Damas - The DFSA Report in Detail

In my previous post I made the comment that the DFSA enforcement actions revealed three themes:

1. An almost unbelievable  pattern of  disregard for the health of DIL and the rights of minority shareholders and other stakeholders by the Abdullah Brothers.  They treated the company as their personal "piggy bank" withdrawing funds when it suited them and then "repaying" the Draws by selling the company assets. 
2. A profound failure of corporate governance at the board, senior officer and auditor levels.   The Board seems to have failed to ask the most basic of questions and to have the most basic of procedures.  Senior management was aware of the Abdullah's practice of "Drawing" funds and other shortcomings, but did not advise the Board.  In March 2009, a DIL Internal Audit Report stated "a large scale diversion of funds from the company by the directors.  The total exposure stands at a whopping AED525.19 million as on 30th  September  2008".  The Report was only circulated to the DIL Managing Director (one of the Abdullah Brothers) and the CFO, but not to the Board or Audit Committee.  In both cases it's hard to understand why independent directors were not notified.
3. A transaction connected with Damas IPO which raises some troubling questions about the involvement of DIG and some of its affiliates, all of whom are part of Dubai Holding.

Given what went on at DIL, I think a detailed review of the DFSA's findings outlined in their Enforceable Undertakings is worthwhile.  Let's step through the Enforceable Undertaking with Damas International Limited ("DIL").  The one for the Abdullah Brothers repeats the same findings. 

Section 6.1:  Board Meetings 

1. Inadequate or no financial info given to Board to enable it to assess DIL's situation.
2. Board packs given to directors only at the Board meetings.  Not before.  Information in packs  insufficient to make decisions.
3. Board minutes poorly maintained and did not accurately reflect decisions and discussions.

Section 6.2:  Audit Committee

1. Did not meet formally during the 2008-2009 fiscal year. It's first formal meeting was 26 July 2009.
2. "Failed at all material times" to meet with Damas Internal Audit team.  Did not receive nor ask for any internal audit reports.  See no evil, hear no evil ...
3. The AC didn't set its own Terms of Reference or establish procedures for Internal Audit reporting to it or the Board.
4. Failed to monitor the Internal Audit function.  

Section 7:  Directors' Draws

1. The Abdullah Brothers treated DIL as their personal "piggy bank" and withdrew money from company accounts with apparent little concern for the impact on the company itself or shareholders even after they had taken the company public.  Only the Brothers were entitled to make such Draws.
2. DIL's Board, Finance Department, Internal Auditor and external auditor were all aware of this practice. More importantly there were no controls on the amounts or purposes for drawings until October 2009.  That is, until after the abuses had become so large they could no longer be ignored.. 
3. Between 1 July 2008 (sale of shares was ongoing at this point) until 27 October 2009, the Brothers made some 2,200 draws for relatively trivial amounts (fuel expenses) all the way to substantial  sums for personal investments, personal loan repayments, etc.  A total  AED 600 million was withdrawn and then retroactively settled by what appear to be questionable netting transactions, reducing the Directors' Draw to AED 365 million.  Tawhid Abdullah borrowed 1,940,250 grams of gold to repay his third party personal gold loan. DIL has yet to be repaid by Tawhid.

Section 9:  DVG Transaction (DIFX Listing)

1. When it was clear that DIL's IPO was not going to get enough investor take-up to secure the 25% free float required for a listing on the DIFC (now Nasdaq Dubai), Tawhid Abdullah arranged to create artificial demand.  He approached Dubai Investment Group, Dubai Ventures and Dubai Financial, apparently proposing that they buy shares in their own names but that the Brothers would provide the funding.  Either that or that they would "lend" their names and front for the Abdullah Brothers.  These three entities subscribed for some 100,000,000 shares in toto - roughly divided equally.
2. As a side note, this amount represented 37% of the total Offering.  Original Offer Circular here.
3. The three Abdullah Brothers withdrew a total of AED293,843,000 from DIL accounts during July 2008 and transferred AED275,480,000 to DIG and AED 18,363,000 to Dubai Ventures.
4. This transaction was documented as a US$100,000,000 personal loan from Tawhid Abdullah to Dubai Ventures dated dated 19 August 2008 (the "First Loan").  Unclear why the loan was for this amount as the cost of the shares was roughly US$80 million.
5. In March or April 2009, a series of subsequent documents were drawn up but backdated to August 2008 and some forward-dated to August 2009.  The purpose of these documents was to disguise the nature of the transaction and to reduce the Directors' Draws used to fund the share purchase.
6. The First Loan was assigned to Damas Jewelry in an assignment dated 20 August 2008.  Mr. Tawhid signed both on behalf of himself  as original lender and on behalf of Damas Jewelry to legally document the assignment!  That is, he signed for both parties in the transaction: assignor and assignee.  This assignment effectively reduced the Directors' Draw.  Note despite its date, it was actually signed in March/April 2009.
7. The First Term Loan was replaced by a Second Term Loan between Damas Jewelry and Dubai Ventures for US$80,000,000 via a document back dated 21 August 2008.  In a document dated 22 August 2008, the Second Term Loan was assigned from Dubai Ventures to DVG (a related company).
8. Then there was an exchange of letters actually signed in March/April 2009 but dated 19 and 20 August 2009 to convert the loan to an investment arrangement.

It's pretty clear that at inception this was a fraudulent transaction designed to trick the DIFX into believing  that the IPO had sold enough shares to the public to meet the Exchange's listing requirements. The subsequent  loan agreements, assignments, and investment management agreement were designed to cover up the draws by the Abdullah Brothers and provide "cover" for reducing their Director Draws.

Frankly, many out there reading this saga are going to have some pretty fundamental questions about the behavior of DIG and its subsidiaries - all entities owned by the Government of Dubai's Dubai Holdings.  How they came to be involved.  And what sort of business judgment and ethics they employed in participating in this transaction.

Section 10:  The Sharjah Transaction

1. Damas Real Estate ("DRE"), a company owned by the Abdullah Brothers, purchased land in Sharjah for AED5,141,700 in January 2005.  This predates the July 2008 share flotation. 
2. Between January 2005 through 25 March 2009, the Abdullah Brothers used an unspecified amount of Damas Company funds to develop the property including erecting a building.
3. Around 25 March 2009, Tawhid Abdullah, former Managing Director of DIL, proposed to the Board to sell DIL the land for AED70,000,000 to AED90,000.000.  The clear goal was to use the transaction to reduce Director Draws prior to the issuance of the year end financials.  The Board was not told that Damas funds had been used to develop the project. 
4. At least that's what the DFSA says. As I read this transaction and others, it's hard not to have the nagging suspicion that the Board may have realized that it was critical to regularize (reduce) the Directors' Draw situation as soon as possible. And was so delighted at any transaction that would lead to a reduction that they didn't look too closely. 
5. The Board agreed to the sale after a Cluttons valuation and paid some AED85,000.000.  Instead of paying cash Directors' Draws were reduced by an equal amount.
6. As part of the transaction, the project was supposed to be developed for staff to live in with investment opportunities offered to staff.  As per the DFSA up to 21 March 2009, Tawhid did not formulate or implement the employee residential property investment scheme.

 Section 11:  AlWasl Transaction

1. AlWasl DMCC (owned by Tawhid and Tamjid Abdullah and a third party) bought two plots of land in the DMCC free zone in June 2007, again well before the DIL IPO.
2. In December 2008, Tawhid Abdullah proposed to the Board that DIL buy the plots, but did not inform the Board of the Brothers' interest in AlWasl.
3. No reasonable due diligence was done.   Board approved the purchase.
4. DIL acquired the land by paying AED46,200,000 - though again there was no cash outflow.  The asset was put on the books and the Directors' Draws reduced by an equivalent amount.

Section 12:  DRE Transaction

1. In December 2007, Damas placed an AED150,000,000 deposit with United Arab Bank ("UAB")  to secure a loan of an equivalent amount made by UAB to DRE.  In January 2008, the deposit was legally pledged as collateral.  The Board was not advised.  This was before the IPO.
2. In October 2008, UAB used the deposit to repay the loan.
3. Presumably, but not mentioned, this was also treated as a Directors' Draw. 

Section 13:  Mashreq Bank Loan

1.  On 13 July 2008 (after the IPO), DRE received an AED70,000,000 loan from Mashreq.  The loan was drawn on 14 July with proceeds transferred to a personal account of the Brothers at First Gulf Bank.
2. On 11 September 2008, Tawfique Abdullah authorized the transfer of AED70,000.000 from a Damas account at UAB to Mashreq to pay off the loan.
3. Again presumably treated at DIL as a Directors' Draw though this is not specified.

Section 14:  Gayrimenkul Transaction

1. In August 2008 (after the IPO) in a series of transactions the Brothers withdrew AED66,301,560 from a Damas account at UAB and transferred it to Gayrimenkul to buy real estate in Turkey.
2. These withdrawals were not advised to the Board until October 2009.

Section 15:  AED42.5 Million Directors' Draw

1. On 18 July 2008, Tawfique Abdullah authorized the transfer for AED42,500,000 from a Damas account to a bank account held by the Brothers.
2. The withdrawal was not disclosed to the Board. 

Section 16:  Gold "Borrowing"

1. In December 2007, Tawhid Abdullah borrowed 2,000 kilograms of gold from a third party.
2. On 1 September 2009, he allowed the lender to take 1,940250 grams of gold from DIL to repay his personal "gold loan".  No disclosure was made to the Board.
3. Tawhid has not yet restored the gold to DIL.

This is a damning report on the Abdullah Brothers and many others involved in the running and monitoring of the company.

I had posted this back in December.  The DFSA Report only re-emphasizes the importance.

When investing in a family company make sure you've got adequate control  at the Board over the family members' management of the company and signature authorities (enhanced requirements for Board approval is one technique), robust corporate governance actually implemented, and of course detailed disclosure of company affairs.

DFSA "Fires" Damas Board and Levies Fine - Dramatic But There's Much More Behind the Headlines

Following the conclusion of its investigation which began last October, the DFSA announced 21 March a series of actions against the Abdullah Brothers (Tamjid, Tawhid, and Tawfique) and Damas International Limited ("DIL").

Abdullah Brothers (Enforceable Undertaking)

1. Resignation from the Board of DIL and the Boards of any of its subsidiaries within 30 days.
2. A 10 year ban on the Tawhid Abdullah from acting as a director  of Damas or any other company on the DIFC or with the promotion, formation or management of any DIFC company or reporting entity without the prior permission of the DFSA.  His two brothers are subject to a similar ban but only for five years.  Though all three may serve as consultants to DIL.
3. Agreement to disclose assets and liabilities in excess of AED300,000.  This clearly to provide the information necessary for Point #4 below.
4. Reimbursement of DIL funds (Directors' Draws, gold borrowing, etc).
5. Restriction on the Brothers dealing in their assets in excess of AED300,000 except with written permission from the Board or its delegate . Another safeguard to secure repayment.
6. A US$3,000,000 fine.  $300,000 payable immediately with the remainder suspended indefinitely, though if the Brothers fail to comply with their undertaking, some or all of this amount can be made "due".

 Damas International Limited (Enforceable Undertaking)

1. DIL shall take actions to secure the resignation of all Board members in 30 days.  Some press reports have referred to the "voluntary" resignation of the Board.  This is scarcely voluntary.
2. Calling of an Extraordinary General Meeting of shareholders to elect replacement directors within 30 days.
3. Creation of Board Committees:  Audit, Compliance and Risk Committee, Nomination Committee, and Remuneration.  With follow-up on their effectiveness.
4. Appointment of qualified and experienced individuals to the Audit Committee.  Bimonthly mandatory meetings.  You can read that as an assessment of the previous Audit Committee.
5. Establishment of an effective Internal Audit function with adequate Board oversight.
6. Replacement of the existing external auditor with a firm acceptable to the (new) Board and the DFSA for the financial year beginning 1 April 2010. You can read that as a decided vote of "no confidence" in the existing auditor.
7. Enhancement of Board information and reports.
8. Establishment of a Risk Management Department with adequate procedures and Board oversight.
9. Establish, maintain and regularly review its financial controls.  Included immediate termination of Directors' right to draw funds.  And enhanced procedures for related party transactions.
10. Greater clarity in roles and responsibilities between the Board and senior managers with specific accountabilities assigned.
11. Appointment of a compliance officer.
12. Appointment of a company secretary.
13. Establishment of a connected persons register.
14. Recovery of the Abdullah Brothers' "Director Drawings" with quarterly reports to shareholders on progress.
15. Submission to periodic DFSA reviews of compliance with the enforceable undertaking. 
16. A US$700,000 fine. US$100,000 is payable immediately.  US$600,000 is suspended.   However, if DIL fails to comply with the Enforceable Undertaking, all or some of the suspended amount can be reinstated.

Dramatic as this is, it is really just the tip of the iceberg.  What's more significant are the detailed DFSA findings that led to these rather severe enforcement actions.

I'll take a look at these in more detail in a subsequent post.  For now, a summary around two key themes: 

1. An almost unbelievable  pattern of  disregard for the health of DIL and the rights of minority shareholders and other stakeholders by the Abdullah Brothers.  
2. A profound failure of corporate governance at the board, senior officer and auditor levels.

Sad as it is, this sort of behavior is not unknown.  

But what is troubling is the involvement of a Government of Dubai  related company,  DIG, a subsidiary of Dubai Holding, in a transaction designed to inflate the amount of  investor demand for the Damas IPO.  As presented in the DFSA Report, the Abdullah Brothers transferred DIL funds to three DIG related companies who "bought" shares, ostensibly for their own account.  This sale helped secure a listing on the DIFX (now Nasdaq Dubai) by creating the impression that the Exchange's 25% free float requirement. had been met.  Later a series of back dated transactions were used in an attempt to disguise the nature of the initial transaction.

Were DIG and its affiliates innocent dupes in this process?  Or complicit?  The DFSA does not take a position.  Many who read the portion  of the DFSA document dealing with this transaction are going to come away with serious questions about the business practice and ethics of DIG and its affiliates.

Dubai World - Nakheel - Wall St WTF Nails the Nakheel Collateral

Here's an interesting and humorous (unless you're a lender) post from Ken over at Wall St WTF. 

Commentary on The Financial Stability Law by Attorney Abdul Razzaq Abdullah

Here's an interesting piece on the FSL by Attorney Abdul Razzaq Abdullah of the Kuwaiti law firm Abdul Razzaq Abdullah and Partners.

In the article he makes the point that legal protection from creditors under the FSL is not automatic.  There are procedures to secure the initial protection and then the debtor must continue to fulfill its obligations under the restructuring in order to maintain it.

Another of his key points is the key role of the Central Bank of Kuwait in the process in both the initial approval and subsequent monitoring.

Damas Voluntarily Suspends Share Trading on Nasdaq Dubai

Today Damas voluntarily suspended trading in its shares on Nasdaq Dubai pending an announcement.

57% of Listed Companies in Kuwait Have Yet to Report 2009 Results

AlQabas quotes "Direct Information" that 57% of KSE listed Kuwaiti companies have not yet reported their 2009 results.  There are nine remaining days before the deadline for reporting is reached.

89 companies have reported so far with KD402.85 million in net income verses KD467.7 million in 2008.

It's probably a fair guess that the non reporting companies are not holding back "good news".  So this is probably a good indication of the level of corporate distress in the country. 

AlAhli Bank v AlSanea – Did ABK Miss the “Red Flags” on the LC Approval?

This is a follow-up to my earlier post on this topic. There I looked at the case AlAhli Bank Kuwait brought against Mr. AlSanea and his company Saad Trading Contracting and Financial Services ("STCFS) in the Supreme Court of New York. While ABK has made allegations, there has not been a court ruling. Mr. AlSanea continues to deny any wrongdoing.

Today I'd like to take a closer look at some "red flags" that ABK should have noticed when asked to  issue the letters of credit.  Here I am presuming that if AlAhli believes these are fraudulent transactions, then they should have noticed some things at the inception of the transaction.  Of course, as far as I know, Mr. AlSanea vigorously defends these transactions as proper.

Even after acknowledging that hindsight is usually 20/20, I think there are some really obvious points that ABK should have noticed at the time.  And which should have given them pause about these transactions and their client.  And thus sparked a review.  Perhaps, they did. Perhaps, they resolved them to their satisfaction. The Court documents (which are all that I have to go on) do not discuss this as it is not particularly relevant to ABK's case.

Some background.

Prior to the issuance of the LCs, ABK had already made a decision that STCFS was creditworthy. Based on its analysis the bank set an overall limit of US$100 million and established the type of facilities it would was prepared to extend: (a) US$80 million of that amount for letters of credit for the import of building materials for STCFS and (b) US$20 million for a "clean" working capital loan. A "clean" loan is a term bankers use to describe a loan that is not tied to a specific project or type of transaction. Under this facility, STCFS could borrow for whatever purpose it wanted. It's unclear to me from the filings if STCFS had already drawn down under the "clean" loan facility. If it had, that would be an important fact supporting ABK's allegation of fraud. That is, they had to resort to the LCs to get money.  Otherwise they could have simply drawn down on the loan facility.

But that's not the end to the credit process. In addition to reviewing subsequent financial information (financial statements and other such data), a bank should monitor usage of a client's line to determine if there is anything in the pattern of usage that indicates distress or other behavior that should be cause for concern.  With all such concerns to be examined and resolved.

Let's look at STCFS's request for the four letters of credit.  There were several "red flags" that should have raised questions about the transactions and about their client.

Before we get to that analysis, a few words about letters of credit ("LCs").

A LC is a financial instrument issued by a bank on behalf of its client (the applicant or buyer) to a beneficiary (the seller) in which the bank promises that it will pay the beneficiary a certain amount of money if the beneficiary presents certain prescribed documents within a certain time period. Most LCs are now irrevocable which means that the beneficiary has the bank's absolute commitment to pay if the right documents are presented in time. In effect the LC substitutes the credit of the bank for that of the applicant. 

LCs are used when the seller is not certain that the buyer will pay for the goods if shipped. This generally occurs when the buyer and seller are located in two different countries. If the seller is comfortable with the buyer's creditworthiness, it would not ask for the LC because the LC costs money and imposes documentary requirements – the documents have to be right and the group of documents have to be internally consistent.  Precise wording is very important.

It's also important to note that the bank does not check the actual goods shipped. It checks the documents. There have been many a case where the documents were in order but the actual goods shipped were not.

Other alternatives are to ship the goods and send the documents, including title documents for collection. Documents are released against payment. Or if the parties have some level of trust, documents are released against the buyer's acceptance of a draft.  In effect that creates a promissory note.  The seller then has a legally enforceable document it can sue on if needed. Where there is complete trust, the seller ships on open account with payment at some mutually specified time.

Now to the analysis.

Red Flag 1: The Transaction Itself

The first red flag - and the major one - was the transaction itself.   This should have perked up the credit officer's antennae and made him or her extremely sensitive to another further "red flags' in the transaction.

ABK should have asked itself why on earth apparently very small companies were asking for a payment guarantee for a company of the stature of STCFS. Both buyer and seller are in AlKhobar.   In AlKhobar/Dammam, Mr. AlSanea is سمك كبير (big fish).  He and his companies are very well known. At that time he was on the Forbes list of richest people in the world.

A second relevant question would be why a company of STCFS' stature would entertain such a request. It would seem a likely bet that companies would be falling all over themselves to deal with STCFS. So, it could just simply say "no" and there would be another potential seller knocking at its door.

Perhaps, STCFS was doing a bit of charitable work to help develop local small and medium enterprises in the Kingdom? And so it would be willing to entertain a request that many large companies would find insulting.  Maybe it was helping out these companies.  A lot of small companies don't have access to credit  - especially for amounts in the millions of US$.  So when they don't already have the goods, then they ask their buyers to open an LC in their favor (the Original LC) and then use this LC with a bank to issue another LC (the Back to Back LC). The Back to Back LC is then used to acquire the goods from a third party to be sold to the buyer on the Original LC.  

However, the goods for these LCs are not being imported. According to the LC applications completed by STCFS, they are being shipped from the beneficiary's warehouse to STCFS's warehouse. It seems highly likely that the beneficiary already has the goods. So the LC appears to be serving as a simple payment guarantee for the obligations of a very major Saudi company.

We seem to be left with two main explanations.

First, that local companies didn't want to take STCFS's credit. And that STCFS has no other option (no other suppliers) so it must grant the request for the LC. If true, that should be an extremely troubling sign to ABK. Something is really wrong at their client. I remember reaming one of my subordinates who approved (interesting coincidence) four domestic LCs for a client. Prior to that all of the client's LCs had been for foreign imports. The domestic LCs were therefore a change in pattern. A couple of them were for trivial amounts (US$100,000) which was a sign that the domestic trade would not take the client even for such a small amount. Yes, the client later hit the wall. Recovery was, if I remember correctly, five cents on the dollar.

Second, that the transactions themselves are not what they appear to be. That they are disguised financing. Several banks got "stuck" with such transactions between (Mainland) Chinese Red Chip Companies in Hong Kong and their affiliated companies on the Mainland.

Red Flag 2: No Title Documents

Generally, among the documents required under an LC are title documents. These are various forms of these, bills of lading etc, that represent ownership in the underlying goods shipped. The shipping company is only supposed to release the goods upon presentation of the B/L. 

At every financial institution I worked at the absence of title documents under an LC transaction was an exception and required special approval.

There were two reasons for this. 

First, the title documents gave reasonable evidence that there was an underlying trade transaction. The carrier was certifying that it took a certain number of crates or boxes on board its vessel or truck. And thus there was a third party – besides the applicant and the beneficiary – testifying to there actually being a trade transaction. 

Second, as long as the documents were in the bank's possession the bank could seize the goods. This provides the bank some collateral though usually for only a short time.

Without title documents, ABK essentially is issuing a standby letter of credit or guarantee. These transactions (if properly recorded in a bank's books) call for a higher risk weight for capital adequacy purposes and should therefore be priced higher than a commercial LC. Also given the credit implications, such transactions should be reviewed in detail to determine if their occurrence is an adverse sign.

Red Flag 3: Outside the Terms of the Facility

ABK's facility letter to STCFS states that the purpose of LC's is "to import building materials for SAAD Construction business". You'll find a copy as NYSC Document #18 which is Exhibit 7 to the Serio Affirmation of 22 December 2009 (NYSC Document #17). Mr. Serio is Mr. AlSanea's counsel in this case and others.

A domestic shipment is not an import.

This should have triggered a review by a credit officer. Again, the principle being that if a transaction does not meet the facility conditions, it is not under the facility.  Therefore, it requires special approval. There might have been good reasons to allow this transaction, though based on all the "red flags" present it seems to me that an approval should have had quite a steep hill to climb. Or perhaps  a mountain.

Red Flag 4: Troubling "Coincidences"

All the beneficiaries on these four LCs just happen to be clients of The International Banking Corporation, a company with a connection to Mr. AlSanea. What are the probabilities of this happening? 

A credit officer might also wonder why these rather small Saudi companies are banking with a foreign bank (TIBC) and not with a Saudi bank with an office the Kingdom. That would certainly seem to make more sense in terms of making their daily operations easier.  Nip around the block to do banking.  Rather than deal by phone, fax and courier with a bank in Bahrain. Or shlep across the Causeway to Manama.

Two of the beneficiaries had account numbers one digit apart. So our probabilities are getting even smaller. Not only are the beneficiaries customers of one foreign bank, but they appear to have opened their accounts one after the other. Of course, TIBC may have a very small number of customers. And, thus, the probability is not as small as it appears. 

To digress on a similar topic I remember the look of amazement when I pointed out to one distraught investor troubled by thought of losses on a "wise" investment in APP Holding Company bonds (Just how does one value air?) that the Singapore companies whose receivables Asia Pulp and Paper had just written off (a rather small sum of a couple of billion US dollars) were all from the Virgin Islands. And just by coincidence their Commercial Registration numbers were all in sequence. And all established by the same  local law firm.  And a check with the local Singapore "D&B" revealed these companies had no assets -- unless you count the equivalent of a folding table, two chairs and a phone line as assets. And that they apparently had received some administrative support from APP in the form of seconded personnel, etc. One explanation is, of course, that APP was helping aspiring small businessmen to get ahead. That it had extended them credit in the form of shipping paper products against deferred payments well in excess of what their financial condition warranted. And what better way to give them a leg up than to ship two or so billion dollars of paper products to them. That would give these small businessmen the clout to undertake major transactions. To literally transform their businesses. Unfortunately, this experiment which began with no doubt the best of intentions the year that APP hit the proverbial credit wall – but before it actually did - did not succeed. After selling the paper products, these companies for some reason didn't have the cash to settle their payables with APP. Perhaps some overhead that wasn't immediately apparent in their modest financials. So APP had to write off these receivables. No doubt reluctantly. But I suppose at least we should commend APP for its effort to give small businessmen a hand.

Two of the beneficiaries' (AlGamea and AlDelijan) description of the goods were identical down to the date of their pro-forma advices. Perhaps, 14 December was a particularly auspicious Feng Shui day for selling A/C goods. Or perhaps just another remarkable coincidence in a transaction with many. On the other hand, if STCFS were acquiring A/C equipment for a project, it would use one description for the goods. Sellers would necessarily parrot back this in their quotes to show they were supplying what the buyer wanted.

A strange saga.

AlAhli Bank Kuwait v Maan AlSanea - Allegations and Analysis

This post reviews documents e-filed at the Supreme Court of New York website in connection with the case brought by Ahli Bank of Kuwait ("ABK") against Mr. Maan AlSanea and Saad Trading Contracting & Financial Services ("STCFS") (Case Index #602847/2009). As before I'd encourage you to take a look at the original documents yourself as this is the best way to form your own opinion. To that end you need to visit the Supreme Court of New York's website  and use the Case Index Number above to search for documents.

We'll use the plaintiff's allegations since the defendants' counsels' argument is more of a technical one - that New York is a forum non conveniens  and thus the suit should be dismissed to be tried in Saudi Arabia or Kuwait.  On that basis then they would not answer the charges but focus solely on dismissal.

You will find ABK's description of the transaction as well as their basic allegations in NYSC Document #1 pages 7-18.

ABK claims to have granted STCFS a US$60 million facility in September 2007 with US$50 million for letters of credit for building materials for Saad Construction business only and US$10 million for a working capital loan. In April 2008 the facilities were amended to increase them to US$100 million with US$80 million again for letters of credit for building materials for Saad Construction and US$20 million for a "clean" loan.

The court case is about four letters of credit ("LCs") that STCFS asked ABK to open in favor of three beneficiaries in the Kingdom of Saudi Arabia in an aggregate amount of US$24,999,545.00. The LC's were to be advised through The International Banking Corporation to the beneficiaries and called for the delivery of certain equipment. ABK is asserting the transactions were fraudulent. That the beneficiaries of the LCs were "front men" for Mr. AlSanea, that no shipment of goods took place and that the funds were not paid to the beneficiaries but were paid to STCFS.

In its allegations in the Complaint pages 7-18 in Document #1, ABK states that: 

1. Paragraph 8: Mr. Delijan "has since been discovered to be the General Manager of Saad Travel Tourism & Cargo Co, an affiliate of the Defendants, and not in the business of selling air conditioning and waterjet cutting machine systems". 
2. Paragraph 10: "The address for Safar stated by Defendants on the L/C application actually is the address for the Saad National School for Girls – another affiliate of the Defendants and not in the business of selling air conditioning equipment". 
3. Paragraph 11 D: During January 14-17, the beneficiaries submitted drafts. 
4. Paragraph 11 E: TIBC confirmed the signatures on 19 January. 
5. Paragraph F: Defendants presented ABK with commercial invoices supposedly signed by authorized signatories of beneficiaries along with signed delivery receipts including defendants' confirmation.   (AA:  Under UCP the beneficiary not the applicant submits documents to the bank.  And documents generally are submitted through the advising bank - though this is not a requirement).
6. Paragraph 11 G: ABK advised STCFS of discrepancies in the documents.  (AA:  Frankly, this boggles the mind.  As you'll see from below the documentary requirements were extremely simple - an invoice and a signed delivery note.  Hard to see why these wouldn't be in apple pie order).
7. Paragraph 11 H: ABK receives letters from STCFS approving discrepancies and requesting ABK to honor the LC and make payment to beneficiaries' accounts at TIBC. 
8. Paragraph 11 I: ABK makes payment of US$24,999,545 on 26 January.

Let's start with the four LC's. For that purpose we'll use the documents submitted by Mr. AlSanea's counsel Robert F. Serio, Esq., of Gibson, Dunn & Crutcher as part of his Affirmation dated 22 December 2009 (NYSC Document #17). That way we are using a source that is not hostile to Mr. AlSanea or STCFS. 

The LC applications are his Exhibit #9. As filed on the Supreme Court's website, Mr. Serio's Exhibit 9 only contains three of the LC's. For the fourth LC, we'll use Exhibit 1 to the 19 January 2010 Affidavit of Charles H. Camp, one of ABK's two counsel, (NYSC Document # 20-1). (The Exhibits in Documents 20-1, 20-2 and 20-3 appear not to be in the same order as in the Camp Affidavit. Unclear why this is.  Filing problems at the NYSC?)   Copies of the LCs applications are in his Exhibit #2 and the LCs actually issued are in Exhibit #7 (SWIFT format). 

Based on a review (and yes the LC applications match - at least three of them), here are some common details.

1. All four are dated 12 January 2009. 
2. All call for payment against commercial invoices and delivery notes. No shipping documents such as bills of lading are required as these are being shipped from the beneficiary's warehouse to the applicant Saad's. 
3. All are domestic LCs.  The LCs do not finance imports from outside the Kingdom.
4. All four LCs are to be advised through The International Banking Corporation with funds to be remitted to the beneficiaries' accounts at TIBC. 
5. All four LC's expire 12 March 2009 in Bahrain (at TIBC's counters).
   

First LC. 

1. Amount: US$7,825,815. 
2. Beneficiary: M/S Emad Youssef AlGamea Trading Establishment. AlKhobar. 
3. Goods: Air Horizontal Units, Chilled Water Fan Coil Units Thermostats and Accessories for Airconditioning Systems as per the Beneficiary's Proforma Invoice Dated December 14, 2008. 
4. Beneficiary Bank and Account: TIBC A/C #001-200010.
   

Second LC. 

1. Amount: US$8,194,830. 
2. Beneficiary: M/S Walid Ahmed Safar Trading Services Est. AlKhobar. 
3. Goods: Supply of 30GTN Series – Dual Refrigerant, Multicompressor, A/C Equipments as per beneficiary's proforma invoice dated 11 December 2008. 
4. Beneficiary Bank and Account: TIBC A/C #001-200033.
   

Third LC. 

1. Amount: US$3,003,700. 
2. Beneficiary: M/S Delian Fahed Al Delijan Est. –Trading AlKhobar. 
3. Goods: Supply of Waterjet Cutting Machine Systems as per beneficiary's Proforma Invoice dated 29 November 2008. 
4. Beneficiary Bank and Account: TIBC A/C #001-200009.
   

Fourth LC. 

1. Amount: US$5,975,200. 
2. Beneficiary: M/S Delian Fahed Al Delijan Est. –Trading AlKhobar. 
3. Goods: Supply of Air Horizontal Units, Chilled Water Fan Coil Units Thermostats and Accessories for Airconditioning Systems as per the Beneficiary's Proforma Invoice Dated December 14, 2008. 
4. Beneficiary Bank and Account: TIBC A/C #001-200009.
   

(I'll post something on ABK's "approval" of these transactions in due course.  This looks like a strong entry for the NBP "Credit War Chest" Award Contest).

Now let's turn to the flow of the payments. As part of the discovery process, ABK's counsel obtained information from Bank of America NY on the clearing account they hold for TIBC.   Exhibit 4 to the Camp Affidavit (in Document 20-1) consists of material provided by BoA.  In an accompanying certificate a BoA officer attests under oath to the accuracy of the documents.  The certificate is notarized. This information shows that TIBC's account at BoA received four credits from ABK on 26 January 2009.   Each credit is in the full amount of the four LCs above. 

Exhibit 1 (in Document 20-1) contains copies of additional information provided by BoA  – again sworn and notarized. This is even more interesting.  This submission contains the details of four payments made by TIBC from its account on  27 January 2009.  Each one is in the exact amount of one of the four letter of credit payments received the previous day from ABK.  Each of the  27 January debits from TIBC's account is directed to HSBC for credit to Saudi British Bank for credit to the account of Saad Trading and Contracting. 

But what I did not see mentioned in the Affidavit are two very curious things. 

1. The By Order Party and the Originator are identified as Saad Trading and Contracting.  That means that TIBC is saying that its customer Saad Trading is remitting the funds.  Under normal banking procedure this means the funds came from an account belonging to Saad Trading and Contracting. 
2. The Originator to Beneficiary Information says "Intercompany Funds Transfer"! Again this means that the owner of the funds is Saad.

Putting the best face on this on this information, it is a rather remarkable coincidence that STCFS just happens to have its own funds which exactly (to the penny) match the funds owed the beneficiaries on the four LC payments made by ABK the day before. And that it transfers them in the exact same four amounts the next day.  

As before a legal note.  At this point, as far as I am aware, no Court has issued a verdict in this or any other case against Mr. AlSanea or his companies.  Mr. AlSanea continues to maintain his innocence of any wrongdoing.

Hissa Hilal: Her Brave Face Obscured But Her Honest Voice Heard

Copyright The National Abu Dbabi

Here's the article from The National with a translation of her poem.  So far I have been unable to find a copy of the Arabic or another English translation.

Her brave face may obscured by the survival of taqlid min al Jahiliyya,  but her honest voice has not been silenced.

Good luck in the finals.  

All posts on Hissa now have the label "Hissa Hilal".  

Dubai World Restructuring: Implications of Low Interest Rate

One of my regular readers (or at least I think so), The Real Nick, raised a question to an earlier post of mine on this topic. "Please Sir, get to the point - what's the bottomline? How much less is this "gracious offer" from a de facto defaulter than what the original yield would have been for the lenders?"

A good question. And one that might of interest to others out there among SAM's vast readership. Heck, if Gulf Finance House can claim to have a proven business strategy, then I for sure am on much sounder ground claiming a "vast" readership. I have as the saying in Karachi goes a veritable "war chest" of readers out there.

This post addresses TRN's question and throws in a few other observations.

First, to his question what is the bottom line? How big will the discount be? 

It will depend on two factors. 

1. The original interest rate on the original loan. 
2. The repayment pattern of the rescheduled obligation.  

As to the first, the original interest rate, its effect will depend first on whether the loan or bond was priced on a floating or a fixed basis. For those on a floating rate, the question will be the margin. For any of the technically inclined out there I am ignoring basis risk.

As to repayment pattern, the longer the average life of the rescheduled debt the higher the haircut. Or in other words, If larger payments occur later in the repayment schedule the average life will be longer than if there were equal payments.

ASSUMPTIONS

To do the math we need several inputs.

First interest rates. Not all DW obligations are at the same rate. Not all margins are public. And I'm not inclined to try and estimate an average rate on US$22 billion of debt. So I've arbitrarily picked two rates: (a) 2.0% as a "margin" over floating rate LIBOR and (b) 5.5% as a fixed rate (which is the rate on the Nakheel Sukuk #2). These should be representative enough to give some ideas.

On the repayment pattern, I've come up with three scenarios. To keep things simple I've assumed annual payments of interest and principal in arrears, that is, at the end of the year. It's likely that the banks will want semi-annual payments. At least of interest. 

1. Scenario A: 6 equal annual installments. 
2. Scenario B: Staggered Installments of 0%, 10%, 15%, 20%, 25% and 30%. 
3. Scenario C: Staggered 0%, 0%, 10%, 15%, 20%, and 55%.
   

One more variable required to calculate the cash flow received for interest: LIBOR. Let's assume 1.00% for our "Base" Case. One year LIBOR is around .87%.

For the floating rate instruments, the discount rate will be the margin plus LIBOR. That's 3%.

For the fixed rate instruments, the discount rate is an invariable 5.5%.

A lot of assumptions.  Many if not all of which will be different when the deal is struck.  But, at this point, all that's really required are directional results to get a sense for likely impacts. These working assumptions will also serve to illustrate how the variables work and interact.

Here are the results.

Base Case: 1% LIBOR, Floating Rate Discount 3% Fixed Rate Discount 5.5%

Original Rate	Scenario A	Scenario B	Scenario C
Floating 2.0%	6%	8%	9%
Fixed 5.5%	14%	17%	20%

 

Alternative Case: 2% LIBOR, Floating Rate Discount 4%, Fixed Rate Discount 5.5%

Original Rate	Scenario A	Scenario B	Scenario C
Floating 2.0%	6%	8%	9%
Fixed 5.5%	11%	13%	15%

 

COMMENTS

1. The worst case under the 100% repayment is a bullet at the end of year six. With a 1% LIBOR and the 5.5% and 3% discount rates, that translates into a 22% and an 11% discount. 
2. For all scenarios, as LIBOR approaches 5.5%, the haircut on the Fixed 5.5% instrument reduces dramatically. That's because the discount rate remains fixed. With the Floating Rate, each time the rate goes up we add the 2% margin to it to determine the discount rate. What this means is that to get to a 1% haircut on the floating rate obligations, LIBOR needs to be around 200%. 
3. On an economic basis, the discount rate on both the fixed and the floating should be the same given the same repayment schedule and assuming that recovery is the same, that is, both instruments have the same probability of default ("PD") and same loss given default ("LGD"). 
4. Through the magic of accounting, one instrument (the fixed) is favored over the other. Mathematically, one can construct other scenarios where this favoritism reverses, though the issue with alternatives is the likelihood of their occurrence. As well, in an environment of 200% LIBOR, collecting DW's debt is going to be a rather minor issue among much larger problems. 
5. What this analysis suggests is that the repayment schedule is likely to be a prime driver of the haircut. A schedule with principal repayments weighted to the back-end will result in larger impairments under IAS #39 and thus larger haircuts.
   

IMPAIRMENT TESTS - PLURAL

Under generally accepted accounting principles like IFRS impairment is not a one time event during the life of a financial instrument or asset. Whenever there are signs of potential impairment, the holder must re-evaluate the asset. If further impairment has occurred, an additional provision must be booked. For non equity investments IAS #39 allows the write-up of impaired assets. Thus, provisions no longer needed can be reversed through the income statement.

If indeed DW reschedules on a floating rate basis, then whenever LIBOR changes, the future estimated cash flows change. When the cash flows change, a new impairment test is required.  Since banks may  reverse provisions, if all that changes are interest rates increasing, then some writebacks may be possible.. Over the proposed six-year tenor, fixed rate instrument holders will have the potential for larger writebacks than those holding floating rate paper given the structural factors mentioned above including the current low level of interest rates.

ACCOUNTING HAIRCUTS & ECONOMIC LOSSES

As noted above there is a discrepancy between the IAS #39 mandated haircut for DW based solely on the nature of the pricing on the instrument. That is, based upon its original rate and whether that rate was floating or not.

In the real, non accounting world, economic loss is what matters. Economic loss is not dependent on the pricing convention on the instrument. It is dependent on the instrument's cash flows and risk adjusted discount rate. The latter a function of the holder's WACC adjusted for any additional risk posed by this instrument over its general WACC.

PRICING AND FUNDING

It's also important to understand that on loans or bond rates like LIBOR are pricing references. The holder is not required to obtain his financing at LIBOR or whatever the benchmark is. Nor is it required to match fund the loan or bond. If interest payments are based on six month LIBOR, the holder can fund with shorter date money (daily, weekly, monthly, quarterly) or longer dated money (nine months, twelve months). The funding or "gapping" pattern chosen would depend on the shape of the yield curve.

Nor does making a loan at LIBOR plus a margin guarantee the lender will be able to secure funding at LIBOR. If it has to pay over the benchmark, that is not the borrower or issuer's problem. It is the holder's Similarly, in the case where the holder can source funds for less, it gets to "keep" the difference.

If a bank has a very large base of US Dollar retail customers, its cost of funds may be below LIBOR. On the other hand, small banks and most GCC banks probably can't borrow at LIBOR – but have to pay a premium over that rate. 

What this means for DW lenders is that those whose cost of funds is above LIBOR the "accounting" haircut is going to be higher than those whose cost is lower.   Though it won't be visible as the funding cost difference will be part of the undifferentiated amount of interest expense.

You Said What?: The "War Chest" of Bad Debts

GulfNews Dubai reports on some radical thinking at the NBP, which is described as having the highest level of non performing loans in Pakistan.  Now you'd expect a bank like NBP to have a large absolute number of non performing loans ("NPLs") if for no other reason than its size relative to other banks in the country.  But according to this somewhat dated KPMG study NBP also leads the pack in terms of percentage of loans. 
 

When life gives you lemons, make lemonade is the applicable guidance.  I can think of no other good reason for this remarkable quote. Not that it's a particularly good reason.

"Our non-performing loans are a war chest for our investors," Chief Executive Officer Syed Ali Raza, 59, said in an interview at his Karachi head office.
"We always had a very passive approach to recoveries, of depending only on the courts; now we have a menu of solutions. Recoveries are our No. 1 priority."

AA always considered Non Performing Loans less a "war chest" than "war damage" so it's nice to get a different perspective.

A great way to enhance shareholder value is tighten up underwriting practices to avoid making bad loans in the first place.  Even with a 100% recovery of principal (and somehow I'm guessing that doesn't always occur in Pakistan) the time and effort spent on recovery is a dead drag on return.

Of course, banks can't control external factors - the overall path of the economy, terrorism, foreign competition -- but prudent underwriting can mitigate problems.  The KPMG study suggests some banks have done reasonably well on this front.  And when a bank has a reputation of not collecting its bad debts, it usually attracts the wrong sorts of borrowers.  

Golden Belt Sukuk 1 - Inching Closer to Dissolution Event

Citicorp as Delegate has posted another update on the Bahrain Stock Exchange.

1. 22.2% of Certificateholders have voted for Dissolution.  A vote of at least 25% is required.  Earlier this month the vote was 13.62%.
2. The Delegate notes that it is not sufficiently indemnified to its satisfaction.
3. Saad has responded that as long as its assets are frozen it will not be proposing any rescheduling agreement.
4. The matters referred to in the Delegate's 2 February 2010 communication, e.g., Saad's failure to provide a promissory note for the next rental payment and failure to pay BSE fees remain outstanding.

Three comments:

1. It's unclear why it is taking so long for the Certificateholders to vote for dissolution.   This is an important step to protect their rights.  If we believe recent press reports, a large number of lenders are preparing to launch legal actions against Saad.  One doesn't really want to sue after other lenders have obtained judgments and may be in the process of enforcing them.  It's usually first come first served.  
2. Note the comment about the Delegate's lack of indemnification.  If you look closely at the announcement, you'll see that dissolution involves two things:  reaching the 25% vote and indemnifying the Delegate.  The Delegate is looking among other things for a commitment to be paid.
3. It's unclear why Saad would at least not provide the new promissory notes.  As you'll recall from my analysis of the structure of this transaction, the notes are a device designed to try and avoid a messy discussion about the "rent' (or interest) payments in Saudi Courts.  As the Offering Circular for the transaction warned, the periodic Payable Rental Amount (the "Rent") did not bear any discernible relationship to the underlying economic value of the land and thus just might be challenged in Saudi Court.  The pro note is an attempt to get around this by having the Rent as simple debt.  It couldn't be that Saad is attempting to weaken its creditors' case in a Saudi Court. The BSE listing fee is a trivial amount.  It would seem to be well within the living expenses granted Mr. AlSanea by the Courts.

Most recent earlier post here.  Other posts can be accessed using the label "Golden Belt Sukuk 1".

Dubai World - More Speculation on Rescheduling - 6 Years at Libor Flat

AlQabas has an article quoting informed bankers (are there any better kind?) on the latest proposal said to be "on the table" from DW:

1. 100% of principal
2. Six Years
3. Libor flat
4. Deal to be announced next week (I believe we heard that last week too.  And maybe the week before. Or the week before that one.)

AlQ then goes on to point out that if banks accept Libor flat, they will have to recognize a loss based on the difference between the interest rate on their existing loans and Libor.  And that this loss will have to be recognized in this year's financials (that assumes they agree this year).  

That's something I've noted before.  Since AlQ is agreeing with me, I'll have to note their keen acumen and clear thinking. 

While IAS #39 forces this unhappy event on the banks, one benefit is those banks who carry their DW loans at cost (e.g., "originated loans") get to use their current contractual rates as the discount rate.  These rates, granted in happier times, do not reflect the current higher margins applicable to Dubai. Those investors who carry DW as "available for sale" have to use the current market rate for DW debt which will be higher and thus their impairments will also have to be higher. 

Are there many lenders carrying DW's debt as available for sale or mark-to-market? Generally commercial banks carry loans at cost.  Depending on the investor, it may have booked the bonds at cost.  Or available for sale.  Or trading assets.  The latter two will need to be discounted using current market rates.  Ouch!  Though rates should come in a bit after the restructuring is finalized.  There's a good bit of "uncertainty" in the current margin.

One thing not mentioned by AlQ nor here at SAM earlier.  As part of the test for impairment, the banks will have to assess the likelihood of DW fulfilling its promise to pay 100% of principal. and be reasonably certain of full recovery.  If this is  doubtful, then an impairment has to be taken as well for the unrecoverable amount of principal.  

Frankly, from where I sit I think a lender to Nakheel or Limitless would be hard pressed to make such an assessment - unless of course there was adequate additional support - collateral, a government guarantee., etc.   Imagined islands in the Gulf or vast tracks of  undeveloped waterfront property onshore might pose some challenges in collateral valuation.

Finally, a flat Libor will cause some "blood in the waters" for those banks who do not borrow at Libor.  This will be buried within their net interest margin (by virtue of a higher funding cost) and so not explicitly visible as related to DW.  Smaller banks and wholesale banks are likely to suffer the most.  Those banks with large retail franchises where they are largely (but not entirely) price setters for cost of  retail deposits will be slightly better off.  Price takers won't fare as well.

Al-Abraj Holding Company Kuwait - Latest Developments in Bank Boubyan Lawsuit

AlQabas has a short item on the lawsuit by Boubyan Bank against AHC under the headline "Banks Request Delay in Bankruptcy Proceedings Against AlAbraj".

Two days ago the High Court - Commercial Section - adjourned its session until 20 April to study the case raised by Boubyan against AlAbraj Holding.   Legal sources are quoted by AlQ as saying that the delay was in response to a request from the Company itself as well as from three local (Kuwaitit) banks.  In its original complaint, BB asked that the Court freeze AHC's accounts with other banks and declare the Company bankrupt.  The banks want time to study BB's legal complaint as well as their records regarding AHC's account with them.

For those reading this post, there are at least three companies which use Towers (AlAbraj or Abraj) in their names.  AHC is a Kuwaiti company.

Earlier posts can be accessed using the label "AlAbraj Kuwait"

Saudi Capital Markets Authority - Changes to Corporate Governance New Definition of "Independent Director"

Well, it really is the season for corporate governance (or at least official announcements  about it).  The Saudi CMA has issued an amendment to the definition of "independent director" today.  So far only the Arabic text is posted.

A few quick comparisons:

1. Both codes set forth certain points which make a director not independent.  Bahrain's test is within the past one year.  CMA's the past two years.
2. The definition of "associate" is spelled out in detail in terms of personal relationships in the Saudi code.  The Bahrain Code just uses the term "associate" which does not appear to be defined in the Code itself.
3. The Bahraini Code has a relatively low threshold of BD31,000 (US$82,150).  Payments over this amount mean an individual is not independent.
4. The CMA definition includes owners of a controlling interest in auditors or advisors.  The Bahrain Code does not explicitly state this, though it does use the term "indirectly".

BIS Issues Consultative Document on Corporate Governance

Apparently, it's the season for corporate governance.  The BIS has just released a consultative document on the topic.  Text here.

The Central Bank of Bahrain is pretty well known for its practice of incorporating international standards into its regulations.  It will be interesting to see how they deal with this development given the release yesterday of Bahrain's much labored over Corporate Governance Code (which applies to all joint stock companies in Bahrain not just those regulated by the CBB.

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

Bahrain Issues New Corporate Governance Code

Copyright Gulf Daily News Bahrain

 

Today the MOIC and Central Bank of Bahrain officially announced the new corporate governance code which will be become applicable 1 January 2011.

Here is the text of the CGC as per the CBB website.

While the CGC has been a while in the making (and involved some co-ordination "issues" between the MOIC and CBB as well as the usual consultation process and objections by industry), the struggles to get the text finalized will pale next to securing effective implementation at the company level.

That being said it's a step in the right direction.

GDN article here.