A court in the Dubai International Financial Centre (DIFC) has called for the liquidation of the local representative of a powerful Swiss private bank, after it failed to pay its share of the record judgment awarded against it. 

The ruling, handed down on May 2 by HE Justice Omar Al Muhairi, ordered Bank Sarasin-Alpen (ME) to be "wound up under the DIFC Insolvency Law No 3 of 2009", and appointed representatives of Sajjad Haider Chartered Accountants LLP as liquidators. 

The case involves investments made at the DIFC by representatives of a prominent Kuwaiti business family in 2007-08. It has raised questions about the scope and limits of the jurisdiction of the Dubai Financial Services Authority (DFSA), and about the viability of "shop windows" set up by international banks at the DIFC.

It has also driven a wedge between Bank J Safra Sarasin, one of Switzerland's most prominent private banks, and Alpen Corporation, the United Arab Emirates (UAE) shareholder with which an earlier owner of the bank entered into the Sarasin-Alpen joint venture a decade ago.

Mis-selling

In 2007, Kuwaiti national Rafed Al Khorafi, his wife and mother approached the Swiss Bank's Dubai affiliate to invest $200 million in structured products sold by the bank, which was then known as Bank Sarasin. These were later found in court to have been unsuitable for the clients' requirements.

The onset of the global financial crisis caused the instruments to lose value, with Bank Sarasin making a margin call against the Al Khorafis to provide additional capital in support of the loans. When this failed to materialise, Bank Sarasin liquidated the structured products, causing the Al Khorafi family substantial losses. 

Representatives of Bank Sarasin-Alpen were also found to have added information to its customer onboarding forms after they had been signed, with the intention of creating the impression that they had been completed by the signatories. 

In 2014, the DIFC Court of First Instance (CFI) established that the Al Khorafis did not have a sufficient level of sophistication to be considered as anything other than "retail investors" in the DIFC, which in 2008 was a "wholesale jurisdiction" only. 

Liquidation

The outcome of the action brought by lawyers for Al Khorafi and his family to bring about the liquidation of Bank Sarasin-Alpen had been expected by the end of April, and was thought likely to mark the final chapter of a protracted case, with only final damages to be decided.

Richard Hill QC acted for Al Khorafi and David Allison QC for Bank Sarasin-Alpen at the liquidation hearing, which took place at the end of March. The Al Khorafis argued that Bank Sarasin-Alpen had failed to pay it damages of more than $35 million, as ordered by the DIFC Courts' Deputy Chief Justice Sir John Chadwick last November.

Justice Al Muhairi's liquidation ruling also implied that Bank Sarasin-Alpen had ceased to be a going concern.

Dr Ghandy Abuhawash, a partner at law firm Hamdan Al Shamsi in Dubai, which acts for the Al Khorafis, said they were disappointed that the bank had refused to pay the amounts awarded against it. He said it was particularly concerning that the shareholders of the bank, who benefited from selling products to customers in the Gulf region, were prepared to walk away from their responsibilities. 

"We will now look extremely closely at the actions of the directors of this company and will carefully investigate the actions of the new companies that Alpen Corporation Ltd and Bank J Safra Sarasin Ltd have set up," he said. "In the meantime, Bank Sarasin Alpen has failed to pay its $35 million share of the judgment and has been liquidated accordingly. Neither of its shareholders has stepped in to pay the damages. Both have started new companies in the DIFC: J Safra Sarasin Asset Management (Middle East) Ltd and Alpen Asset Advisors Ltd."

Bank Sarasin-Alpen's legal representatives, Al Tamimi & Co, declined to respond to several requests by Thomson Reuters in recent weeks to clarify the status of the case or their client's position.

Family ties

The Al Khorafis are understood to be members of the same extended family as the one which runs Kuwaiti infrastructure project development conglomerate Kharafi National.

The Safra Group acquired the shares of Bank Sarasin & Cie AG from Dutch bank Rabobank Groep in 2011, creating a new private banking entity known as Bank J Safra Sarasin AG. Bank J Safra Sarasin has said that the mis-selling of financial instruments took place before J Safra took over Bank Sarasin, and that as a result it had also tried to distance itself from Bank Sarasin-Alpen.

"All these things happened about eight years ago. It is a legacy business issue acquired by J Safra through the acquisition of the Swiss bank," said a lawyer representing Bank J Safra Sarasin who asked to remain anonymous. "Rabobank sold their shares in Sarasin Bank to Safra Group in 2011. J Safra had no involvement in the case."

The Swiss bank has sought to avoid further liability. "The CFI decided that Bank Sarasin-Alpen and Bank J Safra Sarasin have to pay compensation of about $35 million. Bank Sarasin-Alpen was ordered to pay an additional $35 million, while the Swiss bank is not liable for this additional $35 million," the lawyer said.

He also argued that the effectiveness of the limits of the DFSA's authority was not in question. "It's not a question of jurisdictional reach. You can of course, under international agreement, enforce judgments outside a particular country. The question of geographical jurisdiction is theoretical and moot. The Swiss bank paid the amount it was ordered to pay." 

The Kuwaiti family is also understood to be in dispute with London-based litigation funders, Vannin Capital, about funds in court escrow due to be paid to it in damages by the two banks.

Kuwait and the UAE both belong to the six-member Gulf Cooperation Council, which also includes Bahrain, Oman, Qatar and Saudi Arabia. The Al Khorafis may therefore feel they have been vindicated in their original decision that Dubai would be a friendly investment jurisdiction.