London - A British court ruled on Friday in favour of Goldman Sachs in a $1.2 billion dispute with Libya’s $67 billion sovereign wealth fund over derivatives trades, dismissing claims that the investment bank had abused the fund’s trust. The Libyan Investment Authority (LIA) was attempting to claw back the $1.2 billion from the Wall Street giant in relation to nine equity derivatives investments carried out in 2008, which turned out to be worthless.
In the trial, which ran for seven weeks in London’s High Court in the summer, the LIA argued that Goldman exercised “undue influence” and “unconscionable bargaining” to get it to enter the trades, asserting that the terms of the transactions were “overreaching and oppressive”, as defined by English law. The LIA claimed it was too unsophisticated to understand what it was buying, and that Goldman had abused its position as a trusted adviser. The trades were made two years after the LIA was set up to invest the country’s oil wealth. But in her 120-page judgment, seen by Reuters, Judge Vivien Rose dismissed these claims. She said that having considered all the evidence: “I find that the LIA has greatly exaggerated the extent to which senior and junior personnel were naïve and unworldly about the nature of the dynamics of their relationship with Goldman Sachs.” In fact, the key decision-makers understood the trades and the risks, and they were consistent with the fund’s need to get invested quickly, she said. “The LIA management were tasked with generating a much higher return than they could hope to make on plain vanilla trades,” she said.
“This explains why they were prepared to enter into the speculative disputed trades even though this might appear to conflict with the long-term growth objectives of the LIA as a SWF.” Responding to the judgment, Goldman Sachs said it was pleased to win the case, “with a comprehensive judgment in our favour”. The LIA said it was “naturally disappointed” and added in a statement: “Time will be needed fully to digest the judgment and all options are being considered at this time.” While lawyers for the LIA declined to comment, a source with knowledge of the matter told Reuters: “I would be very surprised if there wasn’t an appeal.”
Goldman Sachs had disputed the LIA’s claim that the wealth fund was financially naive, saying that “an unforeseen financial depression” had caused the losses, not any wrongdoing by the bank. It had also maintained that its relationship with the LIA was an arm’s length one between banker and client. The LIA’s lawyers had argued in court that Goldman Sachs had gained the trust of fund executives by providing lavish hospitality and gifts as well as a prestigious internship offered to Haitem Zarti, the younger brother of Mustafa Zarti, a key LIA decision-maker at the time. But the judge found that the main motivation behind the offer was the bank’s belief the younger Zarti might be chosen to lead the LIA’s new office in London. Whilst this may have contributed to a “friendly and productive atmosphere” during negotiation over several trades, it did not have a material influence on the LIA’s decision to go ahead with these, she added. She disagreed that the hospitality went beyond what was provided by other banks, citing in particular documents presented by Goldman to the court which showed tickets to top sporting events were provided by another bank to LIA officials. The judge also found there were no grounds for concluding that profits earned by Goldman Sachs on the disputed trades were excessive. The LIA is also pursuing the French investment bank Societe Generale for some $2.1 billion in relation to another set of trades entered into between 2007 and 2009. SocGen is contesting the case, which is only expected to come to trial in April 2017.