Why the SEC is Probing Goldman Sach's Dealings with Libya

Michael Teague  |

Back in late May of 2011, months before the violent liquidation of Muammar Gaddafi’s regime in Libya, investigative reporting by the Wall Street Journal outlined the details of an investment deal gone sour between Goldman-Sachs (GS) and Libya’s sovereign wealth fund, the Libyan Investment Authority.

The LIA was established in August of 2006 to help the country invest its massive oil wealth. The creation of the LIA can be seen in the context of two interrelated events: first, there was Gaddafi’s abandonment of the country’s nuclear program in the wake of the 2003 invasion of Iraq, along with his willing cooperation with Western intelligence agencies in the war on terror. Second, in 2004 the U.S. government lifted sanctions on Libya that had for some time prevented American firms from doing business or investing in the country.

Libya is known for its high quality oil, “sweet” crude, as well as for its high quantity of oil, having the world’s fifth largest proven reserves (with much of the country’s territory undeveloped/unexplored).

Between January and June of 2008, the LIA had given $1.3 billion to Goldman to invest in option contracts on Citigroup (C) and a number of other European and American banks and energy companies, as well as a basket of six currencies. The theory behind this deal was that the stocks would go up, giving the LIA the 8 percent return it claimed it was seeking.

The move was just in time for the crisis to kick in, however, and as the securities underlying the deal became emptied of their value, 98 percent of the money invested by the Libyan fund vanished. The massive losses prompted the chairman of the fund, Mustafa Zarti, to summon Goldman representatives to Tripoli, demanding explanations and, of course, compensation, and even issuing threats that would prompt the bank’s employees to employ bodyguards for the remainder of their stay in the Maghreb.

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If all of that were not surprising enough, subsequent negotiations over compensation involved the bank’s CEO Lloyd Blankfein, and CFO David Viniar, and included offers of a number of compensation schemes. The most shocking of these was Goldman’s offer to finance a $3.7 billion investment that would have given the LIA $5 billion, thereby making it one of the bank’s largest shareholders. This offer was to be supplemented by the addition of 40 years of annual payments of about 4 to 9 percent. Other plans promised investments in complex financial instruments and well as ownership of preferred shares.

These deals were discussed between the bank and the LIA until about June of 2010, but were made moot by the uprising that broke out in Benghazi (the regional capital of Libya’s coastal Eastern region, once known as Cyrenaica), especially given the eventual direct U.S. involvement on the side of the rebels, and the freezing of Libyan assets in numerous Western countries (on the grounds that the funds were directly controlled by the Gaddafi regime).

But Goldman is not in the clear on this one. On Thursday the WSJ reported that the LIA, of its own admission, is cooperating with the U.S. Securities and Exchange Commission’s investigation into the bank over its involvement in the whole affair, and has further claimed to have hired an unspecified law firm to help it in dealing with the matter. Of particular interest to the SEC, apparently, is a $50 million fee Goldman had initially agreed to pay the LIA, and the possibility that this sum of money was offered in violation of U.S. anti-corruption laws.

The LIA’s board of directors is currently in a standoff with the Libyan government, an extension of the turmoil and violence that has been dragging on in some form or other since the outbreak of armed insurrection against the former regime. But this has not prevented it from trying to recuperate its losses.  Libyan government officials have even allowed certain former Gaddafi-era fund officials to provide the SEC with testimony, suggesting that the story is far from over and may yet yield new surprises.

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