Tuesday, November 22, 2022

Before FTX, Abraaj Failed

FTX founder Sam Bankman-Fried ran the cryptocurrency exchange and affiliated companies as “personal fiefdoms." 

The Abraaj Group, the Middle East's largest private equity fund failed similarly in 2018.

Liquidators overseeing Abraaj Group’s insolvency now estimate chief executive officer Arif Naqvi’s alleged theft to have cost the firm $385 million, an amount significantly more than what prosecutors claimed.
The SEC took action in the matter against a U.S. based Abraaj managing partner for fraud:

...potential investors were provided with an inflated performance track record for existing investments in prior funds managed by Abraaj's investment adviser entity...

...personnel responsible for valuations stated internally that certain write-downs were needed for a number of portfolio companies held by private equity funds managed by AIML. According to the order, Bourgeois-one of Abraaj's managing partners, the CEO of its New York office, and the global head of fundraising and investor relations-was aware of these advised write-downs on at least two separate occasions. The order finds that Bourgeois recommended that AIML not apply the write-downs (or delay doing so) to avoid the negative impact on APEF VI fundraising he anticipated would result if AIML's lower track record was shared with potential investors. 

Where was the oversight from the board or financial audit firms?  Absent.

....conflicts of interest between auditors and the private equity groups that employ them are an “eternal problem” in the sector.

KPMG played a key role enabling the Abraaj debacle.  FT reported:

KPMG has been blocked from winning new audit contracts in Abu Dhabi after regulators removed the Big Four firm from the list of accountants authorised to sign off companies’ financial statements. The move by the Abu Dhabi Accountability Authority comes just weeks after a separate watchdog in Dubai fined KPMG and one of its former partners $2mn for failings in its auditing of Abraaj, the emerging markets private equity group that collapsed in 2018. 

Failure to write down holdings to keep inflated performance figures is the current state of private equity.  That could keep the SEC very busy.