PROVING THINGS 35: RECONSTRUCTION, DOCUMENTS AND MEMORY

Most law reports will look at the findings of law made in a judgment. In this blog we are interested in findings of fact and the way in which a judge goes about making those findings.  A good example can be found in the judgment of Mrs Justice Rose in The Libyan Investment Authority -v- Goldman Sachs International [2016] EWHC 2540 (Ch). Where the judge had to make findings of fact against a background of some delay, missing witnesses and missing documents.

“… he struggled to remember events and conversations that had happened many years ago and was very dependent on the contemporaneous documents to help reconstruct his memory of what happened. I do not regard it as a matter for criticism that he or any of the other witnesses could recollect some incidents better than others, or that he was unable to say in some cases when and why he formed a particular view about someone. The LIA complained that his memory was selective, but that is the nature of memory and the LIA witnesses were also unable to remember many details and conversations they were asked about even though they thought they could remember others clearly.”

“I certainly would not wish to say anything that makes parties to complex litigation in such circumstances feel that they may be criticised if they do not provide evidence from everyone who is named in the contemporaneous documents. That would lead to litigation becoming completely unmanageable.”

THE CASE

The claimant brought an action against the defendant seeking the recovery of $1.2 billion paid in premiums. It was alleged that there was a relationship of undue influence and there were unconscionable bargains. The events took place in 2008 and many of the relevant documents had been lost.

 THE JUDGE’S ASSESSMENT OF THE WITNESSES

(a) Witnesses of fact for the LIA
Abdulfatah Enaami
  1. Mr Enaami was educated at school in Tripoli and then came to England to study manufacturing and engineering at a college in Leicester. He obtained a National Diploma in Business and Finance at what was then Sheffield City Polytechnic in the 1980s. In 1990 he returned to live in Libya and in May 1994 became an assistant manager at the Libyan Foreign Bank where he dealt with recovering loans that were in default. He had some training in general banking operations but this, he said, did not touch on investments. At the Libyan Foreign Bank he was in charge of the Investment Portfolio Department which required him to liaise with external advisers who were given mandates to make investment decisions on the bank’s behalf. For five or six months starting in late October 2007 Mr Enaami split his time between the Libyan Foreign Bank and the LIA. He became head of the Equity Team and started working full time for the LIA in April 2008. He left the LIA in 2012 and went back to work for the Libyan Foreign Bank.
Hisham Najah
  1. Mr Najah was a member of the Equity Team led by Mr Enaami. He has a BSc in Economics from the Al Fatah University in Libya. After graduating from there he worked as an economic analyst at the Al Masabeeh Office for Banking and Financial Consultants in Tripoli and then worked as an accountant for oil companies, including Chevron Libya. He is now the Chief Investment Officer of the LIA, having been appointed to that position in August 2014. His main role in the Disputed Trades during the relevant period was to research the underlying stocks that were being considered as possible investments.
Gamal El Harati
  1. Mr El Harati currently works as a portfolio manager at the LIA’s offices in Malta. He joined the LIA as part of the Equity Team in November 2007 when he was 21. He had graduated in June 2007 from the American University in Cairo with a degree in Business Administration. The main focus of his degree was in finance and he graduated with the highest honours.
Akram Rayes
  1. Mr Rayes started working for the LIA on 1 November 2007. He graduated from De Montfort University in Milton Keynes in 2000 with a degree in computing. Shortly after graduating he went to work in the IT department of the Arab Banking Corporation as a junior support analyst. Before working for the LIA he had no knowledge of financial investment products or of international finance.
Ziad Zekri Benmusa
  1. Mr Zekri worked for the LIA from January 2008 until November 2013. He graduated in chemical engineering from Leeds University in June 2005 and then attained a Master’s degree in engineering management at Nottingham Trent University. After that he had a six month internship working in Frankfurt. When he joined the LIA he had no experience in financial investments. His main role at the LIA was supposed to be working for the oil and gas department at the LIA but there was no work for him to do for them and since he was seated in the same office as the Equity Team, he started working with them. Mr Zekri gave evidence on a video link from Dubai.
  2. I shall refer to Mr Najah, Mr El Harati, Mr Rayes and Mr Zekri together as the Equity Team Junior Members. I consider how far I am able to rely on the evidence of the Equity Team below.
Abdalla Gheblawi
  1. Mr Gheblawi is now a senior partner in a Libyan law firm. He was a member of the Board of Directors of the LIA from 26 February 2007 until late March 2008. He graduated from the University of Libya with a law degree in 1969 and worked as a public prosecutor and as a Government legal adviser in various departments during most of his career. In late 2006 he took early retirement and thereafter set up his own law firm. He was involved in the setting up of the LIA from about 2005 and he was one of the first directors appointed. I accept that he was an honest witness though I consider that his evidence was affected by his desire to deflect any responsibility for the loss of the LIA’s money as a result of the Disputed Trades from himself and his fellow Board members.
Ali Baruni
  1. Mr Baruni is a Libyan national who has been based in London since 2001. He has lived most of his life in London and went to school in England and then studied at the American University in Beirut. He has an MBA in Finance from the Stern School of Business in New York University and worked for many years at senior levels for two international banks dealing with credit, asset management investment banking and corporate finance. Since 2002 he has worked as a freelance consultant managing the investment portfolios of high net worth individuals and corporate clients. He was engaged to act as a consultant for the LIA between April 2007 and September 2007.
  2. Mr Baruni went to work for the LIA with the laudable aim of using his experience in the financial world to help the country of his birth and ancestry as it emerged from many years of isolation. I am sure that Mr Baruni is entirely honest in the evidence that he gave on factual matters and was not attempting to give evidence in a misleading or partial way. However, as I describe later, there were some matters that he was questioned about that he had omitted from his written statement although they were clearly relevant to his evidence on the important issue of the level of expertise of the senior management of the LIA in financial matters. I take that into account when considering how much reliance to place on his evidence as it relates to his impressions of the LIA personnel.
Catherine McDougall
  1. Ms McDougall qualified as a solicitor in Australia in November 2004. Between 2006 and 2008 she worked at Allen & Overy’s London office and during her time there she went on secondment to the LIA. She was working at the LIA between 1 July 2008 and 12 August 2008. During that time she worked closely with Mr Zarti and all the members of the Equity Team. She was recalled to London by Allen & Overy and left the LIA on 12 August 2008.
  2. I accept Ms McDougall as generally being a truthful witness. There are some aspects of her evidence which I consider have been influenced both by her friendship and affection for the Equity Team Junior Members and the antipathy she developed towards Goldman Sachs soon after she arrived at the LIA. She seems to have regarded herself as taking on the role of educator and defender of the Equity Team and she did not, in my judgment, form a balanced understanding of the dynamics of the delicate situation that existed by the time she arrived at the LIA. This may well be, as Goldman Sachs suggest, because she was given only a partial picture of what had happened by the LIA people she spoke to. For example, in her witness statement she refers to the pressure that Goldman Sachs people were putting on her in July to get the confirmations for the Disputed Trades signed and their impatience with the detailed drafting points that she was raising. She felt that her task was to ‘push back’ on behalf of the LIA as the LIA was ‘being bullied by Goldman Sachs to agree to these confirmations’. This strikes me as unfair. Goldman Sachs had already acted upon the orders placed by the LIA by hedging the Disputed Trades. They may well have been anxious that, given the drop in share prices of the underlying companies that had occurred by this time, the sudden arrival of Ms McDougall, and her assumption of a role they thought went beyond her remit as a lawyer, risked generating a substantial disruption to the business. Ms McDougall fairly accepts that she may not have understood fully the politics within the LIA at this very sensitive time and recognises that some senior people within the LIA thought that she adopted an unhelpfully aggressive stance when speaking to the Goldman Sachs people on behalf of the LIA.
Sofia Blount
  1. Finally Ms Sofia Blount was Mr Zarti’s personal assistant during the relevant time. She provided a witness statement for the LIA but decided not to attend for cross-examination for personal reasons. No hearsay notice was served in respect of her statement. I have read her statement but I do not consider that it takes matters forward a great deal.
(b) Witnesses of fact for Goldman Sachs
Andrea Vella
  1. Mr Vella is now a senior executive in Goldman Sachs’ Asian business. He joined Goldman Sachs from JP Morgan in mid October 2007 taking up a senior position in the Investment Banking Division. At the time of these events he was a Partner and Managing Director of Goldman Sachs based in London, taking a lead in the growth markets business, including business in the Middle East and North Africa. Mr Vella was cross-examined over several days. Like all the witnesses he struggled to remember events and conversations that had happened many years ago and was very dependent on the contemporaneous documents to help reconstruct his memory of what happened. I do not regard it as a matter for criticism that he or any of the other witnesses could recollect some incidents better than others, or that he was unable to say in some cases when and why he formed a particular view about someone. The LIA complained that his memory was selective, but that is the nature of memory and the LIA witnesses were also unable to remember many details and conversations they were asked about even though they thought they could remember others clearly.
Enrico Magnifico
  1. Mr Magnifico is currently an Executive Director in the Equity Derivatives team which is part of the Investment Banking Division of Goldman Sachs. As a junior analyst at the time of the Disputed Trades, his role was primarily one of co-ordinating the various tasks necessary to propose, revise and execute the trades. He was involved in preparing marketing materials including presentations and liaising between the coverage team and the trading team to provide indicative prices which the coverage team could then offer to the client. He helped with drafting the documentation for the finalised transactions before they were sent to the client. He was also asked to carry out other steps such as account opening, and obtaining certain approvals to progress the transactions. He met the Equity Team Junior Members when they were attending a training course in London and was in touch with them by email later on. He did not have any contact with the senior executives of the LIA. The LIA accept that Mr Magnifico was an honest witness and I agree that he was doing his best to assist the court.
Philip Berlinski and Dmitri Potishko
  1. Goldman Sachs also provided two witnesses who dealt with the pricing aspects of the Disputed Trades. I describe them in the section below dealing with those aspects.
Expert witnesses
  1. Both parties instructed expert witnesses on two issues: whether the profits earned by Goldman Sachs on the Disputed Trades were excessive and whether the Disputed Trades were suitable investments for the LIA to enter into. I describe these experts and their reports later in this judgment.
(c) Assessment of the evidence of the factual witnesses
  1. Several of the witnesses stated in the introduction to their witness statements that they had very little recollection of the events giving rise to this claim. The relevant events took place between summer 2007 and summer 2008 but the claim was not issued by the LIA until January 2014. This was several years after the relationship between the LIA and Goldman Sachs broke down and about two and a half years after the Disputed Trades had expired worthless at their maturity dates. Much of this delay is the result, no doubt, of the troubled times that Libya has gone through, problems that have been reflected in the internal strife within the LIA itself. I do not therefore criticise the LIA for the delay in bringing the claim, but it has the effect that witnesses have very little accurate recollection of important discussions and meetings. I bear in mind that it is up to the LIA, as the Claimant, to prove their case on the evidence that they are able to put before the court. It would not be fair to Goldman Sachs to draw inferences in the LIA’s favour where evidence about key matters is missing because of the lapse of time since the Disputed Trades were concluded.
  2. Some of the LIA witnesses said that they remembered the more unusual incidents, such as the Stormy Meeting on 23 July 2008 between Mr Zarti and Goldman Sachs personnel, because they were the kind of events that stick in the memory. In assessing the oral evidence in this case I have borne in mind the helpful description of the difficulties facing a judge by Leggatt J in Gestmin SGPS S.A. v Credit Suisse (UK) Limited and another[2013] EWHC 3560 (Comm). Leggatt J refers to an important lesson of research into memory being that in everyday life we are not aware of the extent to which our own and other people’s memories are unreliable – we believe our memories to be more faithful than they are. Two common (and related) errors are to suppose first that the stronger and more vivid is our feeling or experience of recollection, the more likely the recollection is to be accurate; and secondly, that the more confident another person is in their recollection, the more likely their recollection is to be accurate. Leggatt J went on:

“17. Underlying both these errors is a faulty model of memory as a mental record which is fixed at the time of experience of an event and then fades (more or less slowly) over time. In fact, psychological research has demonstrated that memories are fluid and malleable, being constantly rewritten whenever they are retrieved. This is true even of so-called ‘flashbulb’ memories, that is memories of experiencing or learning of a particularly shocking or traumatic event. (The very description ‘flashbulb’ memory is in fact misleading, reflecting as it does the misconception that memory operates like a camera or other device that makes a fixed record of an experience.) External information can intrude into a witness’s memory, as can his or her own thoughts and beliefs, and both can cause dramatic changes in recollection. Events can come to be recalled as memories which did not happen at all or which happened to someone else (referred to in the literature as a failure of source memory).

18. Memory is especially unreliable when it comes to recalling past beliefs. Our memories of past beliefs are revised to make them more consistent with our present beliefs. Studies have also shown that memory is particularly vulnerable to interference and alteration when a person is presented with new information or suggestions about an event in circumstances where his or her memory of it is already weak due to the passage of time.”

  1. Leggatt J then described the process by which witness statements are produced for civil litigation when the witness’s allegiances to the party calling them and the process of drafting and refining statements contribute to establishing in the mind of the witness the matters recorded in his or her own statement and other written material, whether they be true or false. The witness’s memory of events is based increasingly on this material and later interpretations of it rather than on the original experience of the events. Leggatt J concluded:

“22. In the light of these considerations, the best approach for a judge to adopt in the trial of a commercial case is, in my view, to place little if any reliance at all on witnesses’ recollections of what was said in meetings and conversations, and to base factual findings on inferences drawn from the documentary evidence and known or probable facts. This does not mean that oral testimony serves no useful purpose – though its utility is often disproportionate to its length. But its value lies largely, as I see it, in the opportunity which cross-examination affords to subject the documentary record to critical scrutiny and to gauge the personality, motivations and working practices of a witness, rather than in testimony of what the witness recalls of particular conversations and events. Above all, it is important to avoid the fallacy of supposing that, because a witness has confidence in his or her recollection and is honest, evidence based on that recollection provides any reliable guide to the truth.”

  1. In my judgment there is ample evidence to show that the LIA witnesses are mistaken in their recollection of events which they are convinced they remember. For example, Mr Zekri gave evidence about what happened when Mr Zarti came out of the meeting with Mr Vella and Mr Kabbaj at which the April Trades were discussed on 23 April 2008. Mr Zekri said that when Mr Zarti came out of the meeting, he told Mr Zekri and the Equity Team that he had agreed to buy stocks in Santander, Allianz, UniCredit and ENI. He recalled particularly that Mr Zarti said that they had ‘moved the market’ because of the size of the trades and that Mr Zarti wrote these four names on a whiteboard in their office. Those names may well have been written on a white board at some point in Mr Zekri’s office but I am sure that it was not immediately after the 23 April meeting. The documentary evidence shows clearly that in fact two of the shares provisionally agreed at that meeting (Erste Bank and Old Mutual) were different from the ones that were ultimately agreed and were replaced by Allianz and Santander the following day. Similarly, Ms McDougall also said in her witness statement that she remembered having a discussion with Mr Zekri shortly after the Stormy Meeting on 23 July 2008 and was surprised to be told in cross-examination that in fact Mr Zekri was not in Libya that day.
  2. I also consider that the LIA witnesses’ written and oral evidence shows that they now view the material events from a perspective that may have caused them to exaggerate the closeness of their relationship with Goldman Sachs and downplay the contacts they had with other banks with whom the LIA is not in dispute. For example, some of the LIA witnesses referred in their written evidence to the extensive training and assistance they received from Goldman Sachs including access to the Goldman Sachs research portals. In fact, as they accepted in cross-examination and as some of the other witnesses recalled, many different banks provided extensive training, access to research portals and generous corporate hospitality to them and to others in the LIA – this was not as unusual or remarkable as some of them presented it.
  3. Therefore, although all the Equity Team members, and Mr Vella, came across as sincere and serious people doing their best to recollect events and explain to the court their real sense of what they thought and felt at the time, I treat their evidence with some caution.
  4. The LIA criticise Mr Vella’s evidence because in his first witness statement made in April 2014 in support of Goldman Sachs’ application for summary dismissal of the claim (which application was ultimately withdrawn) he did not mention various conversations and meetings he had with Mr Layas. In his second witness statement two years later, he gave evidence about these conversations. The LIA suggest that Mr Layas’ death in between the making of the two statement led to Mr Vella fabricating the evidence of meetings and conversations, in the knowledge that this could no longer be contradicted by Mr Layas.
  5. I reject that criticism of Mr Vella’s evidence. Mr Vella said in an early paragraph of that first witness statement that the purpose of the statement was to draw on the contemporaneous documents, indicating it was not purporting to set out all the evidence he could give on the matters. Evidence in support of an application for summary judgment will always focus on what the applicant believes are its unanswerable points rather than on what was said in meetings, since the latter evidence is not going to provide the knock-out blow that the party needs to deliver for the application to succeed. I consider Mr Vella was a truthful witness subject to the same limitations as the other witnesses of fact.
(d) Missing witnesses
  1. A major difficulty in deciding the issues in this case arises from the fact that there is no evidence before me from key participants in the events. All the LIA witnesses agreed that the decisions on what investments the LIA should make were taken by Mr Layas and Mr Zarti with the approval of the LIA Board of Directors. It is also apparent that Mr Layas and Mr Zarti did not rely on the advice of the Equity Team and that the Equity Team Junior Members had very limited contact, if any, with Mr Layas and Mr Zarti.
  2. Although these proceedings were issued in January 2014 there is apparently no indication capable of being put before the court of what Mr Layas’ evidence would have been on any of the factual issues in the case which directly concern him; what happened at the various meetings he attended with Goldman Sachs where important decisions were taken; why he decided that the LIA should enter into those Disputed Trades in which he was directly involved; what he understood the nature of the trades to be or how he presented the trades to the Board of Directors at their meetings. I regard this as somewhat surprising but I assume that this is due to the internal disputes about control of the LIA.
  3. Whereas the witnesses all describe Mr Layas as a conservative and cautious man, Mr Zarti is described as a more mercurial figure, with a short attention span, a quick and at times explosive temper. Mr El Harati for example, describes how the first report the Equity Team produced analysing a company that they had been told to research was rejected by Mr Zarti as being too long – Mr Zarti wanted no more than a one or two page executive summary. Mr Zarti is not cooperating with either party in these proceedings. He is alleged to have been involved in a fraudulent and corrupt scheme in the Soc Gen proceedings.
  4. Another absence was Aymin Matri, a member of the Equity Team. I do not know why he was not included in the roster of witnesses for the LIA and I am not suggesting that there is anything sinister in his exclusion.
  5. So far as Goldman Sachs witnesses are concerned, another significant absence was that of Mr Kabbaj, the person who is alleged to have been largely responsible for generating the close relationship of trust and confidence on which the LIA rely to found their claim. He has not been called by either party to give evidence in the proceedings. Many critical things have been said about Mr Kabbaj in the course of the trial. Some of the complaints made against him I consider implausible but there is no doubt that on frequent occasions he ignored Goldman Sachs policies on a range of matters when he must have been aware of those policies and engaged in conduct which Mr Vella accepted in cross-examination was “completely unacceptable”, “disappointing”, “inappropriate” and similar epithets. He has also been described by his former colleague as being more concerned about his remuneration package and his annual bonus than most other bankers.
  6. As to what Mr Kabbaj might have said had he been called, the LIA rely on a letter written by the solicitors Withers LLP dated 10 November 2008, at a time when they were acting for Mr Kabbaj in a potential claim against Goldman Sachs. The letter refers to Mr Kabbaj’s claim for a ‘guaranteed bonus’ of $9 million and to his substantial claims against Goldman Sachs for breach of contract, slander and so forth. The letter includes some quotations from the contemporaneous internal Goldman Sachs emails in which concerns are expressed about the suitability of the trades and about the level of profit earned from them by Goldman Sachs. Of course, the letter paints a very different picture from the one which the LIA put forward in these proceedings, namely a picture in which Mr Kabbaj is the wronged party, complaining that he was unfairly side-lined and marginalised from contact with the LIA following the breakdown of the relationship. The Withers letter asserts that by mid October 2008 senior Goldman Sachs executives were reneging on their promise of a bonus and Mr Kabbaj was told, perhaps unsurprisingly, “if you are still counting on a $9 million bonus or even on a fraction of that, you are living in La-la-land.” In my judgment any attempt by the LIA to rely on the content of this self-serving and selective letter is misguided.
  7. Several current or former employees of Goldman Sachs were not called as witnesses even though the contemporaneous evidence shows that they were closely involved in the events giving rise to the claim. These include Driss Ben-Brahim (who left Goldman Sachs in early July 2008 for another bank), Mr Aliredha, Mr di Stasi and Mr Laurent Lalou. I do not know why they were not called or whether any of them would have been able to add anything of value, at this remove, to Mr Vella’s evidence. The LIA invited me to draw an adverse inference from their absence but I decline to do so. It is clear from the contemporaneous documents that it is part of Goldman Sachs policy to ‘socialise’ important decisions within the bank, by which I understand they mean, to make sure that a wide number of people are copied in to the emails and invited to contribute their thoughts. I certainly would not wish to say anything that makes parties to complex litigation in such circumstances feel that they may be criticised if they do not provide evidence from everyone who is named in the contemporaneous documents. That would lead to litigation becoming completely unmanageable.
  8. There are two other former employees of Goldman Sachs who were involved to some extent in the relationship between the LIA and Goldman Sachs. They too have since fallen out with Goldman Sachs and have written letters in which they set out what they say is their recollection of events, critical of Goldman Sachs. The LIA complain that Goldman Sachs refused to release those employees from their confidentiality obligations to Goldman Sachs so that the LIA could not find out what kind of evidence they could give about the events. I have read that correspondence. What I glean from it is that these people were aggrieved by Goldman Sachs’ failure to pay them very large sums of money on their departure from the bank. They were aware of the broad outline of the dispute brewing between Goldman Sachs and the LIA and made thinly veiled threats that unless Goldman Sachs agreed to pay them what they wanted, they knew how to stir up trouble for their former employer. It would not be appropriate for me to place any reliance on the content of these letters.
(e) Contemporaneous documents
  1. The passage I cited above from the judgment of Leggatt J echoed the guidance given by Lord Goff of Chieveley in Grace Shipping Inc v C F Sharp & Co (Malaya) PTE Ltd [1987] 1 Lloyd’s Rep 207. Lord Goff said that when a judge is faced with the task of assessing evidence of witnesses about conversations taking place many years previously “it is of crucial importance for the judge to have regard to the contemporary documents and to the overall probabilities.”
  2. In this case there is the added difficulty that Goldman Sachs complain of gaps in the documentary disclosure. In particular, there appear to be very few documents originating with either Mr Layas or Mr Zarti. The LIA accepts that it never had any centralised document management system for retaining electronic documents or for archiving hard copy documents; it did not adopt a document preservation policy until October 2013 and before that time many of the LIA’s documents were destroyed or lost. They point out that they have had to maintain the documents through a violent revolution, during which one of Colonel Gaddafi’s sons used the building in Tripoli where the LIA has its offices as his base. It would not be fair to criticise the LIA for this and I am satisfied that they have done the best they can. But the fact remains that there are very few documents in the record created by the two main decision makers at the LIA. I decline Goldman Sachs’ invitation to draw an adverse inference against the LIA on factual matters. But I also approach the case on the basis that the absence of a contemporaneous record of something happening does not enable me to infer that it did not happen, if the surrounding context makes it likely that it did happen.
  3. Finally by way of introduction, when quoting from emails and texts I have tidied up the spelling and expanded the many abbreviations used by the authors to make them intelligible.

AND THE RESULT…

The claimant was unsuccessful.

RELATED POSTS

THE “GESTMIN APPROACH”

THE PROVING THINGS SERIES

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