Securities regulators on Thursday sued a well-connected Kuwaiti financier whose investment firm is partly owned by Citigroup Inc , saying he reaped millions in suspicious profits after fraudulent takeover reports sent shares of two U.S. companies soaring.
The civil lawsuit against Hazem Khalid Al-Braikan is sure to send shockwaves through the Middle East investment community. Al-Braikan, who declined to comment when reached by telephone, lists many achievements on his resume, including a U.S. Medal of Honor for service in the first Gulf War -- a claim the U.S. Army says is bogus.
Al-Braikan is chief executive of Al-Raya Investment Company, which is 10 percent owned by Citigroup. A familiar figure at high-level Middle Eastern financial functions, dressed in traditional Arab robe and speaking impeccable English, he is considered a respected member of the Kuwaiti money management world.
The U.S. Securities and Exchange Commission said in papers filed in Manhattan federal court that Al-Braikan and entities linked to him in Kuwait and Bahrain earned more than $5 million from well-timed trades in Harman International Industries Inc and Textron Inc .
In Washington, a top SEC enforcement division official, Scott Friestad, said: This is pretty brazen misconduct.
He said that an investigation began soon after learning about the takeover hoax on Monday at the same time as the markets and media outlets.
We have had a team of six or seven people working around the clock for the last couple of days to gather evidence.
The commission got an emergency court order on Thursday freezing the trading profits in various U.S. accounts.
Defendants engaged in a deceptive scheme to profit by trading around the fraudulent offers to acquire Harman International and Textron, the SEC complaint said.
The defendants profited from amassing large positions in stocks and options in the two companies, the SEC papers said.
Harman shares briefly soared on Monday after several media outlets reported that a private investment firm called Arabian Peninsula Group planned to buy it at almost double its market price. The incident was similar to a phony offer for Textron in April from a United Arab Emirates-Kuwait consortium.
News outlets, including Reuters, received a one-page fax on Sunday announcing the purported Harman bid, originating from a Kuwaiti area code.
The SEC did not specify who sent the fax, or who spread news on the fake bid for Textron.
Al-Braikan is known to discuss market rumors with reporters, a common practice in Kuwait, where businesspeople and traders sometimes leak sensitive company details or questionable information that can move stocks on a market that has no financial regulator.
He alerted a Reuters reporter in Kuwait City that a bid was imminent for Textron before the April hoax.
There is a major scoop coming, he said at the time. Don't tell anyone but I will give you a great scoop.
GULF'S BANKING TROUBLES
The lawsuit deepens problems faced in the Gulf's banking sector. Two Bahrain banks were connected to multibillion-dollar corporate defaults in neighboring Saudi Arabia in June that have since shaken the region's financial industry and spurred investor calls for more transparency.
In a separate case, Bahrain authorities are investigating The International Banking Corporation (TIBC) after its Saudi owner discovered substantial irregularities in its financial services arm.
TIBC and its owner, the Algosaibi group, and rival bank Awal and its owner, the Saad Group , have defaulted on some of their debt, leaving 30 other banks in the broader Gulf Arab region bearing about $9.6 billion in potential losses, according to ratings agency Standard & Poor's.
Other defendants in the SEC suit include investment bank United Gulf Bank and KIPCO Asset Management Co (KAMCO). Both are part of the Kuwait Projects Co (KIPCO) group, according to the SEC.
KIPCO declined to comment. The other defendants could not immediately be reached. Citigroup confirmed it has a stake in Al-Raya but declined further comment.
KIPCO is affiliated with senior members of Kuwait's ruling Sabah family. Its chairman is a son of the ruler and two board members belong to the family. It is the biggest investment firm by assets in Kuwait.
A GLITTERING RESUME
On paper, Al-Braikan looks like a hero. His resume says he has served on multiple boards, has several professional degrees and has military experience including serving in operations Desert Shield and Desert Storm during the first Gulf War.
The resume says he won the U.S. Medal of Honor from the Gulf War Coalition Forces in 1991. It is the highest U.S. medal for valor in combat that can be awarded to the armed forces.
However, U.S. Army spokesman Gary Tallman said none of these medals was awarded for Operations Desert Shield and Storm.
If he's claiming a Medal of Honor, that's bogus, Tallman said.
The resume says he received basic training with U.S. armed forces at Fort Dix, New Jersey, in 1990.
It lists his memberships on nine boards of directors in Kuwait, the United States and Luxembourg.
The SEC said Al-Braikan engaged in an aggressive trading strategy of buying Harman stock and call options in the four trading days before the phony tender offer.
The commission said Al-Braikan and United Gulf Bank liquidated their entire positions in Harman and requested the money in their Citigroup accounts wired to them.
On Monday, Al-Braikan sold his entire position of 341,000 shares of Harman common stock, including 50,000 shares bought that day, for a profit of about $1.15 million, the SEC said.
He sold his entire position of 500 call contracts for a profit of nearly $29,000, the lawsuit said. It said United Gulf Bank sold its entire Harman position for more than $400,000.
The SEC contends that KAMCO made about $377,000 in illegal profit on Textron stock on April 9 after false reports about an offer to take over the company. It said Al-Raya made illegal profits of about $147,000 on Textron.
Neither Harman nor Textron was immediately available for comment on Thursday.
The SEC can bring civil, not criminal charges. It wants the disgorgement of ill-gotten gains and penalties from the defendants for trading around hoax offers to acquire U.S. companies, the SEC said in a press release.
In Washington, SEC Chairman Mary Schapiro, was asked by reporters if the agency was cracking down on stock hoaxes.
I would not tell you it has become a heightened issue, she said. It has always been an issue of concern.
(Reporting by Martha Graybow and Grant McCool; Additional reporting by Thomas Atkins in Dubai, Ulf Laessing in Riyadh, Robert MacMillan and Jon Stempel in New York and Rachelle Younglai in Washington; Editing by John Wallace, Ted Kerr and Gary Hill)