Damage control: Sued by JS for fraud, Ghani Osman levels counter-accusations

Allegations fly between two brokerage firms, capturing the attention of Pakistan’s financial sector.

KARACHI: On Friday afternoon, worshippers at the mosque at the Karachi Stock Exchange were treated to an unusual sight: a person handing out copies of a newspaper clipping that accused Jahangir Siddiqui & Company – one of the largest financial conglomerates in the country – of defrauding investors in order to benefit the founder’s son. What they may not have known was that the accuser himself was being sued for embezzlement by the JS Group and appears to have been trying to cover his tracks by levelling a counter-accusation.

Over the past week, Ghani Osman, CEO of brokerage firm Ghani Osman Securities, has been raising the issue of what he terms an unfair advisory fee of Rs431 million paid to Ali Jahangir Siddiqui, the son of the founder of JSCL, prominent Pakistani investment banker Jahangir Siddiqui. Osman claims that this advisory fee was unfair, and constitutes a violation of fiduciary responsibility to shareholders on the part of the executives of the company.

The timing of Osman’s accusation, however, is somewhat suspect. It comes on the heels of a lawsuit filed by JSCL CEO Suleman Lalani, accusing Osman and others of embezzling over Rs220 million from Al-Abbas Sugar Mills, in which Osman, his family, and his associates own a majority share. The various entities of JS Group own close to 20% of Al-Abbas.

The showdown between the two brokerage houses, meanwhile, has captured the attention of Pakistan’s financial services community, especially since one of the parties involved – the JS Group – is a widely known and respected firm, considered by some to be Pakistan’s equivalent of Goldman Sachs.

In the legal complaint filed in the Sindh High Court on March 12, the JS Group alleges that Ghani Osman, in collusion with Al-Abbas CEO Shunaid Qureshi (a nephew of Jahangir Siddiqui) have colluded to siphon money away from the company’s accounts using a series of shell companies and accounts.

The fraud appears to be remarkably crude. In addition to sugar, Al-Abbas also produces ethanol from the molasses which results as a by-product from the manufacture of sugar. Al-Abbas’ capacity to produce ethanol greatly exceeds its internal generation of molasses so it buys molasses from other sugar mills. What Osman and Qureshi appear to have started doing was making payments for molasses that never arrived at the factory.

At least nine shell companies were used to funnel money from Al-Abbas to Osman and Qureshi, on the pretext of buying molasses. Those shell companies received the money and then, within a few days, transferred the money to either Osman, or Qureshi, or occasionally to their family and other associates.

For instance, a company called Rustam Traders was paid Rs17.5 million on September 10, 2012, ostensibly for molasses that never arrived at Al-Abbas. On September 17, seven cheques, each of Rs2.4 million (totalling Rs16.8 million), were made out by Rustam Traders to Shunaid Qureshi.

Another vendor, Ideal Transporters, was also paid for molasses but about Rs19.9 million of that money was paid to Osman and another Rs17.2 million was paid to his brokerage firm, Ghani Osman Securities.

In some cases the payments were made on by the shell companies directly to banks to which Osman and Qureshi owed money. This led some at JSCL to conclude that even the signatures on the bank accounts being operated by the shell companies were faked. The Express Tribune was able to see at least one case where the alleged owner of Rustam Traders filed a document with Silkbank to notify them that the signature on his cheques would be different from the signature that appears on his computerised national identity card.

In a bid to stem this flow of embezzlement in a company in which the group had such a large share, Ali Jahangir sent a letter to the Securities and Exchanges Commission of Pakistan on March 8, asking them to send an observer to the board meeting at which the JS Group planned to seek the ouster of Qureshi as CEO of Al-Abbas. In a letter dated March 12, the SECP replied saying that they would not be able to send an observer, but asked the JS Group to send evidence of wrongdoing. By that time, JSCL had already filed a lawsuit against Osman and Qureshi.

That lawsuit received wide coverage in several leading Urdu newspapers, including the Daily Express, which reported it on March 15. Soon afterwards, Osman appears to have struck back the JS Group by raising the issue of the bonus paid to Ali Jahangir, through a story in Pakistan Today.

In a written statement, JSCL spokesperson Imran Sheikh clarified that the advisory fee paid to Ali Jahangir was a bonus for successfully concluding the sale of the company’s 21.1% stake in Pakistan International Container Terminal to the Manila-based International Container Terminal Services. That sale netted JSCL a capital gain of Rs2.5 billion, of which about 17.6% was paid to Ali Jahangir, who had been managing the transaction.

“The advisory fee has been appropriately disclosed in the annual report of 2012,” said the statement, a fact not denied by Osman since he cited the notes of the annual report to make the allegations against JSCL.

Ali Jahangir’s bonus appears high by Pakistani standards, but sources close to the company say that JSCL tends to follow compensation practises similar to those at international investment banks, which can pay out as much as 20% of the profits generated for the company as a bonus to the employee that brought in the revenue.

Given the volatile nature of capital markets, most investment banks tend to pay most of their compensation not in the form of a fixed salary, but as bonuses that depend on performance and market conditions. In good market conditions, such as present times, bonuses of more than Rs100 million are not unheard of for some of the JS Group’s senior-most executives. In lean times, the reverse is true: no bonuses are paid at all.

Nonetheless, sources familiar with the matter say that the Securities & Exchanges Commission of Pakistan has sent a letter on Monday to JSCL CEO Suleman Lalani, asking him to provide details about bonus, as well as its approval from the board of directors. The letter appears to be in response to a complaint that Osman filed with the SECP on Friday.