Trouble first surfaced for Saudi Arabia’s most venerable business group, the Ahmad Hamad Algosaibi & Brothers Company (AHAB), in 2009. In that year, both the Bahairn based bank, International Bank Corporation (TIBC), and its Money Exchange division defaulted out of the blue, the fallout impacting upon the financial banking sector worldwide.
Founded in 1940 and owned by Gosaibi family, the AHAB has its roots in trading, farming and pearling, although it has since branched out, its interests now encompassing shipping, property and finance, among other things. Its Money Exchange division was set up in 1981 to handle migrants’ remittances from the kingdom, whilst the International Bank Corporation (TIBC) was formed in Bahrain back in 2002.
According to The Economist, when an aggrieved counterpart filed suit in New York, the group provided an astonishing explanation for its plight. Its lawyers claimed that the group was â€śthe victim of one of the largest financial frauds in historyâ€ť.
A key protagonist in the drama is Mr. Maan Al Sanea, who married one of the Gosaibi family’s daughters some thirty years ago. Mr. Sanea, ranked the third richest Arab businessman by Arabian Business magazine, is head of the Saad Group, a conglomerate with operations in construction & engineering, real estate development, financial services and investments.
After marrying into the family, Mr Sanea was put in charge of AHABâ€™s financial services businesses; businesses which seem to have borrowed with no limit over the years. One body, 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 â€śname lendingâ€ť basis, the borrowerâ€™s reputation counting for more than the state of its accounts. By the close of 2008, the AHAB groupâ€™s assets exceeded $30 billion, including $7.1 billion in cash and $10 billion in liquid securities. Its credit rating was investment grade.
2009: A bad year; TIBC defaulted its debts
In May 2009, the Saudi Arabian Monetary Agency (SAMA), the countryâ€™s central bank, froze Mr Sanea’s bank accounts. The bank gave no reason for its action. In a country that prizes reputation and discretion above all, such things do not normally happen to people like him.
The Saad group says that its business accounts are â€śunimpaired.â€ť Nonetheless, creditors have run for the exits In the aftermath of the Sanea seizure, the Saad Groupâ€™s credit rating was first cut and then withdrawn, and the United Arab Emirates were instructed not to lend any more money to Mr Sanea or any associated businesses. The Saad Group has admitted that it is facing a â€śliquidity squeezeâ€ť. To raise cash, it has been selling its holdings all over the world, including shares in HSBC, in which it was the second-biggest shareholder; Berkeley, a British homebuilder; and 3i, a private equity firm. The group subsequently blamed â€śevents specifically affecting the Bahrain banking sectorâ€ť and â€śthe failure of companies owned by a prominent Saudi family businessâ€ť for its misfortunes.
In the midst of these legal disputes, the Gosaibi family made the astonishing allegation that they have been victims of a US$ 9 billion fraud orchestrated by Mr. Sanea, who had total control of the AHAB financial business. Allegedly, Mr. Sanea borrowed billions of dollars using forged signatures, before diverting the funds to various companies and accounts controlled by him, including several in the Cayman Islands. The family also claim that they were not aware of the existence of TIBC, and allegations indicate that TIBC may have been a Potemkin bank, concocting fake customers and loans for the sole purpose of syphoning money from interbank transactions to Mr. Sanea’s own businesses.
Mr. Sanea and the AHAB dispute
In 2014, AHAB obtained a $2.5 billion judgement against Mr. Sanea in the Cayman Islands after he challenged the jurisdiction of the court and failed to file a defence. Mr Saneaâ€™s response to the Cayman ruling is that it was merely an interim judgement, â€śa purely administrative orderâ€ť obtained after he disputed the courtâ€™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.
Further good fortune arrived for Mr. Sanea with the news that, after six years, the dispute between the two parties was to come to an end in Switzerland. A Geneva prosecutor closed the criminal complaint filed by the AHAB group in August 2009, which accused Sanea and two associated companies Saad Investments Company Ltd and Saad Financial Services SA ď‚ľ of misappropriation, fraud, mismanagement, forgery, and money-laundering.
An American banker in Barhain
Amidst these controversies, another lawsuit came to light â€“ this time against American banker Glenn Stewart. Until July 2014, Stewart was the head of TIBC, having left Barhain only recently. He was responsible for running the financial firm for the Gosaibi family. His ordeal started in 2009, when TIBC defaulted its loans payments. Thereafter, Stewart, alongside Mr Sanea, had lawsuits filed against him in 10 different countries. In an article published in the New Yorker, Stewart said that his job was to â€śraise money and loan facilitiesâ€ť, which he stated he did very well. The same article also mentioned that a corporate-investigation firm, a team of forensic accountants, and a law firm in Washington, D.C. had been hired by the Gosaibis, suggesting that their success wasnâ€™t entirely a reflection of financial skill.
That is when Eric Lewis, a Washington, D.C. based attorney, came into the picture. Lewis was hired by the Gosaibis to defend the family against lawsuits from bank creditors. Lewis prepared litigation and filled a complaint in California, primarily because Stewart owned property there. According to Lewis, Stewart was a â€śprimary co-conspirator and accomplice of Mr. Saneaâ€ť in perpetrating a multibillion-dollar Ponzi scheme. The complaint also stated that Stewart â€śmisappropriatedâ€ť one hundred million dollars himself.
Ultimately, Stewart denied any wrongdoing and refuted any allegations that any Ponzi scheme took place at TIBC, as did Mr Sanea. The Bahraini government imposed a travel ban on Stewart, although the ban was later lifted and Stewart returned to the US.
The Gosaibis dropped their lawsuits against Stewart upon realizing that they were too implicated in the scandal themselves, and despite his signature being on most of the loan documents, Stewart maintains his innocence, referring to the ordeal as a â€śfamily disputeâ€ť between Sanea and the Gosaibis.
What comes next for AHAB group?
According to a statement issued by the company, a total of 90 banks out of 109 identified claimants, representing 60 percent of the companyâ€™s total debt, are either formally involved in the settlement process or have written to Algosaibi to say that they will participate.
In April 2015 the Wall Street Journal reported that AHAB had sent a letter to its creditors and had made progress in fixing the business in the wake of the appointment last year of Simon Charlton, a former Deloitte forensic accounting expert, as its chief restructuring officer. According to Mr. Charlton, the time is ripe to reach a comprehensive agreement with creditors, the company now prepared â€śto offer a substantial portion of its assets to achieve that goal.â€ť Indeed, some Saudi Arabian banks have already seized Algosaibi assets, whilst others are taking legal action as they seek to recover debt.
Although defaults by the Saad and Algosaibi family businesses were painful for the international and regional banks that lent to them, many have long since written off the debt or sold exposures to hedge funds and other investors for pennies on the dollar. These defaults prompted Gulf banks to revisit the common practice of name lending, or lending to large regional conglomerates based on names and reputations alone without undertaking a thorough financial analysis of the businesses themselves.
The statements, views, and opinions expressed in this article are solely those of the author and do not necessarily represent those of EMerging Equity.