Goldman to Disclose Profit It Made on Libyan Trades

Photo
Goldman Sachs’s offices in London, where a suit brought by the Libyan Investment Authority against the firm is being heard.Credit Peter Macdiarmid/Getty Images

LONDON — Goldman Sachs will disclose how much it earned on a set of complex derivatives trades at the heart of a lawsuit brought by Libya’s sovereign wealth fund, the two parties decided before a hearing Monday.

The Libyan Investment Authority is suing Goldman in connection with nine trades it entered into from January through April in 2008. The authority contends that Goldman took advantage of its relationship with the inexperienced fund and exercised undue influence over it to enter into $1.2 billion worth of trades. Those trades were unfairly structured to make Goldman a lot of money but leave the authority highly exposed to losing its entire investment, the suit contends.

After the market crashed in 2008, the trades were rendered worthless, according to the suit, but Goldman made $350 million.

Goldman will disclose its margin, profit and loss from the day the trades were booked as well as a month later. It will also disclose the reserves it set aside for each trade, the parties said during a case-management hearing at London’s High Court.

The disclosure will generate ample attention because complex derivatives trades are highly lucrative, in part because of the opacity of the market and the negotiations involved. The authority contends that a standard margin for trades like the ones in its suit would be 5 percent, compared with the 20 percent to 40 percent charged by Goldman.

Goldman says the case is one of “buyer’s remorse” and has noted that the authority is suing only for the unprofitable trades, not the ones that made it money. The investment bank’s lawyers don’t believe that profit is relevant to the accusations in the suit, specifically that Goldman exercised undue influence over the authority or that the terms of the trade were unfair.

But now it has agreed to provide that information, as well as all the policies it had about pricing derivatives at the time. The document it will produce is called a product control statement and will show the expected profit, as well as reserves set aside for the trade. Such documents are handled by the finance department and are separate from the profit and loss statement that traders use.

At the hearing in London on Monday, Goldman prevailed on three other issues related to disclosure of documents and details related to the profit issue, including a critical one that will most likely cause one of Europe’s most prominent deal makers to breathe a sigh of relief.

The two sides sparred over how much information would be disclosed before they go to trial next year. Not surprisingly, the authority wants every document it can get, including what Goldman’s top executives knew and thought about the authority. Central to the authority’s central claim is that it was naive and inexperienced.

Before the hearing, Goldman had already agreed to produce documents related to 13 individuals who constituted the core Libyan banking team, covering 144 search words from January 2007 to September 2008, soon after the relationship broke down in a heated fight during the summer.

The authority sought to expand that group to include nine additional senior managers, including Michael Sherwood, the co-chief executive of Goldman Sachs International, who had been mentioned as a potential successor to Lloyd C. Blankfein, the firm’s chairman and chief executive. The authority also wanted to expand the period for the documents and drastically increase the number of keywords.

The authority argued that Goldman had already reviewed Mr. Sherwood’s emails for the longer period, according to other court documents, so it should not be costly or put an undue burden on the bank.

“That shows that Goldman thought it was worthwhile to look at his emails across a wider period,” said Roger Masefield, a lawyer for the authority.

The judge refused its request, citing cost and the fact that the original search would produce sufficient information. Goldman will provide documents related to the expanded group in a smaller time frame with only five key words instead of the 144.

The authority also complained that Goldman had refused to address a letter it sent, asking for 43 categories of documents, or at least asking whether the bank would object to any of those categories. Goldman replied that it had already undertaken extensive correspondence with the authority about what documents would be shared and accused it of taking advantage of Goldman’s conciliatory stance.

“They just won’t back off and they jolly well ought to,” said Robert Miles, a lawyer for Goldman.

The authority has revised its suit to argue that the trades were unsuitable and that the profits were “unusually high for financial derivative transactions involving a substantial international bank” and that the premiums paid by the authority were “substantially overvalued.”

The judge ordered that the authority had to pay the costs of Monday’s hearing. In October, the same judge ordered Goldman to pay the authority for its attempts to have the case dismissed.