Wednesday, August 4, 2010

“The Barazi Bruiser” encourages the "DIFCI Demon" to settle, or vice versa




When Muhammad Ali converted to Islam it was controversial. Ernie Terrell, an opponent, kept calling him Cassius. In 1967 Ali beat the hell out of the guy while yelling at him the whole time “What’s my name fool!?! What’s my name!?!” Ali, who won 2/3 of his fights by KO, never delivered a knock-out blow but rather won by decision. It’s been speculated that he did this in order to deliver a longer beating. As I read the Barazi response to the DIFIC counterclaim I imagine his attorney Imran Shafiq shouting “What’s my name fool!?! What’s my name!?!” at his computer while they delivering a solid beating to the DIFCI case all the while keeping his knock out blows in reserve.

The Barazi response opens with a description of Barazi’s background demonstrating that he is eminently qualified for the roles he held at DIFCA and DIFCI. It then goes into the detail of his compensation and his contract reaffirming what his salary was, its compensation, his entitlement to severance. Nothing too exciting. It begins to get interesting when it quotes the DIFIC Articles of Association to make the point that the Governor of the DIFC who is also the Chairman of DIFCI, that is to say Dr. Omar, who has the final say in the management of DIFCI and all other managers are appointed by and subject to his authority. This will be important later.

Next they use inconsistencies in the accounts of the DIFCI managers and the DIFCI counterclaim to shred the chronology and legality of DIFCIs actions in placing Barazi on the “investigative leave” and refusing to pay him. I highlighted some of this in an earlier post but the attack Shafiq launches is far more compelling and better researched. His alternate narrative is backed by quite a bit of documentation and a great many quotes from DIFC laws and DIFCI employee manuals. The core of the argument is that the claims of DIFCI are based on a manual that was not in force at the time of Barazi’s dismissal.

In the narrative that emerges, the people who took over the DIFC after Dr. O was forced out wanted to get rid of the old guard in a hurry. It looks like they did this without fully consulting Barazi’s contract, the DIFC employment laws or the DIFCI employee handbook. I have some sympathy with this, the guys who took over had bigger fish to fry and probably figured that they would get Bisher out of the way ASAP and cross the t’s and dot the i’s later. They didn’t count on Barazi trying to shake them down for $500,000. If they had left it at that and just disputed the circumstances of his unpaid leave then we would be having a boring discussion about which version of the employee handbook is relevant. They didn’t stop there.

No they went the extra mile and rather than debate the minutia of DIFC employment law their line of argument was that Bisher had been engaged in a fraud, or series of frauds and therefore was entitled to precisely zero and, sooner or later, would probably find himself standing tall before the man. Of course once you accuse someone in Dubai publicly of fraud they know what happens next and they’re going to pull out all the stops to defend themselves which is what Barazi and Shafiq do in their response.

The first thing they do is point out that KPMG has its own reservations about the investigation and that the allegations of the DIFCI are being made on preliminary reports all of which are heavily qualified by KPMG. Then the go after each item in particular.

At the very beginning of the discussion of the “fraudulent bonus” of 2007, they make reference to the fact that The Governor of the DIFC could award bonuses at his sole discretion. This was clearly a major error in the design of the governance of the DIFC but Barazi correctly points out that “Mr. Barazi was not responsible for the system by which such responsibility and accountability lay in the Governor alone.” Quite right, my guess is the governor isn’t responsible for it either despite being its chief beneficiary a point I make in an earlier post.

They then categorcally and effectively deny a litany of accusations that the DIFCI alleges but does not substantiate. For example the existence of a conspiracy between Dr. Omar and Barazi is alleged but no evidence is provided other than the fact they both received bonuses which they might well have done without a conspiracy.

The central attack on Barazi in the counterclaim is an allegation that Bisher justified a bonus on the strength of a $60 million realized gain when in fact the DIFCI had an $80 million loss. The DIFCI insinuates that this is a misrepresentation similar to accounting fraud. The argument on the DIFIC side is deceptively simple and the Barazi counterargument is obfuscatingly complex. In sum Barazi makes the following arguments:

1.) It is not formally necessary to actually make money to be paid a bonus
2.) Dr. Omar could decide bonuses at his sole discretion
3.) DIFCI executives benchmarked themselves against payout rates based on a study by Manpower (which implied a 20% payout rate) and their own experience of private equity (which implied a 50%) payout rate.
4.) Given these benchmarks their decision to pay themselves 10% of realized gains after $60 million was conservative.
5.) The decision to base the payouts on realized gains was made because it was conservative
6.) The payouts were made based on unaudited results which it was believed would not be materially different once the audit was completed.
7.) The discrepancy which is pointed out by the DIFCI counterclaim is the result of confusion about the chronology of when the audits were completed and...
8.) Some confusion which arose regarding the accounting treatment of two very large transactions: Bourse Dubai and the Deutsche Bank trade.

A few things stand out. No private investor would pay Bisher and Dr. O 50% fees to manage a PE fund. They had no track record and, as events have shown, would have been wiped out before they were able to create one. That said I personally don’t think their compensation of 10% was too outrageous. I have no view of the issues regarding chronology or realized vs. unrealized gains. Personally I don’t think they’re material. I do have to say that the fact that they contributed the DIFX to bourse Dubai at a valuation in the hundreds of millions justifies a bonus at least twice what they actually got. Don’t get me wrong, I dearly loved the DIFX and I spent nearly a fifth of my working life on it so I have every reason to claim it was more valuable than it was but to get the price they got for it was a miracle.

All in all I think they at least do a pretty good job of explaining in minute detail why the simplistic DIFCI contention of fraud is not what it seems on its face and this should sow a lot of doubt in the minds of the judge.

DIFCI also alleges that Barazi asked for a personal loan after they had been banned and characterizes this as a breach of his fiduciary obligation. More damning they allege that he agreed to buy billions worth of off plan real estate without conducting due diligence another grave breach of fiduciary obligation. The defence regarding the loan is pretty straightforward. Dr. Omar had the right to grant them, he did and Bisher paid it back within weeks of being granted it. Case closed. They also make short work of the allegation of the Pearl due diligence by producing text from the agreement that allows DIFIC to back out ex post facto if their due diligence turns up a material issue even though it is going to be conducted after the first payment is made.

So, all in all, the response from Barazi and Shafiq is a pretty effective refutation of the counterclaims of DIFCI. In cases where they can just shoot down the DIFCI they do it with dispatch and in areas where there is some nuance they seem to have used the “if you can’t convince them, confuse them” strategy so sow doubt about the veracity of the DIFCI claim. As effective as the overt defence buried in the document are two covert defences which will come into play if the DIFCI press their case.

The less powerful one partially emerges in the section on the due diligence. The document points out that in the fall of 2008 the Dubai real estate market was in free fall and the prospects for Cityscape, the annual real estate conference were grim. Then it says “Mr. Barazi was instructed that DIFCIL should make a substantial property investment in a development in the Dubai Technology and Media Free Zone known as “Dubai Pearl” and owned by Pearl Dubai FZ LLC which might be announced before the start of Cityscape in that year." This is not a surprise but it sure does shed some light on why that due diligence was not done before the transaction was executed. What it does not shed light on is who precisely it was that instructed Barazi: the sentence is in the passive voice. The subject is secret, that is until Barazi and his lawyer choose to reveal who precisely it was that was seeking to have DIFCI create a false impression of real estate demand in Dubai by channeling billions of dirhams borrowed by the state into privately owned off plan development. Whoever that was now has a real interest in Barazi not getting prosecuted.

My favourite however comes much earlier in the document. In my first post on this subject I thought it was really odd that the DIFCI counterclaim cited a Gulf Business story about the release of Dr. Omar as evidence that Barazi should have known that he was under investigation. I thought that was preposterous and so does the Barazi legal team who point out the obvious that it does not oblige him to admit any knowledge of the “nature or extent of such investigations as may have been and/or still are being conducted by the DGAT, or as to the alleged charges brought against Dr. Omar or any other employee of the DIFC.”

That’s all well and good but the final clause conceals the knock-out blow: “If and insofar as DIFCIL may seek to assert the truth of (i) any such report (ii) any such investigative findings and/or (iii) any charges that have been laid against any person, they will be put to strict proof of same.” (emphasis mine) This is code for: “if you attempt to pursue me for fraud I will use the higher burden of proof within the DIFC legal system to attack your actions against Dr. Omar in Dubai proper and, (considering we can assume Barazi and Dr. O are in constant contact,) I will very likely be able to show that YOUR ACTIONS AGAINST DR. OMAR HAD NO LEGAL BASIS WHATSOEVER AND THEREFORE ARE INDISTINGUISHABLE FROM EXTORTION.”

What’s my name fool. What’s my name.

So then it will come down to just how much embarrassment the Dubai establishment is willing to take at the hands of Bisher Barazi. I’m not sure, what will happen. They might cave and pay him to go away, or they might say, “Listen little man, its not a secret that this is an autocracy and we can dispose of Dr. Omar as we like. As for public opinion, try to imagine how little we care. As for you, if we don’t win in the DIFC we’ll get you in Dubai proper so either way you’re going to jail. Enjoy.” It may turn out that Barazi, with his elaborate overt and deviously subtle legal arguments, has done nothin more than bring a very elegant knife to a gun fight. Either way the stakes are high for all involved. It’s going to be interesting.

14 comments:

Anonymous said...

Brilliant. You write beautifully - I wish I'd known you when you were here.

Anonymous said...

Outstanding post, Ken. Some graet writing, in addition to the usual top notch analysis.

Ken said...

Gosh, thanks guys. I would never have thought that a close reading of a legal document could be called brilliant. I'm humbled by your praise. -KM

Anonymous said...
This comment has been removed by a blog administrator.
Ken said...

That may well be but under the rule of law it is not enough for something to smell, it has to actually be against the law. The problem here is that the people who set up DIFCA and DIFCI set it up as a mini-emirate with Dr. Omar as the Emir with no checks and balances or oversight. I don't disagree with you, I'm sure Dr. O and Barazi acted collusively. The fact remains that if you want to live in a nation of laws, it doesn't matter what you can smell, it matter what you can prove.

Laocowboy2 said...

Dubai can of course do anything it wants to anyone in situ - we have seen that. However what they seem to forget is that what they do to people is getting more and more attention outside - and will make anyone seriously thinking of an investment into Dubai think again - partcularly when rules appear to be increasinly at risk of being changed on a back-dated basis.

Anonymous said...

The DIFC continues to have almost no HR policy, which I believe was the duty of BB to institute as MD during his tenure, so the failure of meeting a non-existent policy was to his own benefit but a failure of his own accountability. How easy it is to make sure your own systems protect your own back. Why was there never a proper board for the DIFC? When the Thorpe/Hay-Davidson scandal occurred there was supposed to be changes.

Anonymous said...

Ken, you still go very light on BB. I have just read the counterclaim, and frankly most of it is very non-legal. "He paid his respects", etc? Come on. And the critical day on which the whole financial performance of the institution was queried by the auditors - poor thing - "in the many emails he would have received on this day" he apparently was too busy to note something so critical? Have we not just established his amazing audit & risk credentials with AA? (snigger....) As a former CFO, and CEO, getting through the audit is your LIFEBLOOD. To think he's already "tried" to resign - why? Writing on wall?? VERY SIGNIFICANT changes occurred to his unaudited accounts over which he was responsible. No real trained accountant would be "unaware" of this risk. And then he doesn't know proper IFRS accounting principles?? This only calls into question his ability as an accountant, auditor and risk assessor. And how dare PWC send such lengthy questions for audit of an extremely important and complex company? Goodness, and only at the end of February as well. How much time, and how much importance must they attach to this pesky audit? "Get out of my way, I have a yacht to purchase!"

Ken said...

@Anonymous 1: I doubt that Bisher ever imagined he would be making use of the faulty HR procedures in the DIFC when he was CFO, I don't think he was ever MD. I think I'm inclined to agree with you that it's a bit cheeky that he is seeking legal redress for this but that's who he is and it is his right. He may not be doing himself any favors but he is entertaining the rest of us.

@Anonymous 2: Excellent comment. Thanks for the structured critique. I agree with you that I am too light on BB because I am using this to attack the weakness of the case DIFCI makes against him. The points you make seem valid but they are not in fact what the DIFCI alleges. Given the fact they these would be much more damaging if alleged and provable I assume the DIFCI would have alleged and proved them. Since they do neither I assume that there is less behind them than it would seem. Time will tell.

jihad said...
This comment has been removed by a blog administrator.
Anonymous said...
This comment has been removed by a blog administrator.
Anonymous said...

Have you seen the latest reply on the Barazi case?

Anonymous said...

Have you seen the latest reply on the Barazi case?

Ken said...

@jihad/anonymous

I'm afraid I have to disagree with you fairly strongly. It is not the responsibility of Dr. O's subordinates to correct his errors but his superiors. His superiors did nothing and indeed set up a system within which Dr. O had free reign.

As a result, as you quite rightly point out, some collossally bad decisions were made. But the people who are to blame are those who set up the system.

I also challenge the idea that Dr. O admitted wrongdoing by repaying his bonuses. He was imprisoned without trial and held without charge until he disgorged those funds. This is extortion not an admission of guilt. He was never given a chance to defend himself. This is of course why Bisher makes that veiled reference to it in his counterclaim.

-KM