Libyan investment fund sues Goldman Sachs for $1.2bn

A heavy weight legal battle started on Monday at London’s high court between Libya’s sovereign wealth fund and leading investment bank Goldman Sachs. The case will be closely watched by the City as it offers a unique insight into the behaviour of bankers before the 2008 crash.

The Libyan Investment Authority (LIA) claims Goldman Sachs exploited the investment fund’s inexperience and naivety by encouraging it to make risky and worthless derivative trades.

LIA is aiming to get $1.2bn from the US bank from nine contested trades in 2008.

LIA also claims that the Goldman Sachs sought to win business with them by offering gifts, overseas travel and a greatly desired internship for a brother of a Libyan official at the investment fund.

Haitem Zarti, the brother of Mustafa Zarti, LIA’s former deputy director, undertook a £36,000 internship at Goldman Sachs in May 2008, a month after the last contested trade was carried out.

Internships are much-coveted at Goldman Sachs. In 2013 the bank received 17,000 applications for 350 places for a summer analyst internship.

Goldman Sachs denies any wrong doing and said there was nothing unusual or disadvantageous about the trades.

The Wall Street giant maintains that the relationship with LIA was at all “material times an arm’s length one” and the trades “were not difficult to understand”. In a statement on Monday the bank said: "The claims are without merit and we will continue to defend them vigorously."

Over the next seven weeks the lawsuit will be closely observed. The case will shed light on how the world’s biggest investments conducted business with Libya’s former leader Colonel Muammar Gaddafi and his regime. The deals generated large fees but many Libyans say they did little to benefit the state’s sovereign wealth fund.

Sovereign wealth funds are regarded as sophisticated investors but the LIA claims that Goldman Sachs took advantage of their inexperience as the LIA was only set up in 2006 by Gaddafi’s son, Saif al-Islam to exploit the country’s oil wealth and integrate the country’s economy into the financial system, after years of sanctions.

The case might also show how Goldman Sachs does business and the bank is keen to protect its reputation that it does not put its own interests ahead of its clients.

The fund suffered heavy losses, according to an internal quarterly LIA management report obtained by Global Witness in 2011. There was a 9.5% decrease in LIA’s $1.2bn equity and currency derivatives portfolio value.

The case had a two-year delay because the political turmoil in Libya. Business advisory firm BDO was appointed by the court to manage litigations on LIA behalf as two chairmans claim to control of LIA.

Goldman Sachs has hired magic circle law firm Herbert Smith and barrister Robert Miles QC. LIA hired Enyon Law and Roger Masefield QC.

LIA is also suing Société Générale for $2.1bn for trades between 2007 and 2009. The French bank is contesting the case and is expected to come to trial in January 2017.