Libyan fund accuses Goldman of illegal gains of $350 mn

31 Jan 2014

The Libyan Investment Authority, the sovereign-wealth fund, the second-largest in Africa has accused Goldman Sachs Group Inc of making about $350 million on ''worthless'' derivatives trades after exerting ''undue influence'' on its managers, Bloomberg reported.

LIA took Goldman Sachs to court on 21 January in London over investments of about $1 billion made in 2008. The fund, which submitted documents released today, said that its executives, who were given gifts of chocolate and after-shave by the bank, never understood the transactions.

''The unique circumstances allowed Goldman Sachs to take advantage of the LIA's extremely limited financial and legal experience to deliberately exploit its position of influence and to take advantage in a way that generated colossal losses for the LIA but substantial profits for Goldman Sachs,'' LIA chairman AbdulMagid Breish said in an e-mailed statement.

Under Libya's leader Muammar Qaddafi, who was deposed and killed in a coup in 2011, the fund had built up assets of about $60 billion. The fund took a hit of about $1.75 billion betting on structured products in 2007 and 2008, of which around $900 million was with Goldman Sachs, its former chairman, Mohsen Derregia, said in June 2012.

The fund submitted in the court filing that staff at the New York-based bank offered to train LIA employees at its London offices, took them on a trip to Morocco and bought them gifts to build a relationship.

The fund said Goldman Sachs Group Inc exerted "undue influence" over the fund's managers, saddling it with losing trades.

The resulting series of 2008 equity-derivatives trades handled by Goldman, and amounting to over $1 billion, expired worthless in 2011, the Libyan Investment Authority's lawsuit to recover the losses, alleges.

The Wall Street Journal quoted a Goldman spokeswoman as saying the company thought the claims were without merit, and it would defend them vigorously.

The core complaint of the suit--that the lender sought to take advantage of their client's lack of sophistication is one the Wall Street firm has had to confront in several legal and regulatory actions since the financial crisis.

In response to the actions, Goldman formed a business-standards committee of executives charged with shoring up the firm's internal controls and improving its relationships with clients.

The recommended steps, unveiled in 2011, included strengthening its processes for evaluating whether certain complex products were suitable for clients, and a clearer definition of business relationships with those clients.