AlGosaibi v Maan AlSanea - Fortis Bank v ADIB - Fortis Drops "Structured" Bombshell

 

 Warning:  Ethics Depicted in Picture May be Smaller Than They Appear

In  my earlier post analyzing the Awal Bank L/C I spent a bit of time speculating on the transaction as a disguised money on money loan and the potential role of Bunge in the second leg, the purchase on a spot basis of the commodity back from from AlGosaibi/Awal Bank.  The necessary step to get funds to AlGosaibi for the loan.

As they say (and they are right), reading is fundamental.   I could have saved a bit of time by looking a bit closer at two documents I had printed out.  

Today having posted on the BNPP lawsuit against ADIB, I decided to finish off the ADIB topic by commenting on the two latest submissions by ADIB and Fortis' counsel in the Fortis Case (NY Supreme Court Reference #601948/2009) - Documents #78 and #79.   Documents I had printed out on 9 July!

Right there on the first page of the 9 June 2010 letter from George O. Richardson, III, Esq.  of Sullivan & Worcester, Fortis' counsel, was the revelation that Bunge had informed ADIB of the precise nature of the transaction via an email prior dated 7 April 2008 - that is, prior to the date  ADIB agreed to confirm Awal Bank's letter of credit.  ADIB's SWIFT confirmation to Fortis was sent 16 June 2008  as per Document #24 Exhibit #2.  Some two or so months later.   By the way, that document (not the Bunge 7 April email but the copy of  SWIFT confirmation of the LC) was submitted by ADIB as part of Nuhad Saliba's Declaration.  Ms. Saliba is Head of the New Countries and Global Wholesale Banking Department at ADIB.

The Bunge email was sent by Rachel Wong of Bunge SA Geneva to Naeem Ishaque, Manager Financial Institutions at ADIB.  There are a variety of copy parties but their affiliations are not clear from the message.  The email is Exhibit #1 to Exhibit A in the Richardson Letter (Document #79).

So what did the Bunge email say?

"Section 15. Structure  This is a structured transaction whereby Discounting Bank [AA:  Fortis though at this point Fortis name is not mentioned, perhaps because Bunge was still shopping the second confirmation] is required to discount or fund the Instrument in favor of the Beneficiary once the documents are deemed in compliance at its counter, Applicant [AA:  AlGosaibi Trading] will on-sell the Goods to another Bunge affiliated company ("Bunge Buyer").  Once Beneficiary receives the discounted proceeds under the Instrument, Bunge Buyer will effect sight payment to the Applicant immediately.  Applicant will enjoy the cash financing during the Tenor [AA:  the 360 days from acceptance of documents until payment] before repaying the Issuing Bank [AA:  Awal Bank] on maturity of the Instrument."

This effectively demolishes ADIB's argument that it thought this was a trade transaction and that somehow it was tricked and so inadvertently and innocently defrauded.   ADIB is clearly an active and knowing participant in the transaction which equally clearly is a "money on money" loan.  Some might say that transactions like this are  a fraud against the Shari'ah. (With respect to AA's position please see the last sentence).

It also raises a very fundamental question about ADIB's earlier legal arguments in which it and its counsel claim that the bank did not see this was a structured transaction and had no inkling that it was participating in a money on money financing.   

ADIB's learned counsel at Dewey & LeBoeuf have set a high standard of knowledge in their previous pleadings.  They asserted that because Fortis Singapore advised a L/C for the same goods and in fact the same documents, Fortis Netherlands - half way across the world - was deemed to know this with respect to the Awal LC  it confirmed. 

Therefore, it seems highly appropriate and fair to apply D&LB's standard to ADIB with even more rigor because ADIB operates from a single country.  Thus with the greater proximity one would no doubt expect that the knowledge at ADIB permeated every level of that firm, including the chap who makes the tea.

Some might also be tempted to remark that there is a repetitive pattern here with "Islamic" banks of much less than كلام شريف  in their legal pleadings as in the case of TID v BLOM.

Heeding the admonition of Imam AlGhazali, AA will remain silent on all these points.

AlGosaibi v Maan AlSanea - BNPP versus Abu Dhabi Islamic Bank in re TIBC L/Cs

In discussing the Fortis lawsuit against ADIB, I mentioned that ADIB was also a defendant in a lawsuit brought by BNP Paribas' "Full Commercial" Branch in the Kingdom of Bahrain.

The relevant documents can be found at the NY Supreme Court Website http://iapps.courts.state.ny.us/webcivil/FCASMain  under Case # 603365/2009.   Or more precisely one document as all that is posted so far is the complaint by BNPP - missing what I'll bet ares some very interesting attachments.  Unclear why this is.  Especially since the submission in question dates from November 2009.

Here are the facts from the material posted on the NY Supreme Court's website:

1. In March 2009, ADIB issued six irrevocable reimbursement undertakings ("IRU's") in favor of BNPP to induce it to confirm 6 "commercial" letters of credit issued by The International Banking Corporation in favor of Dawnay Day and Co for the Account of AlGosaibi Trading Company.
2. BNPP confirmed TIBC's letters of credit and then upon presentation of the documents accepted the documents and the time drafts presented.  
3. On an unspecified date, BNPP claimed reimbursement of some US$44,875,000 from ADIB.  Presumably, the maturity date of the accepted time drafts.
4. ADIB refused to pay.
5. In September 2009 (after acceptance of the drafts by BNPP) ADIB obtained a judgment in Bahrain Court enjoining ADIB from making any payment.  
6. BNPP is seeking to have the Court issue a temporary restraining order preventing ADIB from moving assets (presumably balances in its correspondent accounts in NY) from the USA.
7. Its claim is for the principal of the payment (US$44,875,000) plus interest, attorney's fees and costs.

Now to some comments.

1. It's not clear to me why there isn't more precision in documents sent to the Court with exact dates when events took place, additional details of the individual transactions -  currency, goods, tenor, etc.  Perhaps time was of the essence and BNPP's lawyers wanted to file quickly to block the potential movement of assets outside of the USA. 
2. Dawnay Day was a very large "financial firm" with a commodities trading wing which ran into some "financial difficulties" as a result, I believe, of the global financial crisis (small "g" as always).  It was also an active participant in structured "Islamic" trade transactions as described in my post about Fortis.  It had at least one subsidiary Condor Trading which it uses so that the "purchaser" and "seller" of the goods are not the same party.  
3. It appears (but the documentary record here is very slim so this is an educated guess) to be a mirror of the Fortis transaction.  The TIBC L/Cs are one half of the "Islamic" structure:  the purchase on deferred terms.  For TIBC/AlGosaibi to actually get the funds a spot sale on a cash basis is required.  That could have been with Condor with TIBC Bank acting as the "arranger" of the transaction.   That is probably the most likely scenario and the one that I think happened - but again note this is an educated (or uneducated) guess.
4. Since discovery in other legal cases has resulted in the publication of  some details of at least the US - domiciled US dollar accounts of Awal Bank and TIBC, clever boots might be looking through that material for incoming credits around the time of the negotiation/acceptance (but not the payment date) of the first leg letters of credit. That is in the Fortis case the Awal Bank LC confirmed by Fortis under ADIB's IRU.  And in the BNPP case, the letters of credit issued by TIBC and confirmed by BNPP against ADIB's IRUs.  If these are indeed disguised clean money on money loans, the second leg (the spot sale) should have occurred around the same time.  The amounts would not necessarily be the same as interest on the loan might be built into the price on the first leg (the deferred payment).
5. But one key additional bit of information.  If we look at the Fortis Case (NY Supreme Court Reference 601948/2009 Exhibit #2 Document #34 Amended Declaration of Qays Zubi, we note two things.  First, TIBC LC's seem to have been denominated in Euros not US.  Second, a restraining order has only been obtained for four L/Cs not six as mentioned in BNPP's complaint.  The total of the L/C's mentioned in the Qays Zubi Declaration are some Euros 18,243,975.  Clearly, that does not equal US$44,875,000.  Two L/Cs are "missing".  Does that give Fortis a legal "wedge"?
6. We also learn that the payment dates on the TIBC L/Cs were between 22 June and 24 June.  You'll also notice that the certified translation has an error in that it shows the last LC as due March 23,2009.  The Arabic clearly states (in "Western" numbers not Arabic!!!) 23 June. 
7. The central point of BNPP's claim (like that of Fortis) is that under a documentary (aka commercial) letter of credit the bank's obligation to pay is independent of the commercial contract.  Its obligation is set by the terms of the letter of credit.  Compliance with the documentary requirements of the letter of credit establishes the obligation.  
8. To overcome the rather substantial amount of case law and precedents in favor of BNPP's legal position, I believe ADIB has to prove two things. (a)  Fraud in the inception.    (b) Involvement of BNPP in that fraud.  That is a a tough row to hoe as the saying goes.  

AlGosaibi v Maan AlSanea - Legal Case Summary and Status

Citi, the Delegate on Saad's Golden Belt Sukuk 1, has posted a notice on the BSE listing the legal cases  it is aware of involving Mr. Al Sanea and his companies as well as their current status.

Besides conveying useful information, the Delegate is putting Golden Belt Certificateholders on notice that other creditors of Mr. AlSanea and his companies are pursuing legal claims.  As long as Golden Belt Certificateholders are not, they are effectively in a junior position.

Why?

As I read the Delegate's last announcement, while a sufficient number of Certificateholders (more than 25%) have voted for Dissolution of the Trust, they have not indemnified the Delegate to its satisfaction.   That is, agreed to reimburse Citi for expenses.  Until that happens, the Delegate is not obligated to take the legal steps to dissolve the Trust, claim on the Repurchase Obligation of Saad Trading and Contracting, and in the event of non payment by STC pursue STC in Court.   Thus, the Certificateholders are effectively in a subordinate position against STC - they have an uncalled guarantee.  

The Delegate is doing this to cover its legal posterior.  In the event that the Certificateholders' recovery is adversely affected by failure to take action, the Delegate will have a legal defense that it has done all it  was obligated to do to protect their rights.

The thorny issue for Certificateholders is whether they agree to repay Citi for legal expenses involved in taking such actions.  Will the net recovery after the expenses be more than if they did not take action?

And this is I suppose as good a place as any to note that Mr. AlSanea still denies any improper or illegal behavior.

AlGosaibi v Maan AlSanea - Abu Dhabi Commercial Bank Sues Saad for US$32 Million

Asa Fitch over at The National reports that ADCB has filed suit in London against Saad Trading and Contracting over a default on a currency swap of US$32 million.

There's really not much to add on top of what's in the article.

AlGosaibi v Maan AlSanea - Fortis Bank versus ADIB - The Letter of Credit

See important additional information here on Bunge's role in transaction and ADIB's knowledge of the nature of the transaction.

As promised a look at the Letter of Credit ("L/C") issued by Awal Bank which Abu Dhabi Islamic Bank ("ADIB") advised and confirmed to Fortis Bank Netherlands.

The text of the L/C issued by ADIB through Fortis is Exhibit #2 to Document #24, the Declaration of Nuhaid Saliba dated 31 August 2009. Note Exhibit #1 is the text that Awal proposed to ADIB.  That of course is not the instrument on which Fortis relied and through which ADIB conveyed its irrevocable undertaking.  Exhibit #2 is the key document as ADIB is its author.

And just to be complete, as you'll recall, ADIB is asserting fraud as the basis for voiding its obligation but not fraudulent documents or fraudulent shipment or non shipment.  Most jurisdictions have held that if the documents comply with the terms of the L/C then the bank is obligated to pay.  The "fraud" defense is applicable only in very limited circumstances.  

These and other documents can be found at the NY Supreme Court Website http://iapps.courts.state.ny.us/webcivil/FCASMain  under Case # 601948/2009, 

Let's step through the details of the L/C.

1. Issue Date: 16 June 2008.
2. Expiry Date:  14 July 2008
3. Applicable Rules:  UCPURR = Uniform Customs and Practice for Documentary Credits (#600 of 2007) and Uniform Rules for Bank-to-Bank Reimbursement under Documentary Credits (#725 of 2007).  The former sets forth the rules for the handling of L/Cs.  The latter the rules for banks to reimburse or pay one another   These are pretty much the standard governing principles for commercial letters of credit (aka "documentary credits").
4. Issuing Bank:  Awal Bank BSC Bahrain
5. Applicant - AlGosaibi Trading Services Hamilton Bermuda
6. Beneficiary - Bunge SA Switzerland
7. Currency/Amount:  US$39.999,996.52
8. Payment:  360 Days after acceptance of documents.
9. Port Loading:  Any port in Brazil.
10. Final Destination: Any port in Taiwan and/or Spain.
11. Latest Date of Shipment:  30 June 2008.
12. Goods Description:  (a) 52,686.31 MTS of Brazilian soybeans, packing in bulk at US$564.90 Per MT CFR Taiwan (b) 30,000.00 MTS of Brazilian maize SLM packing in bulk at US$341.25 per MT CFR Spain.  (Note: CFR = Cost and Freight)
13. Documents Required:  (a) One copy of commercial invoice.  (b) One photocopy of the bill of lading. (c) One copy of beneficiary's certificate stating that the copies of shipping documents provided are true and correct copies of the originals.  That the original bills of lading relating to the shipment should be sent to the Notify Party stated in the B/Ls or to the agent at destination and that the goods described should be discharged at the port state in the B/Ls.

Additional Conditions:

1. Third party documents except drafts and invoices acceptable.
2. Documents showing one or more third party (ies) as shipper and/or exporter are acceptable.
3. Fax or photocopy of documents are acceptable.  Documents issued before LC issuance (including B/L) are acceptable.
4. Documents acceptable inspite of any and all discrepancies with exception that invoice value drawn may not exceed the maximum letter of credit value and the letter of credit may not be expired.
5. Typing mistakes do not constitute a discrepancies.
6. Late presentation of documents is accepted on the condition that documents are presented within LC validity.
7. Bill of lading presenting a greater quantity/amount than shown on invoice is acceptable.
8. Documents shall be acceptable as presented.
9. Abu Dhabi Islamic Bank Abu Dhabi UAE is authorise to confirm this L/C and advise it to Fortis Bank Rotterdam.
10. Fortis Bank Rotterdam is authorised to confirm this L/C at the request and for the account of the beneficiary.  The confirmation of the first advising bank, that is Abu Dhabi Islamic Bank, Abu Dhabi UAE covers the obligation of the issuing bank, that is Awal Bank BSC, Manama and the confirmation of the Fortis Bank (Nederland) NV Rotterdam only covers the obligations of the first advising bank, Abu Dhabi Islamic Bank, Abu Dhabi UAE.
11. Charges:  ADIB's confirmation charge (a cool US$500,000) for Awal.  Fortis' charge (not specified here) for Bunge.

Now to the tafsir.

First, as is pretty clear from the text of the L/C this is not a typical documentary letter of credit.  It is closer to a standby letter of credit - which you can think of as a guarantee of payment.

1. At no time do any of the banks involved have an original bill of lading in their possession.  An original bill of lading is generally required by a shipping company to release goods it has shipped.    Having the B/L provides a measure of collateral security, if the applicant does not pay.  Now in a transaction in which the bank is giving its obligation to pay the beneficiary in the future (in this case 360 days after it accepts the documents) having the B/L only provides collateral comfort for a short period while it is at risk for the applicant or issuing bank's failure to pay.
2. In Additional Conditions #4, the issuing bank has explicitly waived all and any discrepancies in the documents except for the amount drawn under the credit and presentation within the L/C validity.  That means any other condition.  Hardly the stance that a party concerned with the underlying commercial transaction would take.  The power to refuse payment for discrepancies (in the documents) provides a way to enforce the terms of the contract on the seller. Giving this right up doesn't make a lot of commercial sense.
3. In Additional Conditions #7, B/Ls showing a larger quantity are acceptable.  Under UCP 600, for bulk commodities, a variation of +/- 5% is allowed (Article 30 (b)) unless prohibited.  5% of the amount shipped would be roughly US$2 million.  Would all of you out there who think that Bunge is going to ship another US$2 million worth of crops but not get paid for them, please raise your hands?  Didn't think I'd see any.  Of course there is no harm in this clause as it benefits the applicant.   But what is the commercial reason this would be included?  
4. A couple other conditions are worthy of mention.  As noted above, Additional Condition #1  allows third parties on the shipping documents.  Meaning the shipper need not be Bunge and the party receiving the goods need not be AlGosaibi.   Additional Condition #3 allows documents to be dated prior to the L/C issuance. Faxes of documents are acceptable.  Coupled with the earlier waiver of  all discrepancies except for payment amount and presentation within L/C validity, all this looks like setting up the conditions for document shopping.  That is, making it very very easy to find conforming documents from another trade transaction not involving the parties named in the L/C.  All one needs is access to documents and a photocopier.

Second, is there a commercial reason for such a structure?  Possibly but how likely?

1. The above conditions would be useful if both parties were engaged in rapid turnover trading.  Bunge strikes a deal with ATS at price X but finds another seller willing to sell at less than X.  Being able to substitute sellers/shippers allows Bunge to make an additional profit by buying the goods from this other party and delivering to ATS.  This condition allows ATS to sell the goods  to a third party, Buyer B, before it has taken possession by switching the delivery party.
2. But waiving the right to refuse to pay for any discrepancies could be problematical if ATS has on sold the goods as described to new Buyer B.   One would think Buyer B would have stipulated certain quantity and type of goods and reserve the right to refuse payments if these and other conditions that it required were not met.  Now perhaps Buyer B has waived these.  But what are the chances?  The goods are the commercial heart of the transaction.
3. On that score it might be more typical to see an inspection certificate (of the goods) particularly since a third party shipper might not be as reliable as Bunge. 
4. Now it's not unheard of that cargoes already at sea are sold (remember that documents issued prior to the L/C issuance date are acceptable).  But at that point, one should know the exact quantity of the goods and the identity of the parties.  And this could be incorporated into the L/C.  Now, I suppose the transaction could be taking place so quickly that speed was of the essence - a split second response required.  However, the documents submitted in the case indicate that ADIB cogitated for a while (though perhaps not long enough) before agreeing to the transaction.  And then it appears the transaction amount was increased after it had given an approval for a lower amount.  And so it had an opportunity like Proud Edward "tae think again".  Though to be fair, ADIB seems like Proud Edward to have thought again after "24 June" and not before.
5. Generally, transactions of this sort would be secured (from the intermediary buyer's perspective -- here ATS) by use of a transferable letter of credit (opened by the final buyer Buyer B in favor of ATS).  Or through a "back to back" L/C which is a particular favorite among many MENA banks though it is technically less sound from a protection perspective, including for the issuing/confirming banks of the second or "back to back" L/C.

Third, so what could be another reason for this structure?   To provide Awal and/or ATS financing.  But this requires a few bits more in the structure.

1. This L/C provides for a payment to Bunge 360 days from documentary acceptance.  At this point there has been no movement of funds.  Now it's not uncommon in such situations for the seller (Bunge in this case) to ask the confirming bank (Fortis) to make an immediate payment.  The bank would "buy" (discount) the acceptance for an amount less than its face value.  You can think of the difference as interest.  This could get the money to Bunge, though strictly speaking that's not necessary to get funding to ATS/Awal.  
2. If you reflect on the typical "Islamic" "trade" financing described above, you'll see that the ADIB L/C is the equivalent of the purchase of the goods on deferred payment basis.
3. Getting the funds to Awal/ATS requires the other half of the "Islamic" "trade" financing structure: the offsetting transaction the sale of the goods for spot settlement.  Such as sale could be either back to Bunge.  Or to a third party.  This may be a reason why ADIB's lawyers are pushing for further disclosure by Fortis to see if they are involved in this critical leg.
4. Just to close the Bunge circle.  The usual "Islamic" "trade" finance transaction keeps the deal "all in the family" so it's not inconceivable that they might have been involved.  If Bunge were involved, one would presume that it discounted the Fortis payment to use as the purchase price back from ATS/Awal - of course with a suitable commission for its trouble.   Note:  This is hypothetical.  I have no knowledge of Bunge being involved in the second leg. This discussion provides an illustration of how the transaction may have been structured.  Not that it was so structured.
5. Presumably, ATS did not hang on to the commodities with the intent of selling a year later.  Equally, it's unlikely that ATS has a "factory" in which to process the goods.  So the likely disposition of the goods is a sale.  If the goods were sold on a spot basis, then ATS/Awal have a one year loan due when the Fortis acceptance "matures" - irrespective whether Fortis has or has not discounted that obligation.
6. It's well known out there that commodity companies and brokers (including the one named in the TIBC  BNPP / ADIB legal dispute) specialize in providing "trade documents" for "Islamic" "trade" transactions that are really disguised financings.  Because Shari'ah Boards have become a bit more alert, many of these parties have established special purpose subsidiaries with completely different names so the buyers and sellers appear to be unrelated parties.   And have made presentations to  banks who wish to engage in "Islamic" "trade" transactions (or loans if you'd prefer) on how they  can help.
7. How does this work?  The financing bank arranges to acquire goods from Company A (Let's call it Dewey Night Company).  It then sells them to the Buyer (borrower if you will) on a deferred payment basis (the tenor of the loan) at original cost plus a mark-up.  At the same time it offers to sell the goods spot for the Buyer (borrower) to another company (Let's call that one "Eagle" Trading Company).  Usually the Murabaha contract (for this is a Murabaha trade transaction not a loan!) specifies that the spot sale cannot be for less than the original cost. The helpful commodity firm or broker provides all the required documents for the two sales   The mark-up miraculously just happens to equate to the interest on the loan.  Proving that in some forms of "Islam" miracles are indeed common. The commodity company makes a fee for its role - just as the innkeeper makes a profit for renting you a room for a night.  Documents are available for the Shari'ah Board to review if it wants.  These on their face document a trade transaction.  It seems everyone is happy.  و الله اعلم
8. And if you'd like to place a deposit with a bank, you can do the reverse transaction.

Fourth, how does this transaction differ from a typical "Islamic" "trade" transaction?

1. The ultimate financing bank in the transaction is ADIB.  While it is true that it does not advance funds, it is ultimately on the hook if Awal does not pay.  Under its confirmation it is obligated to pay Fortis if Fortis claims within the validity of the L/C and complies with the miniscule conditions provided.
2. For this transaction it only requires half of the set of documents.  A bit less financial engineering.
3. More importantly what is in effect a guarantee or a standby L/C is treated as a commercial L/C with a lower capital charge under Basel II.  Thus, ADIB's risk adjusted ROE/ROA is higher.  And more importantly, its CAR is higher.

Fifth, how credible is ADIB's sudden charge that something was wrong with the transaction?  That there was potential for fraud.

1. First, to accept ADIB's contention, one has to begin by assuming that ADIB has a very limited understanding of letters of credit and UCP600.  Or that the L/C Department personnel assigned to this transaction were incompetent.
2. Second, one also has to assume that ADIB is rather new to structured transactions.  However, since AA has seen ADIB's "Islamic" "trade" documentation of various flavors, at least for AA accepting that is more than a "bit of a stretch".
3. Third, the documents submitted by lawyers in this case indicate what would appear to be scrutiny of the transaction by ADIB's credit department.  If this transaction "slipped by" and wasn't recognized as a "structured" transaction - a payment guarantee and not a trade transaction - then one has to draw some rather unfortunate conclusions about credit analysis and risk management at that bank.
4. Rather what seems to have happened is that ADIB decided for about 500,000 good reasons (the US$ equivalent of the confirmation commission it received from Awal) to go forward with a structured transaction.   One that had some CAR advantages.  
5. Now that Awal has hit the wall, in what sadly seems to be a tradition of some "Islamic" banks (paging TID in re BLOM)  it's looking for a legal way out. (Paging Abu Yusuf).  At least in this case, it doesn't appear they're resorting to spurious arguments regarding the Shari'ah.
6. Finally most of what is labeled "Islamic" "trade" finance  is structured with manufactured transactions   All the parties (save perhaps for the Shari'ah Boards) know that these transactions are structured.   That they are really money on money loans, dressed up in thaubs and ghutras to disguise the reality.  For ADIB to suddenly claim ignorance of this is well beyond the plausible. 

A bit later I'll post some more comments on this case.  In the interim, you can look at the NY Supreme Court website.  Documents #78 and #79 contain letters by the two sides recapping the main points of their arguments.

AlGosaibi v Maan AlSanea - Saudi Court Rejects AHAB Suit Against AlSanea

AlQabas reports that the Saudi Administrative Court for the Eastern Province rejected a lawsuit raised by Ahmad Hamad AlGosaibi and Brothers Company ("AHAB") against Mr. Maan Al Sanea citing lack of jurisdiction and competence to hear the case.

In the case AHAB was seeking 43 million shares of SAMBA plus earnings thereon of some SAR1 billion (US$266.6 million) which it claims are in Mr. AlSanea's possession but which it asserts belong to it.

AlGosaibi v Maan AlSanea - Fortis Bank v Abu Dhabi Islamic Bank In Re Awal Bank

Asa Fitch over at The National has an interesting article on Fortis Bank's suit against ADIB for some US$40 million for ADIB's failure to honor its confirmation of an Awal Bank LC which was the basis for Fortis adding its own confirmation.  

The underlying transaction appears to one of those fairly common "Islamic" transactions - a loan disguised as a commodity purchase transaction carefully to  meet "Shari'ah compliant" banking "principles".  Yes, those quotations marks mean exactly what you think they do.

ADIB is asserting fraud in the inception by Mr. AlSanea as its defense against payment to Fortis.

Where have I heard that legal defense before?

And this is as good place as any to note that Mr. AlSanea denies any wrongdoing.

In any case, I'll post a bit more on this in a day or two once I regain my composure.  I can't stop laughing.

I thought the letters of credit that Ahli Bank Kuwait issued for TIBC were a howl.   ADIB's "letter of credit" is beyond that.  

As an extra bonus for your patience, I'll also post on BNPP Bahrain's suit against ADIB for some US$44.9 million involving letters of credit issued by TIBC that BNPP confirmed against ADIB's irrevocable undertaking.  

AlGosaibi v Maan AlSanea – AlGosaibi’s Strategy with Creditors

In light of my recent post speculating that AlGosaibi was being pressured to accept Grant Thornton's "peace proposal" for a commercial settlement, this is probably an opportune time to take a close look at AlGosaibi's legal strategy. From a document concerned with the recent lawsuit by Trowers and Hamlins that I've seen, it's possible to reconstruct that strategy in more detail and to use AlGosaibi's "voice" in doing so.  Or at least it voice as channeled by US counsel.

Before we do that, a caveat.

What I'm about to present is AlGosaibi's side of the story. As you'd expect AlGosaibi's account is highly favorable to themselves as are statements made by their counsel – who they have hired to represent them.

Nothing surprising here.  This is the (adversarial) nature of the US legal system.  Long ago, AA was called for jury duty in a personal injury case. After the jury had been selected, the judge took us aside. He said that while each counsel had claimed that his sole purpose and desire was to obtain justice, this was not the case.  Each counsel was working for its client's interests, not for justice. And that, recognizing this fact, we should be duly skeptical of any statements made. Such is also the case here. It applies to all parties to the case: AlGosaibi, AlSanea, T&H, TIBC, Awal Bank and their respective management and officers as well as the counsel they have hired to represent them.

Now to AlGosaibi's strategy and rationale.

First, AlGosaibi's central thesis is that TIBC was "throughout its active life a criminal instrumentality operated apparently for the principal purpose of defrauding our client and third parties, incurring massive fraudulent debt in our clients' name and siphoning the proceeds to Maan AlSanea and his Saad Group of companies". In this regard they assert that TIBC was formed without AHAB's knowledge or authorization and that the pledge of shares which is listed as the source of equity for TIBC is not "legitimate." And that they do not "accept any debt owed to TIBC or the validity of any claims whatsoever asserted by TIBC" against AHAB. As part of this thesis, it's important to recall that AHAB also claim that the Money Exchange (through which the proceeds of alleged fraudulent commercial loans were passed) was also under the control of Mr. AlSanea and his confederates.  This thesis - that AlGosaibi itself was the victim of fraud along with the creditors - would also the basis for a less than 100% payback of the loans as I've noted before.  At least by AlGosaibi.

This is also the appropriate place to note that Mr. AlSanea and various other parties accused directly and indirectly by AHAB vigorously deny any wrongdoing.

Second, as a consequence of this (alleged) fraud, the proper response of T&H (and any creditor) is to join with AlGosaibi in pursuing the culprits and not the innocent victim - AlGosaibi.

Why?

"Litigating intercompany positions (e.g., TIBC and AHAB) will take years, if not decades and that such litigation only depletes resources that will be needed to effect a workable commercial settlement". Co-operation on the other hand "avoids wasteful and ineffectual expenditures and offers a potential for TIBC and its creditors to benefit from AHAB's recoveries and its potential commercial resolutions of claims with third parties." 

AHAB's counsel notes that even though AHAB rejects any TIBC claims against itself, it nonetheless has proposed that TIBC's creditors be included alongside its own in any settlement by a "substantive consolidation of all the creditor positions and the creation of a single fund". And that AHAB is creating a "fighting fund" of some US$150 million to use to pursue legal cases against Mr. AlSanea – which would relieve a burden on TIBC's creditors who no doubt would be reluctant to provide substantial funding for such an effort.

As well, it comments that commencement of legal action by T&H against AHAB could jeopardize its good will. And that a further danger to TIBC creditors is that any such legal action will require the presentation of original documents, which AHAB counsel asserts could be difficult to produce. And if produced, AHAB and its counsel are confident that the signatures thereon could be successfully challenged as forgeries.

Counsel also notes that it intends to raise these points with counsel for TIBC creditors, Clifford Chance Dubai.

The fact that T&H launched its suit roughly three weeks after this correspondence was sent indicates that it was not persuaded.

There are a couple of other points in the document - worthy of note and comment:

1. AHAB asserts that Saudi British Bank has refused to turn over to AHAB certain records pertaining to AHAB - which it asserts Mr;. AlSanea has removed from the Company and taken under his personal control and which include those relating to  the underlying pledge of shares which serve as the basis for the equity in TIBC. This is particularly perplexing. Why would SBB not provide duplicates of records to its client of record?  Or in other words, what would be the basis why SBB would refuse to turn over to its client duplicates of certain records pertaining to that client's business with it?
2. That AHAB counsel had proposed an information exchange protocol (apparently in March) under which AHAB and T&H would share information but with the stipulation that neither party would use the information so obtained in legal action against the other. It's perfectly understandable that T&H would not accept this. As the Central Bank appointed Administrator, it has a fiduciary duty to pursue claims against all debtors registered in TIBC's books. And certainly wouldn't want to expose itself to a TIBC creditor later suing it for failure to pursue one of the debtors because it unilaterally decided not to. The better path is to raise the claim.  Then let a Court determine whether the debtor has a defense against payment. This was, I am told, the tactic used in the liquidation of Petra Bank Jordan في الوقت المدثور . 

Stay tuned.  In a day or so, I'll post AlGosaibi's reaction to T&H's apparent rejection of its proposal for co-operation by looking at AHAB's 15 June submission to the NY Bankruptcy Court.

AlGosaibi v Maan AlSanea - Grant Thornton to Broker "Peace" Deal? Authorities Supporing?

Frank Kane over at The National reports that Grant Thornton is trying to broker a settlement between AHAB and Mr. AlSanea.  Under what is described as the proposed deal, the parties would cease litigation against one another and pool assets to repay outstanding debt.  The stated goal is to maximize creditor recovery.  First, by eliminating the costs of litigation which no doubt would be considerable.  Second, and perhaps, more importantly, shortening the time frame until ultimate payment. 

Acceptance of the proposed plan would also achieve at least four other highly convenient goals:

1. It probably closes the book on allegations of financial crimes - which would no doubt be a comfort to any party who may have committed a crime.   In this regard, it should be noted that not a single party to the dispute has admitted to any wrongdoing.  And all aver they are as pure as newly fallen snow.  Perhaps, the proverbial pristine white snows of Saudi Arabia. 
2. It could relieve jurisdictions of the need to engage in complicated, messy and uncertain criminal prosecutions.
3. It will reduce (but not eliminate) the current intense scrutiny and reputation bashing of regulators and their countries - an unwelcome event fed largely by continuing press reports of the feud.
4. It would settle the dispute between two very important Saudi parties via a compromise .  Peace among the tribes rather than a victory for one side over the other.  Well consonant with Saudi tradition.

As the Cayman Islands' Court appointed liquidator for Mr. Al Sanea's Cayman companies,  GT's sense of fiduciary duty is clearly the motive for devising the settlement plan.   

As outlined above the plan would benefit other parties.  And they might well be expected to promote its acceptance.

Since the beginning of the crisis, Mr. AlSanea has suffered  heavy personal opprobrium in the press despite his repeated denial of any wrongdoing.  He and his firms have borne the brunt of legal actions filed.  And thus he may be well incentivized to deal.  

AHAB has until recently had a kinder fate.  And may therefore need a bit of prodding.   As well, they are perhaps the key to acceptance given the nature and vehemence of their accusations against Mr. AlSanea.  If they will sign the deal, then it may be easier for Mr. AlSanea to agree-  particularly if as expected the deal will involve a removal of accusations.

That's why I wonder about the recent spate of litigation directed against AHAB.  

Could it be that certain authorities are attempting to put pressure on AHAB with the view of securing its acceptance?

You'll recall that in announcing its US$720 million lawsuit against TIBC on 16 June Trowers and Hamlins said it took the action "following referral of the claim by the Council of Ministers." Clearly a reference to the Saudi CoM.  No doubt, any proposed legal actions were vetted as well by Trowers and Hamlins with its employer, the Central Bank of Bahrain.   In both cases an official "green light" to proceed.

Then again this all may be coincidence, though I don't think so.  The affair has dragged on to long.  Each day it persists is highly inconvenient for important parties who no doubt feel that it's time to close the book and move on.

Bahrain Court Rules in Favor of Central Bank of Bahrain's Decision to Place Awal Bank in Administration

The CBB issued a press release noting that a Bahrain Court had issued a ruling supporting its decision to place Awal Bank in "administration".  The former Chairman (Mr. Al Sanea) had raised a court case challenging the CBB's action.

It's not clear from the press release or news items (which seem to be a mere transcription of the press release) whether this is the Court of First Instance (which I suspect) or a higher level.  If it is the Court of First Instance, Mr. AlSanea would of course have the right to an appeal. As well, if it is the Appeals Court.  Like American baseball, the Bahraini system gives each litigant three goes at bat - with the Cassation Court (Supreme Court) being the final one.  

I'm guessing that Mr. AlSanea may take another swing in the courts.  And here it's appropriate to remark that Mr. AlSanea still continues to deny any wrongdoing in the conduct of his business affairs.

The importance of the ruling to CBB is evident from the inclusion of quotes from three senior executives.  Their common focus on the CBB's actions to maintain the strength and reputation of the Bahrain banking sector no doubt reflects some concern over the market's perceptions of both. 

AlGosaibi Offers Creditors 20% on the Dollar Plus Proceeds of Lawsuits Against Maan AlSanea

Quoting informed sources, Frank Kane at The National reports that AHAB has offered creditors a cash payment of US$1.8 billion on US$9 billion of liabilities plus up to US$4 billion hoped to result from AHAB lawsuits against Mr. AlSanea.   

As Mr. Kane notes and as I have as well before, Mr. AlSanea continues to deny AHAB's allegations against him.

The al Gosaibi family of Saudi Arabia is prepared to sell much of its 70-year-old business empire to help pay its creditors, informed sources say.

The proposed net payment is a minimum of 20% (US$1.8 billion) with a maximum of 64.4% (US$5.8 billion).

As the article points out, the net value of Mr. AlSanea's assets is not known. 

Assuming for a moment that AHAB would be successful in its lawsuits, I believe it would become another of Mr. AlSanea's unsecured creditors.   And would therefore be entitled to a proportionate share of the "estate".  As well, the resolution of the lawsuits is probably something that will require a very long time to settle.  In objecting to a potential suit against itself by Trowers and Hamlins,  AHAB is reported to have said that "litigating the intercompany positions will take years if not decades and that such litigation only depletes resources that will be needed to effect a workable commercial settlement".   One may perhaps safely presume that the same would apply to AHAB lawsuits against Mr. AlSanea.  

Putting aside the depleted resources argument, one might argue that the present value of the proposed settlement is therefore less, much less, than 64% or 20% for that matter (which will depend on sales of AHAB assets). 

NY Court Compels Release of AlGosaibi Bank Account Details

As per the Gulf Daily News,  Trowers and Hamlins won an important legal victory in US Bankruptcy Court.  The Court ruled that AHAB's New York bankers must disclose details of a key AHAB account.   One to which reportedly a large amount of funds were transferred.  As the article notes, Trowers and Hamlins have been requesting information on this account since last August.  

Trowers & Hamlins partner Abdullah Mutawi, who is leading the asset realisation strategy, said it was a significant development.

"This is the first time AHAB has been compelled to reveal details of any of its bank accounts," he said.

"It is particularly significant because AHAB has repeatedly refused to hand over important information relating to the operation of the account.

"The account is important because a substantial portion of TIBC's funds were remitted to it and the information should help reveal the ultimate destination of those funds."

As I noted in yesterday's post about First Gulf Bank's lawsuit against AHAB,  there seems to have been a change in the dynamic of this story.  The focus is now on AHAB's behavior - both in terms of responsiveness to requests from creditors as well as its role in the collapse.

I suspect this is going to get increasingly messy.  At the end few reputations may be left undamaged.

First Gulf Bank Sues AlGosaibi for AED58.7 Million

First Gulf Bank has launched a suit in the Abu Dhabi Court of First Instance against AlGosaibi's local company and AHAB itself.

Both parties are being quiet about the details of the case.

FGB reportedly has a US$55 million in exposure to both AlGosaibi and Saad.

From recent press announcements it appears that the legal tide has turned - and that the current focus is now on AlGosaibi.

AlGosaibi v Maan AlSanea - Trowers and Hamlins Statement

One of my new and frequent commentators mused whether the fact that Trowers and Hamlins had launched a lawsuit against AHAB represented any sort of determination by T&H about the guilt or innocence of the parties involved in the case.

I had speculated that T&H was merely doing its job - going after the registered debtors of TIBC and pursuing collection of funds without making any such judgments.

That left us in a stand-off of opinions.

So, I posed a question to T&H through Hill and Knowlton.  Today I received the following response which I quote verbatim.

A Trowers and Hamlins spokesperson said: “Our investigations to date and other extrinsic evidence provided by third parties - which we are still considering - would suggest that there were irregularities in the manner in which the business of TIBC and other institutions connected with the AHAB / Saad situation was conducted.  However, investigation of fraud or other criminal activities and/or other material non-compliance by officers or other stakeholders of TIBC with the law or regulatory requirements essentially remains the remit of the public prosecutor and the CBB respectively and it is therefore not appropriate for us to comment or speculate further.”

As you'd expect a law firm to do, this statement is carefully crafted to avoid creating any unwanted legal problems for T&H.

There are several points I think are worthy of comment:

1. That at this point what T&H has seen suggests - though not conclusively - that there were "irregularities in the manner in which the business of TIBC and other institutions connected with AHAB / Saad situation was conducted".
2. That investigation of fraud, criminal activities or material non compliance with regulations is not T&H's responsibility but that of the "Relevant Authorities" in the Kingdom of Bahrain.
3. Accordingly, T&H will not comment on such matters.
   

The International Banking Corporation - Trowers and Hamlins Sues AlGosaibi

Not a good week for the AlGosaibis.

Trowers and Hamlins, the Central Bank of Bahrain Administrator for TIBC, announced through its public relations firm, Hill and Knowlton, that on 16 June, it had "filed a US$720 million foreign exchange claim against Ahmad Hamad Algosaibi & Brothers (AHAB) at the Saudi Arabian Monetary Agency (SAMA) Committee in the Kingdom of Saudi Arabia, following referral of the claim by the Council of Ministers."

There are a couple of telling points in the press release.  The first is the comment that the claim was filed "following referral of the claim by the Council of Ministers".

The second is a quote from Abdullah Mutawi, the T&H Partner handling this case:

“The claim we have launched with the SAMA’s Committee follows unsatisfactory responses from AHAB and their representatives to questions relating to the assets of TIBC that we have repeatedly asked them."  

You'll recall (and if you don't here's the link) that earlier there were complaints from some of the Kuwaiti banks that AHAB (as well as Saad) were not responding to requests for information or to hold meetings.   T&H notes in the press release that it has has "filed an application in the Courts of New York under Chapter 15 of the US Bankruptcy Code for an Order pursuant to Bankruptcy Rule 2004 authorising discovery.  The application seeks to obtain an Order from the Court compelling the disclosure of key financial information which the Administrator has been requesting from AHAB since August 2009 and which has not been forthcoming."  

The third is that AHAB is the "single biggest debtor owing US$3.2 billion."

In its press release T&H notes 

In addition the Administrator recently filed cases with the Negotiable Instruments Committee (NIC) in Saudi Arabia against Saad Trading (US$ 117 million), which is part of the Saad Group, as well as Abdulaziz Al Sanea (US$54 million) for defaults on loans advanced by TIBC.   Hearing dates have been set for early 2011 in relation to those cases and the administrators are currently working to expedite these hearings.

And that it will be pursuing other cases in an attempt to recover monies owed TIBC.

Finally, there is a quote from an unnamed representative of the Central Bank of Bahrain

“We are pleased that litigation has been launched less than 12 months after the CBB placed TIBC into Administration. This is a positive step forward in what is clearly a very complex case and reflects the CBB’s commitment to maintaining a well regulated and stable investment environment in Bahrain.”

Frank Kane over at The National has some additional information.

Two quotes. 

The first.

“Trowers and Hamlins’ rhetoric simply ignores [the Al Gosaibi group’s] multiple offers to enter into a co-operative information sharing agreement …”said Jim Courtovich, the spokesman for Al Gosaibi, said in a statement to The National.

The second.

In a letter to Mr Mutawi dated May 26 obtained by The National, a lawyer for Al Gosaibi said the group was advised not to hand over documents to Trowers and Hamlins because the firm was planning to use them as evidence in cases against Al Gosaibi.
“We could not responsibly advise our clients to proceed in this manner,” the letter, from Eric Lewis at the firm of Baach Robinson and Lewis, said.

In the letter, Mr Lewis also advised Trowers to join Al Gosaibi in the fight against Mr al Sanea, asserting that filing lawsuits against the group would be unproductive for creditors to TIBC.

As always, it's a good way to end a post on this topic to note that Mr. AlSanea vigorously denies the AlGosaibi allegations against him.

AlGosaibi v Maan AlSanea - Bahrain Court Rules Documents Not Forged AlGosaibi to Appeal

A bit of a bombshell from Frank Kane at The National today.

The Bahrain Chamber for Dispute Resolution ruled "at the end of last month there was no evidence to show the signatures were not genuine."

The AlGosaibi's intend to appeal.  And is usual with the Bahraini Court system, it will be up to the Cassation Court (Bahrain's highest Court) to render the final judgment.

Fugitive Banker Gives His Side of Story re TIBC

Frank Kane over at The National conducted an interview with Glen Stewart which was in the June 8 issue of The National.

To set the stage, as I understand it, there are two contentions central to the TIBC/Awal/AlGosaibi/Saad Group saga:

1. That there was massive fraud at the these entities which was the direct cause of their apparent collapse.
2. That Mr. AlSanea was improperly exercising control over TIBC and certain AlGosaibi units (the entity mentioned most was AlGosaibi's Money Exchange).  As noted in the article, a charge that Mr. AlSanea strongly disputes.

In his interview Mr. Stewart addresses the second.  He flatly contradicts the AlGosaibi's assertion that Mr. AlSanea was not authorized to exercise control over TIBC and the Money Exchange

What he does not appear to address in this interview is the first allegation.

I would also be very interested in Mr. Stewart's thoughts on the Ernst and Young report.  As per that report, it seems the CEO of TIBC had very limited authority.  Mr. Stewart deferred to Mr. AlSanea on decision making on just about every matter.  Beyond that there was the curious case of payment approvals.  E&Y stated that Mr. AlSanea used Mr. Stewart's password to release payments.  As I noted at the time I commented on the E&Y Report, it is very unusual for a CEO to be involved in  the operational aspects of releasing payments.  And giving another person one's password is generally considered a violation of segregation of duties and dual control.  

It would be highly useful to know how Mr. Stewart:

1. Saw his role as Chief Executive Officer at TIBC  and how that might compare and contrast to CEO's at other banks.  What precisely were the duties of TIBC's CEO and what were those of  Mr. AlSanea?  Is it good form for a CEO to give his password to a third party?  What does it mean when a person in the position of CEO apparently has no power to make any material decision? 
2. Understood  the requirements of Central Bank of Bahrain regulations regarding corporate governance. And, what if any, disclosures regarding Mr. AlSanea's role were made to the Central Bank.

Perhaps, Mr. Kane will have the opportunity to do another interview with Mr. Stewart.

One thing is abundantly clear from this interview and that is the emotional pain and suffering of Mr. Stewart.  Adding to that distress, we learn in this article that he felt abandoned by his own country in the midst of the "arbitrary actions and retaliations of the Bahraini legal system".   

Gulf Bank Sues AlGosaibi and Saad Groups in Saudi Arabia

According to Marwan AlBadr of  AlQabas, Gulf Bank filed suits in Saudi against both AlGosaibi and Saad in two legal forums:

1. The Negotiable Instruments Committee - which deals with bank checks, letters of credit and similar instruments.  The NIC has set a hearing for March 2011.
2. The Committee for the Settlement of Bank Disputes - which is a SAMA committee to resolve disputes over loans and lines of credit.

It's expected that other banks will follow suit with suits in Saudi.

AlGosaibi v Maan AlSanea - AlGosaibi Attempts to Enlist Kuwaiti Banks Against Saad

AlQabas reports that AlGosaibi and its counsel (Saudi and American lawyers) met with Kuwaiti banks exposed to both AlGosaibi and the Saad Group to request that they unite their legal actions against Saad by forming an alliance whose goal would be the combining of their individual legal documents and other evidence, including any forged documents or documents suspected of being forged to strengthen the legal position of all creditors in recovering their money through the legal process.

At the beginning of the meeting the Kuwait banks reportedly indicated their intention not to co-operate with one party of the debtors.  

The representatives of AlGosaibi responded by:

1. Assuring of the start of a "new page" of co-operation between AlG and its creditors.  You'll recall earlier that AlQabas had carried a report that Kuwaiti creditors were frustrated with AlG's responses to their attempts at contact and negotiation.
2. That the Kuwaiti banks should have a permanent representative in the creditors committee in Riyadh and Dubai so that they would learn "in near proximity" (first hand) what was happening.
3. That 70% of the AlGosaibi Group's wealth had been designated to pay its debts.

The banks responded to the last point by noting they were not going to entertain any discounts on the debt from any party (either AlG or Saad).  And that they were on the verge of taking legal steps against Saad.  This is described in the last paragraph of the article as the filing of cases in Saudi by some and by others in the USA.

The article then notes that the Central Bank of Kuwait has instructed Kuwaiti financial institutions to provision 100% for AlG and Saad exposure by 31 December 2010.  Three banks have almost already achieved that level.  It being understood that some banks had relatively small exposures.  As for those with larger exposures it's expected that they will require until the end of the year.

Assuming the article is correct, what's interesting about this is the apparent attempt by AlGosaibi to enlist creditors in its campaign against Maan AlSanea and the Saad Group.  As you'll recall, AlG has accused Mr. AlSanea of forging certain documents to obtain loans in AlG's name but then using the funds for his own purposes.  And, as you'll recall, Mr. AlSanea vigorously denies these accusations.

AlG appears to be trying to bolster its accusations of wrongdoing by Mr. AlSanea  by enlisting third parties to join in its campaign.  By portraying itself as the innocent victim of wrongdoing,  AlG may hope to  deflect creditor anger and pressure (from itself) to Mr. AlSanea.  A tactic, that if successful, might also set the stage for a later justification for a discount on the debt.

Mashreqbank v AlGosaibi - Mashreqbank's Consolidation Motion Accepted

The NY Supreme Court accepted Mashreq's motion to consolidate its two cases against AlGosaibi (the partnership) and the individual AlGosaibi heirs.  Decision was made on 10 May and posted on the NY Supreme Court's website today as Document #128.  If you'll look at earlier posts, there are details on how to access the NYSC's website.

As you'll recall, having the two cases separate had posed a legal problem for Mashreq as outlined in this earlier post.  The cases in question are 601650/2009 (against the partnership) and 602717/2009 (against the individual heirs/partners).