By Douwe Miedema, Shurna Robbins and Sarah White
LONDON/GEORGE TOWN (Reuters) - Mohammed Algosaibi often turns the palms of his hands up as he talks, as if asking for understanding.
He is trying to explain one of the biggest but least reported failures of the financial crisis. This has split his family, one of Saudi Arabia's richest, cost some of the world's biggest banks billions of dollars and is now being slugged out in courts from London to the Cayman Islands.
Some family members face travel bans linked to the case so it has fallen to the 32-year old to defend the Algosaibi empire since the 2009 collapse of two Bahraini banks left more than 100 banks including Deutsche Bank, HSBC and Societe Generale owed an estimated $22 billion.
Small wonder he appears uncomfortable. During an interview with Reuters, five advisers -- two accountants, two PR advisers and a lawyer -- dominate, interrupting when he tries answering a question.
The missing money, he says, was taken by his uncle Maan al-Sanea, who married into the Algosaibi family 30 years ago and was put in charge of its financial businesses. Al-Sanea used his insider's access, Algosaibi and his advisers say, to siphon off billions of dollars through a money-laundering maze.
As a result the Algosaibis, who say they have been left some $9.2 billion worse off through unauthorized borrowing, are suing al-Sanea in the Cayman Islands for fraud, forgery, and masterminding a massive Ponzi scheme following the collapse of the Bahraini lenders, one of which was owned by the family and the other by al-Sanea.
Accounts of the case so far have focused on the Algosaibi version of events. Al-Sanea has always categorically denied these allegations, and declined to comment for this story.
But new evidence presented by five banks suing the Algosaibi family company in a separate case at the High Court in London -- published here for the first time -- raises doubts about the family's claim that it did not know what al-Sanea was doing.
Banks have compiled a mountain of emails, resolutions and what look like transcripts of telephone conversations for their suit, which centers around deals they struck with units in the family partnership Ahmad Hamad Algosaibi & Brothers (AHAB). The documents show that the Algosaibi's own accountant had been sounding alarm bells about al-Sanea and his business methods for years.
"I am really disturbed from your careless and unprofessional position in dealing with this situation," accountant Salah Ayouti told patriarch Abdulaziz Algosaibi, the second of the partnership's three founding brothers, in a letter about al-Sanea sent in May 1994.
I am "hoping that it will not turn a disaster if you will keep behaving in careless way rather than dealing with it strongly and seriously."
The documents show that al-Sanea built his empire with the full knowledge of his wife's family and is now being made a scapegoat for schemes his in-laws knew existed -- and realized were flawed -- all along, the banks say.
This new evidence and the countless legal cases shine a rare light on the practice of "name lending" in the Gulf Arab region, in which a person's name is sufficient collateral to win a loan or a business deal.
"It's something that happened in a lot of emerging market countries. It tends to be because of government relations or ties with powerful, rich figures," said Andrew Andrijanovs at investment banking boutique Exotix.
"One person's connections or their status in society did lead to large sums being lent, sometimes without the proper risk management. That has been a big lesson for western banks -- although investors do have short memories."
Family and business have been intertwined in the Gulf for generations, a situation epitomized by the Algosaibis. The roots of their wealth lie in a conglomerate of export and import and trading businesses, as well as in land.
Based in the east of the country, the family built construction firms and later won the concession to run the Pepsi-Cola bottling plant.
Some 60 years ago they also started financial businesses, though on a modest scale. The Money Exchange served expatriate workers in the nascent oil industry around oil company Aramco with cash remittance and currency exchange services.
When al-Sanea married Sana Algosaibi, one of patriarch Abdulaziz's five daughters, in 1980, he was made a partner in the Money Exchange and took control of the Algosaibi financial businesses.
Saud Algosaibi, Abdulaziz's only son, resented the fact Sana's husband rose to power. In a sign of how deep the rift has since become, Saud's sister refers to him in her affidavit for the Cayman court as somebody with a "general tendency to avoid any responsibility".
His brother-in-law wasn't the only one unhappy about al-Sanea. Ayouti, the accountant, expressed worries about him on various occasions and was concerned that his debts could hurt AHAB, whose financial business was centered around the Money Exchange. "To date, no decision has been reached as to who will settle that indebtedness," he said in a 2000 auditors' report.
As early as 1997, the accountant wrote that the Money Exchange suffered a "permanent" liquidity shortage -- so much so that it needed to borrow not just to meet the needs of "the partners and their affiliated companies", but also to service existing debt.
Three years later, Abdulaziz stepped in to reassure the accountant -- and creditors who may have been worried about the Exchange. "In his capacity as Chairman and a partner of AHAB", Abdulaziz backed "the entire debts of Maan Al Sanea and his companies", says a March 2000 document described as a "pledge".
The court documents in the London case also show that Abdulaziz's only son Saud played an active role, and seemed to keep tabs on al-Sanea and his plans. Saud met bankers, dealt with the family's financial businesses, and was in frequent conversation with al-Sanea.
Saud could be demanding. "Tried to reach you several times last month and this month," he wrote to Al-Sanea in 2005, according to a court submission. "I understand where you come from, however think the analysis missed several points ... would like to suggest meeting with someone from Money Exchange to discuss a workable plan and come up with a scenario."
Page after page of such exchanges is proof, the banks argue, that the Algosaibis knew what was going on and are therefore responsible for setting things right.
AHAB said it would not comment on statements made in the London court so far, repeating that "the notion that they knew or cooperated in the looting of their business has no logical or legal basis".
THE GOOD LIFE
Despite the family concerns, Al-Sanea clearly enjoyed the fruits of running an important part of the business, basing many of his companies in the Cayman Islands, where he held much of his wealth.
Al-Sanea had a private plane fitted with plush white carpet, a master bedroom hung with expensive artwork, and a bathroom with gold fixtures, says Ninfa Arellano-Smith, a Cayman Islands banker working for HSBC. She met al-Sanea in 2006 through her husband -- the director for the Civil Aviation Authority -- and started working for him.
Al-Sanea, an elegant dresser, has a down-to-earth and easy sense of humor, while his wife Sana dressed like a typical western woman on a beach holiday in the Caymans, Arellano-Smith recalls.
"Sana is a very caring lady and soft spoken, but you know she still runs things. It's how they interact between them: she will pat him on the arm in a joking manner or something. They are a very caring, strong couple."
The al-Saneas took up an entire floor at the luxurious Ritz-Carlton resort on their 2008 vacation, Arellano-Smith said, flying into Grand Cayman with an entourage that included friends, butlers, caretakers and pilots.
Al-Sanea also inspected the resort's 20,000 sq foot penthouse with panoramic views of the world famous Seven Mile Beach and an asking price of $44 million. "He liked it, but it was too small," Arellano-Smith said.
Glenn Stewart, an American banker who was hired by al-Sanea in 1989, says diversification led to rapid growth of the Algosaibi business, and a need for new funds.
At Algosaibi Investment Holdings in Bahrain, Stewart said he was given the task of raising $100 million in credit facilities from Islamic banks for the Algosaibi partnership as the family added canning factories to its bottling plant, and bought land.
This was a far cry from Stewart's days at Oxford University, where he directed actor Rowan Atkinson, who would win fame as Blackadder and Mister Bean.
"I wanted to work in the Middle East. I wanted to have some adventures," Stewart said in his deep baritone during one of three long interviews.
The business grew rapidly for a decade.
Then came the 9/11 attacks on the United States in 2001. America clamped down on money exchanges in Saudi Arabia -- unregulated businesses it feared could be used as a source of funding for terrorist groups. Stewart said the Algosaibis worried they might have to amalgamate their exchange with those of other families.
As a possible way out, they applied for a license to operate as a bank in Bahrain, he said. When they won approval in 2002, they set up The International Banking Corporation (TIBC), which Stewart headed "from day one".
The Algosaibis contest the view that they were involved in TIBC. "It is false that the family had sought to set up or operate a Bahraini bank. The documents do not support it," a spokesman for the family said. The family "had absolutely zero involvement in the running of the bank or in meeting with regulators."
Again according to Stewart, Bahrain-based TIBC could not lend money there, so its customers came through the Money Exchange in Al-Khobar.
"The Money Exchange was responsible for dispersing advances to the customers and for collecting interest," Stewart said.
While Stewart ultimately reported directly to Al-Sanea, the working relationship between the two men -- based at different ends of the bridge that connects Bahrain to Saudi Arabia -- remained very much at arm's length.
"As a non-family member you didn't have any rights. If you questioned their business decisions you just ended up with them jumping down your throat," Stewart told Reuters.
One man who did question the family was English banker Mark Hayley. He was the general manager at the Money Exchange for more than a decade until 2009. His testimony in the Caymans court is a pivotal building block in the Algosaibi argument.
Hayley, now 60, said the Money Exchange did not appear to have any customers. "Any borrowing was to service existing debt and to fund the Saad Group. Nor did the Money Exchange have any significant business lending to customers," he said in a 2010 affidavit to the Cayman court.
"The Money Exchange does not possess any customer details, contact information or any other information which would normally be contained on a customer file."
There was also the matter of a forged letter.
Hayley, who now lives in Britain and refused to talk to Reuters, told the Caymans court that in the early 2000s, he returned from a holiday to find a letter on his desk that used his signature but that had been written when he was still away.
"I telephoned Mr al-Sanea's switchboard and someone put me through to him. I was so angry that I yelled at him. This was the first time I had raised my voice to him, but I was incensed," Hayley told the court.
"Mr al-Sanea tried to placate me. He subsequently told me that (al-Sanea's personal assistant) Mr Sohail had forged my signature and ... would be fined one month's salary."
It was the credit crunch which triggered the unraveling of al-Sanea's empire. TIBC raised its funds against its loan book. Most of its money came through interest-rate swaps and foreign exchange and Islamic finance deals.
This was a risky way to run a bank. Like Lehman Brothers, TIBC needed to constantly roll over short-term maturities. When banks stopped lending, the game was up. In May 2009, TIBC defaulted on a foreign exchange deal with Deutsche Bank.
The bank was put in administration, as was Awal bank, the separate company owned by Maan al-Sanea. It was then that the scale of the losses became clear for the first time. Administrators put the amount owed to the banks at $22 billion.
The Algosaibi family claimed they had no knowledge of the foreign exchange transactions, and didn't even know that TIBC existed. Al-Sanea, they alleged, had stolen billions of dollars and put it into his own Saad Investment Co Ltd (SICL).
The two years since have spawned a series of lawsuits around the world. Besides the cases in London and the Cayman Islands, legal proceedings are taking place in New York, Saudi Arabia, the United Arab Emirates, Bahrain and Geneva. The Algosaibis have also sued Glenn Stewart in Los Angeles, where they describe him as the main architect of al-Sanea's fraud. "TIBC was a sham bank and had no real customers," they say in their claim.
Stewart denies those charges and says the banks who loaned TIBC money were all told where it was going, into real estate, hedge funds and into bank shares, and were given counter-guarantees.
"I certainly refute any allegations in that regard. We had no control over any money or assets of the bank and we had no discretionary power to do anything," Stewart said.
Stewart ignored orders to stay in Bahrain and fled after the collapse of TIBC and Awal. In March, the Bahrain public prosecutor charged him, Al-Sanea and others for breaches of the country's commercial companies law.
The chief operating officer of Awal bank, 63-year old Tony James, was one of those held in the country, only allowed to leave just before last Christmas, following diplomatic pressure from the UK.
The bankers who were detained have filed a complaint with the United Nations Human Rights Council & Treaties Division and are also suing a UK private detective firm for defamation, over a report it wrote for the Central Bank of Bahrain, and which became public in court proceedings.
They suspect the hand of the Algosaibis.
"The Bahrain authorities, and in particular the (Central Bank) have been complicit in permitting the mechanisms of the state to be used to further the private political ends of a powerful family," they say in a the UN complaint.
OF CIGARETTES AND PATRIARCHS
The al-Sanea and Algosaibi businesses are so entangled that it is difficult to work out who is owed what. The banks suing in London hope that by bringing into doubt the Algosaibis' story, a narrative that has so far dominated the case, they might have a better chance of getting something back.
One option being considered in the wider dispute is to pool assets across the two groups, sources familiar with the situation but not involved in the lawsuit told Reuters. This could be used to pay banks a small part of the $22 billion they are owed.
That may be wishful thinking -- Saudi banks owed money by Saad may already have been paid out in real estate assets, leaving foreign banks behind.
Adding to the confusion was the death of Suleyman Algosaibi at the height of the financial crisis.
Suleyman, the last of the three founding partners of AHAB, took over when his brother Abdulaziz died in 2003. That was a fairly smooth transition. But what happened in Suleyman's last few hours is a crucial plank of the Algosaibi defense in the many court cases around the world.
The family claims that some of Suleyman's last-ever signatures must be forgeries, as the dying man was incapable of signing anything.
But al-Sanea's wife Sana told the Cayman court that her brother Saud had hastily traveled to Zurich, hoisted Suleyman out of bed, and had him sign the documents.
"My brother Saud took documents to Zurich for my uncle Suleyman to sign only days before his death, getting uncle Suleyman out of his bed and into a wheelchair so that he could sign and smoke a cigarette," she said.
The dispute over Suleyman's signature highlights the way family companies in the Gulf often operate on the trust and word of patriarchs.
"Name lending", as it is known, enables banks to lend to family conglomerates in the Middle East even if the deals do not meet normal corporate governance standards.
"We are Saudis and we are Muslims. Concepts that are born and bred within us will be unknown to the Cayman court," Sana said in her testimony.
(Douwe Miedema and Sarah White reported from London, Shurna Robinson from George Town; Additional reporting by Michel Rose and Tommy Wilkes in London, Frederik Richter in Bahrain, Amran Abocar in Dubai and Grant McCool in New York)
(Writing by Douwe Miedema, Editing by Chris Wickham, Simon Robinson and Alex Smith)