The High Court has dismissed(1) the Libyan Investment Authority's (LIA) claim against Goldman Sachs International based on two causes of action – undue influence and unconscionable bargains – in relation to a series of transactions which the LIA entered into with Goldman Sachs between September 2007 and April 2008, causing the LIA to lose billions of dollars.
LIA was set up by the Libyan government 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.
The LIA disputed nine trades with Goldman Sachs. These comprised two trades in Citigroup Inc, three trades in respect of French energy company Électricité de France and four trades in respect of other corporates (referred to as the 'April trades'). The total value of the premiums paid by the LIA to Goldman Sachs equalled around $1.2 billion.
The LIA sought to rescind the disputed trades and obtain repayment of the premiums from Goldman Sachs 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' advice and recommendations when entering the disputed trades and 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 that 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, attempts were made 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, into agreeing to the disputed trades by offering his younger brother, Haitem Zarti, an internship at Goldman Sachs in exchange. The internship was arranged by Mr Vella and Mr 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 and therefore denying any claim of undue influence. It noted that the key individuals within the LIA who made the investment decisions knew perfectly well the nature and extent of the disputed trades. It pointed out that these were not the only trades that the LIA had 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 its profits were entirely reasonable. It concluded that the LIA's claim stemmed from buyer's remorse.
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:
- where there has been an improper threat of some kind or, as the LIA contended, an improper inducement; or
- where the nature of the relationship is such as to place on the stronger party a duty to behave towards 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 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".(2)
Unconscionable bargain claim
This claim requires three elements to be satisfied:
- One party was at a serious disadvantage compared with the other, so that circumstances existed of which unfair advantage could be taken;
- The weakness of one party was exploited by the other in some morally culpable manner; and
- The resulting transaction was not merely hard or improvident, but overreaching and oppressive.
Actual undue influence – Haitem Zarti internship and April trades
The LIA asserted that the offer of the internship was improper on the basis that:
- it was offered in contravention of Goldman Sachs' internal policy;
- it was not offered on the basis of Haitem Zarti's merits; and
- Goldman Sachs knew or intended that it would encourage Mustafa 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 Mustafa Zarti's approval of the April trades beyond the mere coincidence of time.
The judge 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 Zarti might well be posted to London to head the LIA's London office and wanted to form a strong and friendly link with the LIA through him. As for Mustafa Zarti's motivation, the judge said that she would have to piece together the most likely narrative in the absence of direct evidence from him, Haitem Zarti or Kabbaj. She stated that it would go too far to say that the internship influenced Mustafa 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 April 17 2008, the date on which Haitem Zarti 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.
The judge therefore dismissed the LIA's claim in relation to the April trades insofar as it was based on actual undue influence arising from the favourable treatment offered to Haitem Zarti.
The court had to decide whether the relationship which grew between the LIA and Goldman Sachs was a protected relationship so that:
- 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
- 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.
Level of sophistication of 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 its knowledge of the LIA's inexperience and thus took unfair advantage of the LIA.
The judge 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 irrelevant, as they were not the true decision makers at the LIA. It was clear that Mustafa Zarti and Mr Layas made the final decision on the LIA's investments and they never conferred with or asked the direct advice of the equity team. In 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. The judge also could not accept that they would not have understood the nature of the relationship between Goldman Sachs and the LIA (primarily as commercial counterparties). The judge further noted that the LIA's board was sufficiently financially literate to understand the risk inherent in the disputed trades.
Other factors relevant to protected relationship
The LIA claimed that Goldman Sachs had overstepped the boundary in their relationship such that it had become exceptional. The judge said that she was looking for something truly out of the ordinary from a normal bank/client relationship, outlining the following key factors:
- The judge concluded that references made by Goldman Sachs about forming a strategic partnership with the LIA, the provision of training, research and 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 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 that Kabbaj was a salesman for Goldman Sachs and that they were keen to create distance with him on that basis. This was 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, the judge found that there was no indication that this had actually happened and the advice that 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 that Goldman Sachs offered.
- The judge 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 from that which 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; and
- Goldman Sachs was aware, or at least suspected, that this 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. The judge 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 that 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.
The judge 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 and Layas – in the absence of direct evidence from Layas and without email traffic between him and the board and Mustafa Zarti, the key evidence came from the impressions of others and his presentations to the board. The judge 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 that he requested showed that he thought the LIA was acquiring shares.
- Mustafa Zarti – similarly, the judge noted that there was little evidence of what Mustafa Zarti understood of the disputed trades. She concluded that he was prone to putting some spin on the documents that he presented to the board and therefore they were not indicative of what he actually understood. In respect of the "stormy meeting" at which Mustafa Zarti is said to have made clear his misunderstanding of the disputed trades, the judge concluded that he partially stage-managed his reaction to make maximum impact. His anger may not have been entirely feigned, but the judge 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, the judge 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 that the evidence was inaccurate and exaggerated.
The judge therefore rejected the LIA's assertion that Goldman Sachs had 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 the judge did not find that the LIA had made out a claim for undue influence.
Unconscionable bargain claim
As the judge 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 should 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 may cross from a normal counterparty relationship to a protected relationship. This will largely be a factual matter dependent on the evidence before the court.
Notably, the judge commented on the inadequacy of the witness evidence provided by the LIA. Although 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 occurred 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.
The judge also 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 emails or otherwise. The judge was thus left to deduce a narrative and a conclusion from the evidence which was before her.
For further information on this topic please contact Sarah Shaul or Simon Hart at RPC by telephone (+44 20 3060 6000) or email (email@example.com or firstname.lastname@example.org). The RPC website can be accessed at www.rpc.co.uk.
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(1) Libyan Investment Authority (incorporated under laws of the State of Libya) v Goldman Sachs International  EWHC 2530.
(2) Royal Bank of Scotland v Etridge (AP)  UKHL 44.