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High Court dismisses Libyan Investment Authority's claim against Goldman Sachs

17 November 2016. Published by Simon Hart, Partner

The High Court dismissed the Libyan Investment Authority's claim against Goldman Sachs based on two causes of action, undue influence and unconscionable bargains, in relation to a series of transactions which the parties entered into (the Disputed Trades) between September 2007 and April 2008, causing the LIA to lose billions.

The Facts

The claimant, LIA, was set up by the Government of Libya as a sovereign wealth fund with the purpose of investing money for the benefit of the present and future citizens of Libya. In late 2007 and early 2008 the LIA had at least $30 billion of assets to manage.

Under each trade the LIA paid a lump sum to Goldman Sachs (a premium) in return for which it gained leveraged 'exposure' to a number of shares in a specific company. The Disputed Trades were synthetic derivative trades and at no point did the LIA ever acquire any actual shares pursuant to the trades. If the price of the shares in the underlying company rose by the maturity date, Goldman Sachs would pay the LIA the difference between the share price at the start of trade and the share price on the maturity date multiplied by the total number of notional shares. If the price remained the same or reduced, Goldman Sachs kept the premium and the LIA received nothing.

There were nine Disputed Trades with Goldman Sachs challenged by the LIA. These comprised two trades in Citigroup Inc. (the Citigroup Trades), three trades in respect of the French energy company Électricité de France (the EdF Trades) and four trades in respect of other corporates (the April Trades). The total value of the premiums paid by the LIA to Goldman Sachs was the equivalent of about $1.2 billion.

The Claim

The LIA sought to rescind the Disputed Trades and obtain repayment of the premiums from Goldman Sachs.  Their claim was based on two causes of action:

  • The main claim asserted that Goldman Sachs procured the LIA to enter into the Disputed Trades by the exercise of undue influence.
  • The second claim was based on the Disputed Trades constituting unconscionable bargains.

The claims were raised broadly on the same factual issues. 

The LIA alleged that a relationship of trust and confidence had been built between it and Goldman Sachs which had crossed the boundary of the usual relationship between a bank and its client. The LIA stated that it came to rely on Goldman Sachs's advice and recommendations when entering the Disputed Trades and it trusted that its best interests were taken into consideration.

The LIA claimed that Goldman Sachs took advantage of its lack of expertise, and that it had always been under the impression that it was actually acquiring shares in the underlying companies. It claimed it did not appreciate that it would lose everything if the share price had not risen by the maturity date. Following a 'stormy meeting' with Goldman Sachs in which the LIA claimed that it had not understood that the Disputed Trades were synthetic, there were attempts to restructure them.  Various proposals were put forward but no solution could be found and the Disputed Trades matured in 2011. The LIA lost its premiums and received no return on its investments.

The LIA went further to state that the Disputed Trades were priced unfairly, permitting Goldman Sachs to make excessive returns and that the nature of the Disputed Trades was entirely unsuitable for the LIA as a sovereign wealth fund. Regarding the April Trades, the LIA alleged that Goldman Sachs had improperly influenced the deputy chairman of the LIA, Mustafa Zarti (Zarti), into agreeing to the Disputed Trades by offering his younger brother, Haitem Zarti (Haitem), an internship at Goldman Sachs in exchange. The internship was arranged by Mr. Vella (Vella) and Mr. Kabbaj (Kabbaj) of Goldman Sachs after some wrangling with the compliance and human resources teams at the bank.

Goldman Sachs contested every aspect of the LIA's claim asserting that the relationship between them never went beyond the ordinary relationship of a bank selling an investment product to a client, therefore denying any claim of undue influence. They noted that the key individuals within the LIA who made the investment decisions knew perfectly well the nature and extent of the Disputed Trades. They pointed out that these were not the only trades the LIA entered into at the time and, although the Disputed Trades were unusual in their size and value, there was nothing about them which was open to criticism. Goldman Sachs argued that their profits were entirely reasonable. They concluded that the LIA's claim stemmed from 'buyer's remorse'.

The Law

Actual and presumed undue influence

Actual undue influence can be asserted if the claimant can point to specific instances of unconscionable conduct. There are two ways to prove this – the first is where there has been an improper threat of some kind or, as the LIA contended, an improper inducement. The other is where the nature of the relationship is such as to place on the stronger party a duty to behave toward the vulnerable party with candour and fairness (a protected relationship). Alternatively, a claimant can rely on a presumption of undue influence because certain circumstances have arisen. In the case of Etridge this was described as proof that the claimant placed trust and confidence in the other party (akin to the establishment of a protected relationship in the case of actual undue influence) in relation to the management of the claimant's financial affairs, coupled with a transaction which "calls for explanation".

The unconscionable bargain claim

This requires three elements to be satisfied namely, (1) one party has been at a serious disadvantage compared with the other so that circumstances existed of which unfair advantage could be taken, (2) the weakness of one party has been exploited by the other in some morally culpable manner, and (3) the resulting transaction has been not merely hard or improvident, but overreaching and oppressive.

The Decision

Actual Undue Influence – the Haitem Zarti Internship and April Trades

The LIA asserted that the offer of the internship was improper on the basis that (i) it was offered in contravention of Goldman Sachs' internal policy (ii) it was not offered on the basis of Haitem's merits and (iii) Goldman Sachs knew or intended that it would encourage Zarti to put more of the LIA's business with them. Goldman Sachs denied this, stating that there was no link between the internship and Zarti's approval of the April Trades beyond the mere coincidence of time.

Rose J concluded that there was a range of reasons for the offer of the internship. The main motivation was that Vella and the others at Goldman Sachs thought that Haitem might well be posted to London to head up the LIA's London office and wanted to form a strong and friendly link with the LIA through him. For Zarti's motivation, Rose J said she would have to piece together the most likely narrative in the absence of direct evidence from him, Haitem or Kabbaj. She stated that it would be to go too far to say that the internship influenced Zarti to place more business with Goldman Sachs than he otherwise would have done. There had already been long and detailed discussions about a further substantial investment by the LIA with Goldman Sachs over several weeks preceding the 17 April 2008, the day on which Haitem was offered the internship by Goldman Sachs. While Kabbaj might have hoped that the offer of the internship would "sweeten the atmosphere" it would be unrealistic to assert that the offer induced Zarti into committing hundreds of millions of euros.

She therefore dismissed the LIA's claim in relation to the April Trades so far as it was based on actual undue influence arising from the favourable treatment offered to Haitem.

The Protected Relationship

The court had to decide whether the relationship which grew between the LIA and Goldman Sachs was one which was a protected relationship so that (a) Goldman Sachs owed the LIA a duty to act with candour and fairness in its dealings (such that the LIA could make good its claim of actual undue influence) and (b) it satisfied the first element that the LIA needed to establish if it wanted to rely on a presumption that the Disputed Trades were the result of undue influence.

The level of sophistication of the LIA

The LIA's witnesses alleged that there was a serious lack of sophistication as regards financial dealings at the LIA which led them mistakenly to trust Goldman Sachs and fail to understand the bank's interests in the Disputed Trades. They stated that Goldman Sachs abused their knowledge of the LIA's inexperience and thus took unfair advantage of the LIA.

Rose J concluded that the lack of financial acumen of the LIA's witnesses was not a material factor in the relationship between the LIA and Goldman Sachs which influenced the LIA's decision to enter into the Disputed Trades. The lack of sophistication of Mr. Enaami (head of the Equity Team) and the Equity Team members was not relevant as they were not the true decision makers at the LIA. It was clear that it was Zarti and Mr. Layas (Layas) who made the final decision on the LIA's investments and they never conferred with or asked the direct advice of the Equity Team. By contrast, Layas and Zarti had extensive financial and banking backgrounds which defied the claim that they did not understand the nature and risk associated with the Disputed Trades. Nor could Rose J accept that they would not have understood the nature of the relationship between Goldman Sachs and the LIA (primarily as commercial counterparties). Additionally she noted that the LIA's Board was sufficiently financially literate to understand the risk inherent in the Disputed Trades.

Other factors relevant to a protected relationship

The LIA claimed that Goldman Sachs had overstepped the boundary in their relationship such that it had become exceptional. Rose J said that she was looking for something truly out of the ordinary from a normal bank/client relationship. The key factors examined by Rose J are outlined below:

Rose J concluded that references that Goldman Sachs made about forming a strategic partnership with the LIA, the provision of training/research/general assistance and Goldman Sachs’s corporate hospitality and provision of gifts, were not out of the ordinary and were frequent features of the bank's relationship with their clients.

The LIA pointed to the presence of Kabbaj at the LIA's offices in Tripoli. Goldman Sachs had provided Kabbaj to work with the LIA staff (training and advising them) over the course of the relevant period. However, on cross examination the Equity Team members showed that they understood Kabbaj was a salesman for Goldman Sachs and that they were keen to create distance with him on that basis. This is not consistent with a picture of Goldman Sachs as the LIA's trusted adviser.

The LIA claimed that Goldman Sachs had acted as an adviser in respect of investment opportunities proposed to the LIA by other banks. However, Rose J found that there was no indication that this had actually happened and the advice Goldman Sachs gave was in any event very high level.

In its defence, Goldman Sachs referred to the many deals which it had tried to persuade the LIA to enter into and which the LIA had refused. Around the time that the LIA claimed that Goldman Sachs was consolidating a protected relationship with the LIA and unduly influencing it, the LIA was clearly capable of assessing and rejecting other deals Goldman Sachs offered.

Rose J concluded that the fact that Goldman Sachs went the extra mile in forming a relationship with the LIA did not mean that it was in a different relationship with the LIA than the LIA had with other banks. She concluded that the relationship never crossed the line from being a strong, cordial one (as between buyer and seller) to one of trust and confidence giving rise to a duty of candour and fairness on the part of Goldman Sachs.

Breaches of candour and fairness

A key tenet of the LIA's undue influence argument was that it fundamentally misunderstood the nature of the Disputed Trades, Goldman Sachs was aware, or at least suspected,  that was the case and nevertheless encouraged it to enter into the transactions.

The LIA claimed that it failed to appreciate that it would never acquire an actual stake in any of the underlying shares under the Disputed Trades. Evidence at trial was focused on exploring what the LIA witnesses thought and understood at the time. During closings, the LIA went on to allege various misunderstandings to which Goldman Sachs objected as they had not been pleaded. Rose J concluded that to allow the LIA to advance these unpleaded allegations in relation to unconscionable conduct regarding the pricing of the Disputed Trades and the level of profit Goldman Sachs sought to make would be unfair. Counsel for Goldman Sachs had not been able to cross examine the LIA witnesses on this point. It is therefore unclear how successful these allegations might have been.

Rose J stated that the most important evidence in this respect was the (much sparser) evidence as to what the key decision makers at the LIA understood of the Disputed Trades at the time. She concluded as follows: 

  • The Board & Layas – in the absence of direct evidence from Layas and without any e-mail traffic between him and the Board/Zarti, the key evidence came from (i) the impression of others and (ii) his presentations to the Board. Rose J concluded that Layas did understand the deal structure and significantly, knew that the deal structure presented in the Board Memo drafted by the Equity Team was out of date and differed from his actual understanding of what the trade involved. She did not believe that he had misread a term sheet relating to forex trades at the time owing to his misunderstanding, nor did she believe that confirmation letters he requested showed that he thought the LIA was acquiring shares.
  • Zarti – similarly, Rose J noted that there was little evidence of what Zarti understood of the Disputed Trades. She concluded that Zarti was prone to putting some spin on the documents he presented to the Board and they were not therefore indicative of what he actually understood. In respect of the 'stormy meeting' at which Zarti is said to have made clear his misunderstanding of the Disputed Trades, Rose J concluded that he partially stage managed his reaction to make maximum impact. His anger may not have been entirely feigned, but Rose J believed that his behaviour before the meeting indicated that he had never actually misunderstood the nature of the Disputed Trades.

In respect of the Equity Team, Rose J concluded that the LIA’s witness evidence was confused which reflected their genuinely confused thinking at the time (such that some of the team did believe that actual shares would be acquired under the Disputed Trades). Nevertheless, she refused to believe (given the team's background) that they had not grasped the difference between a derivative trade and a basic purchase of shares. In this respect she said the evidence was inaccurate and exaggerated.

Rose J therefore rejected the LIA’s assertion that Goldman Sachs unduly influenced the LIA to enter into the Disputed Trades because the LIA misunderstood the nature of the trades and Goldman Sachs took advantage of this.

It followed that Rose J did not find that the LIA had made out a claim for undue influence.

Unconscionable Bargain claim

On the basis that Rose J did not find that the LIA had made out a claim for undue influence, she deemed that the LIA's claim that the transactions should be set aside on the grounds that they were unconscionable bargains must also fail.


This case is interesting because it applies the concepts of actual and presumed undue influence in a commercial and business context, illustrating ways in which the relationship boundary between bank and client might cross from a normal counterparty relationship to a "protected relationship". That will largely be a factual matter dependent on the evidence before the court.

It is of note that Rose J commented on the inadequacy of the witness evidence provided by the LIA.  Although she comments that she was in no doubt that the Equity Team members and Vella tried their best to recollect events, she pointed to the inconsistency and confusion in their witness evidence on several occasions throughout the trial. She further noted the natural bias which formulates when preparing for civil litigation after being called by a particular party, especially when the events concerned are a significant time in the past. Claimants seeking to bring similar claims should be alive to such potential issues in the course of their preparation.

Of further note is that Rose J considered that it was the extent of the knowledge of the key decision makers (who did not give evidence) regarding the nature and structure of the Disputed Trades which was of most significance. However, there was no direct evidence from these individuals and little by way of evidence in e-mails or otherwise. Rose J was thus left to deduce a narrative and a conclusion from the evidence which was before her.