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

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

 

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

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

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

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

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

More Coverage of Hissa Hilal

This from The National Abu Dhabi.

Sort of breaks the Western stereotype about Muslim women.

I particularly like this quote.

Covering my face is not because I am afraid of people. We live in a tribal society and otherwise my husband, my brother will be criticised by other men,” she said.

“I know they love me and they support me. It’s a big sacrifice for them in such a society to let me go to the TV and talk to the media. I am hoping my daughters won’t have to cover their faces and they’ll live a better life.”

Sister Hissa nailed it.

The niqab is tribal taqlid from the Jahiliyya.

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

Hissa Hilal: Update from 25 March Final in Million's Poet

So how did Hissa do in yesterday's competition?

Here's Bader Asman's report on the Million's Poet website.   The article is worth a read as it gives some background on the competition, the judges' analysis of the poems, and some additional information, including a trip the contestants took to Abu Tinah Island - which Abu Dhabi is promoting as one of the wonders of the world..  

This show is fairly popular.   Imagine, if you can,  an "American Idol style show"  except in this one the contestants recite classical poetry.  Nabati poetry.  Here's a webpage of a rather prolific Nabati poet from the UAE with an explanation of the genre as well as some of his poems..

Some background on scoring.  The judges will award 60 points and the public's vote will be translated into another 40 points.  

The judge's points are awarded in two stages.  30 yesterday and 30 next week Wednesday at the final session when the winner will be announced.  Public voting continues until the end of next week's final program.

The five finalist poets will then be ranked according to their total scores with the first place winner receiving AED 5 million, the second place winner AED 4 million and so on.

Here are the results for Wednesday's program:

1. Hissa Hilal (Saudi Arabia) - 28 out of 30 points for her poem on the media.  She described it as a device which spreads both good and bad news, praised the "enlightened" press for battling censorship and evil, and commended those journalists who gave their lives to achieve these ends.
2. Sultan AlAsaymar (Kuwait) - 28 out of 30 for his poem on terrorism.  Reportedly the images were powerful and direct.  The terrorist is ready to act even if it means destroying the smile of a child.  The terrorist has a cancer of the mind and no real homeland. 
3. Fallah AlMoragi (Kuwait) - 27 out of 30 for his poem on the Arabian Gulf (peoples, history, geography).
4. Jazaa al Boqami (Saudi Arabia) - 26 out of 30 for his poem on women.  Woman, a magical creature who though she faces ignorance and oppression, does not lose her inner essence.
5. Nasser al Ajmi (Kuwait) - 26 out of 30 for his poem praising the bravery and loyalty of soldiers defending their country. 

 At this point, Hissa is in the lead though I think the outcome is still far from certain. 

Next week Wednesday each of the five remaining contestants is to recite a poem they believe is the most beautiful written (outside of this contest).  The only constraint is that it cannot exceed 20 "bayts" (verses).  It can be an old poem or a new poem.  And apparently must be by someone other than the contestant.

The winner of the previous year's contest (Million's Poet 2009) has the right to defend his title as Million's Poet against this year's winner.  Ziyad Bin Hijab Bin Nahayt from Saudi Arabia who won the honors in 2009 has decided not to.  So one of the five contestants will be the Million's Poet for 2010.

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

Dubai World Debt Rescheduling Proposal: US$9.5 Bn Govt Cash & "100%" Repayment

DW has finally released its debt restructuring proposal.  The creditors have the details.  We have  somewhat less in the form of press releases and media commentary.

Here is the WAM press release.  And  Nakheel's announcement.  Here are accounts from  The National and Gulf News.

At this point, several key questions are unanswered.   Is there a margin on the financial creditors' debt?  What is the tenor of the maturity pushout? What are the principal and interest repayment terms?  

So what follows is a preliminary assessment.

Certainly, at first glance this looks less onerous that some of the earlier proposals which  were floating around in the media.  But in part that may have been the plan. Often creditors "float" harsh plans which are designed to frame the expectation of creditors.  Then the desired "final offer" can look quite good.   Also  a well timed leak or two is a way to informally test creditor and market reaction.  There's plausible deniability if the market reacts negatively, because a formal offer wasn't made.   And sometimes such reports are result from misinformed sources.

No doubt there was some of the former at play, though I suspect that the final offer was shaped by outside pressure.  Plenty has been applied particularly from the UK.  And so I suspect Dubai was "moved' off its  own plan to something more favorable to creditors.    

The first dramatic headline is about support from the Emirate - contrary to its earlier assertion that these were commercial companies and lenders had to look to the companies themselves for repayment.

Government of Dubai Support:  US$9.5 Billion in New Cash and US$10.1 Billion Debt to Equity Conversion  

1. Three introductory comments before we get into the details about DW and Nakheel.  
2. First, the funds are being sourced US$5.7 billion from those committed to by Abu Dhabi and US$3.8 billion from the Government of Dubai.  The Abu Dhabi portion is coming from the undrawn amounts on its earlier commitment.
3. Does this mean a wavering of support by Abu Dhabi for the restructuring?  After all it's not pledging new money.  I don't think so. In November when Abu Dhabi made its commitment, it did not disburse all the funds at once.  At that time I posted that it appeared Dubai had to justify future drawdowns to Abu Dhabi before the latter would fund.   If that interpretation is correct, then Abu Dhabi is committed to the rescheduling with roughly 60% of the new cash outlay.  Equally the Government of Dubai is putting significant new cash on the table now.  And,  unless Abu Dhabi forgives its previous loans, Dubai is obligated to repay Abu Dhabi for its financing, including this amount.
4. Second, the debt to equity conversion benefits creditors in two ways: cashflow preservation and balance sheet protection.  It reduces the debtor's cash outflow for interest and  principal, leaving more funds for the non governmental creditors.  It also provides an additional legal buffer  to absorb any decline in value of assets or investments held by the companies.
5. Third, given DW's past tendency to employ fuzzy math in its press releases, some of you out there might wonder if some of the numbers being bandied around this time are rock solid.  For example, does the equity conversion  of US$8.9 billion (mentioned in the WAM release) at the DW level also include the US$1.2 billion mentioned later with reference to Nakheel?  Or might  Dubai Inc inadvertently double counted again?  For this analysis, I've  assumed it is not.  That with Aidan in charge things are a bit more professional these days.      

Dubai World

1. New cash US$1.5 billion.
2. Conversion of existing US$8.9 billion of debt to equity.

Nakheel

1. US$8 billion for Nakheel 
2. The cash at Nakheel will be used to fund operations and settle certain liabilities.
3. While support is contingent upon reaching agreement with creditors, US$1.5 billion of the cash will be made available immediately to fund contractors building near term projects. More on that topic below.
4. Conversion of US$1.2 billion of government debt to equity.

Nakheel Debt Restructuring Proposal

Projects

1. It may seem a bit strange that Nakheel's press release on its restructuring gives emphasis to its projects by mentioning them first.  Why don't they lead with the proposal we're all interested in?  What happens to the creditors?  Good question.
2. Looking at Nakheel's 30 June 2009 financials, we get the answer.  Property Under Construction is some 77% of total assets.  Realization of this value is key to two things.  Nakheel's ability to pay its creditors.  Preservation of Nakheel as an ongoing business.  On the latter point, this is a restructuring not a liquidation.  Or at least that's what we're being told now.  Also the company already owes the contractors and suppliers for the work done to date.  Abandoning a  half finished project is a dead cash drag especially given the advance payments received from purchasers which would have to be refunded.  Completing as many projects as possible is therefore warranted as long as they don't result in a large cash loss.
3. Another good reason for this is on the liability side of the balance sheet.  Those AED27.9 billion (US$7.6 billion) in Advances represent client prepayments for purchases.  If the property isn't handed over, Nakheel owes the money back.  If clients lose hope that their villa is going to be built. they may walk away and stop paying their remaining commitments.  Nakheel then needs to replace that funding.  And if enough walk away a project may be uneconomical.  So it's a question of leverage.  Spend a dollar and save having to refund two or more.  Spend a dollar today and complete the project and get some additional cash.  Net net then the company is better off.  So then are its lenders.
4. The focus as you'd expect is on the near term projects.  Those projects further out are not of immediate concern in preventing a cash outflow.
5. And there is another reason to keep working:  the economy.  Continuation of these projects provides support for the entire economy in a period of stress.  The sudden stop of the property merry-go-round in Dubai is going to have some rather serious economic effects.  Better to mute them as much as possible.  And if Nakheel were to stop work, existing clients might decide to throw in the towel on their commitments.  Certainly, new clients would be hard to attract.

Offer to Clients 

1. As outlined above, complete the near term projects and give those clients updates on new completion dates.  The idea of the latter is probably to keep them "on the ranch" and reasonably quiet.  New handover dates will eliminate uncertainty.  A client might not like being pushed out but at least he's got a better idea of when his property will be ready.
2. Clients with projects further out are given options.  They can take a credit for what they've paid and  transfer it to a closer-in project.   A smart move.  This enables Nakheel to fill out those near term projects by shifting demand.  And, of course, if enough clients apply their existing payments to current projects, one can postpone, shrink or cancel future projects - as a response to "market demand" not its own financial condition.  If you're a client, do you wait for five more years for your project to be finished?  Or do you grab something being finished in the next 12 months? 
3. For those who don't want to wait or transfer, they can get their cash without interest after five years.  This is structured to give clients an incentive to either wait or take the transferable credit.  Assume that 5% is a fair rate for waiting.  This payment scheme results in a 22% discount.  Apply a 10% rate and you get a 38% discount.  Powerful incentives to take the alternative offers.

Offer to Trade Creditors and Suppliers

1. We still haven't gotten to the financial creditors yet.  Why?  Nahkeel needs these parties to continue its operations so they're mentioned next.  And showing that it is going to continue operations should have a positive effect on clients' belief that there purchases will actually be built and handed over.
2. What's on offer?  40% cash (based on agreed claims) and 60% (on estimated claims) in a publicly tradeable security at a "commercial interest rate".  Each creditor to receive up to an immediate AED500,000 cash payment or its full receivable.  Apparently, by number some 50% of contractors have amounts equal or less than this amount.  This will help out a lot of small businesses less able to cope with the terms being proposed.  Presumably, most or all of them are local companies - so another shot in the arm for the local economy.  And hopefully a way to prevent tipping these companies into distress and affecting local banks.
3. Let's dissect this a bit.  
4. Note the cash payment is on agreed claims.  If you look at Nakheel's 31 December 2008 financials, you'll see that there were some AED10.4 billion out of the AED28.6 billion in Accounts Payable and Accruals that represent billed but not yet agreed/certified claims.  While that was one year ago and there's been plenty of time to certify those claims, there is probably a significant amount of yet not agreed claims.  And some from 2009 work.  So the initial cash outlay has been muted.
5. 60% of estimated claims will be paid via a tradeable security.  Since it's tradeable, a contractor or supplier can cash out.  Of course, being tradeable does not guarantee there will be a market.  Or the price in that market, i.e., discount if any.  It does, however, make the transfer of a clear title (presumably unencumbered by any warranties for the services performed) a lot easier.  
6. The company is giving the contractor the benefit of the doubt that its yet unagreed claims will prove to be valid.   What's not clear is what happens with the unagreed claims on the cash payment.  If these are later accepted, I'm guessing that they become a new receivable from Nakheel.
7. It's also unclear what the term "commercial" interest rate means.   Does this mean a market rate of interest?  Or does it mean the sort of incentive terms that a contractor might give - which could include an element of discount from market rates?

Financial Creditors

1. Sukuk Holders get a preferential repayment:  100% of principal and periodic distribution/profit amounts ("interest") on scheduled maturity dates.  Two Sukuks.  Sukuk III AED 3.6 billion (US$981 million) due 13 May 2010.  Sukuk II US$750 million due 16 January 2011.  Presumably, being paid because it's thought too hard to get acceptance of any restructuring.  This may reflect the company's analysis of holders and which ones are likely to be hostile.  Looks like a victory for HF and distressed investors.  This is the best deal for financial creditors.
2. Secured creditors also to receive 100% of their principal and accrued interest.  And to keep their security.  Nothing remarkable here.  That's why lenders get security and register it to have priority over those who didn't.  Once they get it, they don't easily give it up - until they're repaid.  Unclear about the interest.  Does this mean at Libor/Eibor flat?  Or do the old margins stay intact? Is there a new margin?  I'm guessing (but note that word) there's no margin.  Existing facilities will be maintained and just extended or rolled over.  Two key points not disclosed:  What is the new maturity? And what are the terms of repayment of principal and interest?  These will determine the extent of the discount.  Some earlier musings on discounts via interest rate reductions.
3. Unsecured creditors a similar deal with respect to 100% receipt of principal and accrued interest/profit margin.  Note all such facilities will be rolled over into a new debt facility.  Since the structure is Ijara, I think this is necessary to keep Shari'ah boards happy that the facility  remains "Islamic". 

Great Moments in Democracy

I don't know whether to laugh or cry.
 

Gulf Finance House - Financial Delusions

GFH held its Ordinary General Shareholders' Meeting 24 March.  

Or as GFH described it: "successfully conducted and concluded its Annual General Meeting (AGM) and has secured its shareholders’ support and agreement to the Bank’s strategy to return to profitability."

There were some press reports that the shareholders' had not voted for the customary discharge of the board of directors for their conduct during 2009.  This is not correct.  Apparently, one shareholder refused to vote "yes" on this agenda item.  Under Bahraini Company Law, such a shareholder needs to ensure that his objection is formally recorded in the minutes for it to have legal standing.  Failure to do so means that later he cannot take any action against the Board.  Registering his objection provides him a theoretical legal "base" for any subsequent action he wishes to take in the courts or with regulators.   However, if only one shareholder has so objected, it's unlikely this will result in anything threatening to GFH.

One quote did catch my eye.  

The Gulf Daily News quoted Dr. Janahi on the difference between real and and what I guess he considers imaginary losses.

He said that while last year was particularly difficult across the globe, and particularly for GFH, the bank had in fact only suffered real losses of $72 million if you stripped out asset right downs.

Those who read GFH's 2009 Annual Report will recall that the net loss for 2009 was some US$728 million.   With a bit of financial engineering, Dr.Janahi has transformed this loss into just a mere US$ 72 million.

I thought I'd highlight this quote because there are a lot of people out there who think that non cash write downs of assets are losses.  And without the benefit of Dr. Janahi's theory of corporate finance these people may be needlessly suffering.

So you really didn't take a loss if you took a non cash charge on:

1. That Lehman Brothers or Bear Stearns stock you bought.
2. Those "AAA" related mortgage backed securities you bought.  This will I believe be particularly comforting to shareholders of GIB and ABC.
3. That apartment or house you bought which isn't worth what you paid for it.
4. Or those GFH shares you bought for KD1.000 in February 2008 which now trade at KD0.068.  (That's right 6.8% of what your cash outlay was).  Especially these.  Under Dr. Janahi's new corporate finance theory, you really haven't lost at all because the decline in value was non cash.

At least that's what the good Doctor would have you believe.   It's an application to matters financial of the theory that if you don't recognize a problem it doesn't exist. 

Not sure I'd buy any investments from a firm that believes this.

AlAbraj Holding Headed for Bankruptcy?

Citing informed sources, AlQabas reports that the meeting held yesterday among AHC's creditor banks did not reach agreement on a restructuring after discussion of the company's current situation and the possibility to restructure.  It's therefore expected that AHC might be the first Kuwaiti company to declare bankruptcy. 

Just a caveat, there are several companies that use the word Abraj (Towers) or Alabraj (The Towers).  This is the Kuwaiti Company, AlAbraj Holding Company.

More on Omar Bin Sulaiman

Here's an update on Dr. Omar Bin Sulaiman by way of a press item from WAM, the Emirates Official News Agency.   

It seems the AED 50 million consists of bonuses he awarded himself for his performance while Governor of the DIFC.

What's highly interesting is the last sentence in the press release.

He also said a number of similar cases will soon be referred by the Public Prosecution to the court of justice.

Not because I'm particularly shocked that there was corruption but that it seems to be being pursued.   

In an article based on this press release, Gulf News comments:

A number of high-profile corruption cases have gone to court with the Dubai Court of Cassation handing irrevocable imprisonment and a fine of millions of dirhams to two former Nakheel executives.
The same court handed a similar jail term and fine of about Dh14 million to an Emirati former executive of Dubai Industrial City.
The Cassation Court will issue its ruling against five officials involved in the same graft case.
The Appeals Court and the Court of First Instance are looking into ten cases of corruption involving more than a dozen officials of companies such as Deyaar, Tamweel, Waterfront, Nakheel, Mizin and Dubai Islamic Bank.
Some have been sentenced and others are being questioned in court. Gulf News has learnt that Deyaar's former CEO could be facing a fifth case.

Dubai World Presents Restructuring Proposals

According to press reports, Wednesday afternoon Aidan Birkett presented Creditors' Committee with restructuring proposals, described as incredibly complex by one unnamed participant.

Here the accounts from The National Abu Dhabi and from Gulf News Dubai.

Once again we're hearing about fairly long tenors at low or below market interest rates.   It seems  pretty clear that some sort of haircut is going to be required.  The current negotiations are no doubt about how to limit it and how to disguise it as much as possible.  

Also there's a new "wrinkle" to the story the presence of Lady Shriti Vadera, an ex UK Minister who was involved in the drafting.

Interestingly The National says that the Government of Dubai invited her to help monitor the process, while the Gulf News, a Dubai newspaper, says the UK Government sent her because UK banks who are owed US$ 5 billion had raised "questions about the process to London".  One might have expected the GN to present this as a Dubai initiative. 

Four Nakheel Employees Under Investigation for Corruption

AlQabas reports that six individuals are under investigation for corruption - four employees of Nakheel and two from a private company over the payment of bribes.    Quoting "The Emirates Today", AlQ says that the investigation is preparatory to formal charges.

They are accused of demanding bribes and forging certain documents (unclear to me what these are) and then using them.  Perhaps, sale documents for properties.

The chief accused the former Head of Marketing for Nakheel is accused of having received AED 930,000 (note the article does not state the currency) according to investigations carried out by the Public Prosecutor during his imprisonment from last June to January.

According to the article this is the fourth corruption case at Nakheel.

With all the hot money sloshing around Dubai during the boom years, it's no surprise that there was corruption of this sort.   It would have happened in almost every other place in the world.

Former Head of DIFC Arrested on Corruption Charges

Yesterday the Gulf News reported the arrest of a former prominent individual at the DIFC  for abuse of his post and AED 50 million (US$ 13.6 million) in financial irregularities.  At that point identified only with the initials OS.     

This morning he's been identified in the press - but not by the authorities - as Dr. Oman Bin Suleiman.  You'll recall last November Shaykh Mohammed relieved Dr. Omar from his position as Governor of the DIFC.

Those who remember their history will recall that back in 2004 the then Head of the DFSA Philip Thorpe and one of his colleagues were summarily ejected from their posts because of their temerity in raising some questions about real estate deals done by the DIFC with related parties. 

Damas Debt Restructuring Deal Near?

The National reports that Damas may be near to striking a deal with its lenders to restructure some AED3.2 billion (US$812.7 million).  That number seemed a "tad" high based on my recollection of their31 March 2009 financials.  If you look at Damas' 30 September 2009 financials, you'll see that that amount is the total of all liabilities.  Bank debt is some AED1.028 billion (US$280.1 million).  This is the amount to be restructured with the banks.  The Directors' Loan of AED150 million is likely to be set off against the Abdullah Brothers' obligations to the Company.

The Company reportedly has about 20 lenders.  It has been negotiating with an informal steering committee comprised of  Standard Chartered, HSBC, Emirates NBD, Mashreqbank, Gulf International Bank and ABN Amro.

The recent DFSA action should give the lenders comfort that the most abusive of the corporate looting is now over.  The DFSA Enforceable Undertaking will remove many but not all of those who were  atctive participants or complicit.   I would expect the banks to ask for the heads of the remaining members of  senior management as part of the restructuring deal.

Probably the best recovery for the banks is via a restructuring.  The Company has a complicated web of subsidiaries and affiliates with a jury-rigged ownership structure to get around constraints in other countries on "foreign" ownership.  Getting comfortable with all this will be another headache for the bankers.

Additional Details on Hissa Hilal

Copyright Gulf News Dubai

Here's a bit more on the story of this remarkable woman from Dubai's Gulf News.

Wednesday 24 March is the final round in the Million's Poet Contest.   The winner will be announced a week later.

And some more information from AlWatan and AlRiyadh Newspapers in Saudi Arabia.

His some biographical data.  She's in her forties, married and the mother of a number of children.  Number unspecified here but GN says four.  She uses the name "Rimiya" and has been a popular (in the sense of peoples' as opposed to elite) poet for over 20 years.  The GN says she was editor of poetry at AlHayat, a pan Arabic newspaper (owned by Saudi interests).   So all this talk of her being a housewife ignores her career.

She has said that both she and her family were frightened by the threats against her.  Her family has advised her to steer clear of topics such as "mixing" of the sexes, vote for women, and religious extremism.  She made the point that her poem was about the latter - not Ikhilat (mixing), though she did note that she did not agree with Shaykh AlBarrak's fatwa as mixing in the workplace was a necessity of life.  As a side note, Shaykh AlBarrak appears to have clarified his fatwa to mean unsupervised "mixing" - which would not include mixed classes at the university or at the workplace.

For those who criticized her for reciting poetry in public, she cited two examples.  Aisha Bint Talha who was a noted poet and was married to four of the companions of the Prophet Muhammad (SAAWAWS).  This is not the Aisha who was married to the Prophet (SAAWS).  And AlKhansa'a.

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

Amwal Al Khaleej Sues Abdullah Brothers

The National reports that Saudi private equity group, Amwal AlKhaleej, is suing the Abdullah Brothers for US$ 22 million over the Brothers failure to pay for some 22 million shares in Amwal AlKhaleej they agreed to purchase in June 2008.

Apparently, Amwal transferred the shares before getting the cash.  

 

A payment plan agreed in November was not honored by the Abdullahs.

Ernst and Young "Fully Stands By" Its 31 March 2009 Audit of Damas

The National Abu Dhabi reports that E&Y has issued the following statement.

“We fully stand by our audit report on the financial statements of Damas International Limited for the period ended 31 March 2009,” the company said.

You can read the Auditors' Report in the 31 March 2009 financial statements here and draw your own conclusions.

Adeem v Gulf Finance House: Comeback "Win" for GFH

Today the race is finally over.  

While the IT Team at Adeem Investments put up an  incredible fight, at the last moment the GFH Team lapped them.

Yes, in less than 115 days, GFH updated its website for several S&P rating downgrades and one upgrade.

Many commentators out there, including Abu Arqala, credit GFH will an innovative strategy which literally helped them lap Adeem several times.  Instead of going through each of S&P's downgrades and its one upgrade in sequence, GFH jumped to the last ratings action (an upgrade from SD to CCC-).

It's that sort of bold decisive action that has earned GFH the well deserved name it has in the market as well as reconfirming yet again (as if that were really needed) the validity of their business model and the unshakable faith and support of the market ....

This blog tried to contact the Adeem Team to get their reactions to this dramatic defeat, but since their website is still being upgraded to serve all of us better, sadly we were unable to make contact.

Khaleeji Commercial Bank Bahrain - Pretty Joins Board

You'll remember that Esam Janahi had resigned from the Board.  Today KHCB announced that Ted Pretty had joined the Board.  GFH owns roughly 37% of KHCB.

As you know, Ted is Acting CEO at Gulf Finance House.

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.