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Further award in Al Khorafi v Sarasin case.

Posted on 31/10/2015 · Posted in Expert Witness, Financial Litigation, Investment

The seven-year transactional history between Rafed Al Khorafi’s family (‘Claimants’) and investment lenders Bank Sarasin-Alpen (ME) Ltd. and Bank Sarasin & Co Ltd. (‘Defendants’), gained a new chapter on 7 October 2015 when the Dubai International Financial Centre (‘DIFC’) court issued a voluminous ruling determining further damages owed to the Claimants as a result of the banks’ wrongdoing in selling inappropriate structured real estate, commodity-backed and equity sector basket instruments. The court’s ponderously detailed discussion of the claims for damages asserted by the Khorafi family (made even lengthier by the Defendants’ reassertion of legal claims previously decided in the case), supplements last October’s award of $10.45 million, (original decision discussed here), with a total award of $59.6 million in total. Sarasin-Alpen was held solely liable for some $35 million of that figure and the two Defendants held jointly and severally liable for the remaining $24.6 million. Underlying those numbers are some significant legal conclusions from the court that put lending banks on notice of both their obligations to clients and customers and the severe penalties looming for those who fail those duties within DIFC jurisdiction.

First they ignore you, then they laugh at you, then they fight you, then you win.”
Mahatma Ghandhi

The basis of the court’s original $10.4 million award of October 2014 was compensation to be paid by the Sarasin-Alpen to repay the Khorafi family members for losses sustained on the sale of their investments, a figure agreed to by the parties. In so doing, the court adopted the “no transaction” method of calculating damages, whereby a court seeks to return the parties to their respective positions had they never entered into the transactions being litigated. Other possible bases for damages could have included a “benefit of the bargain” approach, whereby a claimant could be awarded damages based on a presumed successful outcome of the transaction, or a tort measure of damages which would include all damages reasonably foreseeable and resulting from the defendants’ wrongdoing. The application of the “no transaction” methodology arguably limited the Defendants’ exposure, but the court’s resulting analysis in no way spared the Defendants.

The Khorafis were able to seemingly expand the scope of the “no transaction” damages in the case by successfully arguing as losses charges on loans they acquired from Al Ahli Bank Kuwait (‘ABK’) and the Commercial Bank of Kuwait (‘CBK’) to finance aspects of the investments with the Defendants. The court found that, due to Bank Sarasin’s initial failure to advise the Khorafis of key aspects of the investments sold to them and the unreasonable margin call which resulted from their failure, that the Claimants were required to obtain both the ABK abnd CBK loans to cover the margin call. Thus, “the causal link” between the breaches of the regulatory obligations and the loss suffered by the Claimants on failing to meet the margin calls was not broken by the Claimants’ own conduct and broader liability laid at the feet of Sarasin-Alpen and Bank Sarasin. Claimants damages incurred under the ABK and CBK loans amounted to approximately $16.1 million. Further actual damages against Bank Sarasin were found in the amount of $8.4 million, for a total award of $24.6 million.

It seems to be a law of nature, inflexible and inexorable, that those who will not risk cannot win.”
John Paul Jones
American Soldier 1747-1792

A fascinating aspect of the Khorafi litigation has been the court’s revealing of guidelines for interpreting nascent Dubai Financial Services Authority Rules (‘DFSA Rules’). The court had found that the Defendants had violated DFSA proscriptions by treating the Khorafis as “Clients” instead of “Retail Customers“; the former category being deemed more skilled in high-value transactions and thus requiring a lesser duty of care from the Defendants. Sarasin-Alpen had in fact deliberately falsified documents, known as AGBC’s, to make them appear as if they had been completed by the Khorafis, even though its employees must have known that that was not the case. Sarasin-Alpen thus attempted to sell complex and inappropriate instruments to the Khorafis while underinforming them of the potential risks, claiming that the Khorafis were sophisticated investors who could look after themselves. These violations of DFSA regulations were deemed flagrant by the court, and the Claimants argued that as such, the actions of the Defendants warranted multiple damages, setting an example cautioning other banks against similar misbehaviour. Defendants counter-argued that, though wilfully falsified, the AGBCs themselves did not directly result in any of Claimants’ losses, and so under precedent generated by English and Welsh courts they could not be used as a basis for exemplary damages. The court disagreed with that argument, and followed other courts’ guidance.

The DIFC court’s discretion to award compensation in the form of multiple damages is limited by Article 40(2) of the Law of Damages and Remedies which gives no further guidance as to the principles upon which the Court should exercise its discretion. Given that Sarasin-Alpen acted in deliberate breach of the DFSA rules, the court found ‘a clear case of mis-selling unsuitable investments to an unsophisticated investor, and to his equally unsophisticated wife and mother’. This was “deliberate malpractice” undertaken “with intent to deceive” and put the case “out of the norm“, said the court. Moreover, the court opined that Article 40(2) is not derived from the law of England and Wales, but rather “reflects an intention to depart from that law in favour of the law in the United States of America“. The use of US precedent and statutory guidance in interpreting Dubai regulatory provisions opens up a broad vista of considerations, potentially expanding and shifting greater responsibilities to banks operating with borrowers in the DIFC as a result of stronger US trends in consumer protection. Because of the egregious nature of the Defendants acts, the court held that an award of multiple damages was appropriate and ordered Sarasin-Alpen to pay twice the amount of damages to the Claimants, resulting in a final damages claim of US$59,611,899 in total.

Notwithstanding potential appeals, this opinion does not draw an end to the Khorafi trial court’s duties. The Defendants still must pay interest on the various award amounts from the date of the various 2008 transactions, as well as court costs incurred by the Claimants in recouping all awards, which specific amounts remain to be determined. Given that the Defendants did not pay last October’s award amount in a timely fashion, it is not inconceivable that the Khorafis will be able to claim additional interest award amounts the next time they come to court.

Link: DIFC Court of First Instance, Orders – CFI 026/2009 (1) Abdel Mohsen Bader Al Khorafi (2) Amrah Ali Abdel Latif Al Hamad (3) Alia Mohamed Sulaiman Al Rifai v (1) Bank Sarasin-Alpen (ME) Limited (2) Bank Sarasin & Co. Ltd. Oct 07, 2015

Link: DIFC Court of First Instance, Orders – CFI 026-2009 (1) Rafed Abdel Mohsen Bader Al Khorafi (2) Amrah Ali Abdel Latif Al Hamad (3) Alia Mohamed Sulaiman Al Rifai v (1) Bank Sarasin-Alpen (ME) Limited (2) Bank Sarasin & Co. Ltd. Oct 30, 2014

Link: DIFC Court of First Instance, Orders – CFI-036-2014 Vannin Capital PCC PLC for and on behalf of protected cell – Project Ramsey v (1) Mr Rafed Abdel Mohsen Bader Al Khorafi and others Nov 10, 2014

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