AlGosaibi v Maan AlSanea - Forum Non Conveniens?

Conveniens or Non?

Supreme Court of New York State 60 Center Street Manhattan New York City

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The National has a report today that Judge Lowe seems to be leaning towards accepting Mr. AlSanea's argument that New York is a forum non conveniens.

One of the key arguments for that is that the principals in the case don't speak English well enough to participate in a US Court Case.  One wonders how they managed to conduct their global businesses,  though SMS is known to strike in the most unlikely places.

But could not a counterargument against forum non conveniens be made on similar grounds, arguing from the technical nature of the  matters before the Court.  This case involves rather complicated financial transactions that are relatively rare in occurrence.  Matters that are very likely not to be self evident.  Lots of complicated transactions to boot.

That has two major consequences.

First, with respect to the analysis of and  presentation of evidence.

1. A variety of experts are going to be required to testify on the data and give their analyses.   Many, if not most,  of these documents appear to be in the English language.  Not Arabic. Deal tickets for FX transactions, confirmations of those deals, records of conversations over the Reuters Dealing System.  Applications for letters of credit.  And note the application forms supplied by a Kuwaiti bank to its client in Saudi Arabia are in English!  And the correspondence between The International Banking Corporation (a bank in Bahrain) with the applicant on that letter of credit are again in English!   Copies of documents presented under those letters of credit.    Copies of instructions to transfer funds.  By the look of it The International Banking Corporation ("TIBC") had a high volume treasury.  US$ 6 billion or so  just in April 2009. More than 100 loan and customer files at TIBC.  No doubt multiple loan requests, interest payments, and other correspondence for each client and each loan.   Borrowings by TIBC or other entities with major international banks.  Complicated loan agreements subject to NY or English law.  Billions of dollars worth.   One might argue all highly technical documents.  And lots and lots of them.  Reams of pages.  Few in Arabic.
2. As well there are allegations that  signatures and documents were forged.  That transactions were fraudulent in the inception.  That what appear to be foreign exchange deals are in effect disguised loans.  That letters of credit were really not for trade transactions.  All matters requiring expert testimony to help determine if the allegations have merit.  Matters requiring the utmost precision in analysis. And clarity in testimony.
3. The experts with the greatest ability to speak to these issues are likely to be from the USA or Europe.  Why?  Sadly, these events occur more frequently here.  And thus US or European experts have more experience with these cases.  As a result, they have had more chances to develop their analytical techniques and skills.  And refine them including in the crucible of a courtroom setting.  One thing is for sure.  These witnesses do not speak fluent Arabic.   I'm willing to bet their Arabic is much worse than the purported unfamiliarity with English of some of the witnesses.  If the evidence is not properly presented, what chance is there of a fair trial?  And that applies of course to both parties - defendant and plaintiff.  And it's very likely the questions directed at them and their answers going to be at a much more technical than the questions posed to other witnesses.
4. One might also wonder about the translation of  these highly technical reports and testimony into Arabic.  Is the technical vocabulary as advanced as in English?  Is there an exact word in Arabic for the English term?  Will something be "lost in translation"? A subtle nuance glossed over? A technical explanation as to why a particular finding is justified made incomplete?  Will the translations reflect the specific limits of  the expert's analysis?

Second on the familiarity of the Courts with this sort of evidence.

1. I'd bet that more cases of this nature are held in New York State (USA#1!) than in the Saudi Courts.
2. As a result, NY Judges sitting in the Supreme Court of New York are going to be more familiar with the concepts, with the testimony and the ability to evaluate it.  As are the counsel of both parties and so better able to defend their clients' interests.   All officers of the court well versed and equipped to evaluate the case.  Experienced hands and minds.
3. Will a judge in Saudi Arabia or one of the parties' Saudi counsel have that same knowledge.? I think that's highly unlikely.  In the interests of justice would a judge in New York with  good old Midwestern common sense want to take that chance? 
4. In fact, it's a pretty well known that King Abdullah is engaged in an effort to bring the Saudi Court system out of the Middle Ages.  The Saudi Consultative Council just spent the early part of this year reviewing a comprehensive plan for such reform.  And here I'm talking about competence, training,  systems and equipment, etc.  Not the law to be applied.  But the ability to apply the law.  Judges are being sent abroad for training because they are not felt by the King to be up to the level he believes appropriate.  Additional resources are being provided to ease the burden of judges.  More and trained assistants.  Modernization of facilities, equipment and systems. 
5. Of course, neither of the two parties wants to disparage the Saudi Courts, though I suppose counsel have reviewed closely the comments on Saudi Law and enforcement in the Offering Circular for Golden Belt Sukuk #1 a US$650 million offering undertaken  for the benefit of Mr. AlSanea's company.  They are  after all good Saudi citizens.  Perhaps, one day they might well wind up in Saudi Courts on this or another matter and don't want any excess baggage in the courtroom with them.  Major law firms no doubt don't want to needlessly burn any bridges with negative comments.  But who could argue with the concept of greater familiarity with technical matters?  Familiarity which will give the NY judges an advantage in sifting through the evidence.   If a Saudi has a heart problem and needs mitral valve surgery, his decision to go to Cleveland for an operation would probably be considered a wise one.   The Cleveland Clinic has a world renowned reputation in that field.   Not a condemnation of Saudi medicine.  Just a choice of of the surgeon and hospital with greater experience.  More successful operations performed.
6. What might give pause to the forum non conveniens argument is the famous case in a neighboring Kingdom where when confronted with a forward FX transaction the learned judge asked "Who buys fish in the sea?"   A country whose judicial system is considered more advanced than that in Saudi.

AlGosaibi v Maan AlSanea - The Importance of Singularis

Sunday's AlSeyassah Newspaper from Kuwait has published what it claims is new information on the above case from letters that the Central Bank of Bahrain ("CBB") Governor HE Rashid al Maraj sent to the legal authorities in Bahrain as well as some additional information about the recent Cayman Islands Court ruling against Mr. AlSanea regarding what the Court deemed were violations of Order to freeze his assets.

The latter is the most important bit of "news" in the article.  Most press reports have focused on the US$60 million payment and in passing noted the attempt to liquidate Singularis, one of the companies in the Saad Group.  Not much more is said about Singularis.  The hot topic is the US$60 million.  AlSeyassah believes the US$60 million is relative "chicken feed".

According to AlSeyassah's "legal source", Singularis holds Mr. Al Sanea's 3% stake in HSBC which is worth roughly US$5.39 billion as of the close of business 29 March 2010.  This source asserts that the attempt to liquidate Singularis was an attempt to get the HSBC shares outside of the freeze order.   Singularis being one of the companies specifically named in the Caymans Freeze Order.

The Court has ordered the return of the US$ 60 million within 30 days.  More importantly, its action supposedly will put the stop on the "thawing" of the HSBC shares ensuring they remain under the Cayman Freeze Order.

What else does the AlSeyassah article state? 

As usual my comments appear in blue italics and preceded by AA.

1. First, the documents that AlSeyassah based its article upon date from approximately one year ago.  AA:  Given that time period, there may have been a refinement of earlier findings and charges as  further investigation took place and/or new data came to light. That might possibly even include a retraction or reduction of earlier charges. Or additional charges.  As is clear from other press reports, the investigative process in Bahrain continues with respect to both Awal and TIBC.  Once the process is complete, then the Kingdom's legal authorities will decide what cases, if any, to file.
2. HE Rashid Al Maraj, Governor of the Central Bank,  referred violations of law at Awal Bank to the Attorney General of Bahrain, Mr. AlSayyid Abdul Rahman Al Sayyid, and at The International Banking Corporation ("TIBC") to the Public Prosecutor, Dr. Ali Bin Fadl AlBuAynayn,  and recommended that certain individuals be prohibited from leaving the Kingdom.  I've posted on this before and here is the link.
3. With respect to Awal Bank, the preliminary results (AA:  note the word "preliminary") disclosed numerous violations ( مخالفات = as in violation of a law or rule) of CBB rules and improper actions  (تجاوزات = improprieties or exceeding boundaries) in the management of the Bank that constitute a form of deception, abuse of trust, embezzlement, and money laundering.  
4. Continuing on Awal Bank, that the management of the bank created the appearance of profits through fraud and forgery.  The bank did not apply the regulations for anti money laundering which led to the suspicion of the bank's involvement in these operations.   AA:  You'll recall that the Hibis Report submitted in the New York Supreme Court Case had Evidence Case File #3 redacted, though not completely.  Page 26 of the Report was labeled money laundering.  And if you don't, here's the link.  Allegations of money laundering may conjure up images of narcotraficantes with suitcases full of currency.  But one can launder money in one's possession just as one can launder one's own clothes. 
5. With respect to TIBC, the report is free of mention of the AlGosaibi Family.  Rather it states that the management of TIBC co-operated with an external party in the  completion of most of the operations which the bank engaged and from which this external party benefited against the interests of the bank. According to AlSeyassah, HE AlMaraj's letter names Mr. AlSanea as that external party saying he was in direct contact with TIBC's management for years to effect these schemes.
6. Continuing on TIBC, that the management conspired to take loans and deposits from local and international banks to fund a loan portfolio to imaginary and paper individuals and companies.  And that loan files were forged to give the appearance that the loans were valid.
7. That Mr. AlMaraj's letter stated that the violations at The International Banking Corporation included the forging of the signatures of the owners (AlGosaibi) in some documents.

And as usual some caveats on what was just presented.

1. First, not everything one reads in the press or on the Internet is true. 
2. Second, an allegation is just that, an allegation.  It is proof of nothing.  Even an allegation by an official government body or officer of a government.
3. Third, an official indictment for a crime is also not equal to a conviction.  It is not a proof of guilt.  It is merely the start of a process which hopefully leads to the determination of the facts of guilt or innocence.
4. Fourth, the Court makes that determination.  As of today, I'm not aware that any court has made any ruling.
5. Fifth, Mr. AlSanea and his counsel are on the record as vigorously contesting the allegations made against him and his companies.

Cayman Islands Court Declares Maan AlSanea In Contempt

The Financial Times reports that a Cayman Islands Court has declared Mr. AlSanea in contempt for violating the US$9.2 billion asset freeze it imposed.

Two violations were cited:

1. Transfer of US$60 million to the Saad Specialist Hospital last July
2. Putting one of his companies, Singularis, into voluntary liquidation.

Mr. AlSanea offered the following defenses.

Re the SSH transfer:

1. He was not aware that the freezing order applied when he made the transfer
2. His net worth is US$12.4 billion and so the transfer of US$60 million has no material impact on the freeze.

Re Singularis:

1. He was merely following legal advice and did not know that placing the company into liquidation violated the order.

The Court apparently did not buy these arguments. Here's the FT's characterization of the Court's assessment.

The judgment said it was "clear that an order for imprisonment would be futile and in any event perhaps unjustified", but the court found that "specific breaches of its orders" had "amounted to contempt

In light of the Court's reaction, I think it is really unfortunate that the FT didn't provide a bit more on Mr. AlSanea's defense regarding the requirements of the freezing order.   He certainly deserves his day in Court - including the Court of Public Opinion.

I would like to know if Mr. Al Sanea's is asserting that:

1. The legal draftsmanship skills of the Cayman Islands' Court are so poor that the Order was unclear.
2. The Order was clear but the Court delayed in communicating it to Mr. Al Sanea and his counsel.
3. The Order was clear and promptly delivered to his counsel, but they failed to notify him in time, i.e. before he took these actions.
4. Or the Order was clear, delivered to his counsel promptly and they relayed it to him promptly with sound legal advice, but the chap in the mail room forgot to bring it to him in time.
5. Or the Order was clear, delivered to his counsel promptly, relayed to him promptly and delivered by  that mail room chap the same day, but his counsel misinterpreted the Court Order.  And thus gave him what turned out to be faulty legal advice.
6. Or the Order was clear, delivered to his counsel promptly, relayed to him promptly with sound legal advice, delivered the same day by the mail room chap, but that he  simply forgot.  This is perhaps the most tragic explanation of all:  senior manager syndrome.  Or "SMS" as it's known to corporate lawyers.  It's as pernicious as Alzheimers, though it appears to be work related, not genetic. 

I have seen the most senior levels of my home country government or senior executives at major multinational firms  forced by relentless questioning in Congress to admit the terrible toll their office has taken on them.  That is, they are under such pressure from the volume and highly stressful critical nature of their work that their memories are affected.  Not only can they not remember what was discussed at a meeting, they may not even recall the meeting took place.  They don't  appear to remember much of what they do or why they did it.  Entire days or issues disappear from recollection.  I recall seeing one Harvard JD holding the most senior legal position in my country being forced by heartless Congressman to reveal that he really couldn't remember much of anything.  A rather pathetic sight, though luckily, he apparently still knew his own name.  Perhaps a sign that there is a hope for reversal. 

What's even sadder is the lack of public concern or compassion.  During the entire health care reform debate, I did not hear a single politician - conservative or liberal - raise the plight of this group - many struck down by SMS in the prime of their careers.  I believe that Aristotle said something on how one could judge a civilization by how it treated a certain group. I'm sure this is the group he was thinking of.

Mashreqbank v AlGosaibi - Motion by Mashreqbank to Consolidate Its Two Legal Cases

Mashreqbank's original legal strategy was to pursue two cases:  one against the partnership and a separate case against the heirs.

 

You'll recall earlier that earlier this month Judge Lowe ruled against Mashreqbank in its case against the heirs of Ahmad Hamad Al Gosaibi.  And if you don't remember this, here's the link to an earlier post.

Judge Lowe had stated that since Mashreqbank (a) had not joined the general partners to the suit against the partnership and (b) had not alleged  alleged that the partnership was insolvent or otherwise unable to pay its debts, it had no legal basis for pursuing a judicial order against AHAB's general partners.  

His ruling was "without prejudice" meaning that Mashreq's lawyers had the opportunity to attempt to remedy the legal shortcoming.

On 24 March Mashreq's lawyers, Cleary Gottlieb, filed a motion for consolidation of NYSC Case 601650/2009 (against AHAB) and 602171/2009 (against the general partners of AHAB).   If accepted this will apparently neatly resolve the legal issues cited in Judge Lowe's ruling.  The documents are filed at the NYSC website.  For Case 601650, it is Document  117.  For Case 601171, it's Document 47.

You'll find instructions on how to access the Supreme Court of New York's website in the earlier post linked above.

AlGosaibi v Maan AlSanea - Other Information

(This is the fourth of a series of posts which look at more detail at recent filings in New York Supreme Court Case #601650/2009 - Mashreqbank v AlGosaibi with Mr. AlSanea as a Third Party Defendant.  More detail here on this series).

Here's a list of some other items that might be of interest.

1. Exhibit 32 (NY Supreme Court Document #108):  A dual language copy of the "Law of Procedure Before Shari'ah Courts" which deals with procedures in Saudi Arabia.
2. Exhibit 33 (NYSC Doc #108-1):  AHAB's Counsel's Argument about Mashreqbank's alleged culpability in what is alleged to be Mr. AlSanea's fraud.  On page 9, it's stated that the Money Exchange's volume of remittances during the period January 2008 through April 2009 was approximately US$66.67 million while the volume of FX transactions between Mashreqbank and the ME was approximately US$4.97 billion.
3. Exhibit 34 (NYSC Doc #108-2: Review by Jamal Al-Muzein (Mr. AlSanea's Saudi lawyer) of the legal system in Saudi Arabia.  As noted in an earlier post, one of Mr. AlSanea's arguments for forum non conveniens in New York is the robust nature of the Saudi legal system. So factor that in as you read this paper.  Also be aware that the King currently has a project ongoing to "modernize" the Saudi Court system - which may give you an idea of his view on its state.

As you read these documents - and all others related to this case - bear in mind that at present there has been no judicial determination made or verdict issued.  Mr. AlSanea is vigorously denying any allegations of wrongdoing on his part. 

AlGosaib v Maan AlSanea: Special Saudi Committee& Legal Procedures in the Kingdom

(This is the third of a series of posts which look at more detail at recent filings in New York Supreme Court Case #601650/2009 - Mashreqbank v AlGosaibi with Mr. AlSanea as a Third Party Defendant.  More detail here on this series).

This is another of Appendices to the Supplemental Affirmation of Robert F. Serio, Esq., of Gibson, Dunn & Crutcher (NY Supreme Court Document 107) , who represent Mr. AlSanea in these proceedings.  He is arguing in his submission in support of the contention that New York is a forum non conveniens.

The Appendix is Serio Exhibit #29 (NY Supreme Court Document 107-6).  It is expert witness testimony by Ian David Edge, Esq., who is the founding and present Director of the Centre of Islamic and Middle East Law in the Law Department at SOAS at the University of London.  He was hired as an expert witness by counsel for Mr. AlSanea. He also provided a similar brief regarding Saudi and Kuwaiti law in support of Mr. AlSanea's similar forum non conveniens argument in Ahli Kuwait's suit against Mr. AlSanea in the Supreme Court of New York.

Before we proceed any further, the usual caveat about looking at the sources of information and realizing that they are not completely disinterested parties.  They are working to promote the interests of their clients.  So as usual have your saltshaker in hand as you read.  Bear in mind that the goal of Mr. AlSanea and his attorneys would be to convince the London Court that the Saudi Committee and other legal procedures were robust and capable of dealing with this case in a professional manner resulting in the administration of true justice.  From what I've seen AHAB and its counsel are arguing that the Committee has limited powers and is not adjudicative (i.e., does not have the power to issue a legally binding judicial verdict).

It is probably a fair statement that counsel for Mr. AlSanea are presenting this testimony because it advances their contention that the trial should be held in Saudi Arabia.  One would be hard pressed to imagine them calling a witness to support AHAB's interests.  And the same can be said for AHAB.  They are likely to call witnesses who support their arguments.  Ever wonder how attorneys find witnesses who just happen to hold views congenial to their clients from among all the witnesses out there?  "An unexplained mystery of the law" as one of my buddies who took the "legal holy orders" and labored for an appeals court once told me.

I've read through Mr. Edge's comments and extracted some points about the Committee and what it has done to date: 

1. In late May 2009 in response to a personal complaint from Yousef AlGosaibi (Chairman of AHAB) the King of Saudi Arabia issued a "High Order" ("amr saami") establishing the Committee.  Its goal is to study and the matter and recommend to the King how this dispute should be resolved.
2. The Committee is composed of 12 members appointed by the King, including three judges from the Ministry of Justice, representatives from SAMA, the Saudi Capital Markets Authority, the Ministry of Interior and the Ministry of Commerce.  The Committee is chaired by the equivalent of the Saudi Attorney General.
3. On 28 May 2009, the King issued another "amr saami" freezing various of Mr. AlSanea's assets and those of his wife and his children as well as of Saad Trading Contracting and Financial Services Company.  
4. Around 8 June 2009, a High Order was issued to freeze all assets held in the name of AHAB and its partners in Saudi Arabia.
5. On 1 September 2009, upon further hearings from the Committee and requests from some of AHAB's Saudi Arabian creditors to SAMA, the King imposed further restrictions on AHAB by extending the SAMA freezing order to include assets held in the names of spouses and children of prominent AHAB partners.  
6. On 4 October 2009 AHAB's lawyer sent a petition to the Committee asking them to order that Mr. AlSanea return some 58.4 million shares of SAMBA Finance Group and previous dividends amounting to SAR 975 million. The Committee rejected this request.  AHAB is reportedly appealing in one of the Kingdom's courts.

While I'm not an expert witness in Saudi law, my opinion (which I like to think is reasonably informed) is that there will be strong inclination on the Committee to look for a way to achieve a compromise between the two parties.  This is the general approach in this part of the world as opposed to the West where I think we can safely characterize the judicial system as more adversarial.  It's not uncommon in the region for an individual to be found guilty of murder and then released when the relatives of the victim forgive him.  There's a lot more "gray" in this judicial system than in the more "black and white" world in the West.

And I'll close with my usual caveat which is that as far as I know as of today no Court has ruled in this case or issued any judicial finding.  Mr. AlSanea is vigorously denying any wrongdoing on his part. 

Kuwaiti Banks Prepare to Sue Saad and AlGosaibi

AlQabas reports today that KFH, Commercial Bank of Kuwait, Gulf Bank, and Burgan Bank today launched the first steps towards suing the two groups after becoming convinced that negotiations had reached a dead end.  From the article, it sounds like negotiations never took place.  Quoting unnamed banking sources, AlQ says that the complaints were lack of response to repeated contacts (no answers) or agreeing to meetings but not showing.  Kind of hard to conduct negotiations under those conditions.

The four banks are owed some US$1.5 billion.  Legal advisors have apparently been selected.  Formal launch of legal proceedings is not expected for at least one month while loan files are put together (I'm assuming this refers to work at the lawyers since presumably the banks had their files together for their negotiations) and a decision is made as to where to file the suit.  Complicating factors are the diversity of governing laws for the debts (English, Kuwaiti, Saudi are mentioned), different types of credit extensions - bi-lateral loans, syndicated loans (in which Kuwaiti banks are participants). And I'll presume since KFH is involved some are structured as "Islamic" loans.   The latter point - where to file - will be a choice of the  most preferred/advantageous law (from the creditors' standpoint)  as well as the opportunity to put "hands" on the two group's assets.  

The Central Bank of Kuwait is said to be fully supportive.

The article notes that international banks are also reported to be getting ready to launch legal actions.

It also comments that Ahli United Bank has already (and it's been some time now) sued Saad Group in New York.

And what is perhaps the most relevant point here, the Central Bank of Kuwait has told the banks that they must comply with its request for 100% provisioning for the two groups by 31 December 2010.

Judging by that latter comment, I suppose the appropriate thing to do here is wish the banks in Kuwait الله معكم

AlGosaibi v. Maan AlSanea: UK Proceedings Witness Statement of Andrew John Ford - Allegations Against Mr. AlSanea

(This is the second in a series of posts which reviews documents filed on the Supreme Court of New York's website in connection with Mashreqbank v AHAB to which AHAB has added Mr. AlSanea as a Third Party Defendant. NY Supreme Court Case Index # 601650/2009.  More details here).

The document in question is one of the Appendices to the Supplemental Affirmation of Robert F. Serio, Esq., of Gibson, Dunn & Crutcher (NY Supreme Court Document 107) , who represent Mr. AlSanea in these proceedings.  He is arguing in his submission in support of the contention that New York is a forum non conveniens.

The Appendix is Serio Exhibit #25 (NY Supreme Court Document 107-2).  What's interesting is that this document is a Witness Statement given in London by AHAB's lawyers.  Mr. Serio has introduced it because he believes it shows that in this document  AHAB (a) "acknowledges the burden of transporting those witnesses from the Middle East to testify", (b) it intends to present in evidence in England "expert evidence on 'Saudi law ... in relation to issues of authority'" and that (c) AHAB further admits "some of the factual evidence will require an interpreter". 

What's interesting are some of the other bits in Mr. Ford's statement.  Before we delve into these, it's very important to note that Mr. Ford represents AHAB and just as Mr. Serio has the interests of his client foremost in his mind so does Mr. Ford.   So as you read both documents, make no mistake that we are dealing with impartial disinterested parties in either case.   Also with respect to Mr. Ford's Witness Statement, he makes several assertions, observations and interpretations.  We need to be very clear of the distinction between an assertion - even one made in the most rigorous good faith - and a proven fact. 

Let's go to his Witness Statement.  The following are direct quotes from that statement:

1. "Paragraph 13. AHAB says that this borrowing was obtained by the forgery of the signatures of the chairman of AHAB by or at the direction of Mr AI Sanea on hundreds of banking document number: LN65977/1-EU-5542569/2 3 documents. It has submitted many of the banking documents to  forensic examination by Dr Audrey Giles, head of the Giles Document Laboratory and formerly  head of the Questioned Documents Section of the Metropolitan Police Forensic Science Laboratory. Dr Giles' work has been hampered by the lack of original documents (many of which were removed from the Money Exchange by Mr AI Sanea and which he has refused to return). Nevertheless she has so far concluded that there is evidence that the signatures on at least 286 banking documents are not  genuine. On some documents, signatures have been applied by colour photocopying or by an inkjet printer and then traced over with a porous-tip pen; on others, the signatures are identical matches of  those on other documents and therefore highly unlikely to be genuine. In some cases the signatures  were applied to documents at a time when it would have been physically impossible for the  purported author to have signed because of incapacitating illness."
2. "Paragraph 14. The scale of the alleged fraud is enormous. A large team of forensic accountants from Deloitte has been investigating the fraud on behalf of AHAB since the end of May 2009. Their work is continuing, but their analysis to-date shows that over US$5.2 billion has been paid out from the Money Exchange to Mr AI Sanea or to companies controlled by him. The outstanding total of  unauthorised borrowing arranged by Mr AI Sanea, including accrued interest, commitment fees and related charges, appears to exceed US$9.2 billion, sourced from some 118 banks around the world."

And just to end where we began.   The above are allegations by the counsel for AHAB against Mr. AlSanea.  As you might expect, both Mr. AlSanea and his counsel vigorously deny any wrongoing.  As far as I know, no Court has rendered a judgment in this matter yet.  And so these remain allegations.

AlGosaibi v Maan AlSanea: What Does Arrest Mean?

(This is the first post reviewing documents submitted in Case 601650/2009.  More details here).

There's been a lot of speculation on this issue - some of it informed and some not so well informed, including right here on this blog.

Some new information has emerged on this topic in the form of a legally sworn statement by one of the parties.

As you perhaps know, Ahmad Hamad al Gosaibi and Brothers (AHAB) added Maan AlSanea as a Third Party Defendant to the case brought against them in the Supreme Court of New York (Case Index #601650/2009).

Mr. AlSanea has been arguing that New York is a forum non conveniens. Therefore, the case should be dropped or that he should be severed from the case.

On 9 March 2010, Document #106 was published on the Supreme Court's website under Case 601650/2009.  

It is an affidavit from Mr. AlSanea containing arguments why NY is inconvenient.  These include the usual arguments you'd expect:  (a) many documents relating to the case are in Arabic, (b) the sudden discovery of profound lack of English skills among witnesses (including several who previously  were able to routinely negotiate and conduct complex multi-million dollar transactions in English and who were involved in the running of global multi-billion dollar businesses in English), (c) none of the witnesses live in the USA, (d) the robust legal procedures in the Kingdom of Saudi Arabia,  and so on. You should, of course, read Mr. AlSanea's affidavit to understand his argument in full so that you can judge its merits for yourself.

What's pertinent to this post is a new defense:  many of the key witnesses are under travel bans. And  taking this document on its face enables us to make some definitive statements about the legal status of some of the parties involved.

First, we learn that these parties are not currently incarcerated.  Nor would it appear that they have placed under house arrest - where they are confined to their residences.   

Rather they are forbidden to leave the Kingdom of Saudi Arabia or the Kingdom of Bahrain.  Usually, this procedure involves the surrender of one's passport and a "notation"  in the records of  the "Customs and Immigration Officers" at border crossings, including airports.

In his affidavit, Mr. AlSanea lists the following individuals subject to travel bans:

1. Himself - by Saudi Arabia
2. Yousef, Saud, Dawood, AbdulMuhsin, Waleed Kamal Ahmad Hamad Al Gosaibi - who Mr. AlSanea understands are subject to similar travel bans imposed by Saudi Arabia.  Note that caveat.
3. Mr. Alistair McLeod, Former Acting CEO of Awal Bank, resident of Bahrain and subject to a travel ban imposed by Bahrain.
4. Mr. Anthony James, Former COO of Awal Bank, resident of Bahrain and subject to a travel ban, imposed by Bahrain.
5. Mr. Cliff Giddings, Former Head of Operations of Awal Bank, resident of Bahrain and subjectd to a travel ban imposed by Bahrain.
6. Mr. Mateen AK Mirza, Former Head of Treasury at Awal Bank, resident of Bahrain and subject to a travel ban imposed by Bahrain.
7. Mr. Yasser Al Sharif, Former Risk Manager of Awal Bank, resident of Saudi Arabia but subject to a travel ban by Bahrain.  (Confess I'm not clear how this would work legally.  If he's not resident in Bahrain, he would seem to be outside Bahrain's legal control).

It's very important to note two things:

1. The imposition of a "travel ban" on an individual is not a finding of guilt.  Nor is it necessarily an indication of the suspicion of guilt.  Often witnesses who can give testimony material to an investigation are banned from traveling so that they will be available to the court.  Of course travel bans are also imposed on individuals who may be  later charged with some wrongdoing.   Though being charged and being guilty can be two different things.  As per Mr. AlSanea's affidavit, you will note that both sides in the dispute - the AlGosaibis and Mr. AlSanea himself - are subject to a travel ban.
2. The Court will make the final legal judgment of quilt in this matter.  As far as I know, no Court has yet rendered such a verdict.

New York Supreme Court: Mashreqbank v AlGosaibi - 9 March 2010 Documents

Last week a new batch of  documents relating to the legal case between Mashreqbank and Ahmad Hamad AllGosaibi and Brothers ("AHAB")  (NY Supreme Court Case Index # 601650/2009) and  the legal case between Mashreqbank and the Partners of AHAB (NYSC Case Index # 602171/2009) was published on the Supreme Court of New York's website.  You can go to that link to read these documents in their entirety - which I highly recommend.  There's no substitute for the original source documents. 

In addition to the usual partisan pleadings common to such cases, these documents contain some interesting information.  And you might find some of the assertions in the documents submitted by both sides a source of hilarity.  I still get a chuckle about the guy who ran a multi-billion dollar empire in English but suddenly can barely understand the language.

We'll largely ignore the former and concentrate on the latter in a series of posts to follow. 

Mashreqbank v AlGosaibi Heirs: Ruling Against Mashreq

Last week the Supreme Court of New York updated its website for filings in two cases brought by Mashreqbank against the AlGosaibis.  AlGosaibi heirs refer to the 20 individuals who are the partners in Ahmad Hamad AlGosaibi and Brothers.

To put what follows in context, Mashreqbank has filed three cases in the Supreme Court of New York.

1. A case against The International Banking Corporation which has been effectively stayed by a filing under Chapter 15 of Title 11.  This effectively "ended" Mashreq's case in NY.
2. A case against Ahmad Hamad al Gosaibi and Brothers (the partnership as an entity).  In its response AHAB added Maan AlSanea as a Third Party Defendant.  This is NY Supreme Court Case Index #601650/2009.
3. A case against the twenty individuals comprising the AHAB partnership.   This is NY Supreme Court Case Index #602171/2009.

I printed out a massive stack of documents from the latter two cases and have been merrily reading away the AHAB case documents.  I noticed that the stack of documents from Case #3 above was much smaller.  So I've turned my attention temporarily to that case.

Two developments.

First, as noted above, Justice Richard Lowe III has ruled against Mashreqbank's motion for the Court to order an attachment of defendants' assets, personal property, funds and electronic funds transfers that are located in New York.   He has done so "without prejudice" meaning that Mashreqbank can attempt to remedy the defects in its pleading and file again to obtain the order.  The ruling is dated 25 February 2010 but was only filed on the Supreme Court website on 8 March.  If you want to look yourself, this is document #46.  Instructions on how to access the Supreme Court Website are here.  Be sure to use the right Case Index Number 602171/2009 when you search.

What was the problem?  

The lawsuit concerns two FX deals that Masreqbank undertook.  One with AHAB (the US$150 million which is the subject of Case #2 above) and one with TIBC (which is the subject of Case #1 above).  The transactions themselves were not directly with the partners in AHAB.  

Mashreqbank's lawyers failed to "join" the two contracting parties (AHAB and TIBC) to this lawsuit.  

And in the words of Justice Lowe:  

"To state a contractual cause of action against the individual partners where the partnership is not joined, the complaint must allege that the partnership is insolvent or otherwise unable to meet its obligations."

Mashreqbank has not done this in this case.

Perhaps equally or more important (since Justice Lowe is also on the "bench" for Case #2 above), Mashreqbank has not joined the partners as defendants in Case #2 above. This seems a potentially "fatal" flaw.

Speaking about precedent case Vets North, Inc v Libutti 9278 AD2d 406, 407 [2d Dept 2000]) in which Vets North had not joined the partners and then tried to enforce a judgment against the partners:

The Court determined that plaintiff could not enforce the judgment, because the partners had not been named in the proceeding against the partnership.  "Resort to the personal assets of individual partners is possible only as to those general partners who were named individually as defendants and personally served with process in the proceeding which resulted in the judgment." (id; see also Tally v 885 Real Estate Associates, 11 AD3d 242, 242 [1st Dept 2004])

It looks like Mashreqbank's counsel has some filing to do in both cases.  Since their motion was denied without prejudice they get a second bite at the apple.  (Sorry, I couldn't resist the pun).

The second was that earlier Mashreqbank (14 January 2010) had agreed to drop Mr. AlSanea's wife (Sana Abdulaziz Hamad alGosaibi) as a defendant.  The stipulation (Document #45) is  rather short and gives no reason for this move.  It would seem to me that Mashreqbank would be looking to line up as many pockets  as it could to ensure that it retrieves all the money owed it.   And that amount is not inconsiderable.  Beyond the cases in New York, Mashreqbank has filed a case in the UAE for a total amount of AED1,457,164,610.14 (US$397,047,577.70).

Given all that is at stake, letting Ms. Sana off the hook is a rather curious move indeed.

Mashreqbank v AlGosaibi – Analysis of FX Deals

This post is based on the affidavit (including appendices) submitted by Bruce R. Grace, Esq. of Baach Robinson & Lewis PLLC, who are the attorneys for Ahmad Hamad AlGosaibi & Brothers Company ("AHAB") in the above lawsuit. Attorney Grace submitted these documents to the Supreme Court of the State of New York on 5 February 2010. They were filed as Document #83. But since then for some reason there's been a change. Document #83 has been deleted and it and each of the exhibits contained have been filed as separate documents all dated 25 February. The specific document used as the basis for this post and referred to herein is Document #87-1. 

You can access electronic documents filings for this case at the Supreme Court of New York's website (http://iapps.courts.state.ny.us/webcivil/FCASMain). Search using Case Index #601650/2009. Follow the steps. You have to go through several pages. On the page labeled "WebCivil Supreme – Case Detail" go to the bottom of the page and click on the "Show EFiled Documents" button.

As usual, a caveat. As you read documents filed in the case, keep in mind that each side's lawyers are not disinterested partisans of truth. They are hired to represent their clients.

From the documents I've read it's clear that both parties agree that there was an FX transaction in the name of AHAB with Mashreqbank under which Mashreqbank was to pay US$150 million to AHAB's account at Bank of America on 28 April 2009 and AHAB was to pay SAR564.3 million to Mashreqbank value 5 May 2009. They also agree that Mashreq fulfilled its side of the contract but that AHAB did not.

As you'd expect both parties have different views about this latter fact. Here's how I would summarize their arguments. AHAB has two key contentions. First that they were the victim of a fraud perpetrated by Mr. AlSanea. And second that from the nature and pattern of the deals Mashreq should have known the deals themselves were questionable. Therefore, Mashreq is in some sense complicit. On its part, Mashreqbank has vigorously denied knowledge of any wrongdoing in the deals and asserts that it was acting in commercial good faith. The Bank also argues that the instructions it received appeared to come from duly authorized parties at AHAB. Simply put, there is a commercial deal which AHAB needs to honor. That's my take. But, I suggest you read the case documents themselves to get a complete picture of their positions.

Putting aside the issue of who is right and who is wrong, let's take a closer look at the FX deal which is the subject of this case.

The FX transaction is somewhat unusual as it is a "split value" deal. Normally FX deals have both parties making payments on the same day. If Bank A sells Bank B Sterling against the US Dollar, on the settlement date Bank A remits Sterling to Bank B's account. And on the same day Bank B remits the countervalue in US Dollars to Bank A's account. In a split value date deal, one party pays before the other. The party who pays first is taking risk that the second party might not pay. It is taking a credit risk that the second party may not pay its side of the transaction due to financial problems – being put under administration, entering bankruptcy, etc. Even in an FX transaction where settlement occurs on the same day, there is that credit risk. Herstatt Bank is an example. However, the longer the gap between the first party's payment and the second party's the more credit risk the first party is bearing. 

So what could be the reasons why parties would agree to a split value settlement mechanism?

Credit Risk Management

If one of the parties were concerned about the creditworthiness of the other, it could mitigate its risk by requiring the weaker party to pay first. After confirming receipt of funds and only then, the stronger party would remit its funds. This eliminates credit risk on the weaker party. The time between the two payments would be primarily a function of two things. First, the time it takes for the stronger party to confirm receipt of the funds from the weaker party. Second, how soon thereafter, the stronger party is operationally able to make its payment of the countervalue currency.

Given the currencies involved – the US Dollar and the Saudi Riyal- confirmation of receipt should be relatively easily. There are two widely available methods which provide quick and efficient information (as well as payment functionality) to banks around the world. The shared global "utility" called SWIFT. And proprietary systems offered by various major banks around the world – generally based on access via the Internet using PCs.  AHAB and Mashreq would have access to one or both of these.

In terms of payments, same day payments for these currencies should be no problem.  The US system has been "wired" for some time.  Saudi Arabia has had an electronic interbank payment system - including same day payments - since 1997 SARIE (Saudi Arabian Riyal Interbank Express).  Payment instructions could be transmitted by SWIFT or a proprietary bank system.

Two conclusions. 

First, This can't be a credit motivated transaction since the stronger credit, Mashreq, is paying first.

Second, the gap between payments, seven days, is longer than what a credit driven transaction would require.  Three days is probably sufficient as this represents the  "worst case" in terms of operational timing.  That is, if  Mashreq were to remit US Dollars on a Wednesday,  because of later NY working hours, AHAB might not be able to confirm receipt until the next business day. Even if staff came in on Thursday to confirm receipt, a SAR payment couldn't be made until Saturday. 

The only thing that could lengthen the period would be seasonal holidays, e.g., Eid Al Fitr, Eid AlAdha, National Day, etc.  Were there any seasonal holidays during late April / early May 2009 that extended the time period?   No! 

So I think we can safely exclude credit concerns as a motive for a split value date deal in this case.

OPERATIONAL REQUIREMENTS – DISPARITY OF WORKING DAYS

The second reason for these transactions is ostensibly disparity of working days. That is, on the settlement date, New York is open for US Dollar payments but Riyadh (and the rest of Saudi) is closed for the weekend or a holiday. As noted above, Saudi Arabia's "weekend" is Thursday and Friday. 

In this transaction US Dollars settled on Tuesday 28 April 2009 with the SAR on Tuesday 5 May 2009. There were five Saudi working days from 28 April to 5 May: Tuesday 28 April, Wednesday 29 April, Saturday 2 May, Sunday 3 May and Monday 4 May. There were no "seasonal" holidays during this period. So it is hard to see that there is an operational reason for the seven day gap.

A key question though (at least in my mind) is whether even with a disparity of working days such a split value deal would be entertained. 

When I worked for financial firms in the ME managed according to "USA" practices, a split value deal (except one undertaken for credit reasons) was strictly forbidden.  And generally there was  no interest in the extra hassle involved with credit motivated split value deals.   Two reasons. First, such a transaction could be a way of providing a short term money market loan to a party. Such extensions of credit were required to take place under lines specifically designated for loans.  If a transaction does not appear as a loan, a bank might extend another loan well beyond its risk tolerance for that customer. Another reason was integrity of our financial statements and regulatory reporting. A loan should be reported as a loan not an FX transaction.

Now I recognize that contrary to the beliefs of some what a "USA-style" managed institution does is not necessary infallible behavior. So I checked with an old friend who is long experienced  in Treasury at the DGM/AGM level in both "Arab" and "European" style managed banks. He told me that none of the institutions he worked for ever would entertain such a transaction. The counterparty would simply be told  that the deal had to be done on a common working day for both currencies so that settlement of both sides of the transaction could take place on the same day. But perhaps our horizons are too narrow.  Maybe other institutions apply different rules.  Even if that is the case (and I'm not persuaded that routinely doing split value date deals makes good business sense), the fact is that 28 April was a valid business day in both the Kingdom and the USA. So there was no operational reason both sides could not have settled on the 28 April. 

My friend also commented that the 3.762 FX rate used in the transaction was "non reflective of the market price". In his banks and mine, it was strictly forbidden to book transactions at non market rates. The concern was that one was assisting someone in manipulating their financials.

RATIONALE FOR THE SPLIT VALUE TRANSACTIONS

So if we've eliminated these two justifications, what could be the rationale this transaction?

If we examine the pattern of transactions, we can perhaps gain an insight into their purpose and rationale. 

In his affidavit Exhibit 1, page 20 paragraph #21 Attorney Grace states that between February 2005 and 5 May 2009, Mashreq and AHAB engaged in over "100 purported 'split value foreign exchange transactions' substantially identical to the transaction pleaded by Mashreq in the Complaint. Between January 2008 and 1 May 2009 alone, 52 split value foreign exchange transactions were carried out between Mashreq and the Money Exchange, totaling US$4.7 billion." 

He then goes on to describe that the transactions involved a payment of US Dollars by Mashreq to AlGosaibi's US Dollar account at Bank of America New York with AHAB to pay SAR to Mashreq at National Commercial Bank 3 to 12 days later. The FX rates used in these transactions were not at the prevailing spot FX rate. The SAR is fixed to the US Dollar at 3.75 SAR = $1.00. Interbank trading takes place in a narrow range around that rate. Before the settlement date, AHAB and Mashreq would engage in an offsetting deal to roll the existing deal forward. He also noted that in every deal Mashreq made a profit. AHAB never did.

Here's an outline of how this scenario might work. First, there is the original deal. Let's use the deal settling 5 May for SAR as the "Original Deal" (though to be clear that deal was actually the rollover of an earlier deal). That deal involved US Dollars against SAR with Mashreq paying US$150 million value 28 April with AHAB to pay SAR564.3 million on 5 May. If we presume AHAB doesn't have any money or wants to use its money for something else, how does it settle the payment due on 5 May to Mashreq?

Let's treat this as two separate deals. First a deal to cover the SAR payment due on 5 May (a "Closeout Deal"). And then a second deal to re-open the position in US Dollars (a "Rollover Deal").

In the Closeout Deal AHAB buys SAR from Mashreq against its (AHAB's) payment of US Dollars to Mashreq with settlement of both for value 5 May at the Spot Rate of 3.75. That takes care of the obligation to pay SAR from the Original Deal, except for Mashreq's profit SAR0.9 million which AHAB has to fund from its own resources. (The "profit" arises from the difference in SAR betweens US$150 million at SAR 3.75 = US$1.00 and SAR 3.762).

But now it needs US$150 million to pay for the SAR value 5 May under the Closeout Deal. Where does it get the US Dollars, if it doesn't already have them? From the Rollover Deal. Let's assume the Rollover Deal has the same terms as the Original Deal except the value dates are different. So, AHAB would buy US Dollars from Mashreq value 5 May against a payment of SAR to Mashreq value 12 May. This deal re-introduces the split value date.

While the Affidavit it sounds as though the Closeout Deal and the Rollover Deal were combined into a single deal, the Exhibits contain a copy of AHAB's confirmation for the Original Deal (itself a Rollover of an earlier deal). That confirm shows that there must have been two separate deals as outlined above. AHAB and Mashreq could agree to net the two deals' payments. And thus AHAB would owe Mashreq SAR0.9 million.   AHAB's obligation to pay Mashreq US$150 million (Closeout Deal) would be "offset" by Mashreq's obligation to pay US $150 million to AHAB (Rollover Deal).

Putting this information in tabular form might make the explanation clearer. The table below summarizes the cash flows by value date that would have occurred from a rollover of the transaction maturing 5 May. But note: no such rollover occurred: no Closeout Deal and no Rollover Deal. And since AHAB didn't settle the SAR payment on 5 May, Mashreq is pursuing them in Court.

Transaction	US$ 28 April	US$ 5 May	SAR 5 May	SAR 12 May
Original Deal FX Rate = 3.762	+$150MM		-SAR564.3MM
Closeout Deal FX Rate = 3.75	$0	-$150MM	+SAR562.5MM
Rollover Deal FX Rate = 3.762	$0	+$150MM		-SAR564.3MM
TOTAL CASHFLOW TO AHAB	+$150MM	US$0	-SAR1.8MM	-SAR564.3MM

As you can see from above the Closeout Deal and the Rollover Deal effectively push forward AHAB's payment of the SAR564.3 million to settle the original inflow of US$150 million. The only payment that does occur is the profit payment to Mashreq on 5 May. On each settlement date in the future (assuming the deal would be continued to be rolled forward), AHAB would pay Mashreq its profit. That explains why Mashreq always was making a "profit" on each deal.

Based on the above. 

1. These FX transactions were the equivalent of short term loans. 
2. The persistent "profit" on the deals was in effect the interest payment on the loan. 
3. The transaction FX rate of 3.762 compared to the 3.75 fixed parity results in an implied borrowing rate of 8.32% per annum. That rate might seem high. The day before the 28 April value date one month Libor was trading at roughly 43 basis points. That means the margin over Libor was roughly 7.9%. But remember that at that time spreads were still elevated due to subprime crisis, the failure of Lehman, etc. So there is some rationale to the credit spread here. 
4. Also as is hopefully clear, the Rollover Deals did not result in AHAB getting more money from Mashreq. Rather the Rollovers merely extended the maturity of the loan. So despite the US$4.7 billion volume of transactions mentioned, AHAB only received  (borrowed) US$150 million from Mashreq. 
5. Mashreq's dealers must have known that they were extending loans. Whether its management did is not determinable from the documents I've seen. 
6. In terms of justification for the transaction, it's hard to imagine that anyone with a knowledge of AHAB's business could consider these transactions were commercially necessary to fund the needs of the Money Exchange business. The volumes are too large relative to the Exchange's business.  Since the amounts were rolled forward, there was only one net cash inflow to AHAB. 
7. Nor would these transactions likely to be financially motivated "hedges", particularly, since the US$/SAR FX rate is fixed (and has been so for many many years) and since the Saudi Government has ample financial resources to maintain the "peg".

Kuwaiti Banks to Provision 100% for Saad and AlGosaibi?

AlQabas quotes unnamed banking sources that banks and financial firms have decided to increase provisions against their exposure to Saad and AlGosaibi to 100% in light of the fact that the condition of  the two Groups as not reassuring regarding the possibility of collection of the amounts due.  And that some banks have already received verbal instructions to do so.  (Presumably from the Central Bank, though this is not stated in the article).

One local bank pursuing Saad in court is said to have been surprised by the violent, confrontational and fierce tactics used by Saad to resist which means that the legal battle will be long.  In such circumstances it's not possible to leave the balances open or uncovered.  (This may be AlAhli Bank which was identified earlier as pursuing a court case against Saad in New York).

A banking source  (note now singular) is quoted as being pessimistic about recovery stating that the two factors of time and expenses to wage the protracted legal battle probably mean a net recovery of 20% to 25%.  (It's unclear if the recovery  amount includes interest or is just the principal.  And whether the calculation is face value or present value.  In any case it's small.)

TIBC Administrators to Pursue Debtors

 

The Gulf Daily News reports that TIBC's Administrators,  Trowers and Hamlins, advised creditors that they had secured funding from a group of major creditors and were preparing to go after major debtors of the Bank to secure repayment.

This is an interesting development.  

You'll recall that the Ernst and Young Report on TIBC certainly left the impression that there had been massive fraud at the Bank with the implication that there was little prospect for recovery.

Clearly, creditors wouldn't be putting in more money if there wasn't a real prospect of a reasonable recovery.

Awal Bank & The International Banking Corporation - Update on Legal Investigations Including House Arrest of Maan AlSanea (?)

Here's a summary of a 17 February report from  AlWatan Newspaper (Bahrain) on the latest in the AlGosaibi/AlSanea affair.   For those who are interested in Mr. AlSanea's fate, you'll want to at least read #7 below.

AlWatan's article is based on an "informed source".

First, the head of the Public Prosecution Nawaf (Abdullah) Hamza, has formed a  panel of independent experts to provide an independent opinion on the financial statements of Awal Bank and The International Banking Corporation.  (Digression from article:  While not stated by AlWatan, clearly this report will be used as part of the justification for the levying of charges.  In 2007 the Public Prosecutor's Office also known as   النيابة الكلية  was given jurisdiction over the investigation of all financial and economic crimes.  At that time Mr. Hamza joined the office leaving his post as Head of the Middle Prosecution Office, though at that point he was not made head of Public Prosecution).

1. The investigations continue at both banks.  Lately the focus has been on management and employees.  It's not clear just how far down the management ladder the investigation is proceeding.  The article uses the terms "managers and employees".  
2. Among the parties being interrogated at the CEO and members of the Executive Committee at Awal Bank.
3. The investigation of Awal's Head of Operations has been completed.  There are no further details in the article on what the results were.
4. In the past 10 days, Awal's CEO has charges directed against him.  He has been released against an unspecified bond and forbidden to travel.  Later the article uses the term "rasmiyan" to refer to charges against the CEO of TIBC.  So assuming the insertion of that additional word was deliberate  and has significance, Awal's CEO appears not to have been formally charged with a crime.
5. Awal's Head of Treasury and Foreign Exchange has been released against a BD2,000 bond and forbidden to travel.  AlWatan does not mention that formal charges were levied.
6. The CEO of TIBC has been formally charged with breach of trust and stealing two billion dollars from AlGosaibi Company for Commercial Services (Bahrain).  He has been released from custody against a BD10,000 bond and forbidden to travel. 
7. The article lists five cases pending against Maan AlSanea in Bahrain: (a) Awal Bank v Maan AlSanea, (b) Bahrain Islamic Bank v Maan AlSanea and Others, (c) Bahrain Islamic Bank v Maan AlSanea and Others, (d) Hasan Sharif and 18 Others v Awal Bank (labor case),  and (e) Salah AlKawaari v Awal Bank (labor case).   I suspect the latter two cases were brought by individuals whose employment was terminated and who feel that their termination process and payments were not fair.  It is not uncommon for a dismissed employee in Bahrain to lodge a complaint with the Labour Ministry.  If the employer and employee cannot reach a solution among themselves, then the dispute proceeds to the Labour Court for a decision.  So, perhaps a more accurate statement is that there are three commercial cases against Mr. AlSanea.  With all the downsizing going on in Bahrain, just about every bank who let someone go, has at least one Labour case against it.
8. Also that a freeze (block) has been put on the assets of Mr. AlSanea and his family in Bahrain and that he has been forbidden to travel until the completion of the investigation.

That last point, the reported arrest, seems to be a topic of some interest out there from the number of hits this blog gets related to that topic. 

A couple of observations. 

First, as you've noticed from the cases pending against some of the senior managers of the two banks, they have been released from jail (against rather small bonds considering the allegation of the amounts involved) and forbidden to travel.   I'd guess that would involve surrender of one's passport. That is a modified form of house arrest, meaning in this case that they can move about within the country but may not leave.  No electronic ankle bracelets and stay at home rules.  Just to be clear I have not seen any credible report that Mr. AlSanea has been arrested/jailed.  I'd also note that modified house arrest would be fairly normal procedure for someone accused of a major crime.  Or someone who could be a material witness in an investigation.

Second, it's not clear to me if Mr. AlSanea is currently in Bahrain.  If he's not, then the Bahraini prohibition on travel would be theoretical rather than practical - at least until he entered the Kingdom.  My impression is that he is in Saudi Arabia, probably in AlKhobar.  If so, he's probably subject to similar restrictions on travel in the Kingdom. 

In the interest of fairness a couple of points.  And it's very important that all who follow news on these cases keep these two points in mind.

First, this post is based on a newspaper article.  It is not an official statement issued by the Public Prosecutor or any other official body in Bahrain.  Reports in the press are not always complete or accurate.  "Informed sources" often aren't. And note that AW's article seems to be based on a single source.   

Second,  individuals named in this post (either directly as in the case of Mr. AlSanea or others by their titles) may have been accused of wrongdoing.  However, at this point, there have been no convictions by any competent courts of any criminal or civil offenses.  And it is only the courts that are competent to issue such judgments.

Adnan Yousif Predicts Banks May Recover 60% on AlGosaibi and Saad Loans

Zawya Dow Jones interview with Adnan Yousif Monday on the sidelines of an Abu Dhabi conference.

1. Anticipates 60% recovery as both groups have assets.
2. Arab banks hold the largest share in the loans estimated as we've heard before at about US$20 billion.
3. Arab banks have "turned the page" on the two Groups through taking sufficient provisions.

He also commented on Dubai World situation saying that the lenders were primarily Emirati and international banks.  Not much exposure among other Arab banks.

With respect to loans to the Government of Dubai, he said the problems were not of inability to pay but rather temporary cashflow problems which will be overcome.

For those who don't know, Adnan is Chairman of the Board of the Union of Arab Banks as well as President/CEO of the AlBaraka Group.  He and his brothers (who use the surname Abdul Malik) are among the region's distinguished bankers.

British Banks Negotiating With Saad and AlGosaibi

Okaz quotes the Lord Mayor of London, Nick Anstee not Boris, as saying that some British banks were in negotiations with Saad and AlGosaibi Groups over the settlement of outstanding debts.   He wouldn't name the banks nor the amounts involved.   But said that his country hoped for a speedy settlement.  The British banks should proceed in a just manner with the two groups and other banks so that the investigation of all of the documents used to obtain the loans could proceed.

His remarks were made during a visit to the Amir Muhammad bin Fahd University in Al-Dammam.

Having read the 5 February submission to the Supreme Court of New York, all I can say is "الله معهم".

لا تدع زوج ابنتك يقود سيارة عائلتك

AlBilad's take on the AlGosaibi/Maan Al Sanea issue.

Interestingly, the article gives the name of the former CEO of The International Banking Corporation but not the name of the son in law.   Much of the article is a walk through of main points from the Ernst & Young article.

Awal Bank – Hibis Europe 2009 Investigative Report

This post presents the findings of the Hibis Europe entitled "Report to the Public Prosecutor Bahrain Review of Awal Bank" dated 6 August 2009 (the "Report").

The Hibis Report is contained in the 5 February 2010 filing by Ahmad Hamad AlGosaibi & Brother's counsel and is available at the Supreme Court of New York's website (http://iapps.courts.state.ny.us/webcivil/FCASMain). All the electronic filings in this case can be accessed through that website using the Case Index Number 601650/2009 MASHREQBANK PSC vs. AL GOSAIBI, AHMED HAMAD.   The Report is Exhibit 11 in Document #83.  If you initially have difficulties at the SCNY website, keep trying.  The site appears to be somewhat temperamental.

 

As I noted in my post about the Ernst and Young Report on The International Banking Corporation, I have no independent way to verify that this is indeed a true and correct copy of the Report except for the sworn testimony of the counsel of Ahmad Hamad AlGosaibi. This caveat should not be read as implying any lack of faith in his certification, but merely as a factual statement of the limitations of my knowledge.

 

As before I will quote from the report and make some comments based on the assumption that this is the Hibis Report and that its conclusions are accurate. 

A bit of housekeeping.  Paragraphs and pages in the Report filed with the SCNY do not bear numbers. I have numbered the pages starting from the "INTRODUCTION SECTION". On that basis the Report comprises 47 pages.  In some cases I have redacted the names of staff at AB.   You should also be aware that the Report also includes some excerpts of interviews Hibis conducted with senior managers of Awal Bank.  You might want to read the report itself to see those as I have not transcribed them here.  And it's good practice to take a look at the original sources and not solely rely on tafsir.

 

The report begins with a summary and then a more detailed discussion of eight cases.

1. Page 1 and Page 3 : "Awal Bank is managed on a day to day basis by Maan Al Sanea, who is based in AlKhobar in Saudi Arabia. Al Sanea operates with an autocratic and dictatorial management style suppressing any form of entrepreneurial spirit. Maan Al Sanea makes the decisions relating to any and all transactions that take place at Awal Bank; for example the Chief Executive Officer can only authorize payments of under BDH 12,000." 
2. Page 3 "Many of Awal's transactions with third parties involve entities owned by the AlGosaibi family, such as The International Banking Corporation [TIBC], AlGosaibi Trading Services [ATS} and AlGosaibi Money Exchange [ALGME]." 
3. Page 3: Summary of Findings. "In June 2009 Hibis Europe Limited [Hibis] was retained by the Central Bank of Bahrain [CBB] to conduct a review of the Awal Banking operation. Following the review Hibis prepared eight Evidence Case Files outlining the various criminal and regulatory breaches. The supporting evidence has been obtained as a result of reviewing bank records, recovering data from the bank records and interviews with bank employees. There are many other transactions at the bank that we have not yet reviewed." 
4. Page 3: "Evidence Case Files. For the purposes of this summary file, each identified criminal offense and regulatory breach has been catalogued and exhibited separately in a series of Evidence Case Files- Volumes 1 to 8."  
5. AA: These include: Evidence Case File 1 Fraudulent Land Deals; ECF 2 Foreign Exchange Transactions with ALGME; ECF 3 Redacted (However, the case diagram on page 26 remains. It is labeled "Money Laundering"); ECF 4 Fraudulent Foreign Exchange Deal with SAAD Group, ECF 5 Unsupported Foreign Exchange Deal, ECF 6 (Unlabeled, but detailed later in the report as breach of trust in accepting a deposit); ECF 7 Letters of Credit and ECF 8 Regulatory Issues. 
6. Page 4 "Hibis has identified approximately US$2 billion of suspicious and fraudulent transactions involving criminal offenses and regulatory breaches." 
7. Page 4 "Hibis would like to point out that all the evidence that we have gathered indicates that the Chairman of Awal Bank, Maan Al Sanea, is the central figure in the conspiracy and the main beneficiary of the frauds. Al Sanea's management style has allowed him to control all of the transactions at the bank and use the senior management of the bank to assist him in these frauds." 
8. Page 4: "The common theme that Hibis has seen for most of the frauds discovered and investigated to date is that AlGosaibi assets have been used to the benefit of Maan Al Sanea. Examples of this include land in the name of AlGosaibi being used as collateral to create a profit for Maan Al Sanea through fictitious land deal and the profit for these deals being transferred from ALGME to Awal Bank when the bank is losing money. It is the opinion of Hibis that Maan AlSanea has either disadvantaged the AlGosaibi family for his own personal benefit or used their resources to benefit Awal Bank." 
9. Page 4: "As a result of the preliminary 20 day review completed by Hibis it is our opinion and proven beyond reasonable doubt that senior management of Awal Bank have colluded and conspired together to commit criminal acts and significant breaches of banking regulations and CBB Law." 
10. Page 5: "New Finding. At the time of preparing the Evidence Case Files evidence allegations were made that on the 26^th and 27^th May 2009 all the Commercial Loan files were removed from Awal Bank and sent to the Chairman's office. At this time, Awal Bank was in serious financial trouble and it appears the Chairman wanted the documentation removed from the bank and although senior management were advised against it they allowed the complete files to be removed." 
11. Page 6: "Hibis believes the removal of these files was a breach of CBB law and was done with the objective of removing evidence of a fraud." 
12. Page 6: "In 2007 and 2008 Awal Bank made about 50 commercial loans to entities in Saudi Arabia. All the loans were arranged by the Chairman, Maan Al Sanea, and no one at Awal Bank was involved in meeting or communicating with the alleged "borrowers". Hibis has not investigated these loans but are very suspicious of who the real beneficiaries are. At the end of 2008 these commercial loans were paid up or converted in to the land deals that a reported in Evidence Case File 1." 
13. Page 12: Evidence Case File 1. "The investments in land shown on the Awal balance sheet (AA: US$1.5 billion) are the result of 8 unusual transactions which were recorded from 2008-2009. Seven of the transactions are supported instructions from Maan Al Sanea or his representative from the Saad Group." 
14. Page 13: "Hibis believes that Maan Al Sanea does not in fact own the properties that are described in Awal bank's documentation and that the fair value of the properties is far less that what is on the Awal balance sheet and the figures have been grossly inflated." "Hibis believes that the USD$200 million of reported profits represents False Accounting on behalf of Awal Bank". "Hibis believes that Maan Al Sanea is not entitled to USD$ 461 million nor the USD$ 543 million of cash and assets transferred to him as a result of these land deals." 
15. Pages 15 -16: Evidence Case File 2 "Awal anticipated substantial losses for the year end of 2008, engaged in the transfer of profits from ALGME to Awal through the use of fraudulent FX transactions. Identified sixty transactions entered on the records of Awal Bank that were entered after the event. All positions closed during 2008 and 2009 resulted in Awal making a profit and ALGME being disadvantaged". 
16. Page 20: "To conduct 60 foreign exchange transactions where one party always wins and the other party always loses is not possible and is against the laws of probability. The backdated foreign exchange transactions have been used to justify the transfer of profits from ALGME to Awal." 
17. Pages 22- 26 Evidence Case File 3. Redacted but from Page 26 apparently involving an allegation of money laundering. 
18. Page 27: Evidence Case File 4. "The purpose of preparing this Evidence Case File 4 – Foreign Exchange Deal with SAAD Group is to illustrate is to describe how false accounting was used to treat three deposits totaling USD$44 million on 21^st and 23^rd April 2009 from Singularis Holdings as a Foreign Exchange profit in May 2009." 
19. Page 30: Evidence Case File 5: "The purpose of preparing this Evidence Case File 5 – Unsupported FX deals between Awal & ALGME is to outline an allegation made by an employee of Awal Bank [name redacted by AA] who is employed as an FX Trader with Awal. [Name redacted] alleges that Awal Bank entered in to an unsupported Foreign Exchange Deal for GBP 60 million. This allegation is supported by his colleague [name redacted by AA]. "
20. Page 40: Evidence Case File 6. "The pending liquidity crisis was identified and known to Awal and the CBB aat the time that the first deposit was taken from [name redacted for filing]. While the investigation has not identified evidence of intent to defraud [name redacted for filing] by knowingly entering into a transaction that the bank might be able to honour, the issue of a Breach of Trust arises, given the extent of the liquidity crisis known within Awal Bank from May 12^th 2009 onwards." AA: This ECF relates to two US$1 million deposits taken by Awal – one on 14^th May and the other on 21^st May 2009. 
21. Page 41: Evidence Case File 7 – Letters of Credit. "To date Hibis has not discovered fraud in the Letters of Credit transactions. The evidence is that the Letter of Credit transactions have been structured to the disadvantage of AlGosaibi Trading Services [ATS] and to the advantage of Awal Bank." 
22. Page 44: "The preliminary analysis of these transactions conducted by Hibis estimates that Awal has obtained an unjustified benefit of more than USD$20 million during 2007, 2008, and 2009. Further analysis has yet to be done to establish if fraud has taken place."   AA:  This refers to Point #21.
23. Page 45: Evidence Case File 8 – Regulatory Breaches. "Within the limited time allotted to this Phase 1 review "Quick Wins" Hibis Europe Limited [Hibis] have established the following: Misleading the CBB about cash flow on the 14^th May 2009; The Excom approved land deals after the transaction had been completed by the Chairman, Maan Al Sanea; Shredding of Awal documentation by [name redacted by AA], Chief Financial Officer on the 25^th June 2009; the role of Awal Bank's Chief Internal Auditor in [personal pronoun redacted] employment at TIBC."
    

Comments:

Here are some personal reactions to the Report which are based upon the assumption that it is Hibis' report and accurately reflects the situation at Awal Bank.

1. This Report differs from that issued by Ernst and Young in that it alleges criminal activity and fraud. (Note  that word "alleges".  An allegation is a charge not a conviction or judicial proof).  
2. I was surprised to read that the CEO of the bank had such a modest payment approval limit, i.e. BD 12,000.  
3. Assuming the accuracy of this Report and the E&Y Report, I'm also wondering what the reaction of external auditors including CBB examiners was to what appear in both the case of Awal Bank and TIBC to be a high level of related party transactions. Or were the relations of these parties so cleverly disguised so that they were hidden? If these allegations are true, then a rather sophisticated mechanism would have been required to respond to auditor confirmations to avoid creating suspicion. But in that case how were E&Y and Hibis able to penetrate the veil in rather short time? One would expect external auditors to spend more than 21 days in an institution during the entire year. And for CBB examiners to spend at least that time. 
4. Was it that when the cash ran out that it became a case of staff speaking up?