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http://www.wsj.com/articles/libyanfundofficialsdidntunderstandgoldmantradesattorneysays1467150387

MARKETS

Libyan Fund Officials Didn t

Understand Goldman Trades, Attorney
Says

Managers at the Libyan Investment Authority mistakenly thought they were buying actual
shares through derivatives trades, witness testifies at London trial

LibyaswealthfundissuingGoldmanfor$1.2billion.PHOTO:IMAGINECHINA/ASSOCIATEDPRESS

By SIMON CLARK
Updated June 28, 2016 10:19 p.m. ET
Libyas sovereign-wealth fund was astonished to learn it hadnt acquired any actual
shares through derivatives trades arranged by Goldman Sachs Group Inc., according to a
former lawyer for the fund who gave evidence in the High Court in London on Tuesday.
The Libyan Investment Authority, or LIA, is suing Goldman for $1.2 billion to cover its
losses from nine trades arranged in 2008. Those trades took the form of equity
derivatives and expired worthless in 2011. The LIA alleges that Goldman executives
exerted undue influence over its officials, who didnt understand the trades. Goldman
earned about $222 million from the trades, according to the LIA. Goldman disputes the

amount of profit it made. Goldman denies wrongdoing in the case. Its lawyers have said
that the LIA chose to make the trades, which didnt perform as expected because of the
global financial crisis.
We maintain that the LIA fully understood the disputed trades, a Goldman spokesman
said. The LIAs claim has no merit and we vigorously defend it.
Catherine McDougall was temporarily transferred to the LIA by London-based law firm
Allen & Overy for six weeks in July and August 2008. She told the High Court on
Tuesday that after arriving in Tripoli she was surprised to learn that the Libyan fund
managers didnt understand the trades they had entered into with Goldman.
There was a sea of confusion at the LIA, which ranged from an understanding that they
had purchased shares, quasi-shares or shares with deferred payment, Ms. McDougall
said. I was really surprised as it did not take rocket science to realize that the product
was completely synthetic, she said. There were no shares involved. The cash-based
trades were tied to movements in the share prices of companies including Citigroup Inc.
but didnt confer ownership of the shares.
The Libyan fund managers were in awe of Goldman banker Youssef Kabbaj, whom
they saw as a friend and had complete trust in, Ms. McDougall said in her witness
statement. Mr. Kabbaj exploited them, she said. I expect Goldman Sachs to correct
the facts and protect my reputation, Mr. Kabbaj wrote in a June 13 email to The Wall
Street Journal.
I explained that he was actually a salesperson who would have seen the LIA as an
opportunity to earn a large bonus, she said in her statement. They did not understand
how Goldman Sachs staff would personally benefit from these trades through bonuses
and promotions.
Goldmans lawyer, Robert Miles, asked her if LIA officials were trying to blame the
New York-based investment bank because they had realized by July 2008 that the trades
werent working in their favor. I dont think so, Ms. McDougall responded.

Mr. Miles has spent almost two weeks questioning current and former LIA officials to
try to show that they understood more about finance and the trades than they claimed.

The trial provides a rare insight into the workings of a fledgling sovereign-wealth fund
as Wall Street banks scrambled to win business. The LIA was created in 2006 to manage
income from Libyas oil fields after the country was removed from the U.S. governments
list of state sponsors of terrorism.
Emails between Goldman bankers reveal one executive comparing a Libyan to
someone who lives in the middle of the desert with his camels, court documents show.
On training visits to Goldmans London office, Libyan officials were entertained in
restaurants, documents show. The younger brother of senior LIA official Mustafa Zarti
received a Goldman internship in a bid to gain influence and business, the fund alleges.
Goldman says the internship isnt important. We do not believe the internship
influenced in any way the LIAs decision to enter into the trades, a Goldman spokesman
said.
Goldmans relationship with the LIA finally broke down in a stormy meeting in Tripoli
on July 23, 2008, which Ms. McDougall said she attended along with Goldman bankers
including Mr. Kabbaj and LIA officials. During the meeting, Mr. Zarti said that Goldman
had screwed the LIA, according to Ms. McDougall.
He launched into a very angry tirade, saying that he had a bad side as well as a good side
and that he could come after their families, she wrote in her statement. Mr. Kabbajs
face became white in shock. Mr. Zarti then cursed Mr. Kabbaj in English, she said.
Mr. Kabbaj no longer works at Goldman and isnt due to testify in court. In his June 13
email to The Wall Street Journal Mr. Kabbaj referred to a November 2008 letter sent by
law firm Withers to Goldman on his behalf. The letter has been disclosed in court.
The letter said that during the July 23, 2008, meeting in Tripoli, Mr. Zarti called
Goldman a bank of Mafiosi which had lied to him about the trades. I can make you
disappear and nobody will ever hear back from you, Mr. Zarti told Mr. Kabbaj,
according to the letter. A spokesman for Mr. Zarti declined to comment on the court
case.
Following the meeting, Mr. Kabbaj met with senior Goldman banker Andrea Vella to
discuss what to do, according to the letter. Mr. Vella was in the background of all the
trades and was effectively in charge of the day-to-day commercial relationship, the
letter said. The letter demanded that Goldman pay Mr. Kabbaj a $9 million guaranteed
bonus otherwise legal proceedings would be commenced against the bank. Goldman
agreed to pay Mr. Kabbaj $4.5 million, court documents show.
Goldmans Mr. Vella is due to appear in court on Thursday for at least four days. Philip
Edey, the LIAs lawyer, asked Judge Vivien Rose to read the 2008 letter before Mr. Vella

appears in court. Goldman said Mr. Vella wasnt available for comment.
Write to Simon Clark at simon.clark@wsj.com

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