Tuesday, August 3, 2010

So I'm not sure what a "Cascade Agreement" is but I think it has something to do with a waterfall. Hey! Look! There goes a Damas shareholder!



The long suffering shareholders and creditors of Damas are now able to see the full extent of the damage that has been done by the Abdullah Brothers. The annual report puts a brave face on things. With justifiable pride they point out that the company earned 9.8 million AED not including extraordinary items. This grain of good news needs to be taken with a pinch of salt, or rather a pillar of salt because those extraordinary items weigh in at 1.9 billion AED. So if Damas can keep up the good work, they’ll have repaired the damage from these one off write downs in 200 years. Unfortunately for the creditors, and fatally for the shareholders, Damas’ auditor said the company has to come up with a restructuring plan by the end of the month or it may close its’ doors.

I have to admit that in continuing to write about The Great Damas Heist I feel a little bit like George Orwell in “Shooting an Elephant.” I’ve written so much about it that people seem to expect me to continue even though the story has its’ edge because it is obvious how it ends. Alas, my inbox is full of requests, and some of you are new to my writing through its recent syndication. So I’ll point out a few things and tell you how it’s going to end.

The first thing you have to do is get around the Dubai Newspeak that is used to describe what has gone on with regard to the “unauthorized transactions.” They are universally described in the Damas documents and in the press as monies “borrowed” or “owed” by the Abdullah Brothers. The documents in the DFSA undertaking demonstrate that the at the time of the transfers the Abdullah brothers were not obligated to pay the monies back nor were they charged interest. From my perspective an unauthorized interest free loan for an indefinite period is called “theft.” This makes it easy to interpret their actions through the simple expedient of lip reading. If their lips are moving, they’re lying. If their lips are not moving, they’re stealing.

The next thing you have to do is connect the dots that the DFSA is unwilling and the Dubai press is unable to connect. The first thing that stands out is how ridiculous the continued involvement of the Abdullahs as advisors to the company because of their “relationships” and “reputation.” Their reputation for fraud caused a massive liquidity crisis.

The brothers “borrowed without authorization or interest for an indefinite period” or “stole” depending on your frame of reference, two tons of gold from Damas. Interestingly it turns out that the gold that the Abdullah brothers stole was not even the property of Damas. Damas had borrowed it from other merchants and banks. When the other merchants and banks discovered that the Abdullahs were able to simply drive up in a truck and make off with the gold they had lent to Damas they quite reasonably either called in or demanded substantially greater security against the loans. This in turn caused a massive liquidity crisis at Damas which itself resulted in further losses.

It would seem to me that given the fact that the Abdullah Brothers reputation for theft has made it impossible for Damas to acquire the raw materials of its main business on commercially favourable terms would be a pretty good reason to exclude them from the management of the company even in an “advisory” capacity. The people who say that the business depends on reputation are not wrong but the Abdullah’s have a reputation which is commercially fatal to the business of Damas, yet there they are back in the saddle. Now wait a minute you say, doesn’t Damas have an entirely new board? Aren’t the Abdullah Brothers working in a “non-executive” capacity? Surely this will put the gold lenders at ease. Personally I don’t think so. Anybody who has two tons of gold stolen out from under them is going to be understandably sceptical. There was a board at the time the Abdullahs absconded with the gold last time, what makes this board different. They didn’t even have the willpower to stand up to the Abdullah Brothers and keep them out. I’m sure it wasn’t their idea to bring them back in.

There are also some interesting items in the write down list. One of them is the $80 million Dubai Ventures loan. This was money that the Abdullah Brothers had Damas lend to Dubai Ventures, a private equity firm, to invest in the Damas IPO when it turned out that not enough buyers could be found to give the Abdullahs the valuation they wanted. This created the illusion of interest at the higher price and enough of it to clear the 25% hurdle of independent investors necessary to conduct an IPO on the DIFX. Of course since the shares were purchased with Damas’ own money they were not at all independent. This effectively rigged the book build (auction) and forced the foreign investors to overpay. This helpfully increased the amount the Abdullah’s were able to steal. And of course whose money was used to force the shareholders to overpay? Thiers. At least that’s what it looks like now that Dubai Ventures won’t be paying that loan back. Who owns Dubai Ventures? Dubai Holding. Who owns Dubai Holding? Sheikh Mohammed bin Rashid Al Maktoum the Ruler of Dubai. Naturally Sheikh Mohammed is not going to take the hit, the Damas shareholders and creditors will be doing that. Dubai wins again! Thanks for playing gentlemen shareholders. Can we interest you in some off plan real estate?

Another interesting item that they are reserving against are the shares of Damas that the Abdullah Brothers pledged in the event that they cannot repay the loans. Apparently there are some issues with transferring those shares and so they cannot be properly valued. I pointed this out quite some time ago.

Finally, and unsurprisingly Damas thinks it wise to reserve against the possibility that the Abdullah Brothers will not in fact pay back the money and the gold that they “borrowed indefinitely with neither interest nor authorization.” This makes a lot of sense considering that they’re quite a bit overdue with regard to their payment obligations under the Settlement Agreement. There is even some talk of shredding the Settlement Agreement upon which the DFSA unenforced enforceable undertaking is based in favour of something called a “Cascade Agreement.” I’m not really sure what that means but I like the sound of it. It reminds me of going over the falls in a barrel. Joking aside apparently the Abdullah Brothers owe money to other parties aside from Damas. Apparently what they did was steal money from Damas, use that money as a down payment on some real estate and borrow the rest of the purchase price against the asset. That means that the Abdullah brothers, and with them the Creditors and Shareholders of Damas, are behind the banks in the capital structure of these investments. This is what is meant by the Dubai Newspeak “uncertain title.” If you put 20% down on real estate that has declined 50% in value using funds you have stolen from a company you control your equity has been wiped out and so you no longer have title. Nice.

It seems that the parties involved have decided to indulge themselves in the fiction that if they just don’t sell now but wait a while all will be well. While it is perfectly understandable that this is not the optimal time to liquidate Dubai real estate, and I’m sure the banks would agree, the fact remains that this is beside the point. If the Abdullah Brothers investments in real estate using stolen and borrowed funds are underwater so be it. The remainder of the Abdullah fortune should be being auctioned off and the proceeds should be going to Damas. That is not happening. The fact that the investments made with the “unauthorized interest free loans of indefinite duration” have been wiped out does not mean that the Abdullahs did not steal the money. They did. They should be on the hook for it and the DFSA and the Dubai Courts should be liquidating their personal assets in order to pay back the creditors of Damas. ALL their assets not just the ones that they purchased with Damas money supplemented by banks.

But of course this will not happen. The Abdullah Brothers are rich and connected Emiratis. They won’t have to sell their assets, they stole almost 70 years worth of earnings from Damas in 18 months that should last them a good long time. The Damas Creditors will probably roll the debts in the hope that something can be collected over time but they will be disappointed. The shareholders will be wiped out entirely. This is because the shareholders are unconnected international investors. They bought into the idea that inside the DIFC they would be operating in a legal environment that would protect them supervised by a regulator that was operating according to international best practice. Well they won’t make that mistake again.

12 comments:

Laocowboy2 said...

I couldn't agree more - the foreign investors were robbed (as were the lenders if we only had the details - the financials were clearly cooked). However the last sentance is the most telling of all - and a key reason why the "Dubai is coming back strongly" puffey is just PR. "Rob me once, shame on you. Rob me twice, shame on me". The breadth of lenders to Dubai Inc in its various forms and the reach of the internet means that it is not just oil and cash that Dubai has run out of. The most imprtant supply of all has stopped (at least for a while) - the supply of gullible suckers.

Abu 'Arqala said...
This comment has been removed by the author.
Abu 'Arqala said...

Part 1 of 2

(1) Gullibility

Luckily for Dubai investors and bankers suffer from ADD. A couple of years of relatively good news and it will be let the good times roll again.

(2) Abdullah Brothers and Damas

The involvement of the Flying Abdullah Brothers is distressing.

I think there's a hint in the Chairman's statement why they're back. They have as the saying goes Damas by the short hairs.

(1) The FAB have the designs to certain jewellery. And thus perhaps the operative equivalent of a "patent". Wonder if that fact was in the prospectus?

(2) Besides their undocumented temporary and no doubt fully justified withdrawals of material assets that belong to someone else, the FAB 3 were also possessed of a generous and kindly spirit when it came to dealing with others.

Which explains the gold that Damas lent out to others (while leaving it recorded as "Inventory"). Some of which is no doubt JV's with the FAB or companies in the FAB's names but held in trust for Damas. And who would be more trustworthy?

And of course the credit they extended to no doubt highly credit worthy VIPs - and which are now past due and uncollected receivables.

And now Damas is forced to rely on the FAB 3 to persuade their friends to repay those obligations.

In turn the FAB 3 get a bit of rehabilitation. And from self interest, help maximize the net recovery of their considerable investment in the Company.

Abu 'Arqala said...

Part 2

Since Damas' new board has taken a proverbial accounting bath, much of the write offs will be recovered.

Making them and the new management look like blooming business geniuses.

And as well perhaps giving cover to further rehab of the FAB 3. "They were instrumental in recovering assets".

With the writebacks come earnings, a jump in value on the exchange. And maybe another IPO (See point #1 Gullibility above).

Let's just hope someone is making sure that any recoveries go straight to the Company. And no commissions for arranging a discount wind up in the FAB 3's pocket.

There's probably another unspoken reason for their return. That has to do with "uncertain title". I'm willing to bet that many of the subsidiaries are actually registered in the FAB 3's names or their front men (particularly the overseas companies where there are restrictions on the extent of foreign ownership). A word of encouragement or discouragement from the FAB 3 and these companies could pose a lot of trouble for Damas.

Better to keep one's enemies closer than one's friends. And there is a hint of that as well in the Chairman's statement.

Abu 'Arqala said...

Ken,

Finally something for you to prompt another WallSt WTF speculation.

The Damas IPO was an important one for the new Nasdaq Dubai and Dubai Inc.

A large issue. In fact given the ND's stable of listed stocks, even just being a deal would be important.

The successful privatization of a local family company.

International investors joining with local and regional ones.

When the issue ran into trouble, all this was threatened. Along with the FAB 3's own personal interests.

Could there have been a wink and a nod from "certain parties" to find a way to help the FAB 3 "close the deal"?

Choose a vehicle with some advantages with respect to disclosure and accounting requirements. And whose shareholding might usefully deflect questions if someone (say a regulator) was looking too closely.

The hope that as the boom continued the position could be unwound.

Everyone would be happy and rich.

Ken said...

AA, thanks as always for your insightful comments. Having read your blog I sometimes feel like I'm The Onion to your New York Times.

I'm afraid I don't really agree with you that the Abdullahs' have Damas by the short hairs. This is because the state has a monopoly on the use of coercive force.

It is well within the power of the DFSA and the Dubai Courts either on their own behalf or on behalf of the shareholders as delegated to the BoD to use that coercive force to compel the Abdullah Brothers to provide the cooperation that the BoD are seeking by rehabilitating them.

Let me assure you that a few sultry Dubai August days in an unairconditioned cell with 35 Pakistanis who have overstayed their visas would be more than enough to convince the Abdullah Brothers to play ball. Yes Dubai has all kinds of ways to extract what it wants, ask Dr. O.

That is not happening because the powers that be in Dubai have no intention whatsoever of enforcing the law against the Abdullah Brothes not because they are in possession of some secret knowledge that can only be obtained by reinstating them to the management of the firm.

I had hoped that by writing about it I would be able to draw enough attention to it, and indeed these are my most popular posts by far, that the Dubai authorities would take advantage of the opportunity to extend the writ of the rule of law in Dubai.

No joy.

Abu 'Arqala said...

Ken

Thanks for your kind words. An apt analogy. On the one hand the dying media - boring ponderous - versus the living media - alive growing and entertaining!

Contrary fellow that I am and continue to be ...

(1) If the "authorities" in Dubai will not compel the FAB 3 to perform, then they indeed have Damas by the short hairs. RHIP and not just in Dubai.

And if you give credence to my speculation on the IPO, maybe reasons why not to push too hard on the Brothers - lest they tell a tale out of school.

(2) Sometimes even the threat of jail does not necessarily guarantee a result - particularly when one is looking for action dependent on a third party.

Not the person threatened as in the case of Dr O who was requested to return his "bonus".

So instead of "performance" in the sense instead of results, one gets "performance" in the sense of theater.

"I tried to persuade Mr. Y in India to perform, but he just wouldn't. I'm at my wit's end with him".

"The best I could do with Abu Arqala is a 50% discount on his obligation".

"Ken has raised a counterclaim exceeding the original debt."

Anonymous said...

The Abdullah brothers have been referred to as Emiratis whereas they are naturalized Emirates from Damascus or Damas!

Shishkabob said...

I'm not sure if it's a coincidence but the Damas retail outlet in the DIFC appears to have shut up shop - having said that, so have the majority of the shops adjacent to them....

Laocowboy 2 said...

Ken - in case you did not see it, an item in today's The National
http://www.thenational.ae/apps/pbcs.dll/article?AID=/20100818/BUSINESS/708189885/1005

Is the muppet from Trowers & Hamlins talking about the same Damas? According to Mr Muppet, the action by the DFSA "sent a clear message to corporate Dubai: impropriety will no longer go unpunished". Not really - it merely demonstrated that if you are an Emirati with sufficiently close connections with those who matter, then you can get away with dayliht robbery.

Ken said...

Dude, that is hilarious. -KM

Anonymous said...

That poor H&T boy was a trainee solicitor, obviously had to write something for their Summer 2010 brochure which would be distributed globally. Poor bugger - his reputation is now mud. Lesson No 1 as a new solicitor - never be a patsy for someone more senior than you!! Lesson No 2 - why the hell did The National print this crap on Page 3? Are their normal journalists on holidays and they needed a filler? They've now lost their edge as well.