Orion Holdings Overseas - "Unauthorized" Trading and Corporate Governance "Shortcomings" Led to Collapse

A bit more information has come to light about the causes of the meltdown at OHO via an article in The National: at least US$20 million of unauthorized trades in gold and other commodities including oil.

That sounds familiar.

"It's hard to understand how this happened.  If OHO's main lines of activities were brokerage, fund management and technology, that is a great deal to lose in this period, even given the economic meltdown.  Was OHO taking proprietary positions that turned against it?  Was it trading in oil?  Or other commodities?  OHO was a member of the Dubai Mercantile Exchange."

However, a "mere" US$20 million in losses should not have caused the collapse of a company which  was valued at some US$263 million in February 2008.  The losses would have had to been more, a lot more.  Or it would have to be that the company had a lot of assets whose ultimate value proved to be much less than their carrying value. Or some combination of these and perhaps other factors.

That's not the only thing in the article that I'm having difficulty getting my head around.

1.  Shareholders' Blame Game - This seems to contradict the statement that "management was gambling with the firms' money".  Unless of course some shareholders felt that management was acting on the instructions or with the acquiescence of some of the other shareholders.  And were therefore asserting that that shareholder had a liability to make them whole.  Otherwise, it would seem the shareholders would have a very compelling shared interest to protect their dwindling investment by cleaning house of the culprits in management.  There is also the "testimony" from Shuaa that it was not involved in the management of the company.   Was no other shareholder?  Not even the largest? If so, what then is the basis for Shuaa's legal action against  the Chairman and Petra? 
   
2. Risk Management Report - The article seems to question whether the Board saw the report.  The Chairman says that he resigned in protest of the Board's failure to respond to the report.   It seems plausible that before resigning he would have raised the topic with the Board.   And then it would seem equally plausible that they would have asked to see the report if they had not.  One might also wonder if Sami Boujelben wouldn't have "rung up" the board members as part of the professional discharge of his duties.  Now, if at his resignation, the old Chairman did not agree to allow other parties to select his replacement, his resignation did not diminish his company's control over the number of seats on the Board and thus over OHO. It was then only a matter of changing a face.  Another set of questions regarding corporate governance and risk management focuses on the losses themselves.  Once they occurred, did the Board not receive and review financial reports?  Did the CEO or CFO brief the Board on the financials, including the losses?  If the Board wasn't getting periodic copies of and verbal reports on the financials, then there are some rather potentially difficult questions for the Board about how it implemented corporate governance.
   

What is presented raises more questions than it answers - at least for me.

The shareholders of OHO are primarily institutional investors.  They are not small unsophisticated retail investors hoping to turn a quick buck on their shares so they can buy a refrigerator (as one punter on the Dana Gas IPO told the press in Bahrain).  Thy had placed serious money on the table.  It was evaporating.  They did nothing? 

It seems there must be something more to the story.  Just as the US$20 million loss doesn't fully account for the financial distress the company now finds itself in, the corporate governance  related comments here don't seem to as well.

Another interesting bit from the article and that is the assessment that Shuaa over reached in its private equity investments and will be retrenching to focus on more core business of brokerage.

Finally, other investments as well as the general market trend are responsible as well for the decline in Shuaa's share price. It's not just OHO. When Shuaa issues its year end detailed audited financials, it will  hopefully be possible to quantify in part the relative contribution of each investment to the provisions and the loss.  No doubt,  the debacle involving the convertible and Dubai Group also played a role. 

Orion Holdings Overseas - Involuntary Liquidation at DIFC

You've probably seen the press reports that OHO has been put into involuntary liquidation.  Here's one from The National  Here's another from Business 24/7.

Often a closer look at news items is quite revealing.  Here's a bit more of the story.  Since OHO's financials do not appear to be available on the Internet, we'll use Shuaa Capital's and some other information to reconstruct the story.

Here's the link to OHO's registration at the DIFC.  While the DIFC says it was incorporated in 2008, the company seems to go back at least several years earlier.   It owns Orion Capital, also registered in the DIFC.   OHO's shareholders as per the DIFC are Petra Invest Ltd, Shuaa Capital, Primavera Holdings (Cayman) Ltd., MHK Investments LTD, AJ Capital Limited, and Shihab Ahmad Khalil.  Petra is identified as the majority shareholder, though The National article says it owns 32%.  Manara Capital, a Lebanese related investment company, is mentioned in Shuaa's press release as a shareholder.  It acquired an interest in OHO in September 2007.  It's unclear which of the entities above represents it - MHK, AJ Capital, etc.

As far as Shuaa Capital is concerned the saga began in February 2008 when it acquired 20% of OHO  and controlling stakes in 5 Orion brokerages initially for AED 193 million (US$ 52.5 million).  If you look closely at the press release you'll notice it's dateline is 11 January 2008, though it was released 12 February.

In October 2008, Shuaa announced its preliminary results for 3Q08, including that it had taken a one time charge of AED 45.8 million for OHO.

There's a bit more detail in Shuaa's 3Q08 financials.  Note #7 discloses that Shuaa booked the investment at AED 277.1 million.  There's no explanation for the AED 84 million increase.  The Note discloses that AED 137.7 of the carrying value of OHO has been reversed.  This amount represented a contingent payment due upon OHO meeting certain financial performance targets which it was clear it would not given its year to date results.   The offset was probably a reduction in Payables and Other Credit Balances, though no details were provided. 

Based on OHO's results Shuaa  also booked a provision of AED 36.7 million.  Initially I thought that the difference between the two provisions was due to refinement of Shuaa's numbers from the October press release until the issuance of the financials on 3 November.  However, in the 3 November press release Shuaa repeats the same AED 45.6 million provision number.  No explanation is given for the AED 8.9 million difference.  At this point, the carrying value of OHO on Shuaa's balance sheet was AED 93.7 million.  At year end it was AED 92.2 million, perhaps due to FX movements and/or share of losses.  Since Shuaa  accounts for OHO on an equity basis, this may explain both the AED 8.9 million provision difference and this change.

In its 1Q09 financials, Note 6, Shuaa disclosed a further provision for AED 59.2 million resulting  in a carrying value of AED 23 million.  As you'll notice there is a further AED 10 million in decline in carrying value which is not explained.  More equity earning accounting?

In its 2Q09 financials, Note 6, there is no change in carrying value but legal action by Shuaa is noted.  Apparently, this is related to the July press release discussed in the next paragraph.  Shuaa's 2Q09 financials were released 2 August and the news of the 8 July lawsuit is included within but not specified as a "post balance sheet event". 

On 8 July 2009, Shuaa announced that it had filed a legal claim at the Dubai International Arbitration Centre against Mohamed Abdel-Khaleq Mohamed Abu Al Haj and Orion Holdings Overseas Limited (“OHO”) for breach of obligations in respect of the Company’s investment in OHO.  At that point Shuaa claimed it had lost AED115.9 million on OHO.  The press release states that a full write off of OHO was in Shuaa's 31 March accounts.  As noted above, as of both 31 March 2009 and 30 June 2009, Shuaa showed AED 23 million in carrying value for OHO.  It is unclear what this represents, perhaps the carrying value of controlling interest in the five Orion brokerage firms that were part of the initial purchase?  Also at this time, AlHaj and Petra Invest (a related company) filed a counterclaim against Shuaa.

Unfortunately, in its  September 2009 financials, Shuaa no longer provides a breakdown of its various investments in associates.  See Note #6.   Two interesting bits of information though are contained.  First, that Shuaa took impairment charges of some AED 225 million (note as per information from earlier reports during 2009, the total provision for OHO was AED 59.2 million).  Second, that Shuaa is in discussions "to sell its shareholdings in a number of associates".  

Note 6 also contains: "Orion Holdings Overseas has ceased to trade. The Group owns 20% of this company. The Directors of the entity have voted to liquidate the company but a resolution to liquidate failed to achieve the necessary majority in a vote by the shareholders. It is anticipated that the shareholders who favor liquidation will soon petition the DIFC Court and that thereafter this entity will be placed in insolvency. In these circumstances the Group has written off this investment. The Group has a legal case ongoing in connection with the Orion Holdings Overseas acquisition. It is management's view that the likelihood of the Group incurring a material liability as a consequence of these legal cases is remote."

In November the DIFC Court froze OHO's assets after former employees lodged claims that they had not been paid and that the company was engaged in asset sales.

And finally just recently, the DIFC Court has ordered an involuntary liquidation of OHO.

With that background, some further thoughts:

1. Shuaa made its investment in OHO in 1Q08.  By 3Q08 it was clear that that OHO was not performing.  Ignoring the contingent payment, on a cash basis at 3Q08, Shuaa had lost some 33% of its investment.  By 1Q09, that is within one year of its investment, Shuaa had lost 84%.  It's hard to understand how this happened.  If OHO's main lines of activities were brokerage, fund management and technology, that is a great deal to lose in this period, even given the economic meltdown.  Was OHO taking proprietary positions that turned against it?  Was it trading in oil?  Or other commodities?  OHO was a member of the Dubai Mercantile Exchange.  Were original values overstated?  
2. Also as noted above, Shuaa seems to be selling its other associates - which appear to be focused on industrial activities.  AlKout Industrial Projects (listed on KSE, water projects);  Taghleef Industries LLC (Dubai registered plastics manufacturer),  City Engineering  (a Sharjah construction company) and Septech Holding (a Sharjah company in the waste water and water infrastructure business).  OHO, City Engineering and Septech were acquired during 2008.