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Happier Days
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This post is based upon the 20 July 2016 complaint filed by the US Department of Justice (DoJ) against Red Granite pictures. (the “Red
Granite Complaint” or the “Complaint”), producers of The Wolf of Wall Street.
I will cite sources paragraph numbers
rather than page numbers as “sourcing” for various points.
The Red Granite Complaint is one of at least fifteen
other complaints filed to secure the civil seizure and forfeiture of assets
alleged to have been purchased with the proceeds of an alleged misappropriation
of approximately US$3.5 billion from Malaysia’s state-owned strategic
investment and development fund, 1MDB.
The DoJ is making the individual complaints available at
this website. Also note the powerpoint
with pictures of some of the assets. Link here.
This post will set the stage for subsequent posts here at
Suq Al Mal. Because SAM focuses on the
GCC banking sector, those posts will look at GCC parties involved in
transactions with 1MDB where those parties’ behavior raises questions –at least
to AA. Of course, if past is prologue,
then you know that AA will not be able to resist the urge to venture beyond the
GCC if something interesting catches his eye.
Before I begin one very important note.
The US DoJ has filed complaints. The parties mentioned in the complaints have
not been convicted of any crime, nor have they had a chance to neither respond
to the charges made against them, nor have their responses and the original
complaints tested by the judicial process.
At this stage all that can be said is that allegations have been
made. Please bear that in mind as you
read this post.
According to the Complaint, the misappropriation of funds
from 1MDB took place from 2009 through 2013.
The DOJ identifies three phases named for the vehicles purported to have
been used in the theft.
- The Good Star Phase (2009-2011) US$1 billion
- The Aabar Investments BVI Phase (2012) US$1.367 billion
- The Tanore Phase (2013) US$1.2 billion
The Good Star Phase (Para #8 and Paras
40-112)
In 2009 1MDB signed a joint venture agreement (JVA) with
PetroSaudi International, a privately owned Saudi-registered firm, to develop
properties in Argentina and Turkmenistan.
According to the JVA, 1MDB was to contribute US$1 billion in equity to
the JV.
The Complaint alleges that in
late September the Malaysian fund made payments totaling US$1 billion, but that
US$700 million were transferred to an the Swiss account of Good Star, a company
actually controlled by Malaysian LOW Taek Jho.
In May 2011 and October 2011 an additional US$330 million was
transferred to Good Star, ostensibly advances under a murabaha facility
extended by 1MDB to the JV.
The Aabar Investments PSJ BVI Phase (Paras
#9-10 and 112-226)
During 2012, 1MDB raised US$3.5 billion in bonds (arranged and underwritten by Goldman Sachs) and guaranteed by 1MDB as well as IPIC, an Abu Dhabi state-owned investment fund.
The Red Granite Complaint alleges that US$1.367 billion of the bond proceeds were diverted to a Swiss bank for the account of Aabar Investments PSJ in the British Virgin Islands.
Despite
the similarity to an IPIC subsidiary Aabar Investments and Aabar Investments
PSJ, the company in the BVI was not owned by IPIC or Aabar. Curiously, according to Para #115 of the
Complaint, the directors of the BVI were H.E. Khadem Abdulla al Qubaisi
(Managing Director of IPIC) and Mohamed Ahmed Badawy Al Husseiny (CEO of
Aabar).
Funds were later allegedly transferred from the BVI account to an
account controlled by TAN Kim Loong, described by the Complaint as an associate
of Mr. LOW. Funds were used to acquire
assets and transfers were made for the personal benefit of officials at 1MDB,
IPIC, and Aabar.
The Tanore Phase (Para #11 and Paras
#227-290)
The Complaint alleges that US$1.2 billion was diverted
from a US$3.0 billion third Goldman Sachs arranged bond issue in 2013, which in
part was to fund investments with Abu Dhabi in the Abu Dhabi Malaysian
Investment Company (ADMIC).
The US$1.2
is alleged to have been transferred to an account in Singapore for Tanore
Finance Corporation, a company alleged to be ultimately controlled by Mr. LOW. This amount inter alia is alleged to have
provided funding to Red Granite for the production of The Wolf of Wall
Street.
What Were They Thinking
For the sake of making a few comments, I will assume that
the Complaint is accurate. That is, that
roughly $3.567 billion was misappropriated from 1MDB.
As of 31 March 2014, 1MDB’s financials show roughly
MR51.4 billion in total assets or approximately US$15.7 billion.
US$3.5 billion represents almost twenty-three percent of
total assets. The size of the fraud is immense not only in dollar terms but as
a percentage of assets.
How did the perpetrators think a fraud of this size would
go undetected?
In the future, assets booked to disguise the defalcation
would prove worthless and have to be written down or written off. This would have been very visible not only
because of the amounts of the write-downs/write-offs but perhaps more
importantly by their relation to the fund’s equity.
As of 31 March 2014, 1MDB had equity a shade over MR 2.4
billion (US$747 million), roughly twenty percent of the US$3.5 billion that is
alleged to have been stolen. Thus, even
a partial write down would wipe out equity.
Often in such “operations” the proceeds of new
misappropriations are used to partially cover the previous ones. That is, for example, funds from the Aabar
Phase would have been used to cover the Good Star Phase misappropriations,
justified by a statement that the PSI/1MDB JV projects were not proceeding
according to plan and to prevent further losses “prudent” management was
terminating the JVA. An amount could be
written off ostensibly as costs incurred without necessarily ringing alarm bells.
Or was there something else at play here besides simple
greed and less than adept defalcation skills?
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