DIFC court in $200m ruling against banks

Above, the Zurich branch of Bank Sarasin. Fabrice Coffrini / AFP

A prominent Kuwaiti business family has won a ruling in the Dubai International Financial Centre court against Swiss and Dubai financial services groups over US$200 million of investments that went bad during the financial crisis in 2008.

The DIFC court concluded that Bank Sarasin-Alpen (ME), a bank registered in the emirate’s financial hub, and Bank Sarasin, a related finance house from Basel, Switzerland, had mis-sold “unsuitable investments” to three members of the wealthy Al Khorafi family, which runs a diversified conglomerate in Kuwait.

The court said the two banks, which denied the charges, should pay compensation to the Al Khorafis for the losses on their investments. No specific amount of compensation was set, but the family’s legal representatives have previously claimed at least $26.5m.

The banks have two weeks in which to decide whether to appeal the ruling by the DIFC court deputy chief justice, Sir John Chadwick.

The case goes to the heart of the global financial crisis, when banks offered complicated investment packages, often backed by assets that turned out to have been grossly overvalued.

Mark Beer, the DIFC registrar, told the court “I am satisfied that this is a clear case of mis-selling unsuitable investments to an unsophisticated investor, and to his equally unsophisticated wife and mother.”

The three, led by Rafed Al Khorafi, head of the family business, were introduced to Sarasin in Dubai in 2007 by an accountant who worked for the family and for Al Ahli Bank of Kuwait (ABK). The family wished to invest some of their wealth outside Kuwait, and ABK had indicated it was prepared to put up $80m to back their investment plans.

Before the crisis, “name lending” was a common practice in the Middle East, whereby banks lent money to family businesses on the strength of their reputation.

In total, including the loan from ABK and loans from Sarasin, the three Al Khorafis invested $200m in a variety of “structured financial products” in the form of investment notes drawn up by Sarasin in Dubai and Switzerland.

In November 2008, when the financial crisis was at its height, Sarasin made “margin calls” – demands for further cash deposits – which the family could not meet. The notes were sold at a loss in the market, leading to the action in the DIFC court.

The notes represented a variety of investment products in real estate, energy and financial services. “The investments were not underpinned by assets which had a value independent of the issuers’ covenant,” the court heard. Mr Al Khorafi was told the investments “would never lose money”, the court heard.

The court ruled that Sarasin was not authorised to advise on investment business and structural products were not appropriate.

Mr Beer said that the defendants had argued that “this is yet another case arising out of the crisis where investors are seeking to recover from their bankers the losses they suffered by reason of the dramatic falls in the value of their assets in the markets”.

The defendants had further claimed that Mr Al Khorafi was “not satisfied with the very successful business that his father had left him and wanted to leverage his assets to fund his grandiose plans to participate in global markets and have his own company listed on a leading international stock exchange”, Mr Beer said.

However, the court concluded that the mis-selling was carried out by Sarasin executives motivated by the fees that would be generated from the transactions. “Bank Sarasin adopted a business model which led it to breach financial services prohibition” [part of DIFC regulations], Mr Beer said.

Since the legal action began, Bank Sarasin has merged with another Swiss bank J Safra. Calls to Sarasin-Alpen in Dubai were unanswered.

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