Wednesday, September 8, 2010
I am the Great Barazi! Dr. Omar.... you are getting sleepy.... very sleepy... I'm now going to snap my fingers and when I do, you will pay me.
So I know I’m kind of a block behind the parade on this but I just got done reading the latest broadside from the good ship DIFIC against the HMS Barazi off the coast of Dubai. It seems like fairly weak soup to me. Most of the DIFCI response is taken up with a lengthy chronology of the various memos that went back and forth between the various members of the DIFCI management team and tries to clear up who knew what when. In my last post I ignored this but now I have paid much closer attention. This is a little more complicated than I would like because the court makes the letter from DIFCI public but not the attached exhibits so it is not possible to follow the evidence trail directly. Having read it now I think my initial instinct to disregard it was correct.
DIFCI goes through the lengthy chronology in order to show that in the first two drafts of the investment bonus memo he makes reference to a net income of $200 million. Between the first and second drafts Bisher was sent the unaudited financials which showed that the net income was a loss of $87 million and the second draft was not amended to reflect that. This is the core of their argument that Barazi misrepresented the financial condition of DIFCI. They go on to claim that Barazi knew all along that the DIFCI was in serious financial shape and provide an email he sent to that effect.
This doesn’t make a lot of sense to me. At no point in any of the memos does Bisher suggest paying out bonuses on net income. Instead he suggests paying out bonuses based on realized gains. Considering the business that DIFCI was in this makes some sense. They were running an investment fund containing investments which were highly illiquid either because they were in private companies or else such massive stakes in public companies that they could not be disposed of. To pay yourself based on the performance of a investments that you may not actually be able to monetize might not be best. So I can see the reasoning behind paying themselves based on realized gains rather than net income.
The net income reference was made for the purpose of comparison with the realized gains and was made before the unaudited financials were available. It is true that the second draft was not amended to take into account the new information in a subsequent draft all reference to net income was dropped. Note that this would not have affected the thrust of the memos because they were being paid on realized gains. The relevance of the loss of $80 million has to be taken in context. This is on a multi-billion dollar investment portfolio and the loss was the result of an accounting change. While I think it had some relevance I think it would make as much sense to pay them zero based on the $80 million as it would to pay them $30 million on the $200 million. In any case they were paid on the realized gains of $60 million, a figure which is not disputed at all by the DIFCI. Also at no point did Bisher seek to conceal the $80 million loss, the DIFCI makes a point of saying he signed off on those numbers. Had he attempted to conceal that and paid himself on the basis of false returns that really would have been fraud but DIFCI does not allege this because it did not occur.
As to the allegation that Barazi knew the DIFCI was in hot water at the time of the bonus the evidence they provide is pretty slim. They show an email pleading for additional funds from mid-November 2008. The final memo on the 2007 bonus issue was in July of that year and the most relevant documents were finished by April. Of course everyone knows what happened in September of 2008, Lehman brothers defaulted and the markets went over a cliff. To say that the financial position of the DIFCI post-Lehman should have influenced the 2007 compensation decisions which were made in March seems to me be kind of a stretch. Something may well have been amiss in the finances of the DIFC in the spring of 2008 but the DIFCI response does not show it.
The DIFCI leads their response by denying that “the claimant can not absolve himself from the liabilities arising out of his conduct with respect to the procurement of the 2007 investment bonus on the basis that Dr. Omar authorized that bonus.” It then quotes the handbook saying that management cannot be indemnified against moral turpitude or other misconduct. In the following paragraph they say that “Barazi was not a passive recipient of the bonus” and point out that he played an active role in determining it. This is the weakest part of the case and also the most central.
It is true that Barazi was not a passive participant. This is because, as the DIFCI points out, there was no established methodology for compensating the managers of DIFCI for their performance. Barazi was asked by Dr. Omar to come up with one. They allege that his methodology constitutes moral turpitude and therefore a fraudulent attempt to compensate himself. As mentioned above the centrepiece of this argument is that a change in net income was not reflected in the memo until its third version. I argue that this is not relevant for two reasons. First the net income played no role in the calculation of the bonus and therefore failing to change the memo to reflect the change in net income until the third version does not constitute moral turpitude as the change would have had no effect on the calculation. Also the $87 million loss was never concealed from anyone including Dr. Omar.
Far and away the most important reason that it doesn’t matter is the point they themselves make that the DIFCI “lacked a clear cut methodology.” What that really means when combined with the fact that compensation was “at the sole discretion of the chairman” is that Dr. Omar did not need to refer to anything but his own fancy in order to compensate himself and Barazi. He could have rocked out of bed one day, walked into the office and said “Bisher, that’s a great haircut. I’m going to pay you $10 million.” Or “That was some fine singing at karaoke last night Bisher, here’s $5 million.” Heck, we should be happy that they made any effort to come up with a plausible methodology at all.
The DIFCI ties itself in a pretzel when it argues that Bisher established a questionable methodology and then further argues that he did not properly follow that methodology which it has already alleged was questionable. The fact of the matter is that because of the way DIFCI and the DIFC were set up there was no requirement for a methodology whatsoever. The mysterious workings of the mind of Dr. Omar were all that were needed to pay them out. As a result the only practical way for Barazi to have fraudulently acquired his bonus would have been for him to put Dr. Omar in a hypnotic trance and fraudulently induce him to write him a check. I wouldn’t put it past Bisher to do that but I think it would be really hard to prove in a DIFC court.
Speaking of Dr. Omar and due process what does the DIFCI say with regard to the unspoken allegation in the previous Barazi response that no legal proceedings were brought against Dr. Omar to compel him to disgorge his bonuses? In paragraph 41 the DIFCI says “the defendant notes that Dr. Omar has returned $13,600,000 in bonuses he received from DIFC.” Interesting, there seems to be no mention of legal proceedings. Presumably this would mean that the proceedings used to get Dr. Omar to disgorge this bonus were extra-legal. There’s another word for that, “extortion.” But I’m sure Barazi is really quite familiar with that term right now. This will indeed be a very interesting case if it goes to trial.
Personally I think the DIFC should drop the suit, pay Barazi him his severance conditional on the completion of the forensic audit. If they have real evidence of actual fraud they should charge him with that, not go back and forth with him over whether or not he is entitled to severance based on whether or not he used a proper methodology when no methodology was required.