LONDON - A Goldman Sachs executive footed the bill for prostitutes and the bank paid for a lavish trip to Dubai for the brother of a decision-maker at Libya's sovereign wealth fund, a lawyer for the fund alleged on Monday, in a case it has brought against Goldman in London's High Court.
The Libyan Investment Authority (LIA) is attempting to claw back US$1.2 billion (S$1.6 billion) from nine trades it carried out with Goldman Sachs in 2008. In the suit, the US$67 billion fund argues that the US investment bank took advantage of its financial naivety by first gaining its trust, then encouraging it to make risky and ultimately worthless investments in equity derivatives.
Goldman Sachs denies all the allegations. "The claims are without merit and we will continue to defend them vigorously," the bank said in an emailed statement to Reuters on Friday.
The LIA's claim hinges in part on its allegations that the trades were procured under "undue influence". It specifically cites an internship that Goldman Sachs provided for Haitem Zarti, the brother of Mustafa Zarti, the LIA's former deputy chief and a key decision-maker at the fund.
The LIA alleges that Mustafa Zarti's willingness to do business with Goldman was influenced by the favourable treatment it was conferring on his brother in providing an internship. Neither side disputes that the internship took place.
In his opening statement on Monday for the LIA, lawyer Roger Masefield said that in February 2008 Goldman Sachs sales team executive Youssef Kabbaj had flown Haitem Zarti from Morocco to Dubai at Goldman Sachs' expense.
According to the LIA's claim, accommodation at the five-star Ritz Carlton was also paid for by Goldman, whilst Kabbaj arranged for two prostitutes to spend the evening with them at a cost of US$600, Masefield said.
Blackberry SMS messages between Kabbaj and a woman named Michella were released to the court on Tuesday, in which Kabbaj negotiates a rate with Michella.
Masefield said it was "perfectly clear" that Michella was a prostitute and that Kabbaj had secured the services of her and her friend for the evening.
Following the trip, Masefield said Kabbaj had reported back to a Goldman partner Driss Ben-Brahim that it had been a great success, and he had managed to create very strong links to (Haitem Zarti) and his family ... His brother is delighted." Neither Zarti is connected with the fund now. Reuters could not reach either of the brothers for comment.
The bank does not deny that it paid for some flights and hotels, but Kabbaj did not seek to expense the cost of the prostitutes to Goldman, and the bank did not know about it at the time, a source familiar with the bank's position said.
In an emailed response on Tuesday to the allegations made in court, Kabbaj told Reuters: "GS or myself have never paid for any improper entertainment for clients including LIA and Haitem Zarti. "All my expenses relating to LIA have been signed off by at least two senior partners and fully reimbursed by GS, including any restaurant in London and all LIA-related travel expenses to Morocco," he added. He did not name any of the senior partners.
Robert Miles, a lawyer acting for Goldman, said in his opening statement on Tuesday that documents showed the LIA understood a good deal more than they now "pretend".
In its court filings the bank says the LIA was the victim of an unforeseen financial depression, not of any wrongdoing by Goldman. "Equity markets fell and underlying stocks tanked," said Miles, adding that the LIA was now seeking the return of money from an investment that had turned out badly for it.
Goldman Sachs argues that it was always clear the relationship was one in which the LIA and the bank were dealing with each other as commercial counterparties, and from which each side would seek to profit financially.
Goldman also maintains that its relationship with the LIA was at all "material times an arm's length one" between banker and client, and that the trades in question "were not hard for the LIA to understand".
The bank also rebuts the suggestion that the LIA's employees were naive or unsophisticated. "The LIA's plea that it was 'financially illiterate' is as unfounded as it is extreme," the bank argues.
The LIA is also pursuing the French investment bank Societe Generale for some US$2.1 billion in relation to another set of trades entered into between 2007 and 2009. SocGen is contesting the case, which is only expected to come to trial in January 2017.
The Goldman Sachs case is scheduled to run for seven weeks.