On 14 October 2016, judgment was delivered in The Libyan Investment Authority v Goldman Sachs International [ EWHC 2530 (Ch)]. Rose J dismissed a claim by the Libyan Investment Authority ("LIA") in which it asserted that Goldman Sachs International ("Goldman") had exerted undue influence over its employees which resulted in it making improper investments and which in turn caused losses of US$1.2 billion. Goldman denied these claims and contended that (1) the relationship did not go beyond an ordinary relationship of bank selling investment products to a wealthy client and (2) the LIA, being a sovereign wealth fund ("SWF"), was a more sophisticated investor than it claimed to be.
During 2007-2008, the LIA entered into a number of synthetic derivative trades with Goldman (the "Disputed Trades"), in respect of which the LIA paid a lump sum for each trade by way of premium. In return, the LIA gained exposure to shares in a particular underlying company. The Disputed Trades were also leveraged so that the number of shares to which the LIA gained exposure was more than the LIA could have bought with the premium. No actual shares were acquired by the LIA but if the price of shares in the underlying company rose by the maturity date of the trade, then Goldman would pay the difference between the share price at the start of the trade and the share price on maturity multiplied by the total notional number of shares. The total value of the premiums paid to Goldman was US$1.2 billion.
In its claim, the LIA sought to rescind the Disputed Trades and obtain repayment of the premiums paid from Goldman. Its principal defence was that Goldman procured the LIA to enter into the Disputed Trades by the exercise of undue influence and that it was a "naïve and unsophisticated institution". Its secondary defence was that the Disputed Trades constituted an unconscionable bargain as:- (i) they were priced unfairly and Goldman earned excessive profits from the trades, (ii) the nature of the trades was entirely unsuitable for the needs of the LIA as a SWF and (iii) Goldman improperly influenced the deputy CEO of the LIA, Mr Zarti, to cause the LIA to agree the trades by offering his younger brother, a prestigious internship at the bank.
In particular, the LIA alleged that Goldman had a protected relationship with the LIA and had effectively become the LIA’s adviser and in-house bank through the provision of extensive training, lavish hospitality and the giving of advice and assistance. The LIA contended a duty of candour and fairness should have arisen from this relationship and sought to convey itself as comprising of a rudimentary team of individuals.
Rose J dismissed the claim that the Disputed Trades were as a result of undue influence by Goldman and stated that the claim that these were unconscionable bargains must also fail. She commented that “Although the offer of the internship may have contributed to a friendly and productive atmosphere during the negotiation of the April trades, it did not have a material influence on the decision of Mr. Zarti and the LIA to enter into the April trades.” Further, there was no evidence that Mr Zarti knew the nature or extent of entertainment provided to his brother or that it had any influence on his investing decisions.
Having considered the constitution and composition and experience of the investment teams within the LIA, the Judge placed weight upon that fact that the LIA's constitution provided for the CEO to have "experience and efficiency in the fields of money and investment" and had appointed a Mr Layas, as Chief Executive Officer and Chairman during the relevant period. Mr Layas died in 2015 but prior to this had over 35 years' experience in international banking, and had acted as the Chairman of the Arab Banking Corporation, which engaged in derivative trading. Further, Mr Layas had been involved in the formulation of the Santiago Principles, which are designed for SWFs, and provide detailed explanation of derivatives and emphasise the risk alignment.
Rose J also stated that the LIA placed "too much weight on what are effectively sales pitches made by the bank". It was held that Goldman's "warm words", including a "strategic" and "unique" relationship, did not differ from any other bank seeking to sell products and did not alter its relationship with the LIA. Similarly, Rose J found that the fees that Goldman earned on the Disputed Trades were not excessive “given the nature of the trades and the work that had gone into winning them” and although the Disputed Trades may be regarded as unsuitable for a SWF, “there were other reasons why the LIA wanted to enter into them and, if they were unsuitable, they were no different from many other investments that the LIA made over the period in that regard".
In her judgment, Rose J stated that that the evidence regarding Goldman's hospitality and training was "ambivalent" and did not show a special relationship between the parties, particularly given that over 20 other banks seeking to win the LIA's business offered similar perks. She therefore concluded that there was no protected relationship of trust and confidence which went beyond the normal cordial and mutually beneficial relationship between a bank and a client.
In situations where two commercial entities enter into a transaction, English law expects those contracting parties to look after their own interests and there is no obligation to look after the other party's interests. Courts will not generally intervene because one party enters into a transaction which is disadvantageous and this case is no exception. Whilst there can be exceptions due to undue influence and unconscionable bargain, these exceptions were introduced to protect parties from being wronged, and weakness exploited and the applicable threshold levels are high. It is therefore perhaps unsurprising that a SWF was unable to overcome them.