US securities officials are probing whether Goldman Sachs bribed Libyan Investment Authority officials to win business during the Moamer Kadhafi regime, according to a person familiar with the matter.
The issues under US investigation are also part of lawsuit filed by the LIA in London against Goldman Sachs after the Libyan sovereign wealth fund lost some $1 billion in derivatives trades placed by Goldman on its behalf.
The US Securities and Exchange commission is investigating whether Goldman offered an internship in 2008 to a brother of Mustafa Zarti, deputy chief of the LIA, according to the source.
Goldman has defended the hiring, saying Haitem Zarti was selected for an internship after the disputed trades were placed.
"The internship was viewed by (Goldman Sachs) as part of the training programs it offered to the LIA," Goldman said in a court filing in the British suit.
US companies are barred under the Foreign Corrupt Practices Act from making payments or gifts to foreign government officials, such as those who work for a sovereign wealth fund, to obtain or retain business.
The SEC is also investigating whether Goldman's payments covering hotel expenses for LIA officials on travel to Morocco constituted an illegal gift, the source said.
In its court filing, Goldman admitted that a Goldman employee "occasionally brought LIA employees small gifts," but denied that "this happened frequently, that it would be unusual in any commercial client relationship context, or that it is of any significance."
News of the probe came as a London court held a preliminary hearing Monday in the LIA suit against Goldman.
The Libyan Investment Authority claims that its international inexperience and trusting relationship with the US bank was "exploited" by Goldman Sachs, which allegedly made $350 million in profits from trades that cost the fund $1 billion.
The LIA in 2008 invested $1.0 billion in the disputed trades, which were worthless by the time they had matured in 2011, and is now seeking to recover that sum as compensation.
But Goldman Sachs has argued that LIA representatives knew the risk of the trades, saying in its court filing that the fund included "highly experienced banking professionals."
"This claim is a paradigm of buyers' remorse," Goldman said, blaming the loss-making trades on the huge disruption on the markets caused by the global financial crisis.