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Jun 09 2011

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Eyes on Goldman-Libya Dealings

   By Jean Eaglesham, Liz Rappaport and Margaret Coker 
   Of THE WALL STREET JOURNAL 
 

Enforcement lawyers at the Securities and Exchange Commission are reviewing documents that detail the firms' relationships with the Libyan Investment Authority controlled by Col. Moammar Gadhafi, these people said.

Among other things, SEC officials are interested in a $50 million fee Goldman initialy agreed to pay the Libyan sovereign-wealth fund as part of a proposal by the New York company to help the fund recoup losses, according to these people. The Libyan Investment Authority would have passed on the $50 million payment to an outside adviser, The Wall Street Journal reported last month.

The $50 million payment was never made, because discussions between Goldman and the sovereign-wealth fund stalled before violence erupted in Libya in February, according to people familiar with the matter.

"We are confident that nothing we did or proposed was or could have been a breach of any rule or regulation," said Lucas van Praag, a Goldman spokesman. "We retained outside counsel, as is our normal practice for any transaction, to ensure that we were compliant with all applicable rules." An SEC spokesman declined to comment. The agency's interest in Libya-related documents doesn't necessarily mean the SEC will launch a formal investigation.

The U.S. government has recently become more aggressive in enforcing antibribery laws. Last year, the Justice Department and the SEC brought 74 enforcement actions under the Foreign Corrupt Practices Act, up 85% from 40 such actions in 2009, according to law firm Gibson, Dunn & Crutcher LLP.

Regulatory scrutiny is spreading to financial firms from traditional targets such as defense and pharmaceutical firms, said lawyers who are uninvolved with the matter. After Libya launched its sovereign-wealth fund in 2007, banks and securities firms rushed for a piece of its $40 billion in cash at the time.

Financial firms that had significant dealings with the Libyan Investment Authority included Goldman Sachs ; Société Générale SA; HSBC Holdings PLC; Carlyle Group LP; Bear Stearns, now part of J.P. Morgan Chase & Co.; Och-Ziff Capital Management Group; and Lehman Brothers Holdings Inc., according to documents reviewed by the -Journal. Current and former officials at the sovereign-wealth fund said some firms used middlemen as part of doing business with Libya.

Mark Mendelsohn, who oversaw Foreign Corrupt Practices Act cases at the Justice Department from 2005 to 2010, said the "amounts of money typically involved, and the fact that the financial institutions are often dealing with the sovereign fund with the assistance of a finder or other third party, all raise potential red flags…that require thorough diligence."

Any dealings with sovereign-wealth funds in countries like Libya could be deemed "high-risk" of breaching the law, said Mr. Mendelsohn, a partner at law firm Paul, Weiss, Rifkind, Wharton & Garrison LLP.

Goldman 's discussions about possibly making a $50 million payment came after Libya's sovereign-wealth fund gave the firm $1.3 billion in 2008 for a currency bet and other complicated trades. The investments lost 98% of their value, according to Goldman documents prepared for the fund. In return for unwinding the trades and a "release and discharge of liability," Goldman said it would pay the Libyan Investment Authority transaction expenses and "an additional amount of USD 50,000,000," the documents show.

As part of the arrangement, the Libyan fund planned to hand over the $50 million to Palladyne, according to documents reviewed by the Journal. Goldman said it would make the payment if the deal satisfied "Foreign Corrupt Practices Act representations as set out in the Terms Letter," among other conditions.

Lawyers said firms generally can't rely on such language to ensure compliance with antibribery laws.

Société Générale declined to comment on its business dealings in Libya but said it "complies with all applicable rules and regulations" related to sovereign-wealth funds.

A spokesman for HSBC said he couldn't comment on individuals or companies, due to the bank's duty of confidentiality. "We abide by the rules and regulations of every country where we operate, and comply with international sanctions," the spokesman said.

Carlyle, Och-Ziff and J.P. Morgan declined to comment.

The SEC review is separate from the agency's broad antibribery probe of the financial industry's ties to sovereign-wealth funds, according to people familiar with the matter. The Journal reported earlier this year that Citigroup Inc., Blackstone Group LP and other firms were sent letters of inquiry by the SEC. Citigroup and Blackstone declined to comment.

-By Jean Eaglesham, Liz Rappaport and Margaret Coker

(END) Dow Jones Newswires

09-06-11 0404GMT