Prostitutes, 'bribery' and a new moral low for the Vampire Squid: How Goldman Sachs became embroiled in $1.2bn court battle over claims they duped Libyan officials with girls, parties and luxury trips 

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Youssef Kabbaj, pictured, 'hired prostitutes and fled Libya fearing for his life'

Goldman Sachs banker gets into a car. It is a black, chauffeur-driven Audi A8, booked to whisk him from Dubai airport to the city’s five-star Ritz Carlton Hotel, where rooms cost up to £2,000 a night.

Tomorrow, this Master of the Universe will be attending an important conference, where a collection of high-powered men in bespoke suits will swap business cards and discuss complex financial transactions.

But tonight, it’s time to party and the banker, whose name is Youssef Kabbaj, appears to have pleasure, not business, in mind.

At 5.11pm, he pulls a BlackBerry from his pocket and taps out a message to a female acquaintance named Michella.

‘Hi darling, do you remeber [sic] me?’ it reads. ‘Youssef fom [sic] London. Just arrived in Dubai. Available tonight, with a friend?’

Michella, a prostitute, replies in the affirmative. ‘I can come to your hotel,’ she writes. ‘You will give me and my friend 1,500 [each]?’

Kabbaj bridles at this request, which is for 1,500 dirhams (just under £300).

He sends her a counter-offer: ‘200usd [American dollars] each.’

‘No, 300,’ Michella insists.

There then follows an unseemly negotiation, in which the multi-millionaire attempts to persuade Michella to service him for a knock-down price.

‘Come and we will have a drink and discuss,’ Kabbaj tells her at 5.23pm, as his Audi pulls up outside the Ritz Carlton. ‘I missed you.’

‘I cannot do that,’ she responds.

‘Where are you now?’ asks Kabbaj, two minutes later.

‘I am out [outside],’ writes Michella. ‘But im [sic] not coming there for 200.’

Finally, and a touch reluctantly, the Goldman Sachs man concedes defeat. ‘Ok. Come. You have a deal,’ he writes. ‘300 ok? And I bring my friend, too?’ asks the prostitute.

Mr Kabbaj had wooed fund’s deputy director Mustafa Zarti to win approval for the deals and took his younger brother Haitem on an all-expenses-paid trip to Dubai, where they stayed at the five-star Ritz Carlton (pictured)

Goldman Sachs headquarters in New York City - the bank is embroiled in a $1.2bn court battle

‘Yes,’ Kabbaj confirms, adding the caveat: ‘Your friend has to be as good looking as you.’

At first glance, this tawdry exchange might have been plucked from the script of The Wolf Of Wall Street, or any of the myriad other fictional takes on the cocaine and champagne-fuelled world of high finance.

In reality, it is no work of make-believe. Instead, Youssef Kabbaj’s seedy negotiation with Michella in February 2008 was part of a very real conversation that was being chewed over at the High Court in London this week.

Its transcript is among a host of extraordinary items of evidence being aired at a trial in which Goldman Sachs is being sued for $1.2 billion (around £850 million) by the Libyan Investment Authority (LIA), the country’s sovereign wealth fund. One aspect that has sparked further fascination, as we shall see, is the role played by the glamorous blonde British aristocrat married to the pop star James Blunt.

The blockbuster case, which is scheduled to run for seven weeks, revolves around allegations that the Wall Street giant duped Gaddafi-era LIA officials into making a series of disastrous investments by plying them with girls, parties, and luxury foreign trips.

Goldman Sachs is accused of using lavish corporate hospitality to gain the trust of the hapless Libyans, before persuading them to place the $1.2 billion in highly complex financial instruments. When the markets turned sour, during the 2008 financial crisis, the LIA ended up losing everything. Its Wall Street counterparts, on the other hand, turned a handy profit of $270 million (£190 million).

Zarti did not work for the fund, but Moroccan-born Mr Kabbaj lavished corporate hospitality on him in an attempt to impress his older brother, including the trip to the Ritz Carlton (pictured), Dubai

We shall explore the nuts and bolts of this murky affair in more detail later, but for the suits of Goldman Sachs — the bank that is nicknamed ‘the Vampire Squid’ for what critics call its predatory approach to business — a high-profile trial could scarcely have come at a worse moment.

Since 2008, the U.S. firm has been a poster boy for the greed, hubris and (some say) amorality that sparked the financial crash.

It was fined $550 million in 2010 for selling dodgy and complex investments, based on sub-prime mortgages, to clients including the hapless Royal Bank of Scotland. The products were designed to fail, and duly did, costing the now state-owned bank more than £500 million.

In April this year, meanwhile, Goldman Sachs agreed to pay a further £3.5 billion fine for misleading investors in mortgage bonds during the same crisis. There has also been a long-running scandal over reports that Goldman Sachs plotted with the Greek government to present its national accounts in the best possible light, so that the country could join the eurozone in 2001.

The bank was subsequently involved in elaborate schemes to mask the true horror of Greece’s public debt crisis. It has denied wrongdoing, in relation to the affair, which led to Greece eventually being bailed out by the EU and left in economic ruins.

Today, its links to the EU continue to come under the spotlight.

Goldman is the alma mater of Mario Draghi, the head of the European Central Bank, who controls the bloc’s fiscal policy, as well as Mark Carney, the pro-EU Governor of the Bank of England, and Lord [Jim] O’Neill, a senior adviser to Chancellor George Osborne.

Perhaps unsurprisingly, given these connections, the bank has upset many Britons by donating some £500,000 to the Remain campaign in the increasingly toxic Brexit debate.

It has also been dragged into the ugly controversy over BHS, after it emerged that senior staff advised Sir Philip Green on the sale of the High Street giant to Dominic Chappell, a thrice-bankrupt entrepreneur who then presided over its collapse.

Goldman Sachs executive Youssef Kabbaj paid for Haitem Zarti to fly business class to Dubai, put him up at a five-star hotel and paid $600 (£425) for a night with the two women, to impress his brother Mustafa (right, next to Saif al Islam, General Gaddafi's son)

As a result, the Wall Street giant’s UK chief Michael Sherwood, a portly figure nicknamed ‘Fat Mike’ on account of either his waistline or his pay packet (or perhaps both), has been called to give evidence to the Commons committee investigating the BHS scandal.

And now, in Court 15 at the High Court’s Rolls Building, we have the explosive Libyan case in which the aforementioned Youssef Kabbaj, a Moroccan-born Goldman Sachs executive, plays a leading role.

In 2007, he was told to build a relationship with the LIA, which had been recently created, following the lifting of international sanctions against Libya, to invest a portion of the country’s oil riches.

Told by bosses to ‘teach them, train them, dine them’, according to an email filed in evidence, he duly spent around £50,000 on expenses over the ensuing year, treating Gaddafi’s officials to meals, hotel stays, trips to London and a trip to watch England play rugby against South Africa.

Kabbaj also forged an extraordinarily close relationship with one Haitem Zarti, the younger brother of Mustafa Zarti, the LIA’s former deputy chief executive. In particular, he helped to arrange for him to be offered a highly sought-after £36,000 internship with Goldman Sachs.

The LIA now claims the internship was intended to improperly influence the aforementioned Mustafa Zarti to invest the fund’s billions with the Wall Street firm. It says that, at around the time the internship was arranged, the Libyan fund agreed to several of the ill-fated investments.

At London's High Court, pictured, Goldman Sachs was accused of exploiting the financial naivity and trust of Gaddafi-era officials into investing in complex financial instruments during the financial crisis

Goldman Sachs denies that allegation, along with all other wrongdoing. The firm says its internship offer was not nepotism, but because it believed Haitem Zarti would in future be working for the Libyan investment fund.

What is certainly true, judging by a series of text messages filed in evidence at the High Court, is that the gilded intern Haitem Zarti and Goldman’s Youssef Kabbaj were on intimate terms.

Haitem, you see, turns out to have accompanied Kabbaj on his now-notorious evening out in Dubai with the prostitute Michella and her $300-a-night friend.

Indeed, he appears to have been not only shadowing the Goldman Sachs man throughout the 2008 conference, but also staying in a nearby room at the Ritz Carlton Hotel, at the Wall Street firm’s expense. In the end, Kabbaj’s relationship with the Libyans nearly ended in disaster, with him fleeing the country in fear of his life.

Taking the stand: James Blunt's society wife Sofia Wellesley, pictured, is set to be called as a witness

At the High Court this week, an LIA investment manager described a ‘highly charged’ meeting in Tripoli in 2008, in which the Goldman intern Haitem Zarti’s older brother ‘went berserk’ and raged at Kabbaj over the fund’s huge losses.

As a result, the Goldman Sachs banker was said to be ‘very afraid’, and claimed that a foreign intelligence agency had to be called to extract him from the Libyan capital.

Tracked down in the U.S. this week, Kabbaj, who left Goldman Sachs in 2008 with a £3 million pay-off (for reasons which are not clear), denied paying for prostitutes for LIA officials (a meaningless denial, since Haitem Zarti was not an LIA official, but the brother of an LIA official). He declined to comment when asked if he had paid for a prostitute for himself.

Intriguingly, however, this grubby episode does not appear to have been a one-off. Another of the Libyans’ star witnesses, British lawyer Catherine McDougall, who was seconded to the Libyan investment fund at the time, has said she was ‘shocked’ at the ‘inappropriately close’ bonds Goldman Sachs forged with her clients.

This included, she has revealed, taking them on a ‘lavish trip to Morocco’ on which ‘there was heavy drinking and girls involved’, paid for on a ‘corporate credit card’.

Other evidence appears to support her point of view: in an email setting up that trip, a Goldman Sachs staffer had asked his counterpart: ‘Can u divorce your wife for a weekend?’

The LIA argues that these and other episodes formed part of a plot to exert ‘undue influence’ on its staff, so that they agreed to make foolish investments.

The Wall Street firm, for its part, says no such ploy existed, arguing that its former client is merely experiencing a form of buyer’s remorse after poor judgment led it to make a series of costly mistakes.

Central to at least some of the case will be the thorny question of whether Goldman Sachs believed that the Libyans fully understood the financial deals they were entering into.

The nine disputed investments, all made in 2008, were complex transactions in which the LIA sought to profit from its belief that the share price of a number of blue-chip financial institutions, including the banks Citigroup and Santander, would rise.

Rather than buy shares in the companies, the LIA arranged to pay Goldman Sachs hundreds of millions of dollars up front, on the basis that it would then receive a return if the stock prices of the selected companies rose above a certain point over the ensuing years.

Such deals, known as ‘derivatives’ trades, are often highly complex. Since they can involve huge profits and equally vast losses, they are usually sold only to relatively sophisticated clients.

The LIA, whose investment was subsequently wiped out because shares in all of the firms fell in value, says that its staff did not fully understand them.

The blockbuster case, which is scheduled to run for seven weeks, revolves around allegations that the Wall Street giant duped Gaddafi-era LIA officials

It will argue its staff were persuaded to strike the deals because of the level of trust they had built up, partly via corporate entertaining, with Goldman Sachs and its staff. In support of this argument, it will cite the evidence of a witness who has first-hand knowledge of what went on. This witness comes in the shape of Sofia Wellesley, wife of the singer James Blunt and a descendant of the Duke of Wellington.

Currently an employee of Cherie Blair’s law firm Omnia, which has worked with the despotic governments of the Maldives and Kazakhstan, Wellesley was (for reasons that are somewhat opaque) working in Tripoli at the time the deals were struck, as a personal assistant to a senior LIA manager.

The aristocrat is quoted in the court documents describing her firm’s staff as out of their depth: ‘a team of clearly naive and unqualified individuals . . . doing their best in the face of extremely intelligent, ambitious and experienced individuals.’

Although Wellesley was originally to have appeared at the trial, she decided to withdraw this week, citing ‘media intrusion’ into a part of her career that she would perhaps prefer the world not to know about. Her evidence will, therefore, be entirely of the written variety.

Elsewhere, in further support of their argument, the Libyans will cite a number of emails in which staff at the Wall Street firm appear to acknowledge that their clients have only a limited knowledge of the banking industry.

‘They are very unsophisticated — and anyone could “rape” them,’ is how one Goldman Sachs partner put it in early 2008.

‘You just delivered a pitch on structured leveraged loans to someone who lives in the middle of the desert with his camels,’ is how another described a business meeting with their Arab clients at around the same time.

Goldman Sachs will not attempt to defend the arguably racist language used in the latter email. Nor will it seek to justify its employee’s apparent negotiation with a prostitute, which was carried out on a company Blackberry telephone.

At the High Court this week, an LIA investment manager described a ‘highly charged’ meeting in Tripoli in 2008, in which the Goldman intern Haitem Zarti’s older brother ‘went berserk’ and raged at Kabbaj over the fund’s huge losses. The bank's headquarters in New York

However, it intends to argue that the ‘unsophisticated’ people mentioned in the emails were relatively junior staff at the LIA.

In support of this argument, it points out that more senior employees of the investment fund had a detailed knowledge of international banking.

Goldman Sachs will also point out that the Libyans had dealings with 77 other banks and financial institutions at the time and were, at a senior level, well-versed in international finance.

The firm will further claim that its corporate entertaining of staffers there was relatively modest, with hotel stays budgeted for at £215 a night, dinners capped at £100 a head and other entertainment, including tickets to ‘musical comedies and soccer games’, limited to a similar value.

‘It is unrealistic for the LIA to suggest that the fact that [Goldman Sachs] paid for hotel rooms at £215 a night, dinners and tickets to football matches and musicals for junior employees created a special relationship of influence or had any material impact on the LIA’s decision, made by senior employees, to invest hundreds of millions of dollars in disputed trades,’ reads its submission to the court.

Weighing up the pros and cons of these arguments is Mrs Justice Rose, who will reach a judgment later this year, unless both sides agree to a settlement.

In normal circumstances, given the volume of dirty laundry that is due to be aired, that latter option might be considered a tempting one to Goldman Sachs, which jealously guards its blue-chip image.

But such are the sums of money at stake in this billion-dollar trial, and so convinced is Goldman Sachs of the merits of its argument, that even the disclosure of a former employee’s relationship with a prostitute will not stop the company fighting this one out in court.

And so, for now, this splendidly juicy case continues.