Wednesday, July 21, 2010

How the DIFIC Counter-Claim against Bisher Barazi could drag Dubai back into the debt morass from which it most recently emerged.

So I have decided to have a closer look at the “Fraud Sweep” going on in the DIFC. I’ve written once already on the Dr. Omar aspect which, despite his payoff and release, remains an open question. It will actually be difficult to assess where the Dr. O case is because it is going on in Dubai Courts to the extent that it is being done within a legal system at all.

Then there is the drama of Bisher Barazi. It’s being played out in the DIFC courts with and unusual level of transparency. Both Bisher’s complaint and the response of the DIFCI are viewable by the public. Just go to the DIFC Courts website and click on “anonymous login,” search DIFIC, double click on the case and the documents come right up. They make for interesting reading.

I think Barazi’s complaint is kind of funny. Once Dr. O had been thrown out the new sheriff in town decided to clean house and basically told Barazi to go home. Barazi says that when the DIFCI told him to pack his things they said they were acting on the orders of the Financial Control Department, the organization looking into what happened to all the money that has gone missing from DIFCI. Barazi considered himself to have been terminated and according to his contract he had three months paid leave coming to him. The DIFC didn’t pay him. The new governor told him he would look into it. Nothing happened. He spoke with the guys from Finance Control and they told him he was not under investigation and that they had not ordered his suspension. He had a meeting with the governor and was told that he had no rights and if he wanted anything he should go to court. This he has done and he is suing DIFIC for $484,000 including $122,000 for “emotional damage.”

It seems to me that the new Governor of the DIFC quite reasonably wanted Barazi out once Dr. O had gone and told him to get lost. For some reason the guy decided to claim that it wasn’t his idea but that of the Finance Control department. My guess is that this is a simple administrative error. When they got rid of Barazi, nobody called HR to figure out precisely what Barazi’s contract said and he’s trying to take advantage of that for a few hundred thousand on what he surely thinks will be his way out of Dubai. Well, given the DIFCI counter-claim he’s getting more than he bargained for.

As humorous as Bisher’s complaint is the response from the DIFCI is absolutely hilarious. They begin by nitpicking when Bisher started at the DIFC, when he transferred over to DIFCI, that his 150,000 AED/month compensation was actually 90,000 in salary and 60,000 in housing allowance. Then in a bit of he said/she said they deny that the DIFIC ever told Bisher to leave the office.

This is where it starts getting bizarre and deadly serious.

DIFIC claims it did not order Barazi to leave. So if the DIFIC did not tell Barazi to leave, who did? Well, says DIFCI, the Dubai Government Audit Team. Oh, OK, and what evidence do they present for this version of events? A newspaper clipping about Dr. Omar. Yep, it's true, they present a few lines from an article in Gulf Business saying that Dr. Omar has been arrested and released pending charges of financial irregularities. Surely if the Dubai Government Audit Team ordered the suspension of Mr. Barazi there must be better documentation o this fact than a newspaper article that not only doesn’t mention Mr. Barazi by name it doesn’t name anyone but Dr. Omar. Call me crazy but I would think that the Dubai Government Audit Team would have better records than that I mean, they are an audit team after all.

Then they claim that Bisher tried to resign and they did not accept his resignation but rather placed him on “investigation leave.” What evidence is there of this? None is provided. They do say that “Although the claimant contends that the defendant has failed to provide any evidence of instruction from the Audit Department, the Claimant has in fact admitted that he was aware of the investigations.” How Barazi’s awareness of the investigation constitutes notification that he has been placed on “investigative leave” I have no idea. Sitting here in the New York Public Library, I too am aware of the investigations but I am not aware of having been placed on investigative leave. Surely the easiest way to prove the existence of instructions from the Audit Committee to place Barazi on administrative leave would be to provide a copy of those instructions. The fact that the DIFCI cannot do this actually proves Barazi’s point, not theirs.

Then come the serious allegations. DIFCI says that once it became aware of the Audit Team’s investigation it retained KPMG to conduct an independent review of the actions of the former managers of DIFCI. They claim that Mr. Barazi “breached his fiduciary duty and conducted himself in ways which would warrant his termination” it describes these things as “fraud, dishonesty, misrepresentation, and breach of trust.” Serious indeed. So what precisely does DIFCI accuse Barazi of?

Procurement of an Unlawful Bonus

This crime will be familiar to anyone paying attention to the Dr. Omar saga. DIFIC claims that Bisher and Dr. Omar conspired to pay themselves $1.2 million and $3.3 million respectively in “investment bonuses.” Then comes the zinger “The Claimant justified the Investment Bonuses by misrepresenting that DIFCI had realized an income of $60,000,000 in the 2007 financial year but deliberately failed to disclose that financial statements showed that DIFCI suffered a net loss of $80,000,000 over the same period.” At first glance this looks pretty damning and if Barazi cooked the books he should go to prison full stop. But that’s not what they accuse him of, indeed they're using his uncooked books as evidence against him. They accuse him of using realized income to justify a bonus when the net position of the firm was negative. It’s entirely possible for them to have realized a $60 million gain on a transaction while the book of open positions was down $140 million.

Then there’s the question of to whom were they making this misrepresentation? It seems from the counter-claim that the only person required to approve Barazi’s bonus was Barazi. If that is the case then who is to say ex post facto what was a reasonable level of compensation. At the time DIFCI had literally multiple billions of dollars invested. $80 million on the total value of the assets he was managing was not a material number. Paying someone $1.3 million for managing a multi-billion dollar fund, even if it has a marginal loss, as DIFCI did in 2007 is not a big number. The guys running the DIFCI today have decided ex-post facto that this was unlawful but at the time it was awarded it seems to not in fact have broken any laws. Barazi was operating in a system where there was no external review of his compensation. Given the amounts he was investing you could argue he was not taking full advantage of his capacity to pay himself. The people who set up this system in which Barazi and Dr. Omar operated sure as hell breached their fiduciary obligations to Dubai however.

Unauthorized Loans

Apparently Barazi applied for and received some personal loans from DIFCI after the board declared a moratorium on personal loans to employees. Dr. Omar approved the loans and there seems to have been no objection from the Board. They don’t claim that Dr. Omar was not authorized to approve the loans and if he was then the loans were legal. It may have been in poor taste for Barazi to ask for something that had been banned by the board but if it was within the power of Dr. Omar to grant them then I don’t see how this constitutes fraud.

Then there’s my favourite:

Failure to Conduct Due Diligence

Apparently in September 2009 as the Dubai real estate market was in free fall Barazi decided to buy $1 billion worth of off plan real estate in the Dubai Pearl development for DIFCI. He decided this on September 28, 2009. On October 5th, he sent a check for the first instalment to the Al Fahim Group and on the same day sent a letter to E&Y requesting due diligence. Thus clearly the due diligence could not have been completed before the transaction was executed. AH-HA! Caught red handed! He bought off plan real estate without conducting proper due diligence! Clearly a breach of his fiduciary duty! Given the fact that Dubai was weeks away from seeking a debt moratorium on account of a collapsing real estate market Barazi was almost certainly under a massive amount of political pressure to use DIFCI funds to shore up the market. But this is not why I think that Dubai should give Bisher Barazi a pass on this one. I think they should do it in the national interest of Dubai.

I think this for two reasons: 1.) if the Dubai Authorities are going to prosecute everyone who bought off plan real estate in Dubai without conducting proper due diligence for fraud there will be no one left to pay the subsequent instalments and the rents. Buying off plan real estate in Dubai without conducting due diligence is the national pastime of Dubai. Once the police had finished carting everyone to jail Dubai would need to hire the Saudi police force to throw the Dubai police force in jail for the same crime, and then they would have to find some other police force to throw the Saudi police force in jail for also buying off plan real estate without conducting due diligence. One may as well criminialize speeding or claiming that the reason you are late is because of the traffic, it would be an exercise in futility.

Reason number 2.) is that Nakheel and with it Dubai World have no chance of ever paying back their creditors unless a whole hell of a lot more people buy off plan real estate without conducting due diligence. The last thing Dubai wants is someone actually taking a look at the physical site of Dubai Waterfront rather than the architectural models. Someone might realize that the Crescent Shaped Islands which are valued on the balance sheet at a billion AED do not actually exist. No, no, the last thing on Earth Dubai should be doing is criminalizing the purchase of off plan real estate without conducting due diligence. Hell they should be giving out prizes for it, or allowing people to set their own bonuses as long as they invest some of the proceeds in off plan real estate for which they have not conducted proper due diligence. Now there's an idea...

In my next post I'll tell you the real reason Bisher and Dr. O are in for it.


Abu 'Arqala said...

The rationale for the foundation of the DIFC was an admission by and a promise from the Government of the Emirate of Dubai.

The admission: its basic business infrastructure - legal, regulatory, etc - was woefully deficient.

The promise: that the DIFC would be better. "World class" as the saying goes.

Both were and no doubt remain true.

What you describe regarding onshore institutions certainly supports the admission.

What you describe regarding the offshore (DIFC) institutions clearly demonstrates just how woeful "woefully deficient" is. If the DIFIC practices are laughable, what must the onshore Government Departments' be like?

Ken said...

I'm not sure that it really is a no brainer that the DIFC system is uniformly better than the domestic system. The ESCA judgement in the IPIC/Aabar transaction WAS arbitrary but it was also relatively just. The silence of the DFSA in the face of the blatant theft from the Damas shareholders seems to me to be the worst derilection of duty by a financial regulator in the Emirates in the past 5 years.

Ken said...

Probably because so far there doesn't seem to be any evidence that the books were in fact cooked. If there were accounting fraud involved then the DIFCI would have had a much stronger case to present in their counter-claim. Not only do they not allege accounting fraud but they actually use the books and records of DFICI to _support_ their claim.