SocGen Deals Eyed by Libya

Officials working with Libya's new governing authority are examining whether any payments made by Société Générale SA as part of its business relationship with the Libyan Investment Authority ended up in the hands of people close to Col. Moammar Gadhafi's regime.

The French bank paid an unspecified amount to a Panama-registered company, Leinada Inc., to help structure and advise a $1 billion investment vehicle in 2008, according to deal-related documents reviewed by The Wall Street Journal. Leinada's exact role isn't clear, but the company's involvement was criticized by some officials at Libya's sovereign-wealth fund before fighting engulfed the country.

During Col. Gadhafi's reign, it was common for international companies to pay intermediaries, advisers or consultants when doing business with Libya. U.S. and U.K. securities laws require investment firms to disclose payments to brokers or middlemen who work as matchmakers on deals.

The French bank declined to comment on its relationship with Leinada or on its ties to the Libyan Investment Authority, though Société Générale said it "works occasionally with financial intermediaries in countries where [it] does not have local teams in place." Those middlemen are "fully reviewed through our compliance procedures in respect of the regulations and in complete transparency with the client," Société Générale added. The bank said it "complies with all applicable rules and regulations" related to sovereign-wealth funds.

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Financial deals signed during Col. Gadhafi's rule are among the business relationships being scrutinized by Libyan officials aligned with the National Transitional Council who are trying to rebuild the nation's reputation in the international business community. Leaders of the new government authority are working with former bankers and finance experts and have promised greater transparency and accountability, along with the end of what they claim was endemic corruption and cronyism during Col. Gadhafi's 42-year reign.

Former Libyan fund officials told Société Générale they didn't know there was money being paid to Leinada, and when they asked Société Générale in the spring of 2010 to explain what Leinada was, and who was behind it, the bank declined to specify the company's role or beneficiaries, according to documents reviewed by the Journal and people familiar with the matter.

Still, some Libyan officials pressed Société Générale for answers about Leinada. In a July 2010 email, a Société Générale banker responded that it is the French bank's "practice in the Middle East and North Africa … to use the skills and know how of selected external advisors for the marketing strategy, and the structuring of products." Société Générale "uses Leinada Inc. as one of its external advisors," the banker added.

According to its corporate filings in Panama, Leinada had four directors between 2005 and 2010. The directors included a Libyan, Walid Ali Giahmi, who described himself as a longtime businessman and financier. Mr. Giahmi confirmed his role as a director of Leinada but declined to provide specifics about his work with Société Générale in the investments with the Libyan Investment Authority, citing confidentiality.

Mr. Giahmi, through an email from his lawyer, said that he was remunerated "in accordance with generally recognized U.S. commercial practice as a 'foreign finder' " and that he has never worked on behalf of officials in the Gadhafi regime. "Leinada Inc. has never been used as a tool to transfer money to any Libyan politician, pubic official or any person connected to the former regime," according to the email sent by Mr. Giahmi's lawyer.

Dozens of financial firms did business with the Libyan Investment Authority, including banks, hedge funds and private-equity firms based in the U.S. and in Europe. Société Générale had one of the largest and most active relationships with Libya, transacting several deals together amounting to nearly $2 billion, according to documents reviewed by the Journal.

In contrast, many other firms handled just one investment for the sovereign-wealth fund, where transactions were smaller-sized or in the tens or hundreds of millions of dollars.

As previously reported, the U.S. Securities and Exchange Commission is examining a $50 million payment offered by Goldman Sachs Group Inc. to the Libyan Investment Authority for an outside advisory firm owned by the son of the head of Libya's state-run oil company. The offer was made after the sovereign-wealth fund suffered $1.3 billion in losses on options trades with Goldman in 2008.

The payment was never made, and Goldman has denied any wrongdoing. A Goldman spokesman declined to comment. SEC officials are investigating Goldman and other financial firms that scrambled to do business with the Libyan Investment Authority when it emerged in 2007 with more than $40 billion. An SEC spokesman declined to comment.

"It is the intermediaries that most often are directly involved in transacting illicit payments, and a company cannot hide behind them or claim ignorance of the intermediary's actions," said Ellen Zimiles, a former U.S. prosecutor who now is in charge of global investigations and compliance at Navigant Consulting Inc.

In its dealings with Société Générale, the Libyan Investment Authority in mid-2008 sank $1.8 billion into a string of deals created for the sovereign-wealth fund by the French bank. Two of the deals were called "SG Optimizer" and "Optimizer II," according to internal sovereign-wealth fund documents reviewed by the Journal. Some of the transactions let Libya supersize its investment with borrowed money, or leverage.




In the deal that included the payments to Leinada, the Libyan Investment Authority bet $1 billion that Société Générale's stock price would climb. In return for a 6% annual fee, or $60 million, the French bank created a derivative with a formula pegged to Société Générale's shares during the previous six months. 


Friction soon emerged between the Libyan sovereign-wealth fund and the French bank over losses as the investments began to sour during the financial crisis. Libyan officials requested contractual paperwork in 2009 about the fund's three main investments from Société Générale but didn't get the documents for about a year, according to people familiar with the situation and correspondence reviewed by the Journal.

By 2009, the $1.8 billion total investment had plunged in value by about 50%, according to internal documents. Libyan officials also learned about the payments to Leinada in spring of 2010. The Panama-registered company was named in one set of documents detailing Optimizer II but not in another, which led to some of the Libyan fund officials' suspicion about the payments, documents reviewed by the Journal show.

Many details were murky because the Libyan Investment Authority was plagued by deficiencies in proper compliance and auditing procedures, according to an evaluation by KPMG LLP of the Libyan fund.

"No one could evaluate what was happening" to our money, one former official at the sovereign-wealth fund said in an interview. "We saw the losses mounting, and we didn't have the paperwork or tools to analyze our investment."

Because pockets of Libya are still controlled by pro-Gadhafi tribes and loyalists, new governmental institutions aren't in place yet. Officials are trying to quickly establish a new financial infrastructure, and that effort includes determining which people from Col. Gadhafi's regime are trustworthy and who should answer for questionable deals made while he ruled Libya.

A Libyan official working on financial matters for the National Transitional Council said the new government will establish proper procedures to investigate foreign investments in Libya, including the relationship between financial firms and the Libyan Investment Authority.

Write to Margaret Coker at margaret.coker@wsj.com and Liz Rappaport at liz.rappaport@wsj.com
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