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How Libya bet billions on prosperity - and lost

How Libya bet billions on prosperity - and lost By James Titcomb | Telegraph  –  Sat, Aug 23, 2014 18:39 BST Companies: Electricite de France SA Goldman Sachs Group, Inc. (The) Societe Generale Group RELATED QUOTES Symbol Price Change EDF.PA 24.63 -0.07 GS-PB 25.00 +0.03 GLE.PA 39.315 +0.665 C 52.13 +0.50 UCG.MI 6.03 +0.14

links of london Goldman Sachs (NYSE: GS-PB - news ) and Societe Generale (Paris: FR0000130809 - news ) face accusations of deceiving Libya’s sovereign fund, losing it more than $1bn

Links Of London Shop The Tripoli Tower would be cast in shadow on most city skylines but in Libya’s capital, on the coast of the southern Mediterranean, its 25-storey frame looms hundreds of feet above the surrounding business district.

Links Complete with a revolving restaurant at its summit, the Al-Fateh tower, as it was known at the time, heralded the start of a golden era for a new Libya when it was completed in 2003. In September of that year, the United Nations lifted the sanctions imposed on Libya, opening the door for the country to exploit its vast oil reserves to follow in the footsteps of neighbouring Egypt and enter the 21st century.

links of london wholesale Half a decade later, the same tower was where much of this promise fell apart. Star bankers from Goldman Sachs, visiting the 22nd-floor offices of the country’s sovereign wealth fund, the Libyan Investment Authority (LIA), revealed that more than $1bn (£600 million) of investments made via the Wall Street giant had been lost.

Links Of London Jewellery The LIA’s deputy leader, Mustafa Mohamed Zarti, lost his temper, acting “like a raging bull”, according to The Wall Street Journal, and threw out the two bankers, Youssef Kabbaj and Driss Ben-Brahim, who had been entrusted with the LIA money. The two feared the consequences of the LIA’s reaction so much that they fled the country, court documents show.

links of london outlet Goldman was not the only bank to enter Libya’s bad books. Losses with other institutions, not least the French bank Société Générale, in the middle of the financial crisis, meant the LIA losing billions, and along with it, one of Libya’s best opportunities for investment and prosperity.

Three years later, the country collapsed into civil war, tearing apart the economy and infrastructure of what promised to be one of the Arab world’s most prosperous territories. The eventual toppling of Muammar Gaddafi in 2011, and the political infighting and power-grabs that have followed since, left one of the region’s largest wealth funds, with investments all over the world, in limbo. The country’s GDP contracted by 9.6pc last year, while political infighting and strikes at oilfields have threatened to leave Libya missing out on the oil-fuelled boom that much of the region has enjoyed.

Now (NYSE: DNOW - news ) , however, the LIA, which still controls tens of billions of dollars, is staging a fightback. In two London court cases set to unfold over the coming weeks, the money the fund lost at the hands of Goldman and Société Générale will be clawed back, or so the LIA hopes. The losses are not contested.

The downfall of the fund’s investments, and the subsequent accusations made against the banks, make for compelling reading. The LIA alleges that Goldman, at the height of its hubris in the mid-2000s, duped executives at the fund into investing more than $1bn in complex derivatives while making $350m in fees for itself. Société Générale, meanwhile, is accused of dishing out tens of millions in sweeteners to powerful individuals, including members of the Gaddafi family, via an intermediary in Panama, to assure they approved transactions without proper scrutiny.

Both banks have staunchly denied any wrongdoing. “We continue to believe this case is entirely without merit and intend to contest it vigorously as it moves through the legal process,” a Goldman spokesman said. A Société Générale spokesman said the bank “refutes the claims, which it believes are entirely without merit”.

After a bout of wrangling between the City law firms representing the LIA and the banks, the cases are now expected to reach court.

Last week, Goldman retracted its request to have the case thrown out and, as The Sunday Telegraph reports today, Société Générale’s lawyers have informed the LIA that they also plan to let the case run its course, having previously threatened to have it

dismissed.

A series of hearings, expected in October and November, will see what LIA insiders claim is an “insurmountable” amount of evidence produced to back up the claim that executives at the fund were hoodwinked or bribed into entrusting billions to the banks.

According to sources familiar with the situation, the LIA’s lawyers at City firm Enyo believe the witness statements they have gathered will “blow them [the banks] out of the water”.

The fund claimed last week that Goldman’s attempt to dismiss the case was merely tactical posturing, although others argue that the LIA has repeatedly shifted positions, and that it is simply easier for the banks’ solicitors, Herbert Smith, to let the cases run their course rather than to aim at a moving target.

A couple of high-stakes court cases 2,000 miles away is hardly what anyone imagined as the Gaddafi regime was slowly brought in from the cold in the mid-2000s. The freeing-up of $60bn of Libya’s oil money, alongside the creation of other wealth funds in the Arab world, saw global banks eyeing a gold rush that had not been seen in years. The period brought the establishment of similar bodies in Abu Dhabi, Qatar and Dubai, all eager to invest their vast sums of petrodollars.

In 2006, tens of billions of foreign dollars that had been left sitting in Libya’s central bank, or generating lacklustre yields in safe bonds, was earmarked by Gaddafi and his London-educated son Saif for the LIA. They each appointed a trusted lieutenant, Mohamed Layas and Mustafa Mohamed Zarti respectively, to run the ship.

According to court documents, the two — along with most of the LIA at the time — “had extremely limited legal and financial expertise”, and were appointed largely for being Libyan nationals with a modicum of international business history and a grasp of English. Layas and Zarti were bombarded with banks and funds looking to invest their money.

The key to the doors of the LIA, however, appeared to be close connections to the Gaddafis. As Libya opened up to the world, Tarek Ben Halim, an exile who had forged a lucrative career as a Goldman investment banker in London, received a call from Saif Gaddafi asking him to help modernise Libya’s financial system.

This kicked off what Goldman allegedly referred to as a “partnership” with the LIA. Kabbaj and Ben-Brahim, the two men who led the Goldman charm offensive, were given freedom of the LIA’s offices. The two men, who have since left the bank, were lionised by staff, who hoped an association with the bankers would give them a leg up.

“The Goldman representatives came and went freely; they sat at and used the same desks as the LIA’s own employees … they had access to all of the LIA’s systems and information,” documents from the LIA state.

Kabbaj was especially close with the LIA, it is claimed. Staff at the sovereign fund were whisked away on Goldman-funded jaunts to Morocco and showered with gifts such as aftershave and chocolate when he visited Tripoli. Staff were even promised training at Goldman’s “university” in London, it is claimed.

Amid all this, Goldman was able to invest $1.8bn of Libyan money without, so the LIA says, the fund doing even the bare minimum of due diligence.

The bank invested in swaps linked to the share prices of Citigroup (NYSE: C - news ) , Santander, Allianz, Italy’s UniCredit (Milan: UCG.MI - news ) and the French and Spanish energy giants EdF (Paris: FR0010242511 - news ) and ENI (NYSE: E - news ) .

Nothing was deemed amiss until Catherine McDougall, an Australian lawyer working at the law firm Allen & Overy, joined the fund on a secondment.

Court documents state that McDougall, reviewing the trades Goldman had made, found that “rather than being cautious investments . . . (as the LIA had previously thought), [they] were actually complex derivatives and synthetic instruments which represented highly speculative gambles”.

When Zarti was told, he lost his temper and, once Kabbaj had confirmed that the vast majority of the money had been lost on risky bets, the relationship with Goldman was cut off. By the end of 2008, it is claimed, the original $1.8bn investment had collapsed, now worth just $25m.

Goldman’s scramble to repair the relationship went all the way to Lloyd Blankfein, its chief executive, and its European head Michael Sherwood, according to reports. The LIA was even offered the opportunity to invest $3.7bn in the bank, and offered substantial returns, in an attempt to win back favour.

Société Générale, so the LIA claims, was far less cosy with the fund’s staff, although the methods it is said to have used to win business were no less effective.

The fund alleges that five separate payments worth almost $60m from Société Générale were sent to Leinada, a Panama-registered company. It claims the money was filtered by Leinada through to officials at the highest levels, including members of the Gaddafi family and senior LIA individuals, including its most senior leaders, Layas and Zarti, so that the fund would enter into certain trades.

The LIA says that Leinada provided no service except to process the alleged bribes. “The payments were purportedly for advisory support, including around structuring the transactions, though the legal papers highlight that the descriptions of the services provided were deliberately opaque and inconsistent,” the fund alleges. Where the claims lead to from here remains to be seen but the outcome is unlikely to make up for Libya’s woeful use of its funds.

According to an audit conducted by Deloitte at the end of 2012, the fund’s assets are valued at $66bn, almost unmoved from its creation the best part of a decade ago, with much of it still frozen as a legacy of sanctions established during the 2011 uprising. Its current state remains unclear — among its few public disclosures are a 3pc stake in Pearson (Xetra: 858266 - news ) , the FTSE 100 publishing group, and 2pc of Finmeccanica — the Italian defence group.

Oil output in Libya remains at a third of its pre-2011 peak and government revenues from production halved in the first five months of the year.

Central bank reserves — the money that funded the LIA — have hit the lowest level since before 2005 to fund a swelling deficit, and a third of its remaining cash is expected to drain away next year.

Unemployment is at a record high, corruption remains rife and Libya ranks 187th out of 189 countries for business conditions, according to the World Bank.

Amid a desperate need for investment and new funds, the billions the LIA still controls could be a vital resource.

However, the fund has been blighted by allegations of continued links to officials in the Gaddafi regime. Layas and Zarti, who oversaw its operations in the Gaddafi days, were last reported to be living in Egypt and Vienna, having left the LIA as violence erupted on the streets of Tripoli

in 2011.

The man who replaced Layas at the top, Abdulmagid Breish, was removed when a new law forced anyone with links to the Gaddafi regime out of public office.

As The Daily Telegraph revealed last week, the World Bank’s Ahmed Attiga is expected to take the role at the top before the end of the year.

However events play out in London with Goldman and Société Générale, the LIA’s troubles are unlikely to be solved quickly.

Attiga has a serious job on his hands.

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