(Bloomberg) -- Goldman Sachs Group Inc. used lavish training trips and Moroccan vacations to woo unsophisticated officials at the Libyan Investment Authority, influencing executives to make risky trades that led to a $1.2 billion loss, lawyers for the $60 billion fund said at the start of widely anticipated trial in London.
One Goldman partner said the LIA was "very unsophisticated” in a 2008 e-mail disclosed for the trial that started Monday. Another note from a bank vice president congratulated a co-worker for “a pitch on structured leveraged loans to someone who lives in the middle of the desert with his camels," according to documents. The attitudes are symptomatic of the bank’s dealings with the fund, Roger Masefield, the LIA’s lawyer, said in court.
Goldman is accused of exploiting its close relationship with LIA employees to sell inappropriately risky investments. That relationship broke down in 2008 when derivatives linked to bank stocks turned against the LIA, leading to the loss. The trades gave Goldman a gross profit of $367.7 million, according to an expert witness for the LIA.
The LIA’s claim is "both unusual and ambitious," Goldman’s lawyers said in court documents. The fund chose the underlying stocks with its own research conducted over a matter of months, they said.
"The credit crisis and its impact on global markets turned out to be far more prolonged than the LIA and the great majority of market participants had anticipated," the bank’s lawyers said. "The LIA was the victim of an unforeseen financial depression, not of any wrongdoing by" Goldman Sachs.
A Goldman employee "embedded" himself within the LIA early in the relationship and became "exceptionally close" to the fund. The banker, Youssef Kabbaj, organized "training" for LIA staff in London, paying for expensive entertainment and "stylish hotels," the fund said in the documents. Kabbaj claimed 22,000 pounds ($31,000) in expenses for one trip, according to filings.
The former Goldman employee also took members of the fund on holiday to Morocco where he "put them up and entertained them." Goldman also gave a man a "highly coveted" internship at the bank because he was the brother of a key decision maker at the LIA. Kabbaj declined to comment on the case.
‘Abuse of Trust’
The "provision of training and corporate hospitality" are "unremarkable features of relationships between commercial counterparties," Goldman’s lawyers said in court documents.
"This case is therefore one of abuse of trust, undue influence and unconscionable bargain," Masefield said in court documents. "It most emphatically is not, therefore, as Goldman Sachs would have it, one of little more than ‘buyer’s remorse;’ of a counterparty who, like many others, lost money as a result of the market crash in 2008 and now wants to rewind the clock."
A dispute between rival factions over who now controls the LIA led a U.K. judge to appoint independent “receivers” to manage the litigation. The LIA is also suing Societe Generale SA over investment losses.
The case is: The Libyan Investment Authority v. Goldman Sachs International, case no. HC-2014-000197, High Court of Justice, Chancery Division.
To contact the reporter on this story: Jeremy Hodges in London at [email protected] To contact the editors responsible for this story: Anthony Aarons at [email protected] Christopher Elser, Caroline Alexander