A Saudi investment firm has been awarded US$4.19mn after a Dubai court ruled Rasmala Investment Bank Limited (RIBL) made a “misrepresentation” about the suitability and financial health of its trade finance fund.
RIBL presented the Rasmala Trade Finance Fund as a suitable investment opportunity to Saudi asset manager Alawwal Capital in late 2018, the court found, despite “substantial baked in problems” at the fund in the form of defaults and alleged fraud by borrowers.
RIBL’s misrepresentation caused Alawwal to lose just under half its US$10mn investment in the fund, Dubai International Financial Centre Court judge Justice Roger Stewart KC wrote in a June 12 judgment.
“At the end of 2018 and beginning of 2019, the fund was not a suitable investment for Alawwal and RIBL had no reasonable basis for saying that it was,” Justice Stewart wrote. “The likelihood was that future write-offs would be made leading to losses and ending the long run of continuous returns.”
“Alawwal bought into the fund at an overvalue and then became trapped in the fund when the problems which were already substantially in existence at the time of their investments came to fruition,” Justice Stewart found. Alawwal was also awarded interest and almost US$400,000 in legal costs.
The decision marks a fresh setback for RIBL over its trade finance investment vehicle, which was set up in 2014. The fund entered court-supervised liquidation in the Cayman Islands earlier this year following a court petition by its largest investor.
In June the fund lost a legal attempt to recoup US$21.6mn in losses from global commodity trader Trafigura.
RIBL was the fund’s investment manager. The bank has filed for permission to appeal the ruling, a spokesperson for the bank tells GTR.
“Rasmala Investment Bank Limited are disappointed with the present outcome,” the spokesperson says. “We are currently reviewing the judgment in detail and are assessing our legal rights. As this matter remains ongoing, we are unable to comment further at this time.”
Alawwal declined to comment. The firm was able to redeem US$4.8mn from the fund before the court proceedings.
During a six-day trial in April, witnesses from both sides gave evidence over what was said during several meetings between the companies in Jeddah and Dubai in late 2018 and early 2019, as the investment was negotiated.
The court rejected some of Alawwal’s recollection of the meetings, including that RIBL’s then-head of international business said the fund had “a 0% possibility of losses”.
But the judge accepted Alawwal’s account that the fund was described as selective with borrowers, that it only dealt with reputable clients with long track records, and that it met Alawwal’s investment objectives.
Alawwal told RIBL it was seeking a low-volatility, Shariah-compliant fund “where a cautious approach to investment was taken”, the judgment says.
However, after the investment had been agreed, a RIBL compliance officer asked standard questions about Alawwal’s suitability as an investor and was told that its risk tolerance was “high”.
“I do not consider that there was any basis” for that statement to be made, Justice Stewart wrote.
Non-performing loans
The trade finance fund performed strongly until around 2018 and reported 62 months of continuous positive returns from November 2014 to December 2019, according to the judgment.
Between April 2017 and May 2018, surging investor inflows pushed its funds under management from US$50mn to US$300mn.
But the judge found that by the end of 2018, when RIBL was in talks with Alawwal, it appears “there was very real cause for concern as to the valuation” of over US$72.7mn, or almost a quarter, of the fund’s total assets.
“Had these assets been written off or even written down, the fund’s apparently sound record would have been effectively destroyed,” the judge wrote.
By November 2018, the fund’s largest single counterparty was Farlin Energy & Commodities Ltd, according to internal documents presented to the court.
The company had failed to repay more than US$19mn and had ceased trading sometime in the third quarter of 2018, according to the judgment. The fund later accused the firm of fraud.
Other overdue or loss-making transactions included exposures to Metal Masters, Met Trade, Rhodium Resources and Phoenix Global, according to the judgment.
In 2017, the fund began providing finance to commodity trader Phoenix, which collapsed in 2020.
The judgment says Phoenix’s facility was extended in 2018 despite credit insurance expiring and not replaced. The judge said the inability to obtain insurance cover “suggest[s] market appetite for Phoenix receivables was, at best, limited”.
Accounts RIBL provided to Alawwal included notes that disclosed overdue amounts from Met Trade and Farlin, and said exposures were partly covered by mitigants such as credit insurance, or, in the case of Farlin, that the fund was still in discussions with the company’s management.
Alaa AlEbraheem, Alawwal’s head of capital market funds, told the court he did not read the notes, which the judge accepted but said he found “surprising”.
RIBL laid blame for its clients’ repayment issues on the Covid-19 pandemic, but the judge said the pandemic was “a convenient excuse for [the fund’s] problems but was not the cause of those problems”.
The judge said it was “likely” the fund “lessened its standards in relation to the making of new trades” during 2017 and 2018 as it sought to invest inflows.
He also concluded that the fund’s and RIBL’s directors were unwilling to make provisions for possible bad debts or delayed repayments because “if provisions were made they would very substantially imperil the long-term steady performance of the fund and put off future investors”.
RIBL failed to comply with a legal obligation to take reasonable steps to ensure that its communication was “clear, fair and not misleading”, the judge ruled.
Some of Alawwal’s claims were dismissed by the court, including an argument that it should receive a total of US$7.6mn in damages to take into account the “opportunity cost” of not investing the money in another fund.
