Family feud: Billionaire Saudis tangle over debt

updated 5:43 p.m. ET Oct. 29, 2009

CAIRO - It goes well beyond the average family squabble.

For months, two billionaire families in Saudi Arabia, linked by marriage, have been locked in a bitter legal battle centered on an estimated $22 billion debt implosion and allegations of billions of dollars in fraud.

Bank accounts have been frozen. International banks, facing billions in outstanding debt, have filed suit. Claims of scapegoating and family jealousies have splashed across Mideast newspapers.

The dispute between Maan al-Sanea and his Saad Group and Ahmad Hamad al-Gosaibi and Bros., or AHAB — two of Saudi Arabia's most prominent private conglomerates — threatens to cast a pall over Saudi Arabia's image at a time when the global meltdown and credit crisis already have squeezed the kingdom's companies.

It also has raised new questions whether Saudi's financial and corporate systems — still dominated by family firms and personal relationships — are transparent enough to allow outside lenders to make sound decisions. That worry has the potential to impact investment in the kingdom long term.

'Transparency has deteriorated'
"During the crisis, if anything at all, transparency has deteriorated, and that is one of the key cultural changes that has to take place, particularly among family owned companies — where the tendency to be opaque is far greater," said Philipp Lotter, the Dubai-based senior vice president of Moody's Investor's Service.

Added Rahul Shah, a Dubai-based analyst with Deutsche Bank: "The feeling at the moment is that without greater disclosure, it's difficult to commit capital."

The details of the case have trickled out slowly, mostly in court cases filed in the United States and London.

Little has come from either company or, for that matter, from authorities in Saudi Arabia. Such family run businesses have traditionally been treated with deference.

The fight has so far remained a civil matter, with no known criminal charges.

The saga hinges on claims by the al-Gosaibi family that al-Sanea — Saad's chairman and a major HSBC stakeholder who is also married to a daughter of the al-Gosaibi patriarch — defrauded them of over $9 billion. Al-Sanea was listed in March by Forbes as the world's 62nd richest person.

According to a claim outlined in a New York lawsuit, al-Sanea's actions eventually caused the company to default on billions in debt to international banks.

Freeze on accounts
The Saudi Arabian Monetary Agency, the country's central bank, offered the first hint that trouble was brewing. A letter sent to the country's lenders in May ordered a freeze on the accounts of al-Sanea, as well as those of several family members, including his wife.

The central bank offered no details, which prompted several international ratings agencies to first downgrade, then withdraw, their ratings for Saad Group and then for AHAB.

The central bank has since largely remained silent, and calls and e-mails to both Saad and AHAB were not answered.

Saad Group — whose holdings include hospitals, travel firms, banks and financial services companies — explained at the time that it was facing a "short-term liquidity squeeze" linked to the global credit crunch. It attributed that to factors including the "failure of companies owned by a prominent Saudi family business and the unexpected and unprecedented regional reaction to that failure."

The company said debt restructuring was under way.

It soon became clear that the prominent Saudi family business was AHAB, and the failing companies included The International Banking Co., a Bahrain-based bank owned by AHAB that had defaulted on some debts.

Media reports indicated that al-Sanea had served as TIBC's chairman.

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