A Saudi investment firm is demanding Dubai asset manager Rasmala pay it US$7.6mn over “untrue” representations it alleges were made about the financial health of a trade finance fund.
Jeddah-based Alawwal Capital invested just over US$10mn in the Rasmala Trade Finance Fund in 2019. Rasmala Investment Bank, the fund manager, suspended it in March 2020, citing market ructions caused by the onset of the Covid-19 pandemic.
Alawwal alleges that Rasmala breached its statutory duties by failing to disclose three cases of non-payment or delayed payment by counterparties, including two court cases, before Alawwal invested in the fund.
Rasmala did not respond to written questions from GTR, but a court filing acknowledging the suit says it intends to fully defend the claim. Its trade finance fund remains suspended, Alawwal says, although some redemptions have been allowed.
In a complaint filed last month in the Dubai International Financial Centre (DIFC) Courts, Alawwal says it was approached in late 2018 by Rasmala representatives who said the trade finance fund would be a good match for Alawwal’s strategy of low-risk, sharia-compliant investments.
In meetings in late 2018 and early 2019, Rasmala said there was a “0% chance of making a loss” when investing in the fund because of its strict, low-risk lending policies and risk mitigation measures, according to the complaint.
The measures included lending only to reputable counterparties, conducting inspections of goods, over-collateralisation and use of credit insurance.
Alawwal also says that its representatives asked in the meetings whether there were any defaults or live litigation that could affect the fund’s performance and asked Rasmala to share information on deals that had “gone bad” and lessons learned from them.
The complaint says Rasmala responded that “there were only a few scattered cases of default involving small counterparties” and that “these cases were all settled satisfactorily due to the robust multi-layered security mechanisms put in place by the fund”.
All deals were 100% covered by guarantees and in the case of a default, provision would be made until the guarantees were realised, Alawwal’s complaint cites Rasmala’s representatives as saying.
However, Alawwal later learned, through a London lawsuit Rasmala launched against Trafigura in 2021 over allegedly fictitious coal trades, that a UAE company it had advanced US$22.6mn to had defaulted on the majority of the repayment amount, due in the first quarter of 2018.
Alawwal says the issues with the UAE firm, Farlin Energy & Commodities, were disclosed in Rasmala’s 2017 accounts, which were provided to Alawwal, but the accounts suggested that the fund’s potential losses were only US$4.2mn.
In a document given to Alawwal in late 2018, Rasmala allegedly wrote that “the company has not taken any legal action against other entities or individuals during the last two years”.
But Alawwal says it has since discovered that in 2018 the fund sued UAE firm Met Trade, and its owner Raman Gupta, for US$14.2mn over a failure to make repayments on a murabaha facility.
The case was also disclosed in the fund’s 2017 accounts, which said that the exposure was limited to an uninsured US$4.1mn portion of the loan and that “the guarantor [Gupta] has sufficient financial resources to meet his obligation to the fund”.
In its complaint, Alawwal says that on a “strict interpretation”, Rasmala’s statement that there was no recent litigation related to the Rasmala Investment Bank, which manages the fund, rather than the fund itself.
However, the company argues “the statement gave the impression that there had been no legal action in relation to defaults suffered by the fund”.
Both Rasmala’s suits against Trafigura and Raman Gupta remain active, court records show. A May 2023 order from the Delhi High Court says that insolvency proceedings relating to Gupta are “still pending”.
Alawwal alleges in the complaint that the cases show that Rasmala’s claims about its risk mitigation strategy “were untrue”, otherwise “the fund would not have incurred the losses” from Met Trade and Farlin.
It also claims that Rasmala’s statements about its investment strategy and methods were untrue because “if the fund had only contracted with reputable clients with long track records, it would not have contracted with a fraudster, which forges documents” and that the fraud should have been detected through inspections.
The complaint alleges Rasmala’s statements violated DIFC collective investment laws which require fund managers to provide prospectuses that contain “clear, fair and not misleading” information, prohibit “misleading or deceptive” statements and require them to disclose all information that would reasonably be required by an investor.
Alawwal is seeking US$7.6mn in compensation under the law. The figure comprises US$5.17mn of the firm’s US$10mn investment which remains in the suspended fund after redemptions, and US$2.37mn which it says is the “opportunity cost” of investing in Rasmala’s fund instead of a similar trade finance fund.
The complaint shows that Alawwal has continued to make redemptions from the Rasmala fund, as recently as this year.
Rasmala said in November 2019 that the fund, launched in 2014, had surpassed US$100mn and generated a cumulative return of 14.1%.
Rasmala manages several funds including in real estate and fixed income, primarily aimed at investors in the Gulf. Jeddah-based Alawwal says on its website that it specialises “in wealth and asset management, investment services, financing arrangements, financial advisory and business development services”.
Alawwal and a lawyer representing it in the case did not respond to a request for comment.
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