Most people think of brokerage houses as enterprises that invest for the public in one country or another, but the real money for these powerful companies has lately come from deals struck with foreign governments and foreign municipalities.
One of the most flagrant examples of how brokerage houses can make fabulous profits from deals that ultimately are worthless to the investor, is a deal that Goldman Sachs struck with the Libya Investment Authority, a deeply pocketed fund worth billions of dollars that was manipulated and ultimately under the control of deposed, assassinated leader Muammar Ghadafi.
Goldman Sachs sent a crack team in the mid 2000's, from the Fleet Street office, to hammer out a deal that would give them access to more than 60 billion dollars held in the Libyan Investment Authority. The fund collected the profits from the lucrative oil production controlled by Ghadafi.
The news of this deal became public domain once the present Libyan government sought to recover funds that were misappropriated during Ghadafi's rule, in a complaint presently before the Court in England.
In the claim, now in the British High Court, the Libyan government alleges that the administrators of the Lybia Investment Fund were lured into a deal with Goldman Sachs through the use of perks and goods that plied the managers of the fund into agreeing to a very un-lucrative deal.
Through a labyrinthine network of connections that finally and always led to one of Ghdadafi's family members, the person who won control of the fund was a man with close ties to Saif al-Islam, one of Ghadafi's sons.
In the end, Goldman Sachs gained access to the multi billion dollar fund, and was allowed to invest part of the large fund in a deal that made Goldman Sachs 350 million dollars in profit in a deal worth on paper 1 billion dollars, but which in the end proved to be utterly worthless to the fund and its investors.
The allegations in the complaint detail how Goldman Sachs apparently manipulated naive and inexperienced Libyan Investment Authority personnel to gain access to the money.
At stake, as has been before in international brokerage transactions, are sovereign wealth funds, which is exactly what the Libyan Investment Authority was, were the unusual, and in the complaint outlined as highly unethical transactions. Just like Greece, whose sovereign funds were wiped out by the dumping of worthless mortgage derivatives, so the Libyan fund was used to invest money that netted Goldman Sachs a hefty commission but lost nearly all the value of the fund.
Things were so irregular in the Libyan fund deal, that Goldman Sachs employees were able to gain free access to the offices of the fund. Most of the people who were manning the Fund office had little expertise and did not even have a computer to follow trades. One could say that Goldman Sachs took over, and no one at the fund even understood what they were doing.
That's when Goldman Sachs put half a billion dollars in deposit and begun, just like in Greece, to 'dump' derivatives that were originated by banks such as Citigroup, Banco Santander, and EDF Energy, with an investment total of 1 billion dollar value on paper into the fund.
The administrators of the Libyan Investment Authority who were dealing with Goldman Sachs did not even question the deal or have private counsel peruse or oversee the deal or the investments. Not long after, the fund sunk, wildly underperfoming and taking with it almost all its value. By 2008, the 1 billion dollar deal was nearly worthless.
The investigation into the deal also brought to light the fact that the standard legal documents usually employed in such high stakes brokerage deals were not even signed.
An Australian lawyer investigating the deal, noted how the lack of proper documentation probably prompted Goldman Sachs to invest the fund in a very high risk manner, transacting highly speculative mixes of derivatives and synthetic financial instruments that were - and are - considered amongst the most volatile instruments in the market.
The claim now seeks to gain back monies from the deal, since it alleges that Goldman Sachs used unsavory practices, such as plying inexperienced personnel and investing in notoriously risky derivatives to obtain the huge commission. It also seeks a refund of all the commission fees expended with interest, and the capital lost in the bad investments.
Of course Goldman is rebuffing the accusations in the complaint as lies, with the accusation of Goldman Sachs' alleged predatory practice of basically taking over the fund in a fiduciary capacity repulsed as unfounded. The brokerage firm insists that it was the Libyan Investment Authority which eagerly engaged its services, and even suggested the bad trades in question.
As far as Goldman Sachs is concerned, the claim is just another small bump on the road. Notwithstanding a long history of questionable practices, which have been the subject of numerous lawsuits against Goldman Sachs, the large investment corporation will not see its activities curbed anytime soon, whether or not the British court finds the complaint with cause and awards the Libyan government the award.
Muammar Ghadafi's death, and the annihilation of his family and base of power, afforded the broker who linked the Libyan fund to Goldman Sachs, Mustafa Zarti, a new life. After the fallout of the investment deal, he was dragged before the fund principals and excoriated, so much so that he feared for his life. After all, he was the man 'suggested' by Ghadafi and friend of his son Saif, to be the link, and he was responsible in some way. Knowing how Ghadafi dealt with people who wronged him, prompted him to hire bodyguards.
However, Mustafa Zarti is now working at GLG partners after leaving Goldman Sachs.
Business is, and remains, as usual.
Source : the Independent/ 1.31.14
