The Libyan Investment Authority’s (LIA) long-running, three-year claim against Socie´te´ Ge´ne´rale (SocGen) came to an end on the eve of a 14-week trial at the beginning of May, with SocGen agreeing to pay U.S.$1.05bn (€963m) to settle the dispute.

The lawsuit dates back to 2006, when Libya was still under the control of Colonel Gaddafi but was opening up to western investment after years of economic sanctions. The LIA was set up with U.S.$67bn from its oil revenues to invest in the international markets, and western banks and other institutions flocked to Libya to advise its fledgling wealth fund on what trades and investments it should make.

Soon after the fund started, however, it took a hit when the global financial crisis took hold. Furthermore, the LIA had suspicions—which were not totally without foundation—that the firms brought in as advisers were trying to milk it and were taking advantage of the organisation’s inexperience.

The LIA’s U.S.$1.5bn claim, filed in March 2014, raised allegations of corruption and bribery concerning payments made to an intermediary during 2007 to 2009, just two years before the country became embroiled in the Arab Spring and Gaddafi was killed.

The LIA alleged that SocGen made corrupt payments worth U.S.$58.5m to Leinada, a Panama-registered company run by Libyan-Italian businessman Walid Al-Giahmi, who was also close to the Gaddafi family. Al-Giahmi’s role was to “influence the LIA’s decision to enter into each and every one” of the five complex financial derivatives it bought with the bank.

The LIA said the trades were secured as part of a “fraudulent and corrupt scheme,” regarded the payments to Leinada as bribes, and believed that this made the trades invalid. The LIA thereby sought to void the SocGen deals, which (coincidentally) had lost roughly half of their value by 2013, just a year before the LIA filed its claim.

In court documents, the LIA claimed that neither Giahmi nor Leinada had any known expertise in financial advising or restructuring and that the payments offered no apparent value for either SocGen or the LIA. Lawyers representing Giahmi deny this. Lenaida was dissolved in 2010.

In its claim, the LIA also said that it was clear that intermediaries were not to be used. According to the LIA, its board of directors “had issued standing orders to the effect that no intermediaries should be used when the LIA entered into transactions with financial institutions.”

However, it is not as if the LIA’s top brass followed the organisation’s rules too closely, either: Mohammad Husain Layas, the LIA’s executive director at the time who was appointed personally by Colonel Gaddafi, and Mustafa Mohamed Zarti, then-LIA deputy executive director who was recommended by Gaddafi’s son, were two of those who the LIA says benefitted from the bribes (though they may not have been the “ultimate recipients”).

“Individuals seeking to promote themselves politically within Libya and to take control of the country’s sovereign wealth fund saw this as an opportunity to accuse Giahmi of wrongdoing, rather than acknowledging that the downturn in the market had resulted in the LIA's losses.”
Kathryn Garbett, Head of Fraud Defence, Mishcon de Reya

The LIA also claimed in court documents that SocGen bankers had used code words to cover up alleged corrupt activity. For example, “Men in Black” referred to members of Libya's secret police who were “procured” to intimidate officials from Libya’s central bank to buy financial products from Elyes Jebali, SocGen’s then head of sales for structured investments for North Africa and Saudi Arabia, who the LIA said had “personal connections” with Giahmi.

SocGen had always denied wrongdoing, saying the money was for introductory services and market research. When the LIA filed its lawsuit in March 2014, the bank contested “the unfounded allegations in the Libyan Investment Authority’s (LIA) complaint.” Even in its latest annual report the bank said that it “firmly refutes such allegations and any claim calling into question the lawfulness of these investments.”

But what a difference three years can make, and the LIA’s deep pockets that were able to fund an army of lawyers, professional services firms, forensic investigators, PR professionals, and receivers may have also had an impact. Indeed, lawyers familiar with the case have remarked upon the LIA’s “mob-handedness” and its decision to engage a vast legal team that included four QCs. Several lawyers estimate that around a third of the settlement payment—some U.S.$300m or more—will be used to pay-off the LIA’s legal costs.

“There is no doubt that the LIA meant business, and it has the cash to throw at lawyers. Unfortunately, litigation is a gamble and there’s no guarantee that it would have won in court, despite its impressive array of lawyers. The settlement is probably the best outcome given the ruling in the Goldman Sachs case,” says one lawyer who declined to be named. (See sidebar for details of the Goldman Sachs case.)

In a terse statement published on both Websites on 4 May, SocGen and the LIA jointly announced that they had signed a confidential settlement agreement that “resolves all matters between both parties concerning five financial transactions entered into between 2007 and 2009 that have been the subject of legal action in the English High Court.”

SocGen added that it “wishes to place on record its regret about the lack of caution of some of its employees” and “apologises to the LIA and hopes that the challenges faced at this difficult time in Libya's development are soon overcome.”

Much of the SocGen trial was going to be held behind closed doors to protect the identities of Libyans named in court. Some of the bank’s executives were also due to give evidence in private to avoid the risk of incriminating themselves in a separate U.S. Department of Justice investigation into whether banks, hedge funds, and private equity firms violated anti-bribery laws in Libya. (The judge ruled that the evidence they would give in the U.K. proceedings would not be passed to the U.S. proceedings and would not be reported.)

The LIA case against Goldman Sachs

The case against SocGen is not the first billion-dollar damages claim that the LIA has made against a western bank over disputed trades executed between 2007 and 2009.
Last October the wealth fund lost a US$1.2bn High Court case in London against Goldman Sachs over nine disputed trades. The LIA’s argument was that it was too unsophisticated to understand what it was buying.
The organisation claimed Goldman Sachs took advantage of the low level of financial literacy of LIA staff, and suggested large and risky trades that led to heavy losses for the Libyans and large margins (reportedly US$222m) for the bank.
While Goldman Sachs won the dispute, embarrassing details, such as text messages between a former salesman and an alleged prostitute, emerged during the court case.
Moreover, communications that could have been monitored and should have been flagged up that gave ample warning of the kind of culture that the bank’s traders revelled in were seemingly not acted upon.
Driss Ben-Brahim, a former Goldman banker, said in an email at the time: “They are very unsophisticated — and anyone could ‘rape’ them.” Laurent Lalou, a Goldman vice-president, described a Goldman presentation to the LIA team as being a pitch “to someone who lives in the middle of the desert with his camels?.?.?.” according to the LIA’s opening written submissions.
—Neil Hodge

In its results for the first quarter—released on the same day as the press statement regarding its settlement—SocGen said that it has booked €350m in extra provisions, adding that “the impact of this settlement in full-year group net income is fully covered as from Q1 2017.”

At the same time SocGen Chief Executive Fre´de´ric Oude´a said that the bank aimed to resolve other ongoing (but unspecified) legal disputes, as well as clean up its corporate culture. “Over the next few quarters, the group will continue actively working to bring an end to past disputes and complete the culture and conduct projects in order to further enhance the quality of its services and the control of its risks,” he said.

Compliance Week approached SocGen to ask if any of the employees who exercised a “lack of caution” were senior managers and if they were still working at the bank or had been removed or disciplined. We also asked what steps have been taken subsequently to ensure such conduct is not repeated, as well as whether the settlement might have any impact on the ongoing U.S. investigations. The bank declined to comment.

While SocGen has seemingly admitted partial blame (one lawyer says the settlement and admission that some employees exercised a “lack of caution” is a “cynical” attempt by the bank to reduce the claim from U.S.$1.5bn to U.S.$1bn), Giahmi has been exonerated, with the LIA being liable for his costs.

His defence lawyer, Kathryn Garbett, head of fraud defence at law firm Mishcon de Reya, says that she was only told of the LIA's decision to discontinue the claim against Giahmi at 6.30 a.m. on 3 May—just four hours before the parties were due to appear in court for the first day of the trial.

According to Garbett, during the course of the proceedings, Giahmi provided full disclosure of all of his financial records and telephone communications dating back to 2006, which showed no illegal payments at all. He was also forced to seek confidentiality protection for the identities of other individuals in Libya giving evidence in the proceedings because of the risks to their lives and the lives of their families. The Court agreed to impose these protective measures in the face of opposition from the LIA.

Garbett says that the LIA’s complaint was based on “purely inferential” claims against Giahmi, adding that “there was no evidence against Giahmi when the original complaint was filed, and none came to light after extensive document disclosure.”

She adds: “Individuals seeking to promote themselves politically within Libya and to take control of the country’s sovereign wealth fund saw this as an opportunity to accuse Giahmi of wrongdoing, rather than acknowledging that the downturn in the market had resulted in the LIA’s losses.”

David Kirk, a partner at law firm McGuireWoods, says that the case is a reminder to compliance professionals that “there is always a possibility in high-risk countries, where you are dealing with organisations that are headed up or influenced by high-ranking politicians and powerful family connections, that your organisation could be blamed and take the fall when things go wrong.”

One legal expert, who declined to be named, says that SocGen should not have had to settle. “It’s a bloody cheek, frankly. The LIA sponsored the corruption in the first place and has said that its own representatives benefitted from it.”

“The trades were probably the right trades at the right time. The LIA just doesn’t like to think that prices can fall as well as go up,” he adds.