Sunday, Sep 16, 2012

-- Relates to Sale and Buyback in 2009 of Eight Paintings

-- Arqaam Operating Income For 2009 Was Overstated, Regulator Says

-- Hearings Due to Start Monday

By Asa Fitch

Of ZAWYA DOW JONES

DUBAI (Zawya Dow Jones)--The regulator of Dubai's international financial center is accusing Ernst & Young and the Dubai-based investment bank Arqaam Capital of accounting irregularities and breaches of its rules in relation to the way Arqaam allegedly overstated its 2009 income with the sale and repurchase of eight paintings by a contemporary Iranian artist.

The claims against Arqaam and the international accountancy firm came to light Sunday when a hearing panel of the Dubai International Financial Center's financial markets tribunal ruled that further hearings in the case should be held in public. Arqaam and Ernst & Young had asked for the proceedings to be kept confidential.

The Dubai Financial Services Authority, the DIFC regulator, "alleges that the treatment of the artworks in the 2009 accounts did not comply with accounting standards and that there have therefore been breaches of the Regulatory Law," according to the text of the tribunal ruling published on the DFSA website. Both Arqaam and Ernst & Young deny that any irregularities took place, the ruling says. The tribunal is due to start hearings on the DFSA's claims against Arqaam and Ernst & Young on Monday.

According to the ruling on the confidentiality issue published Sunday, Arqaam made two agreements in September 2009 with a Syrian company identified as Alissar Co. Ltd., under which it agreed to sell eight artworks by the Iranian artist Farhad Moshiri for $2.45 million and then buy them back from Alissar for the same price.

Arqaam is an emerging markets investment bank that provides services including cash equity, asset management, credit trading, custody and research, according to its website. It is owned privately by wealthy Arab Gulf investors.

The tribunal ruling said that Arqaam had commissioned the paintings from Mr. Moshiri for $200,000 in 2007, but they had been valued at $2.45 million in August 2009 by Artspace, an art gallery located in the Dubai financial free zone.

After the valuation, Arqaam consulted its auditors Ernst & Young on how to reflect the increase in value on its financial statements, the tribunal ruling says. The sale was dated June 29 in Arqaam's accounts and the buyback was dated June 30, the tribunal ruling says.

As a result, the DFSA alleged Arqaam recorded a cash inflow and outflow of $2.45 million from the deal "notwithstanding that there was no cash movement," the ruling states. "The effect of these contraventions was to overstate Arqaam's operating income by 42% and understate Arqaam's loss for the year by 21%," the DFSA allegations continue.

The DFSA is seeking a declaration from the tribunal that Arqaam breached regulations and the imposition of a fine $75,000 each on both Arqaam and Ernst & Young. It also is seeking an order requiring Arqaam to restate its accounts for 2009. Arqaam and Ernst & Young contested the allegations and the fines, leading to the tribunal hearing. The tribunal is an independent body that oversees regulatory actions; its decisions can be appealed in the DIFC courts, according to the DFSA website.

"This concerns a technical accounting issue in relation to our accounts from three years ago and how you account for artwork, and has no relevance to the services and advice we provide our clients," a spokesman for Arqaam said in an emailed statement. "This will have no bearing on the success of our ongoing operations, nor will it distract us from continuing to run our firm to the high standards our clients and shareholders have come to expect."

In its evidence to the tribunal, Arqaam argued that making the allegations public could damage its relationships with clients and cause the "termination of current merger negotiations or a significant decrease in Arqaam's value in such discussions."

The DFSA responded to Arqaam's concerns about publicity by making clear that it was "not alleged that the valuation of the artworks was not genuine." While the accounting treatment of the artworks was "intentionally created ... in order to enable Arqaam to show that it had made a gain and that it owned assets that had a cost of $2.45 million, when it in fact did not," the DFSA said it was "not alleged that Arqaam acted dishonestly in adopting this accounting treatment."

"In their statement of case, DFSA clearly states that there is no allegation of dishonesty in its claim," the spokesman for Arqaam said. "The DFSA also notes that it does not contest the validity of the artworks' valuation. It all concerns proper accounting standards. We have an unqualified opinion on our accounts from our auditors, Ernst & Young, and are supported in our accounting treatment by several experts from the top five accounting firms in the world and a leading academic."

The tribunal hearing panel ruled that the risk of making the proceedings public was "not of significant or disproportionate harm."

Ernst & Young and the Artspace gallery did not return requests for comment. Alissar could not be reached for comment.

Write to Asa Fitch and Nicolas Parasie at asa.fitch@dowjones.com

Copyright (c) 2012 Dow Jones & Co.

(END) Dow Jones Newswires

16-09-12 1213GMT