billion to cover its losses from the equity-derivatives trades.

Goldman Sachs denies wrongdoing and disputes the amount of profit it made.

The Libyan fund alleges in court documents that Goldman Sachs executives exerted "undue influence" over officials at the new sovereign-wealth fund. The fund was created in 2006 to manage income from Libya's oil fields after the country was removed from the U.S. government's list of state sponsors of terrorism.

"Libya had been an international pariah for decades, cut off from much of the rest of the world and from international financial markets," lawyers for the fund wrote in court documents. "In its isolation, Libya's financial system was under-developed and unsophisticated, as were the individuals who worked within it."

Between January and April 2008, the Libyan fund entered into nine financial derivative transactions, the disputed trades, with Goldman Sachs. Those trades expired worthless in 2011.

"The claims are without merit and we will continue to defend them vigorously," a representative from Goldman Sachs said.

Documents show Goldman Sachs executives saying that the Libyan fund had little experience in finance. "They are very unsophisticated—and anyone could "rape" them," one executive wrote in 2008.

In another internal email exchange, a Goldman Sachs executive wrote to a colleague that "you just delivered a pitch on structured leveraged loans to someone who lives in the middle of the desert with his camels."

Goldman has declined to comment on the email exchanges, which were revealed in the court documents.

Libyan fund officials first met executives from the U.S. bank in November 2006, court documents presented by the Libyan fund show. The fund presented an investment opportunity that was "one of the largest I've ever seen," a Goldman Sachs executive wrote. "We are all over them."

Goldman Sachs banker Youssef Kabbaj "was quickly embedded within the nascent institution" and became close to the Libyan management team, lawyers for the Libyan fund wrote. Within Goldman, he was encouraged to "stay a lot" in Tripoli, the lawyers wrote, citing Goldman correspondence. Mr. Kabbaj is no longer at Goldman Sachs.

"It's important you stay super close to the client on a daily basis. Teach them, train them, dine them," one executive wrote to Mr. Kabbaj, the documents show. Another told him that, "This is a once in a career opportunity."

In 2008, Mr. Kabbaj helped arrange an internship at the bank for the younger brother of Mustafa Zarti, an executive at the Libyan fund. Mr. Kabbaj texted Mustafa Zarti on April 17, 2008, with the "good news" that the internship had been arranged. In the following days, Mr. Zarti committed to the largest four disputed trades with Goldman Sachs, involving payments of more than $828 million.

During a visit to Dubai in early 2008 with Mr. Zarti's younger brother, Mr. Kabbaj paid $600 for "a pair of prostitutes to entertain them both," according to the documents submitted by the Libyans.

Mr. Kabbaj said in an interview that he didn't pay or arrange for prostitutes for Mr. Zarti's younger brother or any official of the Libyan fund. He said that Goldman Sachs partners signed off on all his expenses for the Libyan fund. Mr. Kabbaj declined to comment on whether he paid for a prostitute for himself.

The Libyan fund describes the internship that Goldman Sachs offered as "bespoke and highly-coveted." The internship started on June 23, 2008, and was initially due to last three months. It was extended a number of times.

Goldman Sachs says the internship isn't important. "We do not believe the internship influenced in any way the LIA's decision to enter into the trades," the representative for the bank said.

The Securities and Exchange Commission has been—and may still be— scrutinizing the internship, lawyers for the Libyan fund said. A representative for the SEC declined to comment.

Banking internships awarded to people connected to sovereign-wealth funds have been investigated before. Last year, Bank of New York Mellon Corp. agreed to pay $14.8 million to settle allegations that it violated U.S. antibribery laws when it gave internships to family members of officials affiliated with a Middle Eastern sovereign-wealth fund. An SEC investigation found the family members didn't meet the "rigorous criteria" to join the bank's internship program, yet they were hired, to help the bank keep the sovereign-wealth fund's business. The bank neither admitted nor denied the SEC's findings.

The Libyan fund's assets were valued at $67 billion in 2012. Most of the assets are currently frozen by United Nations and European Union sanctions because of continuing conflict in Libya.

The fund has been the subject of a power struggle between two rival chairmen loyal to competing Libyan governments that emerged in the civil war following the death of Moammar Gadhafi in 2011. Both chairmen support the lawsuit against Goldman Sachs.

Write to Simon Clark at [e-mail]

(END) Dow Jones Newswires

June 13, 2016 17:25 ET (21:25 GMT)

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