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England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> The Libyan Investment Authority v Goldman Sachs International  EWHC 2530 (Ch) (14 October 2016)
Cite as:  EWHC 2530 (Ch)
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Strand, London, WC2A 2LL
B e f o r e :
| THE LIBYAN INVESTMENT AUTHORITY
(incorporated under the laws of the State of Libya)
|- and -
|GOLDMAN SACHS INTERNATIONAL
ROBERT MILES QC, ORLANDO GLEDHILL, RUPERT ALLEN (instructed by Herbert Smith Freehills LLP) for the Defendant
Hearing dates: 13th June – 17th June, 20th June – 24th June, 27th June, 28th June, 30th June, 1st July, 4th July – 8th July, 11th July – 15th July, 18th July, 21st July, 26th July – 29th July 2016.
Crown Copyright ©
II THE PARTIES
|(a) The LIA||13|
|(b) Goldman Sachs||20|
III THE EVIDENCE AT TRIAL
|(a) Witnesses of fact for the LIA||21|
|(b) Witnesses of fact for Goldman Sachs||33|
|(c) Assessment of the evidence of the factual witnesses||37|
|(d) Missing witnesses||45|
|(e) Contemporaneous documents||53|
IV THE FEATURES OF THE DISPUTED TRADES
V THE HISTORY OF DEALINGS BETWEEN THE PARTIES
|(a) The early stages: summer 2007||67|
|(b) The investment in the Petershill and Mezzanine Funds||75|
|(c) Autumn 2007||77|
|(d) The Citigroup Trades||82|
|(e) The EdF Trades||100|
|(f) The April Trades||110|
|(g) Events following the April Trades||123|
|(h) The Stormy Meeting and the end of the relationship||126|
VI THE LAW
|(a) Actual and presumed undue influence||133|
|(b) The unconscionable bargain claim||159|
VII ACTUAL UNDUE INFLUENCE: THE HAITEM ZARTI INTERNSHIP AND THE APRIL TRADES
VIII DID A PROTECTED RELATIONSHIP ARISE BETWEEN THE LIA AND GOLDMAN SACHS?
|(a) The level of sophistication at the LIA||197|
|(i) The level of sophistication of the Board of Directors||200|
|(ii) The level of sophistication of Mr Layas||203|
|(iii) The level of sophistication of Mr Zarti||211|
|(iv) The level of sophistication of the Equity Team||214|
|(v) Goldman Sachs' view of the sophistication of the LIA||224|
|(b) Other factors relevant to the existence of the protected relationship||226|
|(i) References to the desire of Goldman Sachs to build a strategic partnership||228|
|(ii) The provision of training, research and general assistance||234|
|(iii) Corporate hospitality and gifts||238|
|(iv) The presence of Mr Kabbaj at the LIA's offices in Tripoli||241|
|(v) Advisory work on other deals||248|
|(vi) Incidents arising from the history of dealings between the parties||259|
|(vii) Goldman Sachs' view of the relationship||269|
|(viii) The deals which LIA refused to do||270|
|(ix) The deals that the LIA did with other counterparties||275|
|(x) Conclusion on the factors relevant to the protected relationship||278|
IX BREACHES OF THE DUTY OF CANDOUR AND FAIRNESS
|(a) The Board and Mr Layas' understanding of the nature of the Disputed Trades||285|
|(i) Mr Layas' presentation of the Citigroup Trade to the LIA Board||290|
|(ii) The exchange about the call option in the forex trade||309|
|(iii) The confirmation letters||312|
|(b) Mr Zarti's understanding of the nature of the Disputed Trades||319|
|(i) Presentations to the Board of Directors||321|
|(ii) The Stormy Meeting||323|
|(c) The Equity Team's understanding about the Disputed Trades||334|
|(d) Conclusions about actual undue influence: the LIA's misunderstandings and Goldman Sachs' knowledge||349|
X PRESUMED UNDUE INFLUENCE: DO THE DISPUTED TRADES CALL FOR AN EXPLANATION?
|(a) Did Goldman Sachs earn excessive profits on the Disputed Trades?||352|
|(i) How trades are priced||356|
|(ii) Booking the trade||363|
|(iii) What was the level of profit earned on the Disputed Trades?||364|
|(iv) Was that profit unusually high?||372|
|(b) Other points on how the prices were arrived at||401|
|(c) Were the Disputed Trades unsuitable for the LIA?||406|
MRS JUSTICE ROSE:
a. Two trades in Citigroup Inc, the US banking corporation, were concluded, one for a premium of $100 million on 24 January 2008 and one for a premium of $100 million on 28 January 2008. These combined Citigroup Trades gave the LIA exposure to about 22 million Citigroup shares which was about three times the number of shares that could be bought with $200 million.
b. Three trades were concluded in respect of the French energy company Électricité de France ('EdF').
- The First EdF Trade was entered into on 19 February 2008 with a premium of €50 million ($73.4 million). This gave the LIA exposure to just over 3 million EdF shares which was 4.6 times the number of shares that it could have bought with €50 million.
- The Second EdF Trade was entered into on 22 February 2008 with a premium of €44.3 million ($65.6 million). This gave the LIA exposure to about 3 million EdF shares, again about 4.6 times what could be bought with the premium.
- The Third EdF Trade was also entered into on 22 February 2008 for a premium of €25 million ($37 million). This gave the LIA notional exposure to just over 1 million shares in EdF, which was a leverage of three times.
c. On 23/24 April 2008 the LIA entered into four further trades with Goldman Sachs ('the April Trades').
- The Santander Trade was for a premium of €95.7 million ($151.7 million) in relation to the Spanish banking group Banco Santander. This gave the LIA notional exposure to over 36 million shares in Santander which was over five times what could be bought with the premium.
- The Allianz Trade was for a premium of €48 million ($75.4 million) in relation to the German insurance group Allianz. The notional exposure was 1.7 million shares with a leverage of 4.6.
- The ENI Trade was for a premium of €96 million ($150 million) in relation to the Italian energy company ENI. This was the most highly leveraged trade with a leverage of 5.2 giving the LIA notional exposure to over 21 million ENI shares.
- The UniCredit Trade was for a premium of €289.3 million ($452.6 million) in relation to the Italian banking group UniCredit. This gave the LIA notional exposure to about 249.5 million shares in UniCredit with a leverage of 4.2.
II THE PARTIES
(a) The LIA
"The objectives of the Authority shall be investment of Libyan Funds / Monies abroad in the various financial and economic fields, on sound economic basis, as would contribute to development of the national economic resources and diversification thereof for achieving the best financial revenues for supporting the Public Treasury resources, and minimizing income fluctuations and other revenues of the State." ????
(b) Goldman Sachs
a. The coverage team. The coverage team's role was to deal directly with clients. This included identifying the client's requirements and negotiating the terms of transactions based on pricing calculations carried out by the trading team. The coverage team for the Disputed Trades consisted principally of Mr Andrea Vella, Mr Yusuf Aliredha and Mr Driss Ben-Brahim (all three were partners in Goldman Sachs) and Mr Youssef Kabbaj, who was an Executive Director.
b. The trading team. The trading team was part of the Securities Division. Its role was to assist in the pricing of trades and to manage the ongoing risk taken on by the bank as a result of entering into transactions. The trading team for the Disputed Trades consisted principally of Mr Philip Berlinski, Mr Vishal Gupta and Mr Krishna Rao in London, and Mr Dmitri Potishko in New York. None of them had significant direct contact with the LIA in relation to the negotiation of the Disputed Trades.
c. The structuring team. The structuring team was also part of the Securities Division. It assisted the trading team in developing structures and pricing. Mr Ian Jensen-Humphreys was the principal representative of the structuring team involved with the Disputed Trades. He had some direct contact with the LIA.
d. The equity derivatives team. This team was part of the Investment Banking Division. It became involved in the Disputed Trades because of its experience in structuring large investments in listed equities. It was led by Mr Chicco di Stasi and included Mr Enrico Magnifico, who at the relevant time was an analyst.
III THE EVIDENCE AT TRIAL
(a) Witnesses of fact for the LIA
Gamal El Harati
Ziad Zekri Benmusa
(b) Witnesses of fact for Goldman Sachs
Philip Berlinski and Dmitri Potishko
(c) Assessment of the evidence of the factual witnesses
"17. Underlying both these errors is a faulty model of memory as a mental record which is fixed at the time of experience of an event and then fades (more or less slowly) over time. In fact, psychological research has demonstrated that memories are fluid and malleable, being constantly rewritten whenever they are retrieved. This is true even of so-called 'flashbulb' memories, that is memories of experiencing or learning of a particularly shocking or traumatic event. (The very description 'flashbulb' memory is in fact misleading, reflecting as it does the misconception that memory operates like a camera or other device that makes a fixed record of an experience.) External information can intrude into a witness's memory, as can his or her own thoughts and beliefs, and both can cause dramatic changes in recollection. Events can come to be recalled as memories which did not happen at all or which happened to someone else (referred to in the literature as a failure of source memory).
18. Memory is especially unreliable when it comes to recalling past beliefs. Our memories of past beliefs are revised to make them more consistent with our present beliefs. Studies have also shown that memory is particularly vulnerable to interference and alteration when a person is presented with new information or suggestions about an event in circumstances where his or her memory of it is already weak due to the passage of time."
"22. In the light of these considerations, the best approach for a judge to adopt in the trial of a commercial case is, in my view, to place little if any reliance at all on witnesses' recollections of what was said in meetings and conversations, and to base factual findings on inferences drawn from the documentary evidence and known or probable facts. This does not mean that oral testimony serves no useful purpose – though its utility is often disproportionate to its length. But its value lies largely, as I see it, in the opportunity which cross-examination affords to subject the documentary record to critical scrutiny and to gauge the personality, motivations and working practices of a witness, rather than in testimony of what the witness recalls of particular conversations and events. Above all, it is important to avoid the fallacy of supposing that, because a witness has confidence in his or her recollection and is honest, evidence based on that recollection provides any reliable guide to the truth."
(d) Missing witnesses
(e) Contemporaneous documents
IV THE FEATURES OF THE DISPUTED TRADES
a. The two Citigroup Trades had a nine month lookback feature but with a 90% floor. This meant that at the maturity of the trades, the price of Citigroup shares would be compared with the lower of the initial strike price or the lowest of the monthly average share prices between January and October 2008;
b. There was no lookback feature for the First EdF Trade;
c. The Second and Third EdF Trades both had a six month lookback;
d. None of the April Trades had a lookback.
a. There was no cap on the upside for the Citigroup Trades;
b. The First EdF Trade had a collar of 140% limiting the benefit to the LIA of any rise in the share price to a rise of 140%. However this cap only applied to 90% of the exposure. The remaining 10% was uncapped;
c. The Second EdF Trade had a collar of 140%;
d. There was no collar on the Third EdF Trade;
e. None of the April Trades had a collar.
V THE HISTORY OF DEALINGS BETWEEN THE PARTIES
(a) The early stages: summer 2007
"As discussed, we have been asked by LIA to present on Monday our recommendations regarding potential investments in the financial sector.
Their intention is to benefit from current market weakness to accumulate on the banks they like: GS, UBS, DB, Fortis... and any other financial institution we may recommend.
They have asked us to enhance our proposal with our stock specific research, ROE analysis in various scenarios vs straight non levered investments, and full disclosure of our pricing models. We would need your assistance in selecting the stocks, pricing these options (on single stock and basket), and coming up with a comprehensive pitch. The customer will rely on our recommendations regarding optimal maturity and strike but will select the stocks and has a target ROE of 30%
Please let me know your availability to discuss this further."
"The structures will be 3y 90-140, 95-135, and 95-135 (75% capped), which should be broad enough to discuss different return profiles for different structures. I will assume a notional investment of $1billion. If the client is interested and wants to get to the next level, we can work on the longer, more thorough presentation and get Francesca, myself and the research analyst to come along for the next trip. I know in this first meeting we need to keep everything simple, and we will streamline the presentation keeping that in mind."
"Within the framework of the Authority's Management pursuit of good investment opportunities, we contacted a number of financial markets experts to discuss the feasibility of purchasing a percentage of shares in certain banks whose values suffered notable decline. The need to invest was confirmed considering that the current financial markets conditions represent an opportunity for purchasing a percentage of shares in leading global banks and institutions.
Based on available indices, we propose purchasing the shares of certain global banks and institutions. It might be more appropriate to form a technical subcommittee designated for following up this matter and entitled to approve the shares purchase process. It should be noted that such investments require prompt decision. This Subcommittee will be proposed a number of banks after studying them and preparing necessary statements in their respect. The Subcommittee's decisions, however, must be presented before the Board of Trustees.
Therefore, we present this matter before you with the hope to approve the formation of the technical subcommittee so that it can meet as soon as possible to benefit from current market conditions."
The arrival of Mr Kabbaj
(b) The investment in the Petershill and Mezzanine Funds
(c) Autumn 2007
"… to create investment portfolios as an indirect investment of not more than the sum of $10 billion (ten billion dollars) in cooperation with specialist international banks and institutions after receiving a technical opinion from a consulting company still to be appointed."
a. the LIA's management were responsible for negotiating for the best possible terms from the banks and financial institutions;
b. international companies must be appointed to track the investments; and
c. there should be a ceiling of $200 million on investment in any particular fund.
(d) The Citigroup Trades
"We consulted with a number of financial analysts specializing in equity markets, who confirmed that the current decline in shares witnessed by markets was not founded on factual bases, and that it was only temporary and caused by illogical panic that adversely affected the value of shares. They further noted that the value of shares will increase again due to the new economic conditions in USA, remaining industrial states, and developing states, which are not expected to suffer recession in the foreseeable future."
"We showed the structure to the chairman of LIA yesterday. He likes the idea of (i) getting exposure to Citi (ii) buying a lookback option on the first 6 months but he thinks that LIA has enough cash not to have to enter into any leveraged structure. On this, his [Chief Investment Officer and Chief Operating Officer] disagree. After some discussion, we agreed to meet this Sunday again to look at the two options: leveraged and unleveraged. GS is to prepare a two pagers in plain English to explain the structures to the chairman. They also specifically asked to have at least 50% participation on the upside. They are flexible on the 5 time leverage so we can do 4 times if needed. They also asked ABC to transfer to GS the $50m of stocks they bought a couple of weeks ago to include them in the structure. Premium investable should be between $50- 130m."
"Q. Do you say that you recall actually discussing the structure of the Citi trade with Mr Layas?
A. So I remember certain things from that meeting that make me conclude that the structure of the transaction would have been discussed.
Q. Well, I suggest to you that you didn't discuss the structure of the transaction and you have no recollection of doing so, did you?
A. So I don't remember exactly the exact discussion about the structure. But we did talk about certain things that would make me, with a certain degree of certainty, believe that we did discuss some salient features of the transaction that was being discussed."
(e) The EdF Trades
"The executive director also emphasized the positive aspects of such involvement, as follows:
• The recommendations of most studies by financial analysts at most investment banks are positive and encourage buying, particularly given that this company has a near-monopoly position in the French market, which gives it support and protection by the French government, being that the French government is the principal owner of this company.
• This investment will contribute to decreasing the effects of the weak US dollar on the Authority, as it will guarantee for the Authority annual capital profit revenues in the euro currency."
"Just spoke with Abdulfettah. On EdF, LIA would like to compare three strategies:
- delta one with lookback paid by dividends
- leveraged similar to Citi
- caesar or any other one we recommend
They are looking to see expected payoffs for 100 m euros and [internal rates of return] as functions of final price.
Enrico, should we meet tomorrow to prepare these?"
"I hereby allow you to use [EUR100,000,000] to pay for the purchase of the EUR50,000,000 worth of EDF shares you were ordered to buy today and the EUR 50,000,000 leveraged structure we agreed to do today. Please execute the FX transaction on best effort basis at market price.
We would also like to transfer the shares purchased to our global custodian HSBC and to novate the leveraged structure to HSBC or to another counterparty we will agree on as soon as the transactions are completed. Please liaise with Mr Abdulfetah Enaami to coordinate this step."
"After this, I believe that the EDF share price began to go down. I recall that Mr Kabbaj then put together a structured deal and Mr Zarti decided that the investment should be structured through Goldman Sachs as Mr Kabbaj had recommended to him the same leveraged structure that would give the LIA the opportunity to benefit from increases in share prices by giving up dividends that he had advised the LIA to use with Citigroup. I recall that while our team was still working on analysing EDF, the price (after falling to its lowest point) was starting to rise again, and Mr Zarti came into our offices extremely annoyed and screamed at Mr Enaami to "start buying". Although, I'm not sure what Mr Zarti expected Mr Enaami to do."
"Just took a call from Chicco.
LIA chairman has approved an additional €25mm premium spend
They will buy a 3yr 100% call with a 3m lookback on the strike as discussed below (notional of approx USD $110mm)
In addition they want to restructure their existing 1 delta position (worth approx. €45mm) They want to sell this to buy a 3yr 100%-140% call spread with a 3m lookback on the lower call strike as below (notional of approx USD $320mm)
Client expectations are for "roughly" 5x leverage on the call spread (i.e. approx 20% offer) and 3x leverage on the call (i.e. 33% offer)"
(f) The April Trades
"Driss and myself spoke with Mustafa for almost an hour today. He has the current names in mind: Barclays, Santander, Siemens, Repsol, ENI, Unicredito, Erste. He wants our analysis, recommendation of type of lookback etc .. he said that he is open to the telecom single name or a basket if we really believe he is overexposed to financials. I told him we will meet him next Wednesday in Tripoli to discuss in details a structure and try to execute it. Mustafa wants to give us something. If we can have him focus, we should be in a good position.
I suggest we help tomorrow with Enrico his team prepare one pager on the names they like in Word and show him a proposal that makes sense."
"The Direct Investments Team seeks to determine the strongest investment opportunities through choosing 4 to 5 companies in each sector, which witnessed a high fall in prices due to the global crisis and not as a result of a fundamental flaw in the companies' structures, to invest in it by buying its shares at the current low price and benefit when the share prices rises when the crisis is over within the next 12 to 18 months."
"The current fall in equity prices is a golden opportunity for direct investment because such opportunities come once every 20 to 25 years"
"The brother/executive manager stated that the data upon which the Authority depends are coming from the investment banks with which the Authority deals like Societe Generale, Goldman Sachs and Lehman Brothers Bank in addition to views of more than thirty financial analysts posted in Bloomberg's website"
(g) Events following the April Trades
(h) The Stormy Meeting and the end of the relationship
"He was shocked. He punched the wall and stood there for a while before looking at me, saying "Did you understand this Gamal?" and leaving the office in anger."
"I remember Akram Rayes, Salah Gadmor (of the Alternative Investments Team), Ms McDougall and someone else from Goldman Sachs were also present. When we confronted Mr Kabbaj and his colleague with what we now understood about the trades and how we felt misled, Mr Zarti lost his temper and started shouting and screaming at Mr Kabbaj saying things like "you tricked us", "No shares? What do you mean no shares?", "you lied to us", and "you will never work again in Libya". He also accused Mr Kabbaj of fooling the LIA. Mr Kabbaj was shaking and neither he nor his colleague was able to answer back. They were both then thrown out of the LIA's offices. Some days after the meeting, Mr Kabbaj called us (the Equity Team) and said that he had called Goldman Sachs to ask them to prepare an evacuation as they were worried what might happen. It was very clear to me from the meeting that Mr Zarti had not previously understood how risky the derivatives were and he was very angry at discovering this."
"Mr Zarti continued in a non-confrontational manner for a little while and asked why the Disputed Trades were sold to the LIA. Some of the Disputed Trades were composed of different options and Mr Zarti asked why he had paid for two when he only needed one - he thought that they only needed one type of derivative to come to the same point. Mr Pentreath tried to provide some complex answer relating to pricing. Mr Zarti then got very angry. He said that he thought Goldman Sachs had ''screwed" the LIA and that he did not trust them. 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. Mr Kabbaj's face became white in shock and Mr Pentreath also seemed very worried."
"…stormed into the board room, screamed something in Arabic at Mr Kabbaj and Mr Pentreath, then cursed at them in English. His curses were along the lines of "fuck your mother, fuck you and get out of my country". I remember thinking that I had experienced the strangest meeting of my career between one of the largest sovereign wealth funds and one of the biggest international banks."
VI THE LAW
"It is worth pausing to notice why it continues to beguile and why it is a heresy. It has the obvious merit of allowing the court to impose what it considers to be a fair solution in the individual case. The principle that equity will restrain the enforcement of legal rights when it would be unconscionable to insist upon them has an attractive breadth. But the reasons why the courts have rejected such generalisations are founded not merely upon authority (see per Lord Radcliffe in Campbell Discount Co. Ltd. v. Bridge  A.C. 600, 626) but also upon practical considerations of business. These are, in summary, that in many forms of transaction it is of great importance that if something happens for which the contract has made express provision, the parties should know with certainty that the terms of the contract will be enforced. The existence of an undefined discretion to refuse to enforce the contract on the ground that this would be "unconscionable" is sufficient to create uncertainty. Even if it is most unlikely that a discretion to grant relief will be exercised, its mere existence enables litigation to be employed as a negotiating tactic. The realities of commercial life are that this may cause injustice which cannot be fully compensated by the ultimate decision in the case."
(a) Actual and presumed undue influence
"What then is the principle? Is it that it is right and expedient to save persons from the consequences of their own folly? Or is it that it is right and expedient to save them from being victimised by other people? In my opinion the doctrine of undue influence is founded upon the second of these two principles. Courts of Equity have never set aside gifts on the ground of the folly, imprudence, or want of foresight on the part of donors. The Courts have always repudiated any such jurisdiction. Huguenin v. Baseley (1) is itself a clear authority to this effect. It would obviously be to encourage folly, recklessness, extravagance and vice if persons could get back property which they foolishly made away with, whether by giving it to charitable institutions or by bestowing it on less worthy objects. On the other hand, to protect people from being forced, tricked or misled in any way by others into parting with their property is one of the most legitimate objects of all laws; and the equitable doctrine of undue influence has grown out of and been developed by the necessity of grappling with insidious forms of spiritual tyranny and with the infinite varieties of fraud."
"36. This passage, which I repeat applies to both forms of undue influence, demonstrates to me that in all cases of undue influence the critical question is whether or not the persuasion or the advice, in other words the influence, has invaded the free volition of the donor to accept or reject the persuasion or advice or withstand the influence. The donor may be led but she must not be driven and her will must be the offspring of her own volition, not a record of someone else's. There is no undue influence unless the donor if she were free and informed could say 'This is not my wish but I must do it'."
"7. … If the intention was produced by an unacceptable means, the law will not permit the transaction to stand. The means used is regarded as an exercise of improper or 'undue' influence, and hence unacceptable, whenever the consent thus procured ought not fairly to be treated as the expression of a person's free will. It is impossible to be more precise or definitive. The circumstances in which one person acquires influence over another, and the manner in which influence may be exercised, vary too widely to permit of any more specific criterion."
"9. … The relationship between two individuals may be such that, without more, one of them is disposed to agree a course of action proposed by the other. Typically this occurs when one person places trust in another to look after his affairs and interests, and the latter betrays this trust by preferring his own interests. He abuses the influence he has acquired."
"11. Even this test is not comprehensive. The principle is not confined to cases of abuse of trust and confidence. It also includes, for instance, cases where a vulnerable person has been exploited. Indeed, there is no single touchstone for determining whether the principle is applicable. Several expressions have been used in an endeavour to encapsulate the essence: trust and confidence, reliance, dependence or vulnerability on the one hand and ascendancy, domination or control on the other. None of these descriptions is perfect. None is all embracing. Each has its proper place."
"Such cases tend to arise where someone relies on the guidance or advice of another, where the other is aware of that reliance and where the person upon whom reliance is placed obtains, or may well obtain, a benefit from the transaction or has some other interest in it being concluded. In addition, there must, of course, be shown to exist a vital element which in this judgment will for convenience be referred to as confidentiality. It is this element which is so impossible to define and which is a matter for the judgment of the court on the facts of any particular case."
"It not infrequently occurs in provincial and country branches of great banks that a relationship is built up over the years, and in due course the senior officials may become trusted councillors of customers of whose affairs they have an intimate knowledge. Confidential trust is placed in them because of a combination of status, goodwill and knowledge. Mr. Head was the last of a relevant chain of those who over the years had earned, or inherited, such trust whilst becoming familiar with the finance and business of the Bundys and the relevant company: he had taken over the accounts from Mr. Bennett (a former assistant manager at Salisbury) of whom Mr. Bundy said "I always trusted him."."
"… nothing in this judgment affects the duties of a bank in the normal case where it is obtaining a guarantee, and in accordance with standard practice explains to the person about to sign its legal effect and the sums involved. When, however, a bank, as in the present case, goes further and advises on more general matters germane to the wisdom of the transaction, that indicates that it may—not necessarily must—be crossing the line into the area of confidentiality so that the court may then have to examine all the facts including, of course, the history leading up to the transaction, to ascertain whether or not that line has, as here, been crossed. It would indeed be rather odd if a bank which vis-a-vis a customer attained a special relationship in some ways akin to that of a 'man of affairs'—something which can be a matter of pride and enhance its local reputation—should not, where a conflict of interest has arisen as between itself and the person advised, be under the resulting duty now under discussion. Once, as was inevitably conceded, it is possible for a bank to be under that duty, it is, as in the present case, simply a question for 'meticulous examination' of the particular facts to see whether that duty has arisen. On the special facts here it did arise and it has been broken."
" … the degree of trust and confidence is such that the party in whom it is reposed, either because he is or has become an adviser of the other or because he has been entrusted with the management of his affairs or everyday needs or for some other reason, is in a position to influence him into effecting the transaction of which complaint is later made."
a. A finding of undue influence does not depend, as a necessary pre-requisite, upon a conclusion that the victim made no decision of her own, or that her will and intention was completely overborne. No doubt there are many examples where that is shown, but a conscious exercise of will may nonetheless be vitiated by undue influence.
b. For an obligation of candour and fairness to be owed by the husband, it is necessary to show that the wife reposes trust and confidence in him. Usually that means she reposes trust and confidence in his conduct of the family's financial affairs.
c. The first instance judge had found that Mrs Hewett regarded her husband as being in charge of the family finances, albeit not to an extent that excluded her from any participation in important decisions. It would be wrong to confine a husband's obligation of candour and fairness when proposing a risky financial transaction to his wife as confined to cases where the wife meekly follows her husband's directions without question. The purpose of an obligation of candour is that the wife should be able to make an informed decision (with or without the benefit of independent advice) properly and fairly appraised of the relevant circumstances. There was therefore a pre-existing relationship of trust and confidence which had been intensified by the husband's solemn promises to meet the mortgage payments in the future.
d. The existence of his affair was a material fact that the duty of candour and fairness obliged Mr Hewett to disclose to his wife.
e. Mrs Hewett did not have to prove that she would not have agreed to the mortgage if she had known of the affair.
f. Her consent was therefore vitiated by the non-disclosure.
"14. Proof that the complainant placed trust and confidence in the other party in relation to the management of the complainant's financial affairs, coupled with a transaction which calls for explanation, will normally be sufficient, failing satisfactory evidence to the contrary, to discharge the burden of proof. On proof of these two matters the stage is set for the court to infer that, in the absence of a satisfactory explanation, the transaction can only have been procured by undue influence. In other words, proof of these two facts is prima facie evidence that the defendant abused the influence he acquired in the parties' relationship. He preferred his own interests. He did not behave fairly to the other. So the evidential burden then shifts to him. It is for him to produce evidence to counter the inference which otherwise should be drawn."
"220. … the expression is no more than shorthand for the proposition that the nature and ingredients of the impugned transaction are essential factors in deciding whether the evidential presumption has arisen and in determining the strength of that presumption. It is not a divining-rod by means of which the presence of undue influence in the procuring of a transaction can be identified. It is merely a description of a transaction which cannot be explained by reference to the ordinary motives by which people are accustomed to act."
"I cannot find .. any warrant for the adoption by the Vice- Chancellor of an objective test of motivation by putting a hypothetical ordinary man in place of the testator and asking how he would have been expected to act. If the question to be investigated is whether the testator acted spontaneously and independently or in response to undue influence, then it seems to me to be quite artificial not to take full account of all that we know of his character and attitudes."
"The presumption of undue influence, … is a rebuttable evidential presumption. It is a presumption which arises if the nature of the relationship between two parties coupled with the nature of the transaction between them is such as justifies, in the absence of any other evidence, an inference that the transaction was procured by the undue influence of one party over the other. This evidential presumption shifts the onus to the dominant party and requires the dominant party, if he is to avoid a finding of undue influence, to adduce some sufficient additional evidence to rebut the presumption. In a case where there has been a full trial, however, the judge must decide on the totality of the evidence before the court whether or not the allegation of undue influence has been proved. In an appropriate case the presumption may carry the complainant home. But it makes no sense to find, on the one hand, that there was no undue influence but, on the other hand, that the presumption applies. If the presumption does, after all the evidence has been heard, still apply, then a finding of undue influence is justified. If, on the other hand, the judge, having heard the evidence, concludes that there was no undue influence, the presumption stands rebutted. A finding of actual undue influence and a finding that there is a presumption of undue influence are not alternatives to one another. The presumption is, I repeat, an evidential presumption. If it applies, and the evidence is not sufficient to rebut it, an allegation of undue influence succeeds."
"Undue influence is exerted when improper means of persuasion are used to procure the complainant's consent to participate in a transaction, such that "the consent thus procured ought not fairly to be treated as the expression of [the complainant's] free will" (see Etridge at para 7 per Lord Nicholls). In such a case, equity proceeds on the basis that the complainant did not consent to the transaction. Is that enough to give rise to an equity in the complainant to set aside the transaction as against the wrongdoer? In my judgment, it is. … I cannot see any reason in principle why (for example) a husband who has fraudulently procured the consent of his wife to participate in a transaction should be able, in effect, to escape the consequences of his wrongdoing by establishing that had he not acted fraudulently, and had his wife had the opportunity to make a free and informed choice, she would have acted in the same way. The fact is that the husband's fraud deprived the wife of the opportunity to make such a choice, and, as I see it, it is that fact which founds the wife's equity (as against her husband) to set aside the transaction."
"84. It has never been part of the proof of undue influence that, but for the relevant abuse of trust, the impugned transaction would not have been entered into. The right to set aside the transaction arises not because, on a but for causation analysis, it would otherwise have been avoided, but because of the equitable wrong constituted by the abuse of confidence was part of the process by which the victim's consent to it was obtained."
(b) The unconscionable bargain claim
"To my mind none of the essential touchstones of an unconscionable bargain are to be found in this case. The first defendant was not at a serious disadvantage to the building society: neither he nor his son had any existing indebtedness towards them. His situation was not exploited by the building society. The building society did not act in a morally reprehensible manner. The transaction, although improvident, was not 'overreaching and oppressive'. In short, the conscience of the court is not shocked."
a. one party has been at a serious disadvantage to the other, whether through poverty, or ignorance, or lack of advice, or otherwise, so that circumstances existed of which unfair advantage could be taken;
b. the weakness of one party has been exploited by the other in some morally culpable manner; and
c. the resulting transaction has been, not merely hard or improvident, but overreaching and oppressive.
VII ACTUAL UNDUE INFLUENCE: THE HAITEM ZARTI INTERNSHIP AND THE APRIL TRADES
"Haitem has been referred to us by the Libyan Investment Authority, one of our strategic accounts in the MENA [sc. Middle East North Africa] region, that has produced this year almost $100m in revenues. We know that this is a very short notice but we would be grateful if you can try to get him a seat.
Andrea Vella and Wassim Younan PMD, are both very supportive of this recruitment."
"Good news, Haitem is gonna receive an offer from Goldman Sachs to join the sovereign team in London for 6-12 weeks renewable if he is good. He will be paid as Goldman Sachs entry level analyst (5000-7000 dollars a month). Contract next week. Can start whenever he wants. Also, we still have the two seats for Dubai. Is it possible to allow Haitem and Anass Bouhadi or only Haitem as they are the only ones to have European passports? We will pay for plane and hotel. It can be a great experience as all the SWFs are represented."
"Can you start May 1? June 1? Mustafa wants you to start asap"
"Ok. How long? Mustafa is killing us"
"Andrea/Michelle - I've just learned of a temporary client placement into Andrea's private-side team, Haitem Zarti. Going toward please come to me first on client placements - we always do everything we can to avoid them anywhere in IBD - they raise multiple issues. To the extent we have permitted them they've been carefully orchestrated to minimise the risks. Is Haitem still here? When is he leaving? Thanks.
"He's not a client, he's the brother of a client, but I see the point. He is still here, working mostly with Alessandro Dusi on the sovereign debt and derivatives team. He's supposed to finish in three months, and possibly rotate between now and then.
"Q. And as I understand it, you say that the internship which was then offered -- we will look at the correspondence in a moment -- to Haitem Zarti, was offered for the purposes of training him as part of Goldman Sachs' ongoing efforts to train and develop all LIA employees?
A. That was one of the reasons.
Q. Tell me the other one?
A. The other important reason, from my perspective at the time and today, is that knowing that he would have a job of responsibility at the LIA in London or elsewhere, but the London -- the thinking was around this London office that the LIA eventually opened. It would be a great opportunity for us to be in front of him, establish a relationship across different parts of the business. And if you spend time with someone and they spend time on your desk to work or, you know, the equity derivatives desk, on the fixed income desk, on the investment grading, investment banking, when they have that job responsibility and they have personal relationships with people in the firm, you are more likely to do business --
Q. So the idea --
A. -- likely to get that first call when they have to make any of their business decisions or initiatives.
Q. We will come to the LIA, then, in a moment. But just so I understand that, the idea was that by giving Haitem Zarti an internship, Goldman Sachs was more likely to get business in the future from the London office of the LIA?
A. I think the idea was (1) to show the equipment that we talked about and (2), to structurally create an opportunity for the business people and the client to actually talk business in the day-to-day job, and therefore establish that relationship on which one day they would be deriving business from.
Q. So the idea of the internship, on that part of it, was to -- it was given in the hope and expectation that that would encourage Mr Zarti when he joined the LIA in London, if that is what he did, to give Goldman Sachs business?
A. It is not really about encouraging. It is about creating the link. If he spends six months with our FIG banker [sc. Financial Institutions Group], not the Lehman Brothers FIG banker, if in future he has a FIG deal to do, he is more likely to call the Goldman Sachs FIG bank. It is just a fact.
Q. It was to make it more likely that he would give business to Goldman Sachs?
A. I think you could say that, with all the caveats I just spoke about.
Q. Looking at the other aspect of it, you say that you thought he was going to become an LIA employee and therefore it was training like you were giving to the other LIA employees; is that what you say?
A. It was part of that, you know, pledge and commitment we had made to them, that we would help them train people and transfer knowledge.
Q. And so effectively you say he was treated as if he was an LIA employee for that purpose?
A. I think so."
"The members of the committee listened to the presentation by the executive director of the memorandum submitted to request approval to assemble a consulting team to assist the Authority in its activities. In the memorandum he stated that the Authority has a critical need to set up a technical team consisting of experts in the field of investment, to be headquartered in London. This team would take part in studying and issuing technical opinions on the investment offers and opportunities made available to the Authority. It would also take on the function of training Libyan nationals working at the Authority, so that it will be able to keep pace with changes in the international investment market.
The executive director also stated that selecting and appointing the members of the consulting team, assessing its performance, and determining its remuneration, would be done in accordance with the rules and criteria set by the Authority. The consulting team would be tasked with administering a single investment portfolio of the Authority, valued at US$500 million and to be held by a company to be established in the Cayman Islands, in exchange for giving the consulting team administrative fees in accordance with market rates.
Based on the aforementioned, the executive director requested approval to begin the procedures for setting up a consulting team and setting up a company in the Cayman Islands to administer the portfolios which the consulting team will be tasked with managing.
After discussion, the committee made the following decision:
Decision No. 08/01/2008
l. Approval to begin setting up a consulting team to assist the Authority in carrying out its activities through a London office.
2. Approval to set up and register a company in the Cayman Islands, to be owned entirely by the Libyan Investment Authority, through which the consulting team will manage the portfolios of the Authority with which it will be tasked.
3. The consulting team will be subordinate to the executive administration of the Authority for approval of all of its investment decisions."
VIII DID A PROTECTED RELATIONSHIP ARISE BETWEEN THE LIA AND GOLDMAN SACHS?
a. Goldman Sachs owed the LIA a duty to act with candour and fairness in its dealings for the purpose of the LIA making good its claim of actual undue influence; and
b. It satisfied the first element that the LIA needs to establish if it wants to rely on a presumption that the Disputed Trades were the result of undue influence exercised by Goldman Sachs.
(a) The level of sophistication at the LIA
"27. There did not appear to be any investment strategy at the LIA and no consideration was given to what the LIA's risk appetite should be or to currency weights and sector weights. We had nothing. We would say "let's have a portfolio not focusing on industrials'' or "let's have a focus on telecommunication companies" and Mr Zarti would respond along the lines of "Okay, get me some good telecom companies" and we would go off and prepare a report for him. It was very basic; there was very little sophistication in what we did. In summary, so far as I was aware, there was no asset allocation strategy, no agreed risk profile for investments."
(i) The level of sophistication of the Board of Directors
"When it came to reviewing and considering proposals, we worked on the understanding that, by the time any proposal was presented to the Board, it had already been looked at by the investment teams and that those teams had, in conjunction with its relevant international external advisors and experts, conducted examination and analysis of the merits of the transaction. We therefore understood that, in respect of any investment brought to us for approval, the executive management and their teams would already have determined that it would be a good investment for the LIA as far as we understood (although we appreciated that all risk could not be excluded from any potential investment) and that it was being proposed to the Board on that basis. Inevitably the Board relied heavily on Mr Layas and Mr Zarti as the executive management (and those that assisted them, including the equity team and the alternative investment team) to conduct this exercise properly, since we were not in a position to 'second guess' the details of the transaction. Our role was to assess and decide, based on the summary of the transaction and its features as summarised and explained by the executive management, whether the transaction was an appropriate one for the LIA."
(ii) The level of sophistication of Mr Layas
"However, we enter 2008 with a high degree of confidence, as our strategic plan continues to unfold and our revenue base expands as a result. Given the speed with which demand for corporate finance in the region is gravitating towards the development of capital markets and stock exchanges, we believe that the decision we took two years ago to create a regional force in investment banking was the correct one. Our new Investment Banking Division, engaged over the last year in building the capability to meet all types of corporate finance needs in the region now stands poised for rapid expansion in all product types: bonds, subordinated debt, capital markets, mergers and acquisitions, private equity funds. As regional and multinational corporates and financial institutions become more familiar with the advantages of tapping local capital and investment markets, we foresee a shift from the traditional banking products towards those offered by the Division."
"My impression of Mr Layas from this meeting (which was reinforced by my subsequent discussions with him) was that he was an experienced and capable financial professional. Mr Layas explained to me his many years' experience in the banking industry, including holding several senior positions in commercial banks in Libya, the Middle East and in Western Europe. … Mr Layas also explained to me the history and origin of the LIA. I have a recollection of coming away from this discussion with the view that Mr Layas had a good and current understanding of the global financial environment and that he had an understanding of global events and their impact on investments. In the context of Libya being a growth market which had been closed to the world for some years, this impressed me. It was obvious to me, based on Mr Layas' years of experience in senior positions of commercial banks, including in Europe, that he would have a clear understanding of concepts such as risk, leverage, enforcement of collateral and security. It was also clear to me that Mr Layas had a depth of experience as a business professional and was capable of conducting arm's-length business negotiations and ensuring that someone with a detailed technical understanding of the proposal under discussion would be involved (whether in-house or a specialised third-party). I also considered that in Mr Layas, the LIA had a Chairman who would ensure that it had access to numerous other counterparties (such as my previous firm, JP [Morgan]) and could create competition between them where appropriate. I had no doubt that because of his experience he had an understanding of the different features which were under consideration and which were eventually selected by the LIA for each of the Disputed Trades."
"… the level of engagement, the type of questions, the back and forth. This is a normal type of activity that I do every day, so you form that view when you interact with people by hearing what they say and what they ask and how they look at things, the questions, the exceptions, the requests that they make, et cetera. These kind of things. You know, I can't point the finger on he said exactly that question. It would be very helpful, but I can't."
(iii) The level of sophistication of Mr Zarti
"The plan for distributing its investment will be determined by dividing them among bonds, stocks, derivatives, and hedge funds. Negotiations will be held with the international banks and financial institutions about the terms of their bids submitted for investment of the Authority's funds to modify them so that they include realizing the highest possible returns while adhering to the Authority's strategy with regard to investment in the realm of investment portfolios."
(iv) The level of sophistication of the Equity Team
As discussed over the telephone, please find below a summary of the FX Hedging structure that I want GS to price
1. The initial reference fx-rate would be computed as the average USD-EUR fx rate of the first 20 business days
2. A barrier would be placed at 75% of the initial reference fx-rate.
3. If the barrier is breached, the fx-rate would be 75% of the initial reference rate, otherwise we would sell our EUR at the same FX-rate as the initial reference rate."
a. Mr Matri was able to prepare spreadsheets which calculated the net returns on the Disputed Trades depending on the share price at maturity. Mr Najah accepted that Mr Matri must have been able to understand the tables as he compiled them even though he, Mr Najah, insisted that he had not understood them at the time. Mr Najah said that Mr Kabbaj may have helped Mr Matri prepare these but that seems to me speculation rather than based on any real evidence.
b. Mr Matri provided written weekly updates on ongoing projects listing the action taken to obtain more information or discuss the merits of the investments.
c. Mr Matri chased Goldman Sachs for payoff tables of the different stocks after the trades. For example on 26 February 2008 Mr Matri emailed Mr Kabbaj saying that he was still missing information on the finalisation of the EdF deal and that they still required a breakdown of the LIA's position as regards EdF, a final term sheet a payoff table "(assuming the strike price is the average of the executed tranches)". Similarly in June 2008 Mr Matri asked for pay off tables in respect of each stock in the April Trades. I do not believe that he would have done so if he did not understand what these pay off tables said.
d. It was Mr Matri who delegated different tasks to the different members of the Equity Team in relation to work on EdF in December 2007 and who circulated to the team a template that they should use when producing their reports.
e. Mr Matri was involved with Mr Rayes in the discussions with Goldman Sachs and other banks after the April Trades about forex hedging strategies and was able to ask and answer questions about complicated derivative structures for this purpose.
"They did not appreciate that the trades did not involve and would not involve the acquisition of shares and that they were completely synthetic products. I asked them where the due diligence was and they responded "due what?". The Equity Team said that they did not ask for any due diligence - there was no need to since Goldman Sachs had advised them to do these trades. They completely trusted Goldman Sachs and thought Mr Kabbaj, with whom they worked very closely was their close friend."
(v) Goldman Sachs' view of the sophistication of the LIA
a. In February 2007, Mr Murgian of GSAM wrote an email reporting on a visit to Tripoli where he met Mr Layas, Mr Zarti and Mr Gheriani. He described the LIA as a very newly created organisation with about $40 billion in assets and a target of $100 billion in total size over the next 5 years. He says that by their own admission "they are at an embryonic stage of their development and so are looking for input and advice from all sources". However, he then goes on to record Mr Zarti as having given a sensible and informed precis of what the LIA wants to achieve:
"Zarti explained that while the [LIA] will certainly not be a "gambler" they are committed to targeting strong long term growth and as such have asked us to prepare some proposed investment solutions that target 10%; 12% and 15% returns. They are also very interested in alternatives (including private equity) and the opportunity to co-invest alongside Goldman Sachs in attractive direct investment opportunities. They see private equity investment as a return generator as well as an opportunity to build a network of global contacts to help them develop and grow."
b. In July 2007, Mr Aliredha wrote to colleagues shortly after the LIA had agreed to invest in the Petershill and Mezzanine Funds to say that the LIA have a lot of cash to invest and they are 'not hugely sophisticated'. Later in September 2007, Mr Aliredha described the LIA to a colleague as 'a very unsophisticated arab investor'. However that was in the context of debates between different branches of Goldman Sachs as to who should have access to the LIA, sparked by a visit to London by Mr Zarti when he had dinner with Mr Aliredha and Mr Ben-Brahim without people at GSAM being invited. The point Mr Aliredha was making focused on the LIA's reluctance to do business with a US firm and the importance of the fact that he and Mr Ben-Brahim were fellow Arabs in overcoming that reluctance.
c. On 4 October 2007 Mr Ben-Brahim emailed a colleague about proposed work on a foreign exchange mix for the LIA. He says "whatever we do I want to story to be EXTREMELY simple to explain. Our Libyan friends have unfortunately a very basic understanding of finance." However, again, one must look at this in the context that the colleague was proposing to recycle some existing material which, as he describes it, used very complicated terms assuming a very high level of expertise on the part of the listener.
d. On 18 February 2008, Mr Magnifico emailed Mr Kabbaj asking how literate the LIA people are about derivatives because he needed to set the goals of the equity derivatives training course they were attending. Mr Kabbaj replied "Baaaaaaaasic". In context, this clearly relates to the junior members of the Equity Team who were going to attend the training not to the senior management with whom the details of the Disputed Trades were discussed and agreed.
e. On 1 March 2008, Mr Lalou, a vice-president of Goldman Sachs was passing on the feedback from the Equity Team members who attended training at Goldman Sachs to the effect that it had been at too high a level. He said to the presenter "don't take it personally, you just delivered a pitch on structured leveraged loans to someone who lives in the middle of the desert with his camels... There was a bit of a clash". Again, in context, this relates to the Equity Team Junior Members rather than to the senior decision makers in the LIA.
f. On 19 April 2008, shortly before the conclusion of the April Trades, Mr Ben-Brahim wrote to Mr Younan saying of the LIA "They are very unsophisticated - and anyone could "rape" them." However, this is one element in his overall assessment of the LIA, in particular Mr Zarti, the full flavour of which was very far from claiming that this lack of sophistication meant that Goldman Sachs could take advantage of them with impunity:
"These guys are extreme - if we truly behave as steadfast friends looking after their interests they will do anything for us - if we ever lose their trust they are ruthless. I know their type. We always need to be careful not to let greed take us from "commercial" to "obnoxious". That's why we always need to double check the charges. You, Andrea, Youssef and I have to always make sure anyone that gets in contact with them from our side knows the rules. They are very unsophisticated - and anyone could "rape" them."
g. On 4 June 2008 Mr Ben-Brahim wrote to Mr Younan saying "the more I think about it - the more I think we should AVOID doing any more derivatives solutions. … They will end up having a problem with things they are doing (remember most competitors have little scruples and will/can take advantage of their zero-level sophistication). They are bound to have something blow and there will be recriminations". However, in context it appears from the chain of emails of which this forms a part that Mr Ben-Brahim and Mr Younan were not talking about the Disputed Trades here but a different foreign exchange transaction where there had been a mistake in the term sheet indicating that the LIA could lose a substantial part of its assets. I discuss that exchange of emails later.
(b) Other factors relevant to the existence of the protected relationship
(i) References to the desire of Goldman Sachs to build a strategic partnership
"You should stay a lot in Tripoli. It's important you stay super close to the client on a daily basis. Teach them, train then, dine them."
(ii) The provision of training, research and general assistance
(iii) Corporate hospitality and gifts
(iv) The presence of Mr Kabbaj at the LIA's offices in Tripoli
"In 4Q07 we showed GSIP to the LIA. Unfortunately they declined the investment. The feedback we received at that time was that they had "done too much business with GS". There was a view at the highest levels that the LIA was getting too close to GS and that we were effectively almost an in-house bank (a person from Securities was there every week for several days) and there was no longer any impartiality in our relationship. Therefore they imposed a moratorium on doing any more business with GS until 2008."
(v) Advisory work on other deals
"Given that the consultants we have engaged are not ready yet, we have signed an agreement with..., we have a good relationship with a number of banks which we have developed over a while now, and there is one particular bank – Goldman Sachs, which we have developed a very good relationship with over the last period, and it is indisputably the number one investment bank in the world, and they have a very good team. Despite it just being Goldman Sachs, it is actually the team within Goldman Sachs. They have two managers– one is Moroccan and one is Bahraini, and they have their respective teams. They came and visited us here, and we developed a very good relationship with them. We have never seen such competence of this level, even with the other banks we have dealt with in the past 3 years. In the past month, they have been preparing the same thing that Mercers are preparing for us, and we will present you the results of the work that we have conducted in the next period."
"The second thing, in relation to all these offers, we signed a confidentiality agreement with Goldman Sachs and we showed them every single offer and we told we want you to analyse these offers tomorrow, and we want you to provide us with your objective opinion. They are very professional, and inshallah they will give us their opinion as they see it. They will provide us an opinion on both the institutions that have put forward these offers, as well the actual offers themselves and how they can be improved. We have already received some feedback from them, and will receive feedback on the others shortly. On the basis of their feedback, we will get back to these institutions to negotiate the commissions, management fees and the structure itself."
"6. Neither this letter agreement nor the receipt by Goldman Sachs of Confidential Information nor any other matter shall give rise to any fiduciary, equitable or contractual duties (including without limitation any duty of confidence) which would prevent or hinder Goldman Sachs from acting on behalf of other customers or for their own account."
"we were struggling with understanding the product that Soc Gen offered us and I think he saw that on our faces and overheard it in our discussions, and therefore he said, "If you want us -- if you want me to help you, I will take my Goldman Sachs hat off and I will look at the deals for you". And this is what he did."
(vi) Incidents arising from the history of dealings between the parties
The LIA's decision to invest in the Petershill and Mezzanine Funds
"At the time of making these commitments, an external advisor to the LIA, Ali Baruni, met with the Petershill team and subsequently was vociferously against the Petershill commitment. He was very vocal in advising Layas not to make the commitment and provided him with a list of reservations. Gheriani forwarded these to us and we drafted a point by point response addressing each issue. It is worth noting that the points raised by Baruni were often unprofessional (verging on personal) and showed a genuine lack of perspective on the product. Obviously his views were overruled and the commitment was made (although they did move from a soft circled $200m to their final $150m commitment). The above may be an issue raised by Layas."
Although there may be a self-serving element in this report, since the purpose of it was to put the executive in a position to respond to the matter being raised by Mr Layas, there would be no point in inventing this account.
The speed and informality with which the Disputed Trades were concluded
(vii) Goldman Sachs' view of the relationship
a. In mid February 2008 Mr Vella emailed a Goldman Sachs colleague saying that the Goldman Sachs relationship with the LIA 'is very close and we are becoming more and more a 'trusted advisor' to them when it comes to a large number of their initiatives, not only on the investment front'. However, this was not in the context of describing what kind of relationship the LIA had with Goldman Sachs but in the context of checking whether it would be polite to inform Mr Layas and Mr Zarti that Goldman Sachs was about to pitch for business to a different company in Libya, given that Mr Layas and Mr Zarti had mentioned to Goldman Sachs on a previous trip that the potential client might be looking for advice on a particular topic. Mr Vella was clearly keen that having been given the tip from Mr Layas and Mr Zarti, they should not find out from another source that Goldman Sachs was pursuing the opportunity. I do not see that this email says anything about whether Goldman Sachs has crossed the line from a close banking relationship to a 'man of affairs' relationship.
b. On 17 January 2008 Mr Vella wrote to Mr Aliredha and others updating them on his visit to Tripoli. At the end of the email he says "Kabbaj indeed has a very impressive grip on these people". A reading of the whole email, however, shows that Mr Vella was very far from suggesting that Mr Kabbaj's influence meant that it was a foregone conclusion that Goldman Sachs could persuade the LIA to enter into whatever transaction it wanted. In fact it appears that they were mostly discussing the Project Block deal with Santander which the LIA ultimately rejected. In the email, Mr Vella describes lengthy discussions with Mr Layas and Mr Zarti about different deals including a leveraged investment in Citibank about which he says "The citi investment is something the 'micro' team at LIA has been spending a lot of time on - doing scenario analysis and pricing simulations - and we had the feeling it will be 'live' soon, Layas, the chairman, is fully involved and has indicated to us the terms he would like to execute on. Chicco's team is working on finalising the terms." He is not describing a situation where he believes Mr Kabbaj can influence Mr Layas and Mr Zarti to agree to a deal.
c. In an email of 1 April 2008 to Wassim Younan Mr Kabbaj said "we are LIA consultants and they consider us as part of their team." In this message Mr Kabbaj describes, in slightly histrionic terms, the burden that he is bearing working on the LIA account. His complaints come at the end of a chain of emails in which the two men are discussing the expansion of Mr Kabbaj's role within Goldman Sachs' Middle East and North Africa business and his need for one or two support staff to help him. He is asked by Mr Younan to list in order of priority the six countries where he could spend time; in answer to his question, how many support staff he should assume he has when making his choice, he is told to assume no support will be provided. This causes the long outburst email from which the quotation is drawn where he complains about the amount of work he has to do and berates Mr Younan for failing to provide proper resources for this important client. This is not a considered description of Goldman Sachs' relationship with the LIA. In fact Mr Kabbaj is complaining that Goldman Sachs is not dedicating enough resources to covering the LIA account and that Mr Enaami is a demanding client who does not understand why there is no one to answer their questions when Mr Kabbaj is travelling and why he does not answer his mobile phone at 7 am on Sundays.
(viii) The deals which the LIA refused to do
(ix) The deals that the LIA did with other counterparties
(x) Conclusion on the factors relevant to the protected relationship
IX BREACHES OF THE DUTY OF CANDOUR AND FAIRNESS
a. The LIA fundamentally misunderstood the nature of the Disputed Trades;
b. Goldman Sachs knew or at the very least suspected this; and
c. Goldman Sachs nevertheless:
- exerted its influence over the LIA to encourage or even push the LIA to enter into the Disputed Trades; and
- did so without explaining the true position clearly or accurately or otherwise taking sufficient steps to make the position clear to the LIA.
(a) The Board and Mr Layas' understanding of the nature of the Disputed Trades
(i) Mr Layas' presentation of the Citigroup Trade to the LIA Board
"Therefore, we would like to inform you that investment in this Bank may be carried out by dealing with Goldman Sachs, while applying the following strategy:
1. The Libyan Investment Authority pays USD 200 million.
2. Goldman Sachs Bank is to be used in designing an investment portfolio to acquire stocks in Citigroup by attaining leverage at and equivalent of USD 607,902,736 for three years.
3. Dividends distributed on Citigroup stocks are to be paid to Goldman Sachs in advance to offset part of the cost of borrowing (LIBOR 3.34%), considering a settlement to be made after three years.
4. Loan surety is to be paid through purchasing a put option from Goldman Sachs.
5. The lowest price possible per share during the next nine months will be secured through purchasing a financial derivative called "Look Back Option" at a 90% barrier.
This strategy will enable the Libyan Investment Authority to acquire the equivalent of 0.5% of Citigroup."
"The members of the committee listened to the Executive Director present his memorandum on the investment opportunity available to the Authority to buy some shares in the Citigroup bank. He presented a brief summary on the current situation of the bank, which is that it is considered the largest financial institution in the world, owning capital amounting in 2007 to US$2.4 trillion. The profitability of the bank had also been affected substantially as a result of the collapse of the financial market in the United States, which has led to a major decline in the value of its shares.
The executive director stated that the Authority administration has concluded from its study on the expectations of financial analysts that it will be efficacious to invest in the Citigroup bank, given that all of the studies done predict a major increase in the price of its shares as of the end of 2008 and by mid-2009.
In light of the preceding, the executive director requested approval to buy shares in the Citigroup bank in phases, beginning with US$200,000,000.00 (two hundred million US dollars) and ending with a total value of US$600,000,000.00 (six hundred million US dollars), and with Goldman Sachs to provide additional investment beyond the value of the investment by the Authority, of US$400,000,000.00, and to guarantee the lowest purchase price for the shares of the bank on the market for a period of nine months, in exchange for the Authority foregoing the profits in the shares for this period of time.
After deliberation, the committee made the following decision:
Decision No. 03/01/2008
Approval to buy shares in the Citigroup bank in stages, beginning with US$200,000,000.00 (two hundred million US dollars) with a total value of US$600,000,000.00 (six hundred million US dollars), and with the bank Goldman Sachs to provide financing beyond the value of the involvement by the Authority (US$400,000,000.00) and to guarantee the purchase at the lowest price of the shares of the bank on the market over a period of nine months, in exchange for the establishment forfeiting its profits during this time."
"MRS JUSTICE ROSE: Why would it have to be in an SPV, why couldn't the Libyan Investment Authority just own the shares and be loaned the money?
A. If they wanted to just buy the shares, that could have been easy to do. Now, doing a loan to the Libyan Investment Authority and organising the financing and the book protection to cover some of the downside risk, that would have been challenging from a legal perspective, and doing the loan where, from a risk perspective, we would be able to actually look at the security over the shares, we would not be able to do that with a Libyan entity. It would have to be in an SPV in a jurisdiction where we can take comfort that the loan and the financing actually would work.
MRS JUSTICE ROSE: Because you would be worried if you loaned them lots of money, hundreds of millions of dollars, if they didn't pay it back you would be in difficulty in enforcing that?
A. Yes, that is -- one of the issues would be that, absolutely. So it wasn't very clear to us that we could do anything of that sort. It would require a lot more time. So I can -- while I don't remember the exact discussion, I think it would be -- what must have taken place there, and again I don't remember the exact conversation, was to figure out if you want to move quickly, unless you want to spend a month or two negotiating that structure and that documentation, then for a financial investment, a forward with a put is achieving exactly the same economic outcome.
MRS JUSTICE ROSE: And who do you -- I'm not quite clear whether your evidence is that you actually remember having this conversation, and if so with whom, or you are now thinking that you might have or probably had this conversation; what is your evidence?
A. I don't remember exactly having that conversation. So I'm thinking that that would be a natural conversation to have happened in those trips -- in that trip in Tripoli, with the relevant people.
MRS JUSTICE ROSE: Before the Citigroup trade?
A. In connection to the trip in January, 17 and 18 January."
(ii) The exchange about the call option in the forex trade
1) Position of the problem: An iterated term sheet sent with a confusing risk disclaimer:
* Client received a term sheet on Sunday that was different from the one he received on Thursday. In the Sunday term sheet and in the disclosures, there is under "Leverage" the following sentence: "In certain circumstances this can mean investors losing all or more than the amount invested." In the initial term sheet, it was written only "certain circumstances this can mean investors losing all the amount invested".
* Client inferred that he was committing now to a RECOURSE structure with a max potential loss of $4billion. Mr Layas was told by CIO Hatim Gheriani that we changed the structure and that LIA was now possibly committing to a leveraged structure with a recourse financing and a max loss for LIA of $4 billion. CIO showed the two different term sheets and advised him to seek clarifications from GS.
* Client decided to inform Minister Zlitni of possible GS mistake and of difference in term sheets. … Mr Zlitni asked LIA to ask to cancel the transaction as it is too large (10% of LIA assets).
2) Actions taken and next steps:
* Explanations and new term sheet. I had a one-to-one three hour dinner with Mr Layas yesterday at his hotel. I explained to him that the sentence was a standard disclosure that was mistakenly copied/pasted and I have shown him the new termsheet (below) that says now that "In certain circumstances this can mean investors losing all the amount invested. However, in no cases will the loss incurred exceed the initial premium e.g. in this case approximately USD 98,000,000".
* Client understands the mistake. …"
"If it is a call that they bought, how could they lose more than the premium!"
(iii) The confirmation letters
"Dear Mr Layas,
I hereby confirm that the structured transaction you executed with us on Citigroup for a premium of USD 200,000,000 doesn't involve the LIA holding any shares of Citigroup and that all the shares purchased by Goldman Sachs International to hedge this transaction are under the name of GSI."
"This is to inform you that any Citigroup Inc shares that Goldman Sachs may have bought to hedge its economic exposure under the two "Structured Investment in Citigroup Inc." executed on the 24-January-08 and 28-January-08 were bought for Goldman Sachs benefit acting for its own account, and not purchased as agent of LIA. The legal and beneficial ownership of such shares belongs to Goldman Sachs."
"This is to inform you that any Electricite De France shares that Goldman Sachs may have bought to hedge its economic exposure under the "Structured Investments in Electricite De France" executed between the 14-February-08 and 22-February-08 were bought for Goldman Sachs' benefit acting for its own account, and not purchased as agent of LIA. The legal and beneficial ownership of such shares belongs to Goldman Sachs"
"Most Libyan investments in US institutions "Stocks of Citibank" are not shown in Goldman Sachs books in the name of the Libyan Corporation. The value of investment in stocks is increased through borrowing and by considering the shares registered in the name of the US bank. Therefore, in case data is requested pertaining to the availability of Libyan investments with the Bank, it confirmed that it would return this request back, given that there is no stocks in the name of the Corporation."
(b) Mr Zarti's understanding of the nature of the Disputed Trades
"At the time, Mr Zarti seemed very happy with the new structured investments the LIA had entered into with Goldman Sachs and every time we looked at a new investment in a financial stock, he would say he wanted something similar (and say things like "How about we get maximum exposure?" and "How about we get a structured investment to give us enhanced returns?"). We were asking about structures that included "keeping the upside" (i.e. the total potential amount of profits the LIA could make) or a cap on the potential return because we understood that there was a balance between maximum exposure (which Mr Zarti wanted) and "keeping the upside" (which Mr Zarti also very much wanted) because the financing cost of the leverage involved in the structures would have to come out of the total amount of potential profits. Mr Zarti encouraged us to look into investments like this in other financials with Goldman Sachs."
(i) Presentations to the Board of Directors
"A. What I'm trying to say here is: the reports that the Direct Investment team prepared to be given to the board of directors, we were told by Mr Mustafa Zarti, for example, to put in this and that in the report, and sometimes even if we put the negatives in the report, he would say, "You have to remove that". And this is why we always ended up putting the name of Mr Mohammed Layas, as the executive director, at the end of each report.
Q. So this is something that Mr Zarti said to you; is that right? From time to time, he said this or that should go in the report? So he was involved in looking at the drafting of those reports, was he?
MRS JUSTICE ROSE: When you said, "If we put negatives in the report, Mr Zarti would say, 'You have to remove that'", what do you mean by "negatives in the report"?
A. The, like, pros and cons of a certain investment. So say, for example, that we believed that the stock price -- one of the risks of this investment is that the stock price, for example, might go down or we are going to be giving up the dividends, he's like, "You don't have to put that in; I mean, I will explain it".
MRS JUSTICE ROSE: This was reports to the board, was it?
(ii) The Stormy Meeting
"Mr Zarti had read my notes on the Disputed Trades and on the FX Trade. Mr Zarti appeared to have got fixated with my reference to "purpose of a put?" in my notes- he believed he had paid for two but only needed one. The reason I had put that in my notes was because, whilst I was no expert on how to structure derivatives, it seemed unnecessarily complex and I wanted to obtain more information on this. I explained to him that this was not his biggest problem - his biggest problem was that no one seemed to understand that the LIA did not hold shares and that the LIA had a real risk of losing all its money with these investments. He then asked me what I thought about the FX trade. I told him that I could not think of one redeeming feature and that I thought that if he gave me the $50 million I would have better odds at a Monaco casino. Mr Zarti responded by saying that Goldman Sachs/Mr Kabbaj had told him to enter into it and that he had not chosen the currencies. l believe this was the turning point for Mr Zarti - he wanted explanations from Goldman Sachs."
"LIA is concerned about the performance of its equity portfolio and wants us to recommend a potential restructuring. [They understand this is due to the overall market weakness and not to the specific structures executed by them]. LIA is worried in particular about its entry levels in the financial stocks and is willing to consider a restructuring, an upsize to average down etc-.-LIA wants also more input on how to diversify its current exposure within the equity space. We will be speaking to our colleagues in equity to take this forward."
"This is a client who is clearly concerned about the status of their outstanding structured equity trades with us, and with our competitors. It is their number 1 priority to restructure those trades when the time is right.
- Mustafa seemed very genuine. Instead of spending the allotted 45 minutes with us he spent 3.5 hours. He was plain clear that the relationship will continue to grow and prosper following Driss' departure."
"Rafik has been very open and straightforward and has indicated that the bulk of the issue is that some in the senior management of LIA feel that the trust they had put in Youssef Kabbaj had been somewhat abused. They are not referring to specific events, as Rafik points out it is difficult at this point to pinpoint specific examples given the emotions within LIA.
Rafik has indicated that there is some confusion within LIA about the pure derivative nature of the transactions executed, some seem to believe that there would be leveraged acquisition of shares on their behalf through a static margin loan. He recognises that this is not consistent with the LIA initial instructions not to have any physical share ownership and blames the confusion on a number of internal elements as well."
(c) The Equity Team's understanding about the Disputed Trades
"67. What I made of the proposal at the time was that, instead of investing US$1 billion, the LIA would invest US$200m but, if the share price rose, the LIA would be able to benefit as if it had bought US$1 billion worth of shares. Mr Zarti left Mr Kabbaj to come up with a structure to achieve this. This was the first time I had heard of the concept of leverage. At the time I didn't understand how this worked or how this would be paid for; I remember being told that Goldman Sachs would pay for the US$800 million and the LIA would give up its right to dividends to pay for this. I didn't like the idea as I didn't understand it. My own view was that if I did not understand an investment, I should not do it.
68. Looking back, I think that Mr Kabbaj always told us what he thought we wanted to hear. I distinctly remember that Mr Kabbaj told us that we were buying shares, although as I say, he always told us what he thought we wanted to hear. I was 100 per cent convinced that we were buying shares but that they would be held in an account with Goldman Sachs. I remember asking our team what would happen next and whether we would simply be transferring the money to Goldman - nobody knew the answer."
(d) Conclusions about actual undue influence: the LIA's misunderstandings and Goldman Sachs' knowledge
X PRESUMED UNDUE INFLUENCE: DO THE DISPUTED TRADES CALL FOR AN EXPLANATION?
(a) Did Goldman Sachs earn excessive profits on the Disputed Trades?
(i) How trades are priced
"Having an understanding of the walkaway figure is important for the sales team so that it can position itself appropriately in price negotiations with the client. In particular, it gives the sales team an understanding of its room to manoeuvre and how much cushion it can build into the price both for the purpose of negotiations with the client and to enable the sales team to reflect the indicative nature of the prices at that stage. Where the price quotes are given in advance of a trade (as was the case for the Disputed Trades, where the LIA sought to obtain indicative quotes on a number of iterations of the structures before selecting its preference) … there is a risk that market conditions could change and result in that price moving before the trade was to be executed. This had the potential to cause difficulty. If a client is given a price quote, and then is told when it comes to make the trade that the price has increased, the client can become irritated, and potentially unwilling to execute. It is therefore common practice when quoting for a trade to build some cushion into the mark-up on the price shown to the client to absorb any price increase at the time of execution."
(ii) Booking the trade
(iii) What was the level of profit earned on the Disputed Trades?
a. For the Citigroup Trades the mark up for the first Citigroup Trade was 2% of the notional value. For the second Citigroup Trade, Mr Lyons concluded that the mark up was also 2% whereas Mr Afaf concluded that it was 2.46%.
b. For the EdF Trades, it was common ground that:
- the First EdF Trade mark up was 4.17%
- the Second EdF Trade mark up was 2.94%
- the Third EdF Trade mark up was 2.97%.
c. For the April Trades, Mr Lyons used a figure of 2.4% as his mark up calculation and Mr Afaf did not dispute this.
"Throughout all of the events I recount below, I was not influenced at all by the identity of the counterparty, the LIA. I do not recall forming any impression that they were in any way unsophisticated. Nor do I recall any discussions to that effect. I priced the Citigroup Trades as I would have priced any similar trades for another counterparty. My view was that the Citigroup Trades carried substantial risk for [Goldman Sachs] and that they were priced fairly to reflect this."
(iv) Was that profit unusually high?
"Fyi, only. The background here is that we are currently with Lloyd in Abu Dhabi. He must have gotten a brief email from someone on the Libya and rating advisory, when he found out how big the p&l on the recent trade he started asking Richard and I questions about it. I knew we did the trade but did not know the full details, neither Richard, nor I were able to answer Lloyd's questions. Arm us my friend with the details so we can get back to Lloyd. We are seeing him again at 9 am. Pls keep this email to yourself."
a. $5.97 million for the Citigroup Trades (being less than 1% of the combined notional value of $607.9 million);
b. $12 million for the First EdF Trade (being 3.55% of the value of $338 million of the shares to which the LIA gained exposure);
c. $10 million for the Second and Third EdF Trades (being 2.39% of the combined notional value of $418 million);
d. $54 million for the April Trades (being 1.4% of the notional value of $3,852 million).
a. A spreadsheet compiled by Mr Jensen-Humphreys for the purposes of the negotiations with the LIA in July and August 2008 about a possible restructuring of the Disputed Trades shows a p&l figure of $129 million and a figure for customer amortisation of $94.4 million making a total figure for what the LIA described as 'anticipated profit' of $223 million.
b. Other documents also drafted after the Stormy Meeting refer to Goldman Sachs' 'fee' for the Disputed Trades as $222 million.
(b) Other points on how the prices were arrived at
"In my bank's systems for different counterparties when we generated the same risk we related the mark-up spread by different multiplier for different types of counterparties. So we related the unit of risk that was there and, depending on the counterparty, whether it was captive business, whether it was a mid corporates or, for example, when we went to very large corporates like Microsoft, we were extremely price competitive, we had very different multipliers. So we did base it on the basic unit of risk which would be our cost of hedging.
So many banks have automated systems for trading for clients, and they will set different multipliers. So they will price the same risk, let's say you have an option or you have some product, it will have the same risk, but then the client category classification pops in and it says okay it is B3, and for B3 it may that be I multiply this basic cost of hedging by this amount, and that goes up -- the less that multiplier goes up, the less competitive the client is.
MRS JUSTICE ROSE: And the question of how competitive the client is, is that based on your past experience of dealing with that client and how much they push back on price and whether you know that they go to other banks to ask them?
A. Absolutely, my Lady. It is normally a client -- it can be specific client information, so for example I knew Microsoft were extremely competitive, or it can also be a client classification. So, for example, mid corporates, if you are a bank like HSBC, they have lots of small mid corporates and I don't want to say much, but they may have room for profits that maybe some other banks who don't have those clients do. So definitely it is a question of –
MRS JUSTICE ROSE: Because they know those clients don't tend to shop around and haven't --
MRS JUSTICE ROSE: -- and just have always paid the price quoted to them?
A. Indeed, my Lady. In fact we had an expression for that, it was called captive business."
(c) Were the Disputed Trades unsuitable for the LIA?
a. whether the Disputed Trades were so unsuitable that it was unconscionable for Goldman Sachs to sell them, thereby constituting an instance of actual undue influence; and/or
b. whether the fact that the LIA bought the instruments from Goldman Sachs despite them being so unsuitable raises a presumption that this was the result of the exercise of undue influence.
"In view of the availability of large liquid sums of money that have been deposited in the Central Bank of Libya at prevailing market rates, the committee considered that it would be better to invest 30% of these funds, which amounts to $10 billion, in investment portfolios with international banks and institutions that specialise in this area of investment."
"• … The executive director explained that this is due to the type of investment and the risk level associated with each fund, with the risk rising as the expected revenues rise, and the risk level dropping as the expected revenues drop. The executive director also stated that the obligation of the Authority to fund the general budget of the government at a rate of US$3 billion requires achieving higher levels of return. Accordingly, the Authority administration has decided to diversify its investments by participating in certain investment activities which carry a relatively high risk.
• There is no guarantee for the capital of the investor in the funds in which participation is proposed."
"In the meantime the LIA intends to begin investing on an expedited basis in a diversified portfolio of assets. The LIA is open to all asset classes, including alternatives. While the bulk of the investments will be committed to liquid securities (and indeed also to cash and enhanced cash products), the LIA will also invest in illiquid assets such as private equity, property and hedge funds. For the moment the LIA will avoid direct investments in securities, positions or real assets or will so invest only under exceptional circumstances. For the bulk of its funds therefore the LIA will act through independent specialized managers that are deemed to be excellent in their class."
"A. My Lady, I do not recollect the sequence or timing of this issue. But very generally, we started talking about commissioning an investment consultant like Mercers. At some point in time later than -- after we started talking and even approaching Mercers, we were told that we needed to spend $10 billion pretty quickly. We therefore came up with a strategy that said let us identify investments in approximately the amount of $10 billion that would not need to be substantially changed after the investment consultant had been appointed and done his work. I suppose that this document reflects that understanding."
a. I find that the main motivation behind the offer of the Goldman Sachs internship to Haitem Zarti was Goldman Sachs' belief that he might be chosen to lead the LIA's new office in London and it would be beneficial for Goldman Sachs' future business prospects with the LIA for them to establish a good working relationship with him at an early stage. I find that Mr Mustafa Zarti was keen for his younger brother to work as an intern, though there is no evidence as to why he thought this was important. Although the offer of the internship may have contributed to a friendly and productive atmosphere during the negotiation of the April Trades, it did not have a material influence on the decision of Mr Zarti and the LIA to enter into the April Trades.
b. I find that there was no protected relationship of trust and confidence between the LIA and Goldman Sachs. Their relationship did not go beyond the normal cordial and mutually beneficial relationship that grows up between a bank and a client. Goldman Sachs did not become a trusted adviser or a 'man of affairs' for the LIA.
c. There was nothing about the Disputed Trades that would raise a presumption, if such a protected relationship did exist, that they were the result of undue influence. I find that there are no grounds for concluding that the level of profits earned by Goldman Sachs on the Disputed Trades was excessive given the nature of the trades and the work that had gone in to winning them. Although the Disputed Trades may be regarded as unsuitable for a SWF, there were other reasons why the LIA wanted to enter into them and, if they were unsuitable, they were no different from many other investments that the LIA made over the period in that regard.