Goldman And SocGen Accused Of Defrauding Libya Out Of Billions With Derivatives During Gaddafi's Rein

Apr 1 2014, 7:09pm CDT | by

Goldman And SocGen Accused Of Defrauding Libya Out Of Billions With Derivatives During Gaddafi's Rein
Photo Credit: Forbes Business

The devastating civil war that has ravaged Libya has undoubtedly altered the power structure of the North African nation.  It also revealed that major U.S. and European financial firms, including Goldman Sachs and Societe Generale, actively courted executives of the Libyan Investment Authority (LIA), which, flush with $60 billion of the nation’s oil profits, paid rich fees to invest with Western banks and funds, in some cases losing their whole investment.  Now, the LIA is suing Goldman Sachs and Societe Generale in London, while the SEC and the U.S. Justice Department are also scrutinizing the practices of hedge fund Och-Ziff and private equity firm Blackstone.

In 2004, the U.S. lifted commercial sanctions on Libya after Colonel Muammar al-Gaddafi agreed to hand over his chemical weapons.  Major U.S. and European names flocked to the oil producing nation for a cut of the potential profits as the reins on global capitalism were loosened.  Established in 2006, Libya’s sovereign wealth fund was approached by at least 25 different financial institutions looking to attract its funds, ultimately forging relationships with Goldman Sachs, Societe Generale, HSBC, JPMorgan Chase, the Carlyle Group, Lehman Brothers, and Och-Ziff Capital Management.

Jitters throughout the U.S. mortgage market became an all out meltdown after the collapse of Lehman Brothers in 2008, and along with the global financial system went the investments of the LIA.  Goldman Sachs effectively lost 98% of the LIA’s $1.3 billion investment, as I previously reported.  Societe Generale reportedly lost half of the $1.8 billion entrusted to it by the Libyans.

Now, after the fall of Gaddafi and armed with new executives, the LIA is on the legal offensive.  With London as their battleground, they first sued Goldman Sachs this January, accusing the Wall Street institution of “deliberately exploiting the relationship of trust and confidence it had established with the LIA to cause the LIA to enter into each of the disputed [equity derivative] trades,” according to the Libya Herald.  Goldman is said to have netted $350 million in profit from the trades, which included investments in Citigroup, Banco Santander, Allianz, Eni, UniCredit, Electricite de France, and a basket of currencies.  Initially worth $1.3 billion, the positions acquired between January and June of 2008 saw their value decimated, falling to a meager $25.1 million by February 2010.  Goldman described the accusations as “without merit.”

Societe Generale was next.  The LIA sued France’s second largest bank in March, accusing them of paying at least $58 million in bribes to a company close to the Gaddafi family, while investing $1.8 billion on their behalf in complex derivative deals that lost half their value by the time the uprising began in February 2011, just a few months before Gaddafi’s death.  According to the FT, SocGen paid a Panamanian-registered firm named Leinada $58 million in advisory services.  The company, which has no expertise in structuring derivative trades, is controlled by Libyan businessman Walid Giahmi, who is accused of having been close to Gaddafi’s son Sai al-Islam; Giahmi, through his lawyers, denies Leinada was ever used to pay public officials. SocGen, who is accused of not reporting those “advisory” fees in the contract signed with LIA, called the suit “groundless.”

Over in the U.S., the Securities and Exchange Commission and the Justice Department are scrutinizing the relationship of publicly traded hedge fund Och-Ziff with the LIA.  In its latest annual results, the hedge fund admits it’s “received subpoenas from the Securities and Exchange Commission and requests for information from the U.S. Department of Justice in connection with an investigation involving the FCPA [Foreign Corrupt Practices Act] and related laws” in connection to “an investment by a foreign sovereign wealth fund in some of the Och-Ziff funds in 2007 and investments by some of the funds, both directly and indirectly, in a number of companies in Africa.”  Also reportedly under investigation are Blackstone and Credit Suisse.

Source: Forbes Business


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