Libya vs Goldman Sachs – the secret memo
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Libya vs Goldman Sachs – the secret memo

Last month Goldman Sachs filed papers in the UK courts seeking to have a case for mis-selling brought by the Libyan Investment Authority summarily dismissed. This is not the first attempt by the bank to end the problems caused by its engagement with Gaddafi-era Libya. In a 2010 memo, Goldman proposed a complex structure that would have involved a $52 million payment in exchange for unwinding trades that had cost the Libyan fund almost $1.3 billion. While the US investigates, LIA chairman Abdulmagid Breish is making plans for the sovereign wealth fund’s future – and he wants his country’s money back.

There are recruitment adverts out at the Libyan Investment Authority. Libya’s sovereign wealth fund, seeking to regain direction after the country’s revolution, has employed consultants for a few key roles. There’s the CEO. And the CFO. And the chief investment officer. And the head of risk, the head of internal audit, and the chief operating officer.

Oh, and the deputy CEO. And the head of legal.

There are revamps, and then there’s the LIA. Founded by Muammar Gaddafi’s second son, Saif Al Islam Gaddafi, in 2006, the fund has already gone through more drama and upheaval than most of its sovereign wealth peershave endured in their combined history. 

Waves of executives and managers have come and gone, foreign banks and fund managers have sold it extraordinary duds that soured during the financial crisis, the country has undergone painful revolution during which Saif was jailed and his father killed, its funds have been frozen by the UN (and remain so, at the fund’s own insistence, today) and at the end of it all it finds itself with a glut of legacy headaches and an empty management bench. Now, as it seeks to move forward, it must also look back. This year it has launched litigation against some of the biggest names in global banking, seeking to recover billions of dollars for deals those banks put the LIA into during the Gaddafi regime. And no matter how much Libyan executives seek to paint themselves as a breath of fresh air, correcting the sins of the past, they must inevitably face scrutiny for just what their role in the bad old days really was.

Transgressions of the past

AbdulMagid Breish, the chairman and acting CEO of the LIA, is an urbane and confident presence. He is absolutely fluent in English, while his thick glasses and swept-back hair give him something of the appearance of a mid-career Henry Kissinger. 

LIA AbdulMagid Breish
AbdulMagid Breish, the 
chairman and acting CEO 
of the LIA

Breish has plenty of ideas for the future, but this year he’s been in the news for taking on the transgressions of the past, launching litigation to claim more than $2.5 billion from Goldman Sachs and Société Générale for instruments those banks sold to the LIA between 2007 and 2009.  Today, flanked by a lawyer who never feels a need to rein him in, Breish is adamant the LIA is in the right on both cases. On Goldman – a case that rests on demonstrating that Goldman abused the trust it had built with the fledgling and somewhat wide-eyed sovereign fund, selling structures that its officials could not understand – he says: “It was very clear and evident that there was a breach in trust. They abused that confidence that was built, and the inexperience of individuals.

“I wouldn’t say it was a con job, but it was very near to it, where people were taken on holidays and bought gifts and things. The trust element was there and they totally took advantage of it and sold LIA complicated transactions with complicated documents that they couldn’t understand, at a moment when the whole world was going south, and they knew that.”

Goldman Sachs, which has applied for summary dismissal of the case before trial, tells Euromoney: “We think the claims are without merit, and we will defend them vigorously.”

TheSociété Générale caseis less about mis-selling and more about over $58 million of payments the French bank made to a third party called Leinada, a Panama-registered vehicle owned by a man called Walid Al-Giahmi who was close to the Gaddafi regime – payments that the lawsuit describes as bribes.

“Then, SocGen did not disclose how much was being paid. They did not disclose the identity. It was like pulling teeth. Only months and months later we found out what was going on. SocGen itself was one of the prime banks in the world, at the forefront of derivatives trading. They bring in a party who is not even literate in financial affairs to advise them on structures and derivatives? Hard to understand.”

The secret memo

Société Générale tells Euromoney the allegations are unsubstantiated and says it “works occasionally with financial intermediaries in countries where it does not have local teams in place”. A spokesman for Leinada told the Financial Times in March that “[the LIA] case is without merit”.

One can’t fault the LIA for boldness, but some are puzzled that this claim should be heading for court at all. The LIA’s legal representatives in the cases are Enyo Law, specifically partner Simon Twigden, who is considered a lawyer of the highest calibre; but look what he and his client are up against: the most powerful bank in the US and all its Wall Street legal advisers (although, these being London-heard cases, both Goldman and Société Générale are being represented by Herbert Smith). Many observers think the Goldman litigation in particular has no realistic chance of success. Did the LIA try to negotiate first?

“I personally did not have any discussions with Goldman Sachs,” says Breish. Why, then, is litigation better than engagement? “We’ve been preparing ourselves for some time,” he says. “We’ve been analysing our documents, reviewing our strategy, talking to our legal counsel, and a lot of this has come out and about in the market. If Goldman Sachs wanted to come and talk, they had ample time to do so. It wasn’t as if we were working under cover: people knew what was going on.”

Indeed, Euromoney reported the LIA’s intention to sue both Goldman and Société Générale back in April 2013. (Interestingly, the third institution that then-CEO Mohsen Derregia named at that time, Millennium Capital, no longer appears to be on the LIA hit list, although Breish says “we are looking at around another five and investigating the documentation”.)

With Société Générale, he goes further, saying that he did write to the bank’s chairman before going to court, “inviting him to establish a direct line to sit and discuss this. I’m ready to meet with him and talk to him about this and see if we can settle some issues.” He says he didn’t hear back for two months. “And when we pressed their office I received an answer which was composed of half a page which didn’t say anything really: not even a willingness to meet, just ‘we’ve done nothing wrong’.”

Breish adds: “I find it perplexing that people at that level don’t even seem to think of their reputational risk.”

And how realistic is it that the LIA can win in court?

“Our objective is to regain all the money that we lost that belongs to the Libyan people,” Breish says. “That is what we will do. We feel very strongly about the principle of it, and we’re ready to go until the very end: it doesn’t really matter how much it is going to cost.”

But is that really what it’s about? Is litigation, Euromoney asks, also about sending a message, not just to international banks but to Libyans as well?

“Definitely. There’s a whole new message being sent.”

Gaddafi-era headaches 

For Goldman in particular, Gaddafi-era headaches go well beyond the LIA litigation. Its subsequent attempts to make amends for its losses have now put it in hot water with the US Department of Justice. In the end, the efforts to make things right might hurt Goldman much more than the original mistakes did. A confidential memo dated March 9 2010, prepared by Goldman Sachs for the Libyan Investment Authority and seen by Euromoney, sheds light on Goldman’s negotiations to move on from those disastrous trades.

The memo, titled ‘Unwind of trades and collateralized bond obligation transaction’, outlines a proposed deal whereby Goldman would pay $50 million, agree to unwind its trades, and pay additional expenses of up to $2 million, in order to draw a line under the deals from 2008 that would mutually release and discharge liability (which, the document says, carried an initial premium of $1.3 billion between them but by then were worth just $25 million). But this is not a straight compensation deal from Goldman to the Libyan fund.

It also involves a special-purpose vehicle called Tiber Bond Investment Ltd, a Cayman Islands entity. And another party is a group referred to as the ‘investment adviser’ in the memo – Palladyne International Asset Management. Under the terms outlined in the memo, the LIA would instruct Goldman to pay the amount directly to Tiber. Tiber would then issue a limited recourse note to LIA as its sole investor. Libya would then buy a $5 billion unlisted 6% note due 2030 at a price of 74%, meaning it would put $3.7 billion (74% of $5 billion) into Tiber, which would invest it in a portfolio of dollar-denominated investment-grade and high-yield bonds under Palladyne’s management.

Regular readers of Euromoney’s online edition will be familiar with Palladyne, an institution that first came to public light when a leaked internal LIA document drawing on a KPMG audit referred to it as having received $300 million from the LIA and having lost 17% of it in less than two years, despite having been paid $19 million in fees. (It also received $200 million apiece from two other Libyan institutions.)

Palladyne then turned up in another lawsuit earlier this year. Filed in a US District Court in Connecticut on behalf of a former Palladyne employee called Dan Friedman, and compiled by the noted ex-Jones Day international litigator Alan Kaufman, who has something of the bearing and charisma of George C Scott, it shows a boisterous turn of phrase. It describes Palladyne as “a kickback and money-laundering operation for the former dictatorial Gaddafi regime in Libya, operating under the public pretence of a hedge fund”.

The claim goes into some detail about Palladyne’s provenance: Dutch-incorporated, headquartered in Amsterdam, and run by Ismael Abudher, who is the son-in-law of Shukri Ghanem.

LIA Shukri Ghanam
Shukri Ghanem (c) former
head of Libya’s National
Oil Company

Ghanem was head of Libya’s National Oil Company (and a former Libyan prime minister) whose oil revenues fed the LIA, until the revolution; he was found dead in the river Danube in Vienna in April 2012. Palladyne calls the claims “entirely untrue and ludicrous”, presenting them as bad blood from a bitter former employee. In turn, Kaufman tells Euromoney: “We investigated this for 18 months on four continents before filing, and are fully confident that we will prove these claims.”

The case claims that Palladyne had absolutely no investment capability, which raises the question why it was initially entrusted with $700 million of Libyan money. One person familiar with the matter says: “the $300 million [from the LIA] was given to Palladyne without a single piece of paper to document it or explain their investment plans”.

It also raises the question of why such an institution should be appointed as the broker to resolve Goldman’s problems with the LIA, or why it would be entrusted with a new portfolio intended to hold $3.7 billion of assets. “At the time they were appointed investment adviser, they had already lost more than 17% of the money they had been given in a short period of time including the rising market that followed the 2008 crash,” says a source familiar with the matter.

“The whole thing is just ludicrous. The LIA, which has already lost money through Palladyne, is solving the problem by investing 10 times more money with Palladyne. Justice [the DoJ] looks at this, and says: ‘This is nuts, there is no innocent explanation for this and no business terms that could explain it’.”

The Goldman memo suggests the bank knew how this looked – paying $50 million to an institution with allegedly no capability to do anything with it but receive it – because it appears to try to head off some gnarly complications from the outset.

The memo specifically refers to the Foreign Corrupt Practices Act in a bullet point in a section about payments, saying that GSI (Goldman Sachs International) “will only accept this instruction” (to pay the money to the SPV) if the LIA delivers that payment instruction, and to the satisfaction of FCPA representations by LIA as set out in the terms of a separate letter. Euromoney has not seen this additional letter.

The memo also specifically points out that although Goldman did preliminary due diligence on Palladyne, it “did not provide a basis for Goldman to determine that Palladyne” is an “appropriate” investment adviser, or about the “services” rendered by Palladyne to the LIA. Finally it insists that both the LIA and Palladyne are responsible for determining whether the transaction is suitable for them, and that they “cannot rely on Goldman for any determination” as to whether it’s a good idea.

This section proceeds to sever Goldman from whatever happens to that money next. It is saying, in essence: now you’re on your own, and you decide whether or not it’s a good deal. And in aggregate, the memo infers: for our $52 million of payments, we will be released of all liability from our old trades. It’s odd, though, that only $2 million of that appears to go to the LIA, when the liability in the recent lawsuit against Goldman is put at more than $1 billion.

A lawyer familiar with the matter is puzzled as to why the memo goes into such great detail about what will happen to the money after it is transferred to Palladyne. “It should be none of Goldman’s business,” he says. “They should care less about what the LIA is going to do. You don’t care if it goes to pay for ice cream cones for every person in Bangladesh. If I’m unwinding my trades that I did for you, and giving a little cash to you, that’s the end of it: a release of liability. All of the detail about Tiber would never have been in a settlement and liability release.”

Euromoney understands that this was the fifth proposal that Palladyne, Goldman and the LIA (two sets of lawyers, Nabarro and the Libyan firm Bakhnug, are also mentioned) had discussed, and the last, following considerable negotiation.

It is understood that events were then overtaken by revolution and that the payment was never made, although this commonly accepted version of events is slightly problematic: the memo, which suggests an arrangement approaching finality, is dated March 2010, and the first street protests in Benghazi did not get under way until February 2011. But Palladyne itself, in a rare communication with the outside world, cites this version to Euromoney. “Our expertise in finance and asset management was sought several years ago in the negotiation of a potential resolution between the LIA and Goldman Sachs,” a spokesperson says. “That process was halted with the rise of the Arab Spring in Libya in 2011.” Euromoney offered to come to Amsterdam to see for ourselves what Palladyne actually is. Palladyne declined, but sent a statement claiming it had “a team of around 30 professionals working with a wide variety of clients”. The lawsuit by Palladyne’s former employee specifically mentions the Goldman negotiations. “Defendant Abudher was inserted directly into the Goldman-LIA dispute by his father-in-law, and Abudher immediately proceeded to propose five distinctive ways for Goldman to ‘make right’ with the LIA, with the coincidence that under each option, Palladyne would be the asset ‘manager’ and collect fees and payments,” the suit alleges. Because no legitimate bank, fund or investment company would partner with Palladyne, the complaint says: “Abudher’s proposals were a transparent effort by his father-in-law to take a major loss for Libya and turn it into profit for the Ghanem-Abudher family.”

The suit openly refers to “an alleged attempt to launder a bribe to Libya” and says that funnelling the alleged bribe of $50 million through Palladyne would “show ‘good faith’ by Goldman that it would undertake to rectify the losses”.

Breish agrees with the claim’s depiction of Palladyne as a front. “It is an accurate description,” he says. “No investment capability.” He says the LIA now wants its money back. This is likely to be the next litigation we see. “Our lawyers are looking at this also,” he says. “It’s the same story: funds being assigned to someone who’s been close to the regime.” That is likely to mean going through the Dutch courts, and there might be a queue: Palladyne was raided by the Dutch Openbaar Ministerie (public prosecution service) and Fiscal Information and Investigation Service in simultaneous actions on June 21, 2013. The officers conducting the raid were heavily armed.

There is another point of view. One former LIA employee says: “At the time for us Palladyne was a legitimate counterparty. It was supposed to be a mixed portfolio, though they seemed to keep most of it in cash, and charged us 3%.” And since Goldman apparently didn’t make the payment, its sins do not look particularly egregious. But under the FCPA, even the discussion of a payment is enough for a penalty, if that payment can be construed as a bribe.

Whatever the outcome of the litigation battles, the LIA is attempting to move on from the controversies of the Gaddafi-era past.


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