Switzerland’s Bank Sarasin mis-sold $200 million of investment products to Kuwait’s prominent Khorafi family, a court at Dubai’s financial centre found on Thursday in a ruling that could set a precedent for similar disputes in the region.
The Dubai International Financial Centre’s (DIFC) Court of First Instance ordered Sarasin to pay compensation in what may be one of the biggest awards in the 10-year history of the DIFC, which is growing in importance as a financial jurisdiction.
The verdict could also set a precedent in future disputes between cash-rich Middle Eastern investors and the Western financial institutions which channel much of the region’s wealth into overseas markets.
The court’s judgement did not set a figure for the compensation to be paid to the Khorafis, but the family has been asking for more than $26.5 million in court. Sarasin has 14 days to appeal, court officials said.
Sarasin and its Middle Eastern subsidiary Sarasin-Alpen (ME) Ltd sold unsuitable real estate-related investments to Khorafi family members in 2007 and 2008, deputy chief justice John Chadwick said.
Bank Sarasin, which had denied that it broke any regulation or failed to meet any obligation, said in an emailed statement to Reuters: “We and Bank Sarasin-Alpen (ME) Ltd are currently considering the judgement and our options, including an appeal.”
In their suit, originally brought several years ago, Rafed Abdel Mohsen Bader al Khorafi, his wife and his mother alleged that Sarasin failed to give them enough advice and warn them of risks in the complex investments.
They said they borrowed money from Al Ahli Bank of Kuwait to invest in real estate-related products through Sarasin, which lent the wealthy family additional amounts.-Reuters
According to court documents, the Khorafis said they were told they would “never lose money” and that the risk of their investments not appreciating in value was “negligible”, which they described as “hopelessly over-optimistic”.
As the global financial crisis erupted in late 2008, dragging down real-estate prices around the world, Sarasin asked the Khorafis for extra collateral to back their loans and eventually liquidated their investments at a loss.
“It is said he (Khorafi) overreached himself and his schemes fell apart when markets crashed and that he has no one to blame but himself,” Chadwick wrote in his judgement.
“I do not take that view. I am satisfied that the present is a clear case of financial mis-selling (of) unsuitable investments to an unsophisticated investor and to his equally unsophisticated wife and mother.”
In 2013, Bank Sarasin merged with another Swiss bank to form the J. Safra Sarasin group, according to the group’s website.
In the wake of the global financial crisis, some other Middle Eastern investors have tried to win some of their lost money back from Western institutions.
In February this year, a U.S. appeals court rejected an attempt by the Abu Dhabi Investment Authority (ADIA) to void an arbitration victory by Citigroup in a dispute over a $7.5 billion investment in the bank.
ADIA had said Citigroup fraudulently induced its investment, in part by issuing preferred shares to other investors that diluted its stake. Citigroup denies wrongdoing.
Goldman Sachs and Libya’s sovereign wealth fund are set to meet in a London court over Libyan allegations that the bank exploited a position of trust by encouraging the fund to invest over $1 billion in trades that ended up worthless. Goldman denies wrongdoing, and a hearing has been scheduled for early October.
Bushra Ahmed, a barrister at KBH Kaanuun, the law firm representing the Khorafis, said on Thursday: “Lawyers across the world will be looking at this judgement, to what he (Chadwick) said, his reasoning and how he’s come to the conclusions he has.”-Reuters