From The Economist
Six years on, the claims arising from a huge corporate scandal in the Gulf are still being fought over

Though little noticed by the international media, it was one of the largest corporate collapses of the credit crunch and the messiest of the numerous debt crises to afflict family conglomerates in the Middle East. More than 100 banks worldwide have altogether been contemplating losses of several billion dollars since Ahmad Hamad Algosaibi & Brothers Company (AHAB) defaulted in 2009. A tangle of resulting claims and counter-claims is being litigated in Saudi Arabia, Bahrain, America, Britain, Switzerland and the Cayman Islands. One seasoned investor, asked if he has ever been involved in a corporate failure more challenging than this, replies drily: “Yes, I had one on Mars.”

With AHAB and its creditors long unable to agree terms, the stand-off has been described as a “frozen war”. Six years on, some participants still see no end to it. But others say they have detected signs of a thaw. If they are right, it would come at a useful time for the Saudis, who are keen to attract foreign capital to help finance infrastructure projects. The allegations and counter-allegations—which are still to be adjudicated—point up problems with corporate and financial governance that would give any sensible investor pause.

Founded in 1940 by the Gosaibi family (pictured above) of Saudi Arabia, AHAB branched out from its roots in pearling and farming into finance, soft-drinks bottling, tyres and more. As the business grew, so did the number of family members with a stake. One of them, the daughter of one of the founders, married Maan al-Sanea, a Saudi billionaire of Kuwaiti origin. Mr Sanea is head of the Saad Group, a prominent investment company. At one time he was a big shareholder in HSBC, a global bank.

After marrying into the family, Mr Sanea was put in charge of AHAB’s financial-services businesses. These borrowed with abandon in the go-go years. One of them, the Money Exchange, took on loans of more than $120 billion between 2000 and 2009—a huge amount for a regional remittance and foreign-exchange business. Much of this bank credit was extended unsecured, on a “name lending” basis—with the borrower’s reputation counting for more than the state of its accounts.

The problems begin
The group’s finances began to unravel in 2009, as crisis-weary banks stopped providing fresh loans. TIBC, a Bahrain bank owned by AHAB, defaulted in May 2009. The Money Exchange followed. In the ensuing legal disputes, the Gosaibis made a startling but hotly disputed allegation: that they were victims of a $9 billion fraud, orchestrated by Mr Sanea—who, they claimed, had had complete control of the toppling financial businesses.

The Gosaibis have alleged that Mr Sanea “usurped the name and credit” of the family. They accuse him of using an iron grip on the financial divisions to engage in massive unauthorised borrowing in the name of, or guaranteed by, AHAB, with the help of forged documents; and of siphoning the proceeds to his own companies, including several in the Cayman Islands. Of the many billions that flowed through AHAB’s financial subsidiaries between 2000 and 2009, the family claims it received only $146m, in dividend payments.

A Cayman court concluded in 2011 that there was “compelling evidence of a pattern of massive payments” to Mr Sanea’s Saad Group that were “inexplicable having regard to the nature of AHAB’s business”. The court found that “there is a patent and now deemed proven dishonesty involved”, citing the example of Mr Sanea writing $2 billion in cheques to himself and his firms.

Among the fiercely contested allegations yet to be determined in any court are claims that TIBC was a Potemkin bank, with fictitious customers and loans; and that it was concocted as a device to transfer money raised in interbank markets from the bank to Mr Sanea’s own businesses. (The family claims it did not even know of TIBC’s existence.) AHAB claims that loans were also raised and diverted using letters of credit backed by non-existent exports, that the Money Exchange had very little substance and that its role, like that of TIBC, was to borrow money to fund Mr Sanea’s own companies.

Other issues to be determined include claims by independent experts that Gosaibi family signatures on 89 documents were forged. Mr Sanea asserts that the signatures were all genuine.

Mr Sanea is believed to be in Saudi Arabia, subject to a travel ban. He has consistently and categorically denied any wrongdoing. He insists that, far from owing billions, he is owed money by the family, via promissory notes. His lawyers point out that courts in Dubai, Abu Dhabi and Bahrain that have considered AHAB’s debts have found no evidence of forgeries.

Claims by the family that it did not know about any of the borrowings were undermined when files came to light showing one of AHAB’s partners became aware of some transactions in 2000-02. This led an English court to reject its claim that it had no knowledge of the loans.

The family points out that these transactions were conducted before the bulk of the borrowing took place. It continues to insist it was unaware of most of the loans. A representative says: “It is clear from the methods adopted by Mr Sanea to obtain finance in the name of AHAB, such as forged documents…that his actions were not authorised and were designed to avoid detection by AHAB’s partners, lenders and regulators…Why would the family sign up to a programme of borrowing that would almost certainly destroy a trading empire that had taken generations to build?”

A final legal determination still looks far away. Mr Sanea’s response to several allegations and complaints has been to challenge courts’ jurisdiction—including even in Saudi Arabia—and to seek dismissal of the claims. AHAB obtained a $2.5 billion judgment against him in the Cayman Islands after he challenged the jurisdiction of the court and failed to file a defence. The ruling itself withstood a challenge from Grant Thornton, the liquidator of some Saad-related firms, but it has not been recognised by foreign courts.

Mr Sanea’s response to the Cayman ruling is that it was merely an interim judgment, “a purely administrative order”, obtained after he disputed the court’s right to hear the case, and without a detailed review of the merits of the case. His lawyers point out that AHAB has not been successful in any other actions. A criminal complaint filed by AHAB in Bahrain stalled after prosecutors there decided not to pursue the case. In response to questions from The Economist, Mr Sanea’s lawyers also said that he “is not prepared to rehearse his formal defence in the media before it has been properly heard and adjudicated upon by a competent court.”

Many unanswered questions
For all the sleuthing by private and government investigators, forensic accountants and lawyers since 2009, much remains unclear. The extent and nature of Mr Sanea’s role is the subject of fierce dispute. Nor is it clear why hired hands, including experienced foreign moneymen, consented to be the titular heads of AHAB businesses that they seemingly did not run—or why the family apparently conducted so little oversight of those companies.

Then there are the unanswered questions for AHAB’s lenders. Why did dozens of supposedly sophisticated foreign banks lend to a group they clearly did not know much about? Even if they thought Mr Sanea was acting with full authorisation, was AHAB such a good credit that it deserved such large unsecured loans? The family has claimed that none of the banks contacted the partners about the extraordinary level of borrowing or asked for evidence of how the money was being spent. Whatever the truth of the allegations and counter-allegations, the creditors will surely now be asking themselves if it was wise to rely so heavily on the strong reputations of the Gosaibis and Mr Sanea when making such large loans to the business.

As for where the borrowed money went, tens of billions are believed to have flowed through New York, with numerous international banks acting as dollar-clearers for the transactions. This raises potentially awkward questions about the level of monitoring by correspondent banks and oversight by their regulators.

The banks suing AHAB (as the parent of the bad debtors) have outstanding claims of $5.9 billion. One-third of the debt is held by Saudi-based or -owned banks, the rest by banks from elsewhere in the Gulf or farther afield—including BNP Paribas and Standard Chartered. An unknown amount of the debt is in the hands of non-bank investors, bought in the secondary market.

In a bid to resolve these claims, AHAB met the foreign creditors last summer and subsequently made an offer to pay 20 cents on the dollar (ten immediately and ten after five years), plus at least half of any recoveries from litigation against Mr Sanea. Its negotiators are led by Simon Charlton, AHAB’s acting chief executive, formerly a forensic accountant with Deloitte.

Four-fifths of the banks, almost all of them non-Saudi, have indicated they will support efforts to reach a consensus, though not the current offer. They recently made a counter-proposal (details of which have not been disclosed). Mr Charlton says he has grown more optimistic that a deal can be agreed this year. But creditors still feel they are groping in the dark. The Saudi legal framework for establishing and enforcing the rights of those owed money remains rudimentary and in many respects unclear, despite some modest recent reforms. “Even if a deal can be struck, no one is sure how to implement it under Saudi law,” says an adviser to the banks.

Maan al-Sanea
Nor is it clear what assets are available for creditors to go after. AHAB has interests in, among other things, property, industrial products and fast food. But it is not required to report on them in detail, says a creditor, who likens the process to “Storage Wars”, a television programme in which participants bid blind on the contents of storage lockers.

Worse, Saudi Arabia has no equivalent of a Western-style “scheme of arrangement”, whereby unco-operative creditors can be “crammed down” if those holding 75% of the debt (by value) are on board. In AHAB’s case, the co-operative creditors so far make up only 60% of the debt by value. Lawyers reckon AHAB will need at least two-thirds, possibly three-quarters, on board to be confident of pushing any deal through. But no one is sure.

That means more of the Saudi banks will have to be brought into the fold. They have so far stood aloof, seeking preferential treatment while also pursuing AHAB unilaterally. To its credit, the government has refused to bend to them. Under Saudi law, all of the banks should be treated equally, as unsecured creditors. Two Saudi banks have won judgments against AHAB, but courts have, in effect, stayed these while talks go on with other creditors.

One participant says a Saudi judge has indicated that he will write to the Saudi banks, urging them to join any deal that is struck with the foreign creditors. But they might continue to resist unless the government arm-twists them into joining—and it has shown no sign of doing so. “Officials have taken the view that this is a private corporate dispute, even though it probably can’t be resolved without pressure from the top. That’s the disconnect in the entire process,” says a European creditor.

Nudge theory
Saudi officials are unlikely to approve a deal that does not include domestic banks. Optimists think the government has grown a bit more willing to nudge them into joining because it wants to attract more foreign investment to cut the country’s dependence on oil and to help develop local infrastructure. Among signs of greater investor-friendliness is a planned opening of the country’s stockmarket, the region’s biggest, to direct investment by foreigners, expected later this year.

The best the foreign creditors can hope for, even if the Saudi banks were to start co-operating today, is an agreement with AHAB at well below par, some time in 2016. Forging unity could be further complicated by the involvement of the non-banks that bought debt after the defaults.

If the required level of support—from either creditors or the government—proves unattainable, the saga’s future could prove to be a lot longer than its past. Saudi Arabia does have a system of sorts for liquidators to be appointed, to sell and to distribute assets in cases where private agreements cannot be reached. But this, too, is untested on such a scale. “We could be looking at another ten years or more,” says a lawyer, “with recoveries anyone’s guess.”

Resolving the impasse is an important test of how keen the Saudi authorities are to adopt standards for dealing with corporate failures that would satisfy Western investors and businesses. Unfortunately, external pressure for change has not been as strong as it might have been: foreign banks have not stopped lending in the kingdom; the practice of “name lending” still goes on, albeit on a smaller scale. The Saudis “haven’t been taught the lessons they should have,” sighs a lender.

Furthermore, despite court-ordered restrictions on the use of some assets—the Gosaibis lost their lucrative Pepsi-bottling contract in Saudi Arabia last year as a result—neither the family nor Mr Sanea has suffered an empire-crushing squeeze, reducing the incentive for either party to seek an accommodation. All the more reason why the Algosaibi affair should serve as a warning to anyone seeking to lend or invest in the kingdom.

For more on this story go to: http://www.economist.com/news/business/21646751-six-years-claims-arising-huge-corporate-scandal-gulf-are-still-being?fsrc=rss%7Cbus