Goldman Ordered by Judge to Disclose Profits on Libya Trades - Analyst Blog

Legal woes continue to trouble The Goldman Sachs Group, Inc. (GS). The Wall Street banking giant has been ordered by a High Court judge in London to disclose the amount of profit it derived from nine complex derivatives trades associated with the $1 billion lawsuit filed against the bank by the Libyan Investment Authority (“LIA”).  

LIA, a sovereign wealth fund, filed a lawsuit in Jan 2014, pertaining to Goldman’s dealings with the LIA in the earlier part of 2008, which led to significant losses for LIA.

At a London court hearing on Monday, Judge Vivien Rose asked Goldman to reveal its margin, profit and loss on the trades, starting from the day those were booked as well as a month later. The bank is also ordered to reveal how the profits were calculated and the amount of reserves it set aside for each trade.

Both parties are in a hitch over the extent of disclosure of information by the bank to the LIA’s legal panel before the summer 2016 trial. However, Goldman intends to provide documents regarding 13 individuals who represented the Libyan banking team, covering 144 search words from the period between Jan 2007 and Sep 2008.  

LIA, besides seeking to expand the group with additional nine senior personnel, also wanted to increase the period for the documents as well as the number of keywords. However, the judge turned down the request and stated that Goldman is required to provide documents for a lesser time frame with only five key words including ‘Libya’ and ‘LIA,’ related to those nine senior personnel.

Background

In May 2011, the Libyan Investment Authority, which once functioned under the authority of the late Muammar Gaddafi, lost almost 98% of a $1.3 billion bet on currency movements and other complex trades handled by Goldman in 2008. However, it is alleged that Goldman booked profits of around $350 million on these equity-derivatives trades.

Since then, the sovereign fund’s ties with Goldman have been strained. The U.S. banking giant advised the fund to recoup the losses through structured-finance instruments or investment funds. However, these would have required LIA to invest more money through Goldman.

The lawsuit alleged that Goldman leveraged its relationship with the fund and unfairly influenced the LIA officials who had limited financial and legal expertise, resulting in the soured investments. Further, it accused Goldman of maintaining inadequate documents concerning the trades. The company failed to provide timely information about the trades to LIA.

Gradually, when the reality of complex trades came into light, it became apparent that Goldman had taken undue advantage of the trust LIA had placed on the Wall Street giant.

The LIA contends that although the normal margin for the concerned trades would have been 5%, Goldman, however, charged 20–40% for the same. On the Monday hearing, Roger Masefield QC, serving LIA, alleged that Goldman “took advantage of my client’s naivety and the profit they took was unusual and excessively high”.

However, Goldman strongly denies any wrongdoing. The bank defends itself by saying that the trades were not complicated for the LIA’s “financially sophisticated” senior banking personnel to comprehend and has opposed the claim as “a paradigm of buyer’s remorse”.

Currently, Goldman carries a Zacks Rank #2 (Buy). Some better-ranked stocks in the finance space include Piper Jaffray Companies (PJC), Western Alliance Bancorporation (WAL) and Bridge Capital Holdings (BBNK). All these stocks sport a Zacks Rank #1 (Strong Buy).

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