An expert witness in the litigation between Goldman Sachs and Libya’s sovereign wealth fund said disputed trades of $5 billion were bigger than most traders would see in their careers, making the profits difficult to compare to industry standards.
Will Lyons, a former head of equity derivatives trading at Santander who is acting as an expert witness for Goldman Sachs, said: “I regard the size of these trades as very large and very seldom would you see transactions this size in the market,” under cross-examination from Roger Masefield, the Libyan Investment Authority’s lawyer on Wednesday.
The Libyan Investment Authority is claiming it lost more than $1 billion (£750 million) on nine trades executed by Goldman Sachs in 2008 on banks such as Citigroup and UniCredit as well as the French company EDF.
The LIA was set up in 2006 to invest Libya’s oil wealth internationally. The organisation claims that Goldman Sachs took advantage of the low level of financial literacy of LIA staff and suggested large and risky trades that led to heavy losses for it and profits for the bank.
Goldman Sachs has said it will defend against the claims “vigorously,” calling them “without merit” when the case started.
In total, Goldman Sachs salespeople added a markup of $130 million (£100 million) to the disputed trades with the Libyan fund, which was 2.5% of the notional deal value. Lyons said this “falls within the range that I would consider reasonable for trades of this size and risk,” in a statement released this week.
Masefield asked whether Lyons had personally dealt with trades and profits of the size disputed by the LIA.
“The answer to that is I think very, very few traders will ever have come across trades that size in their trading lives, so to ask me if I have ever experienced something that has never happened, the answer is clearly no,” said Lyons.
Masefield asked about the size of the profits charged: “From your experience as a trader, are you aware of an example of a large institutional fund or corporate investor paying prices to a bank that exceeded the bank’s walk-away by more than $100 million?”
“I’m sorry to have to repeat my answer, but these trades aren’t seen in most traders’ lifetimes,” Lyons said.
There are three levels to pricing a structured equity derivative for a client, which is the type of trade carried out by Goldman for the LIA.
First, the so-called midmarket price is derived by the bank’s own pricing models. On top of that, the trading team adds a “walkaway,” which includes adjustments to the model and an assessment by the trading desk of how risky the trade is to the bank and how costly that risk would be to hedge. Finally, the sales team adds a markup and takes the final price to the client.
Earlier in the trial, a lawyer for the LIA questioned Andrea Vella, a partner at Goldman Sachs, on how the bank developed a relationship with the Libyan authority and whether it considered it financially unsophisticated.
Vella agreed that the LIA was perceived as being capable of carrying out deals of a “significant” size, when asked by LIA’s barrister, Phillip Edey QC.
“I think if you asked certain people at Goldman Sachs at the time they would have described them as elephant,” Vella, now based in Hong Kong, told the court.
The reference to elephants came from a chapter in the book “Why I Left Goldman Sachs” by Greg Smith, called “Hunting for Elephants” and referenced as evidence by Edey.
The trial is scheduled to last until the end of July.