New York Securities Lawyer Blog
The Libyan Investment Authority (“LIA”) is in a current litigation battle with Goldman Sachs (“Goldman”) regarding Goldman’s potential exploitation of the relative inexperience and financial illiteracy of LIA managers. The Complaint alleges Goldman advised LIA to place trades that incurred enormous losses, while yielding Goldman approximately $200 million in fees. LIA is suing Goldman for $1.2 Billion in losses, with the trial beginning in June 2016 in London. LIA is arguing that its investment staffers never understood the complexity of the deals Goldman sold them, and were exploited through Goldman’s use of misleading marketing materials and lavish gifts that were bestowed on staffers. LIA staffers gave statements saying that they had never heard of “derivatives,” “Goldman Sachs,” “options,” or “due diligence” while attempting to show the court the extent of their naiveté, despite the fact that they managed a multi-billion-dollar fund. Goldman disputes the degree of LIA’s ineptitude and naiveté, arguing that LIA “[u]nderstood at all times that [our representative] was a salesman, and that his job was to sell investments to the LIA from which [Goldman] could make money.” Furthermore, Goldman argues it is clear that LIA “[u]nderstood the disputed trades and entered into them of their own volition.”
Youssef Kabbaj (“Kabbaj”), a Goldman Sachs securities salesperson, almost singlehandedly wooed in excess of one billion dollars from the LIA in the form of complex derivative investments. Kabbaj, an MIT engineering graduate from a wealthy and prominent African family, joined Goldman’s London office in 2006. While assigned to a sales team covering Africa, a desk that posted little to no profit at that time, Kabbaj shrewdly identified Libya as an “elephant”—an incredibly wealthy petro state client with enormous coffers that could be persuaded to buy securities. Despite being one of the wealthiest states in Africa, Libya had very few privately owned companies, no credit cards until late 2005, and limited experience with investing. Kabbaj managed to persuade Mustaga Zarti (“Zarti”), the LIA Deputy Chief Executive, that Libya would miss out if it didn’t buy into the rising bull market.
Consequently, the LIA fund purchased in excess of $2 billion worth of bullish derivative bets on US banks, including Citibank, Lehman Brothers, and the French Utility EDF Group. In the aftermath of the enormous losses these bets incurred, LIA management stated they were unaware they had purchased synthetic derivatives which, during the rapid devaluation of the 2008 financial crises, entirely wiped out their books, and thought instead they had purchased shares directly. While synthetic derivatives can take innumerable forms—they can be structured in any way as long as there is a buyer to take the other side of the deal—the instruments Goldman sold to LIA were structured in a particularly risky manner. If, for example, Citibank’s stock rose, then LIA would get a return on their investment in multiples of their initial purchase, due to the leverage. If, however, Citibank’s stock fell, even incrementally, LIA’s entire book would have been wiped out.
LIA is bringing its case under the legal concept of “undue influence,” an unusual approach in securities law. As such, Goldman is aggressively litigating this matter because if LIA succeeds, it will set a precedent for the use of “undue influence” against Goldman and other investment banks by any party.
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