16 April 2014

Libya Goes Head to Head With SocGen in U.S.$1.5 Billion Lawsuit

analysis

Libya's sovereign wealth fund has filed a bribery case against French bank Société Générale, adding to its $1 billion lawsuit against Goldman Sachs.

Tripoli: The Libyan Investment Authority (LIA) has filed a $1.5 billion lawsuit against Société Générale (SocGen), claiming the French investment bank helped channel bribes worth tens of millions of dollars to associates of Saif al-Islam, the son of the former Libyan dictator Muammar Gaddafi.

The LIA, a $60 billion fund set up to invest the country's vast oil wealth, alleges that SocGen fraudulently paid over $58 million to a company called Leinada for "advisory services". These services related to $2.1 billion of derivatives trades that the LIA entered into with SocGen between 2007 and 2009.

The Libyan fund claims that Leinada has "no discernible expertise in advising on or structuring financial derivative transactions." Leinada is registered in Panama but controlled by Libyan businessman Walid Giahmi, who is believed to be close to the Gaddafi family.

In the derivative transactions, the LIA suffered heavy losses and are calling for the trades to be voided.

SocGen has called the claims in the lawsuit, which has been filed in London's High Court, as "groundless and without substance."

The bank admits to using agents to conduct sales, but says this was normal practice and that middlemen are "fully reviewed through our compliance procedures in respect of the regulations and in complete transparency with the client."

The case against Goldman Sachs

The LIA's lawsuit against SocGen is not its only ongoing case in a London court. The fund's $1 billion case against Goldman Sachs, in which it accuses the American investment bank of exploiting the LIA's lack of financial expertise to make a profit, commenced in January.

Goldman Sachs was one of many Western banks that tried to curry favour with the fund in the mid-2000s when Libya's relations with Western governments thawed, reportedly by plying executives with expensive chocolates and aftershave, and funding luxury trips for officials.

Having won its trust, Goldman Sachs allegedly then abused it by investing vast sums of the LIA's money in risky and complex derivative trades in the run-up to the 2008 financial crisis.

The Libyan fund claims that it lost over $1 billion in these deals, which its executives did not have the expertise to understand, while Goldman Sachs reaped profits of $350 million.

"No one could evaluate what was happening to our money," one former LIA employee said in an interview with the Wall Street Journal in 2011. "We saw the losses mounting, and we didn't have the paperwork or tools to analyze our investment."

In a statement released by the LIA in January 2014, it claimed: "[Goldman Sachs] abused the relationship of trust and confidence with the then newly-formed LIA, being the sovereign wealth fund of the Libyan people."

Goldman Sachs has refuted the accusations, saying they are "without merit".

Misappropriation, misuse and misconduct

Under Gaddafi, the LIA is understood to have been riddled with large-scale misappropriation, misuse and misconduct of funds. Since the dictator's overthrow, the new management is reportedly trying to turn things around, partly by reassessing past dealings with the likes of Société Générale.

"This claim, together with the one against Goldman Sachs that was initiated in January 2014 reflects the desire of the LIA's new board of directors to redress previous wrongs and seek the recovery of these substantial funds as it seeks to invest and generate wealth for the people of Libya," said LIA chair, Abdul-Magid Breish.

The suits against Goldman Sachs and Société Générale also come as the US Securities and Exchange Commission investigates relations between the LIA and US financial institutions.

The agency is looking into whether US financial organisations made payments to LIA executives in the hope of gaining closer access to the fund.

Many of the LIA's assets remain frozen under sanctions. Jason Peck, a researcher at the University of Cambridge and President of the consultancy company Libya Analysis, says that the corruption in Libya is such that the government prefers some sanctions to remain on LIA assets to avoid individuals or groups siphoning off funds.

Rebuilding after Gaddafi

Libya boasts some of the largest oil reserves in the world and the LIA was established to manage its vast resource wealth in the interests of the population.

The Libyan fund has huge reserves in the Central Bank of Libya, set up myriad subsidiary companies, and has investments in hundreds of firms around the world from General Electric to the telecoms multinational AT&T to the Italian football giants Juventus.

It has also had multi-billion dollar investments with investment banks, many of which went awry when markets collapsed in the 2007/8 financial crisis.

In the wake of these losses and in an attempt to break with a past characterised by corruption, the LIA now seems to be trying to rebuild its reputation and recover some of the huge sums lost.

It also claims to be set on improving accountability and transparency, recently hiring accountancy firm Deloitte to conduct an asset audit and consultants Oliver Wyman to report on strategy in order to "enhance its corporate governance in accordance with best practices."

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