Lawyers scrutinize fraud trial outcome

Walkers Cayman Islands partners Colette Wilkins and Shelley White write: After a trial lasting a little over a year, the Chief Justice of the Grand Court of the Cayman Islands has handed down judgment in the case of AHAB v SICL & Others, the most significant fraud trial, both in terms of value and length, ever to be heard in the Cayman Islands. The Chief Justice dismissed AHAB’s claims and dismissed the counterclaims brought by two of the nine GT Defendants. 

The Chief Justice found that certain businesses of the Ahmad Hamad Algosaibi Brothers partnership (or AHAB, the plaintiff in the proceeding), including the Money Exchange (an unincorporated division of AHAB), were used to perpetrate an enormous and long-standing Ponzi scheme (“one of the largest… in history”) which defrauded more than a hundred banks. From near the time of the establishment of the Money Exchange until its collapse in May 2009, financial statements disseminated to the lenders to AHAB deliberately and grossly understated the extent of the borrowings and so the true extent of the AHAB indebtedness to the banks and its status as a borrower. By presenting them to the banks, the false financial statements became the central instrumentality of the fraud. Every single dollar or riyal that ever flowed into the Money Exchange was obtained dishonestly through fraudulently obtained borrowing. It was, from inception, a criminal enterprise and remained so throughout its existence.

Background to the proceedings:

The proceeding commenced as a family dispute between Algosaibi family (who controlled AHAB) and Maan Al Sanea who had married into the Algosaibi family, had become the Managing Director of the Money Exchange in 1981 and had established his own ‘Saad Group’ through various vehicles including a number of Cayman Islands companies and trusts. The businesses of AHAB and Al-Sanea (or the Saad Group) were predominantly located in Saudi Arabia but there were also various aspects carried on Bahrain and Switzerland.

In 2009, the global financial crisis impacted AHAB’s credit lines and AHAB defaulted on billions of Saudi Riyals of debt. Shortly after that default, AHAB commenced the proceeding against Al Sanea and 42 corporate defendants (who were part of, or did business with, the Saad Group) to recover US$9.2bn, being the amount of borrowing that was unrepaid at the time of the default and representing the proceeds of a fraud AHAB alleged had been perpetrated against AHAB by Al Sanea. The corporate defendants were alleged to have been vehicles of that fraud.  Shortly after the commencement of the proceeding, a number of the corporate defendants were placed into official liquidation and, by the time of trial, only 16 stood as corporate defendants, all of whom were under the control of official liquidators.

AHAB’s case at trial accepted that some of its borrowing was authorised pursuant to a policy termed “New for Old” but alleged that all borrowing in excess of that which existed at the time of the implementation of the policy was unauthorised and fraudulent. AHAB alleged that Al Sanea embarked on forgery on an “industrial scale”, by applying signatures of the partners of AHAB to facility documents without their knowledge or authority and that some facility documents were manipulated by Al Sanea in order to deceive AHAB into thinking that the existing and new facility agreements were for the same amount when they were not.

AHAB’s claim:

The Chief Justice framed the success of AHAB claims as being dependent upon three things: (1) unauthorised bank borrowings; (2) forgery; and (3) unauthorised bank borrowing being misappropriated, or stolen, by Al Sanea. To be fraudulent, all three things had to have been unknown to the partners of AHAB.

AHAB’s claims failed on all three levels. First, AHAB knew of and authorised the enormous borrowings from banks which were obtained by fraudulent means through the Money Exchange and the Financial Businesses. Secondly, and as to AHAB’s forgery allegations, there was no reasonable foundation for a finding that the questioned documents and signatures were deployed by Al Sanea without the knowledge and authority of AHAB Partners. Thirdly, the transfers out of the Money Exchange were all recorded in the books and records of the Money Exchange, of which AHAB’s claim of ignorance and non-authorisation was found to be false.

The judgment, which runs to 1,330 pages, considers various detailed issues of fact and complex areas of law.  We set out below in brief the main issues of fact and law determined by the Chief Justice:

• The Chief Justice was satisfied that the knowledge and authority of the AHAB Partners was “overwhelmingly and conclusively proven”. The evidence showed that those who were in charge of AHAB (over two generations) were aware of the fraudulent practices of the Money Exchange (namely the production of and dissemination to the banks of falsified financial statements) and were institutionalised for the purposes of defrauding the banks. “New for Old” never existed and was an invention raised in a desperate attempt to salvage AHAB’s falsified case. As such, there was never any restriction placed upon Al Sanea’s authority to borrow;

• The Chief Justice found that AHAB’s forgery allegations had been made on a random “scatter-shot” basis without any reasonable foundation for a finding that the questioned documents and signatures were deployed by Al Sanea without the knowledge and authority of AHAB Partners. Moreover, the 16 sets of bank facility documents on which AHAB’s manipulation case rested could not bear the weight of inference that AHAB wished to place upon them. The inevitable conclusion was that there was no fraud perpetrated upon AHAB. Rather, a fraud on the lending banks was perpetrated by AHAB and Al Sanea acting in concert against the banks to obtain borrowing which would certainly not have been provided had the banks known the true financial position of the Money Exchange. The fraud on the banks was the Money Exchange’s raison d’être; defrauding the lending banks was in its DNA. The AHAB Partners were willing to allow the massive personal borrowing of Al Sanea to go unchecked because it was the quid pro quo for his willingness also to use the Money Exchange to procure fraudulent borrowing on behalf of the AHAB Partners themselves. In short; the AHAB Partners allowed Al Sanea to use the Money Exchange to borrow because they also benefitted;

• The withdrawals from the Money Exchange made by Al Sanea were not “misappropriations” but were loans which were expected to be repaid. As such, Al Sanea did not steal from AHAB; his “indebtedness” to the Money Exchange was authorised by the AHAB Partners, and was meticulously accounted for. The Chief Justice said that the reality was that the AHAB Partners made a bad credit decision;

• AHAB’s claims were primarily proprietary in nature seeking to recover what AHAB said was its property (or the traceable substitutes) from the Defendants. AHAB therefore had to meet the requirements of the proprietary remedies which it sought. AHAB’s proprietary claims were essential to its success because, unless AHAB proved that the assets held by the Defendants were its property, AHAB would be unable to secure priority over the existing contractual claims of third party banks, which had been admitted as debts in the respective liquidations of the Defendants. The Court held that for every proprietary tracing claim, two premises would have to be established: first, the antecedent breach of trust or fiduciary duty; second, the identification of the traced asset or its traceable proceeds in the possession of the defendant:

(i)        As to the first, having at all times been privy to and having authorised Al Sanea’s activities, AHAB had failed to prove that fundamental premise of its case. That finding was sufficient to determine AHAB’s claims.

(ii)       As to the second, even if AHAB had been able to establish the antecedent breach of trust by Al Sanea, it would still have had to prove the necessary transactional links invariably required by the case law, between its funds taken from the Money Exchange and the accounts of the Defendants.  It was not possible for the Court to make such a determination on the basis of the documents disclosed.

• AHAB had sought to reverse the burden of proof by alleging that the Defendants participated with Al Sanea in the creation of a “maelstrom” and that they were involved with him in the “cross-firing” of transactions. However, the Court said that in the case of a “maelstrom” there will in every case be a minimal requirement of proof of a deliberate attempt to create a coordinated scheme calculated to hinder any attempt to trace the relevant funds before the burden of proof would be reversed and AHAB had not proven these facts in this case.

• Each of AHAB’s dishonest assistance claim, conspiracy claim, and unjust enrichment claim rested upon the allegation that the Defendants received money or assets that represented the proceeds of funds misappropriated from the Money Exchange. As the tracing claim failed, so did these claims.

• The Chief Justice found that the Defendants’ illegality defence was entitled to succeed not only on the basis of AHAB’s continuous complicity in the fraud from beginning to end but, even in the event “New for Old” was real, because of AHAB’s indisputable, and admitted, involvement until 2000, in what had already become a massive fraud on the banks and one which AHAB must have known would be continued, even if curtailed, in order to give effect to “New for Old” itself. AHAB’s claim would therefore be barred in any event through the application of the Court’s policy that it would not enforce an illegal arrangement or because AHAB lacked clean hands such that it would not be entitled to invoke equitable remedies;

• The Chief Justice determined that there was no possibility of AHAB establishing a locus poenitentiae in the face of its involvement in the use of fraudulent accounts to obtain loans from the banks, even if (which the Court did not accept) pursuant to the “New for Old” policy. The effects of the fraud were entirely irreversible. The loans obtained by the Money Exchange have been paid off many times with the proceeds of other dishonestly borrowed funds.  Far from seeking to make amends for their unlawful conduct, AHAB has continued to benefit from it and shows no signs of returning those benefits.

The counterclaims:

Two of the Saad Group corporate defendants counterclaimed against AHAB for a total of US$5.9 billion, instigated in large part by promissory notes presented to them as representing security for debts owed to them by AHAB and signed and delivered to Al Sanea by AHAB. Other of the counterclaims amounting to more than US$1 billion were based primarily upon liabilities recorded in the accounts of those corporate defendants as due from AHAB.

The counterclaims were dismissed. The Chief Justice found that the evidence relied upon in proof of the counterclaims was unsafe and unreliable (there being no contemporaneous witness to speak to the counterclaims) and was said to arise against the background and out of the cauldron of fraud that the Chief Justice said characterised the existence and operation, not only of the Money Exchange and other financial businesses conducted by AHAB but also the existence and operation of the Saad Group and the manner and use by Al Sanea of certain corporate entities to foster the growth of his wealth by defrauding others.

Walkers were instructed by Stephen Akers, Hugh Dickson and Mark Byers of Grant Thornton who were appointed as the joint official liquidators of nine Saad Group corporate defendants including Saad Investments Company Limited (in Official Liquidation), the Saad Group’s principal international finance and investment arm, and Singularis Holdings Limited (in Official Liquidation), a special purpose vehicle to facilitate the acquisition of significant shareholdings in global financial institutions.

This evaluation of the trial was provided by Walkers Cayman Islands.