Kingdom facing up to fallout from the Saad affair

In a rather swanky restaurant off London's Piccadilly last week, I enjoyed gazpacho and paella with the communications executive who has possibly the toughest job in the business world right now - adviser to Saad Group, the embattled Saudi conglomerate, and its boss, Maan al Sanea. My host has an illustrious career in UK public relations, having served the highest in the realm with PR advice at very sensitive times. He has known Saad and al Sanea for years, and is an articulate and accomplished advocate on his behalf. Nonetheless, he would rather not be identified publicly as Saad's media defender, instead leaving the limelight to another London firm, the financial specialist Cardew & Co.

I take his discretion as a sign that the job of defending Saad and Mr al Sanea is a demanding and complicated one that will not get any easier in weeks to come. Saad has fallen out terminally with its once arm's-length ally, the giant Saudi corporate structure run by the al Gosaibi, in the biggest scandal ever to hit the kingdom's corporate sector. Billions of dollars are at stake in the affair, as well as the reputation and financial well-being of banks and financial institutions across the Middle East, Europe and North America.

Last week it all turned nastier. Al Gosaibi filed a lawsuit in New York alleging a US$10 billion (Dh37bn) fraud by Mr al Sanea, accusing the billionaire entrepreneur of swindling his wife's family firm in a series of "skimming" exercises in the foreign exchange business he ran out of Bahrain. That legal move is only the beginning, with actions lined up in courts from Geneva to the Cayman Islands. UAE banks - as significant creditors to the al Gosaibi's troubled empire - are already deeply embroiled in the affair. One court document on behalf of Dubai's Mashreqbank, filed in New York, names the entire al Gosaibi family as defendants in a writ demanding the repayment of $219 million Mashreq claims is owed to it in unfulfilled foreign exchange transactions.

Among the 20 family members named is Sana Abdel Aziz Hamad al Gosaibi, wife of Mr al Sanea and a key figure in the affair. It is suggested Mr al Sanea used his wife's money to set up and maintain the Bahrain banking business where the alleged fraud took place. Other UAE banks are also believed to be considering action against Al Gosaibi and Saad. Abu Dhabi Commercial Bank is reported to have a $500m exposure to the scandal, and other regional and international financial institutions are consulting their lawyers. It makes for a field day for the international legal profession, which is already contemplating the considerable technical problems of filing foreign lawsuits - from the US and other jurisdictions - against Saudi citizens in the kingdom.

But the main action remains in Riyadh. The bank accounts of both Al Gosaibi and Saad executives have been frozen, and travel restrictions imposed on their movements outside the country. It looks like the Cote d'Azur will be missing some of its regular Middle Eastern visitors this summer. All eyes are on the Saudi Arabia Monetary Authority, the national financial regulator. According to people in the know, SAMA is aware of the shock that has rippled through the kingdom's financial community, and the damage that is being done to its reputation around the world, but still views the problem as an internal affair.

If it can finesse some kind of settlement in Riyadh, it believes that will be a sound platform for tackling the Gulf-wide and international dimensions of the affair. The difficulty is that reaching a Saudi resolution may not be as easy as it seems, now that international lawyers have become involved. The protective and publicity-shy Saudi financial establishment is in effect being asked to chose between Al Gosaibi and Mr al Sanea, and decide on this painful issue: which firm's demise would be less damaging to the kingdom's financial infrastructure?

The al Gosaibis have been part of the Saudi establishment for decades, reputedly only ever one phone call away from $1 billion of credit; Mr al Sanea is being painted as an arriviste financial adventurer who took big risks in the pre-credit crunch days and left himself and his extended family with a toxic exposure of leverage when the bubble burst. The choice for the SAMA looks clear-cut, as does the likelihood that Mr al Sanea will be hung out to dry in the desert wind.

If a settlement is reached in Saudi, negotiations can begin on how to settle the rest of the outstanding liabilities from the affair. Credit Suisse has been retained to handle this tricky process, but faces the immediate problem of quantifying its extent. Some suggest there is $20 billion or more owing from Al Gosaibi-Saad liabilities, and that the number of institutions involved is more than 100. That will make for a gigantic scramble of bankers hoping to get some of their money back.

Al Gosaibi has shown itself alert to the reputational risk, to itself and the kingdom, from the affair. Just last week it hired the influential Washington lobbying firm Kearsage Global Advisers to help it limit the global fallout. Like my luncheon host in Piccadilly, the men from DC will have their work cut out. [e-mail]