Saif al-Islam Gaddafi, left, and Mustafa Zarti
In 2008, Catherine McDougall was a young Australian lawyer seconded to the Libyan Investment Authority’s offices in Tripoli to assist its legal team and review financial transactions conducted by Goldman Sachs.
She was “shocked” by what she learnt, according to her witness statement detailed in a London court earlier this month.
In it, Ms McDougall details a “very angry tirade” allegedly unleashed by Mustafa Zarti, then the deputy director of the LIA, towards Goldman bankers Youssef Kabbaj and Nick Pentreath at the sovereign wealth fund’s 22nd floor offices at Tripoli Towers in a meeting in July 2008.
This meeting is among revealing details thrown up by a $1bn court case filed by the LIA against Goldman. The litigation is being closely watched for the light it sheds on the banking world and what was once one of the world’s most opaque state investment vehicles.
Key players in LIA
For a closer look at some of the personalities behind Libya’s opaque sovereign wealth fund
Set up in 2006 by Colonel Muammer Gaddafi’s son Saif al-Islam to exploit the country’s vast oil wealth as it was emerging from 20 years of sanctions, the LIA started with $65bn of assets.
Western banks and hedge funds, including Goldman and Och-Ziff Capital Management, began intensely courting the world’s biggest sovereign wealth funds as a source of fresh capital in 2007 as they sought to replenish balance sheets battered by the global financial crisis.
On the LIA’s advisory board sat Lord Jacob Rothschild, scion of the famous banking dynasty, and Sir Howard Davies, the former regulator who had to resign as director of the London School of Economics in 2011. An independent report later found that £1.5m in donations the university accepted might have been the proceeds of bribes paid to the Gaddafi family by companies seeking “business favours” from the regime.
To head up the fund, Mr Gaddafi appointed his university friend Mr Zarti, and by 2010 the LIA had built a large share portfolio, accumulating stakes in foreign assets ranging from newspapers to football teams.
But it had also unwittingly entered into riskier financial derivative transactions that turned out to be lossmaking.
Now, the LIA is fighting back against the banks through litigation. In a pre-trial hearing, the LIA’s barrister claimed the wealth fund had been “taken for a complete ride” by the US bank.
It was at that 2008 meeting when the relationship between the LIA and Goldman allegedly began to unravel after the LIA questioned nine financial trades detailed in the pre-trial hearings.
Mr Zarti screamed and swore at the two Goldman Sachs bankers as he claimed the investment bank had “screwed” the LIA and that he “could come after their families”, her witness statement says.
“His curses were along the lines of ‘f**k your mother, f**k you and get out of my country’ and the two bankers seemed ‘very fearful and quickly gathered their things and left’,” Ms McDougall adds.
Goldman is fiercely contesting the lawsuit that it calls a “paradigm of buyer’s remorse”. It alleges in its defence document that LIA executives included “highly experienced” bankers who were perfectly capable of understanding the deals and that the LIA was not “as it now contends, financially illiterate”.
The US bank is one of several western financial institutions whose dealings with the LIA have come under scrutiny.
In March the LIA filed a $1.5bn claim against Société Générale and five others, accusing the French bank of helping to funnel bribes to close associates of Mr Gaddafi. SocGen said it planned to contest the High Court claim that it considers “groundless and without substance”.
Sofia Wellesley, right, and James Blunt
The Goldman court battle has even dragged in Sofia Wellesley, pictured, the granddaughter of the Duke of Wellington who has just married pop star James Blunt.
Written arguments submitted to the hearing by the LIA quoted a 2007 email sent by Ms Wellesley, then working for the fund, saying it was staffed by “a team of clearly naive and unqualified individuals . . . doing their best in the face of extremely intelligent, ambitious and experienced individuals”.
However, in its written arguments for the hearing, Goldman claims the LIA’s trades “were not difficult to understand” and “there is no suggestion that the LIA lacked sophistication to make those investment decisions”.
Robert Miles, QC, acting for Goldman, told the court that the LIA’s case depended on the fund demonstrating that its staff were “unsophisticated” about finance. He added some of the claims made by the LIA about corporate hospitality were “tittle tattle”. Goldman claims that the LIA “freely entered into commercial bargains which have turned out badly for it”.
The US bank has already said in its defence that its relationship with the LIA did not go beyond “an arm’s-length one between banker and client”. It denies that the LIA was “acting under the defendant’s influence”.
The LIA is now considering further legal action to recover $700m it invested in Netherlands-based Palladyne International Asset Management and to investigate several other smaller transactions.
PIAM, which is led by Ismael Abudher, the son-in-law of Libya’s former oil minister, is accused in a separate lawsuit filed by a previous employee of serving as a “kickback and money laundering operation” for the former Libyan regime. Palladyne has referred to the allegations as “untrue and ludicrous”.
The litigation is being seen as a way of drawing a line under the LIA’s turbulent past and the Gaddafi era. But it is also likely to help the LIA’s newly appointed management team, which has set about driving up standards of corporate governance, to move forward with more certainty about its direction.
Key players in the Goldman-LIA saga
Mustafa Mohamed Zarti was the deputy executive director of the LIA and was a friend of Saif al-Islam Gaddafi, pictured, the son of the former Libyan dictator.
Saif al-Islam Gaddafi
The pair met in Vienna while Mr Zarti was studying for an MBA at Webster University. At the time Mr Gaddafi was also studying at Imadec business and law school.
Mr Zarti previously worked for the Opec Fund for International Development between 2003 and 2005, according to court papers. While at the LIA, Mr Zarti and his team started building a stock portfolio in large companies. He became deputy head of the LIA in 2007.
In a witness statement lodged before the court, Catherine McDougall says Mr Zarti “was keen to show he was connected to the London elite and would drop names like Rothschild”.
Driss Ben-Brahim hit the headlines a decade ago for being paid millions of pounds in bonuses while at Goldman. The star banker joined Goldman in 1994 where he quickly made a name for himself as a specialist fixed income and derivatives trader.
Born to a Moroccan father and Austrian mother, he spent time at the European Bank for Reconstruction and Development and joined Goldman in 1996 specialising in fixed income and derivatives. He later jumped ship to GLG Partners, the hedge fund, from where he stepped down in 2012 as co-manager of Man’s GLG Atlas Macro Fund.
He graduated as an applied mathematician and engineer from Ecole Centrale de Paris in 1987 and earned an MBA from Insead in 1990.
Roger Masefield QC, acting for the LIA, told the High Court in the pre-trial hearing an email from Youssef Kabbaj in April 2008 with the subject “Driss” – referring to senior Goldman banker Driss Ben-Brahim – details a conversation with Mr Zarti about investments and claimed that it showed “[Goldman’s] roles as between principal, financier and adviser have become completely blurred”.
Hatim Gheriani, pictured, led a team that built the LIA from its initial start-up phase, and he was in charge of the fund’s alternative investment team from 2007. He holds a masters degree in finance and investments and had worked previously at the Libyan Foreign Bank, according to court papers.
He was also on the board of Banco Arabe Espanol with Mr Zarti. Mr Gheriani left the LIA in 2010 to work for HSBC in Dubai.
Youssef Kabbaj formerly served as Goldman’s head of North Africa. Ms McDougall, who at the time was seconded to the LIA, in a witness statement to the court said she was told by LIA staff about a “lavish trip to Morocco” and that there was “heavy drinking and girls involved” and the trip was paid for by Mr Kabbaj, mostly on his Goldman corporate credit card. There were also “expensive nights” in London, she said in the statement.
Mr Kabbaj left Goldman in 2009 to join GLG. He left the hedge fund in January 2013 to join Exotix, the expert in illiquid, emerging and frontier markets.