Al Gosaibis raise the stakes in Saad Group affair

The stakes in the biggest financial scandal to hit the Middle East are being slowly wound up.

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While the European bankers head off to the Mediterranean and the Arab world prepares for Ramadan, the stakes in the biggest financial scandal to hit the Middle East are being slowly wound up. Neither the al Gosaibi family of Saudi Arabia, nor their erstwhile confidant Maan al Sanea, will have much time for relaxation, though. New readers start here: Mr al Sanea is a Kuwaiti-born entrepreneur who married into the wealthy al Gosaibi dynasty of Al Khobar in Saudi Arabia and built his own multibillion-dollar business, the Saad Group.

Earlier this year, tensions between them exploded into the open when two Bahraini banks were unable to meet loan repayment schedules. The al Gosaibi family has since claimed it was the victim of a US$10 billion (Dh36.73bn) fraud by Mr al Sanea. The seriousness of the affair - for the companies and individuals involved, for their creditors comprising some 200 global banks, and for the financial system of both Saudi Arabia and the Gulf as a region - is growing by the day. Just this week, it was estimated that the scandal had knocked 500 points off the Saudi market index and would cost the kingdom 0.5 per cent of its growth this year.

Members of the al Gosaibi family are travelling the world to meet creditor banks concerned about the security of loans apparently made to the group. Talks in Dubai earlier this week have given way to negotiations with banks in London about how to restructure billions of dollars worth of loans endangered by the scandal. According to people familiar with those talks, the family is seeking a standstill on these loans while it pursues "other actions" against Mr al Sanea.

Those actions are outlined in two lawsuits brought by Ahmad Hamad Al Gosaibi and Brothers, one in New York and the other in the Cayman Islands, where many of Mr al Sanea's businesses are ultimately registered. When the legal proceedings were begun last month, many in the kingdom were shocked by the extent of the allegations against Mr al Sanea. These have fundamentally changed the nature of the affair.

Until the legal moves, the dispute could have been seen as a family affair within Saudi Arabia. Under the pressure of the global crisis, financial tensions within the groups had increased to breaking point, which came with the Bahraini banks' problems. The Al Gosaibi allegations have changed that impression completely. Now, according to the New York court documents, Mr al Sanea is accused of a "massive fraud" on Al Gosaibi amounting to $10bn of misappropriated funds. The Cayman filings go further, seeking - and being granted - a freeze on the assets of some 43 companies related to Saad Group, ranging from investment and financial groups down to aircraft financing companies.

The pressure from Al Gosaibi has also been increased by its appointment of a firm of Washington lobbyists to advance the company's cause. Kearsarge Global Advisors were taken on just over a month ago, and have been co-ordinating the communication efforts of forensic accountants, lawyers and Al Gosaibi executives. Jim Courtovich, the managing partner and founder of Kearsarge, says: "The al Gosaibi family is continuing to exceed all they said they would do to pursue a resolution to this. Now we are waiting for al Sanea to respond."

So far, Mr al Sanea is keeping his powder dry. Spokesmen have repeated the formula that the allegations are based on "spurious and scurrilous" accusations and that he would "respond fully to all these claims through the proper judicial process". Mr al Sanea has not been formally served with the legal papers, they maintain. The affair has already had serious repercussions in the UAE. Mashreqbank and Abu Dhabi Commercial Bank have admitted to having exposures to the Saudi groups amounting to hundreds of millions of dollars. Other UAE banks are also thought to have significant positions.

Meanwhile, forensic accountants are investigating transactions at a Jebel Ali trading offshoot of Al Gosaibi, of which the Saudi family says it was unaware until very recently. The al Gosaibi family must now persuade the international financial community it can retrieve sufficient assets through its legal actions to meet outstanding claims against it. It must convince the banks that the liabilities against it were incurred wholly by Mr al Sanea in the course of his alleged "massive fraud", and that the billions of dollars claimed are not the responsibility of the Al Gosaibi group.

In the current climate, that could be a demanding proposition. Mr al Sanea's property assets in Saudi Arabia may not be worth as much in a fire sale on the open market, even if the al Gosaibis get unrestricted title to them. Other assets around the world may be leveraged up already. Having raised the stakes in the affair, the al Gosaibi family must hope that Mr al Sanea, once a close part of the family and regarded as a dynamic wealth creator, has preserved most of that wealth intact.