Algosaibi Sues Former TIBC Chief For $9.2Bn, Alleges Ponzi Scheme

The long running multi-billion dollar legal battle between two prominent Saudi family firms, Ahmad Hamad Algosaibi & Brothers (AHAB), and the Saad Group controlled by business tycoon Maan al-Sanea, has taken a significant new twist. AHAB has filed a $9.2bn fraud charge against the former CEO of The International Banking Corporation (TIBC), Glenn Stewart, alleging that he conspired with Mr Sanea in one of the largest global Ponzi schemes in history.

The 44-page complaint, filed on 28 March in the US District Court for the Central District of California, asserts that Mr Stewart created and/or used a number of entities, particularly in Bahrain where TIBC is based, to obtain loans through misuse of the Algosaibi family name. It alleges that the proceeds were funneled into this giant Ponzi scheme, ultimately resulting in the laundering of up to $1 trillion through the US financial system.

The two defendants raised billions of dollars in funding using falsified financial statements and forged AHAB guarantees, alleges the suit. It also claims they falsely said that TIBC had the backing of the Algosaibi family. In particular, the pair forged documents to create the impression that senior Algosaibi family members participated in TIBCs governance and sanctioned its commercial activities, according to the filing.

The counts against Mr Stewart include aiding and abetting fraud, aiding and abetting breach of fiduciary duty, conspiracy to commit fraud, perpetrating fraud, and unjust enrichment. AHAB alleges that Mr Stewart, who fled Bahrain in May 2010 and currently resides in a $7mn home in Malibu, California, constructed a complex web of offshore companies to skim off phony commissions and other payments totaling around $100mn. AHABs chief legal counsel, Eric Lewis, commented that this lawsuit represents a necessary step to bring the frauds key conspirators to justice.

Mr Stewart was banned from traveling out of Bahrain, but by his own account escaped during the governments investigation into the collapse of TIBC and his dealings, said AHABs legal representative, the US law firm of Baach, Robinson & Lewis. It said that Mr Stewart was charged by the Public Prosecutor of Bahrain on 8 March with criminal and regulatory violations in the country.

AHABs Allegations

The suit, of which MEEShas seen a copy, alleges that TIBC had no real income, capital or business, and that while it portrayed itself as a retail lending institution with a large commercial loan portfolio this really consisted of nothing more than approximately 100 fake loans to fictitious or unaware borrowers totaling more than $2bn.

The plaintiff alleges in the suit that Mr Sanea, who was connected to the Algosaibi family by marriage, was the managing director of the Money Exchange, an unincorporated division of AHAB that was operated as a separate business. Unbeknownst to the AHAB partners, Mr Sanea, through Mr Stewart and others, used the Money Exchange and related companies to procure massive lending in AHABs name, and then in the name of affiliates siphoned billions of dollars of this lending into his own accounts and the accounts of companies that he controlled (within what is known as the Saad Group of companies), said the lawsuit. This left AHAB with hundreds of banks seeking to collect billions of dollars in purported loans, but with no ability to meet the ostensible liabilities on account of the massive defalcations of the loan proceeds, it went on.

Once the loans were obtained with forged documents, Mr Sanea, with Mr Stewarts knowing assistance channeled some of the proceeds into servicing previously obtained loans and otherwise funding the operational costs of this fraud, alleges the suit. It alleges that the remainder of the proceeds were simply stolen or embezzled by Mr Sanea, Mr Stewart and their co-conspirators. The suit notes that at the time of its collapse TIBC appeared, based on its apparent assets, to be the fourth largest bank in Bahrain. However, it said that in reality it was a sham bank and had no real customers. From its inception in 2003, TIBC was purely an instrumentality of fraud with no real capital, income or business, the suit stressed, noting however, that this was highly effective in al-Saneas and Stewarts efforts to mobilize huge amounts of credit through fraud from international financial institutions.

The filing notes that in the end TIBC succeeded in borrowing well in excess of $10bn using forged documents, forged board minutes and resolutions and other concocted paperwork. When TIBC went into liquidation more than $2bn remained unpaid. The suit said that Mr Stewart was rewarded by illicit bonuses, some paid from Money Exchange although he was not employed there, and also through a sub-scheme of his own in which he used special purpose vehicles (SPVs) to skim bogus commissions.

Massive And Growing Debt

The alleged fraud was not discovered by AHABs partners until May 2009, by which time the Ponzi scheme had begun to founder under the massive and growing debt servicing required to keep the cash flowing. The suit explains that in essence, al-Sanea could not borrow new money fast enough to make payments on his existing debt, and the entire scheme collapsed causing an estimated $20bn in loan defaults, destroying several businesses, destabilizing the regional financial infrastructure, and causing massive reputational damage to AHAB and the Algosaibi family. In 2009 Mr Stewart was investigated by the Central Bank of Bahrain (CBB) in connection with TIBCs collapse and as a result then investigated by the Bahrain Public Prosecutor and accused of forging private documents, using forged documents, knowingly gaining benefit from a crime, and failure to notify the CBB of TIBCs insolvency.

Mr Stewart could not be reached by MEES at press time, but Abu Dhabis The National reported that while he wanted time to study the claim, he denied the allegations. Newspapers, including the UKs Daily Telegraph, said in May last year that he was suing Bahrain at the International Court of Human Rights after being held in the country for 10 months.

In addition to TIBC, the Bahraini authorities have held hearings on another bank, Awal, which was owned by AHAB. Awal also collapsed in May 2009. The two main parties, Mr Sanea, who has consistently denied all the allegations against him, and AHAB, have brought actions against each other and had to answer investigations across multiple jurisdictions including New York, London, the Cayman Islands and Saudi Arabia, in addition to the aforementioned California and Bahrain. The news of the problems between the two prominent Saudi families shook the kingdom when it broke, affecting many local, regional, and international banks (MEES, 8 June 2009). It discouraged the practice of name lending (where banks provide loans based on good faith in the family name) in the country. Banks are continuing to try and recover their assets, with the UAE Central Bank at the end of 2010 instructing domestic lenders with exposure to the two Saudi companies to hike their loan loss provisions to 80% from 50%.

Copyright MEES 2011.