Litigation-related issues continue to mount for The Goldman Sachs Group, Inc. (GS). Recently, the Wall Street giant was sued by The Libyan Investment Authority (:LIA), a sovereign wealth fund related to investments worth approximately $1 billion. The lawsuit was filed at London’s High Court and it pertained to dealings made in the earlier part of 2008, which led to substantial losses for the sovereign fund.
In May 2011, the Libyan Investment Authority – once controlled by Moammar Gadhafi – lost almost 98% of a $1.3 billion bet on currency movements and other complex trades transacted with Goldman in 2008. Consequently, the wealth fund demanded that the bank compensate its losses.
Since then, the sovereign fund’s ties with Goldman have been under strain. The U.S banking giant advised the fund to recoup the losses through structured-finance instruments or investment funds. However, these would have required LIA to invest more money through Goldman.
Additionally, in 2011, Goldman had run into trouble with the Securities and Exchange Commission (:SEC) regarding its exposure by the Libyan fund. The U.S. bank was under scrutiny over its compliance with the Foreign Corrupt Practices Act, which prevents U.S.-based companies from paying or offering to pay foreign government officials bribes in return for business advantages.
The SEC is still investigating the $50 million fee Goldman initially agreed to pay to help the LIA recover its losses, although the transaction could not be completed as political unrest erupted in Libya.
The lawsuit adds to the differences between Goldman and the sovereign-wealth fund of Libya. We also believe that the recent lawsuit will dent Goldman’s reputation and legal expenses will continue to drag its financials in the coming quarters. However, investors who have incurred losses in such investments should feel relieved.
At present, Goldman carries a Zacks Rank #2 (Buy). Other banking majors worth considering include Bank of America Corp. (BAC), BB&T Corp. (BBT) and Fifth Third Bancorp (FITB). All of these have the same Zacks Rank as Goldman.