Investment bank in undue influence claim
Posted: 3rd November 2016
Business relationships depend on cordiality and trust – but at what point do such arrangements give rise to dependency and a duty of care? The High Court addressed that thorny issue in the case of a sovereign wealth fund that blamed an investment bank after losing more than $1 billion following the 2008 financial crisis.
The fund was established to manage about $30 billion in oil revenues held by a country that had recently been released from United Nations sanctions. On US bank Goldman Sachs' advice, the Libyan Investment Authority (LIA) invested heavily in synthetic derivative trades in the belief that the crisis was a temporary blip and that the markets would swiftly bounce back. That hope was in vain and the fund lost about $1.2 billion.
In seeking to rescind the trades and to recover its losses from the Goldman Sachs, the fund argued that the latter had exerted undue influence. Having been isolated for many years from the international financial markets, the fund was said to be a naive and unsophisticated institution. By the giving of extensive hospitality, training, advice and assistance, the bank had overstepped the usual relationship that exists between a bank and a client. The fund had not really understood the nature of the trades and had come to rely entirely on the bank’s recommendations.
In disputing the claim, Goldman Sachs insisted that its relationship with the LIA had never advanced beyond the ordinary relationship of a bank selling investment products to a wealthy client. The LIA’s executives were said to have been keen to obtain market exposure, to have well understood the nature of the trades and to have been bullish about the prospects of a good return.
In rejecting the case, the Court found that the relationship between Goldman Sachs and the LIA did not extend beyond the normal cordial and mutually beneficial relationship that grows up between a bank and a client. There was no protected relationship of trust and confidence and the bank had not brought undue influence to bear. The profits earned by the bank were not excessive and the Court also rejected arguments that the trades amounted to unconscionable bargains.