Funds News

Libya SWF adviser says execs who invested in derivatives were financially "illiterate"

LONDON (Reuters) - Top decision makers at Libya’s $67 billion sovereign wealth fund were “illiterate” in terms of investment with little knowledge of the derivatives instruments purchased on the advice of Goldman Sachs, an adviser to the fund told a court on Thursday.

In a closely watched case in the City of London, the Libyan Investment Authority (LIA) is attempting to claw back $1.2 billion from the U.S. investment bank from nine disputed trades carried out in 2008.

The LIA argues that the U.S. bank took advantage of its financial naivety by first gaining its trust, then encouraging it to make risky and ultimately worthless investments.

Goldman Sachs, which denies all the allegations, maintains that the trades in question “were not difficult to understand”. It has pledged to defend itself against the LIA’s claims, describing them as “without merit”.

Robert Miles, a lawyer acting for Goldman, noted while questioning a witness called by the LIA that Mohamed Husain Layas, the Libyan fund’s now deceased executive director, had worked in banking for over 30 years, including a stint on the board of Bahrain-based Arab Banking Corporation (ABC).

He said the Bank ABC statements showed the institution provided a series of complex financial products to clients and also traded such instruments, indicating Layas had been familiar with these products.

But London-based financial consultant Ali Baruni, who advised the LIA between April and September 2007, described Layas as “illiterate in terms of investments”.

Baruni said he had resigned after the fund ignored his advice and invested in certain products recommended by Goldman Sachs. He resumed working with the LIA as a consultant in 2013, he told the court.

His witness statement, seen by Reuters, shows he has held several banking and consultancy roles since 1978, including at Bankers Trust and the Saudi American Bank.

Appearing as a witness for the LIA, Baruni told the court:

“I have talked to Mr Layas about some investments, but not derivatives, investments in equities, fixed income and real estate and whatever and his level of sophistication on all of those was very basic.”

“I would be astonished if he had any understanding of derivatives,” he added.

Baruni said in his witness statement that by the autumn of 2007, the LIA’s senior management had begun to place too much trust in Goldman Sachs, leading the fund executives to “behave in an unprofessional manner”.

Goldman Sachs says its relationship with the LIA was at all “material times an arm’s length one” between banker and client.

Miles said there was no evidence to say the LIA had been “financially illiterate” when it made the investments.

“You have no basis for that, it’s just advocacy,” he told Baruni, noting that Hatim Gheriani, another LIA official who had led the alternative investment team and then became CIO, was an experienced banker whose career prior to the LIA included working at Commerzbank in London.

Baruni replied that he had “never heard Mr Gheriani speak to me with any level of sophistication on derivatives, valuation of equities or almost any other field of investment”.

Gheriani whose LinkedIn page shows he worked at HSBC Middle East between 2010-2014 after his stint at the LIA, could not be reached for comment.

Libya set up the LIA in 2006, aiming to invest reserves accumulated from oil revenues and to integrate its economy into the international financial system after years of sanctions.

Abdulfatah Enaami, who was head of direct investments at the LIA between April 2008 and June 2012, took the witness stand after Baruni.

Enaami, now employed by the state-run Libyan Foreign Bank told the court that meeting international bankers after sanctions on Libya were lifted had been a new experience for Libyan officials.

He said the fund had been under the impression it would be buying direct shares in companies but had instead received “something else synthetic that we couldn’t understand”.

“We were always relying on the trust and confidence that they would offer us the best product that they can offer,” Enaami said. “We were not fully aware they would be selling no matter what...we discovered that afterwards.”

Editing by Larry King and Hugh Lawson