US Securities and Exchange Commission files law suit against Abraaj group, its CEO

LAHORE: The Securities and Exchange Commission (SEC) of the United State of America (USA) has filed a civil lawsuit in New York district court against defunct private equity firm Abraaj Investment Management and its founder and CEO Arif Naqvi over fraud and alleged misappropriation of more than $230 million from Abraaj's healthcare fund.

Also, Mr Naqvi and former managing partner Mustafa Abdel-Wadood were arrested on US charges of defrauding investors, with one defendant nabbed after arriving in New York with his wife and son to look at colleges. Mr Naqvi was arrested Wednesday in the UK and is awaiting possible extradition to the US. Mr Abdel-Wadood was apprehended Thursday in New York and remains in a federal lockup.

The SEC pleads in the suit that Abraaj Investment Management and Naqvi allegedly falsely reported to the Abraaj Growth Markets Health Fund and its investors that their money would be invested in healthcare-related businesses in emerging markets. Instead, the SEC's complaint, filed in US District Court in New York, alleges the money was used to cover cash shortfalls at Abraaj Investment Management and its parent company, Abraaj Holdings Ltd., a separate company largely owned by Mr Naqvi.

The SEC is asking the federal court to enjoin Abraaj and Mr Naqvi from violating federal securities laws in future, disgorgement of all ill-gotten gains, with prejudgment interest and civil monetary penalties.

The SEC alleges that the Abraaj Health Fund was a private equity fund formed as a limited partnership in 2015, and managed by Abraaj Investment Management and Naqvi. The Fund’s largest investor was based in this District (New York), and other United States-based investors were among the limited partners, including a large charitable foundation and several other charitable organisations. The Fund was formed to primarily make investments in the securities of health care-related businesses such as hospitals and treatment centres in emerging markets.

According to the Heath Fund Limited partnership (HFLPA), Abraaj Investment Management was authorised to take all necessary or desirable actions in connection with the operation of the Fund, the management of the Fund’s investment portfolio or otherwise in the furtherance of the Fund’s business. Naqvi had signatory authority on all Abraaj Health Fund Bank Accounts, as well as Abraaj Holdings’ and Abraaj Investment Management’s bank accounts. Pursuant to this authority, Naqvi was a required signatory on all transfers in excess of $75 million.

According to Abraaj Investment Management’s Quarterly Report to investors for the third quarter of 2017, the limited partners paid approximately $544 million in capital contributions pursuant to drawdowns. According to the report, however, Abraaj Investment Management had invested only approximately $265 million in Fund portfolio companies, leaving hundreds of millions of capital uninvested and still available for the Fund’s use. It also informed investors that the Abraaj Health Fund had, to date, paid Abraaj Investment Management $37.6 million in management fees and $2.5 million in expenses, the plaintiff-SEC contends through its lawyer.

Abraaj Investment Management’s emails, bank records, and internal finance documents, however, reflect that Defendants (Abraaj Group) were not using the Abraaj Health Fund’s money as case required by the HFLPA, as described in the Fund’s written disclosures to investors, and in the investor drawdown notices, SEC explains.

Instead, Abraaj Investment Management and Naqvi were identifying and acknowledging that Abraaj Holdings and Abraaj Investment Management were suffering significant cash shortfalls, and then misappropriating Fund money to cover the shortfalls and pay for items such as Abraaj Holdings’ debt obligations.

These material facts were not disclosed to the Fund, its investors, or the LPAC in the Abraaj Investment Management’s Quarterly Reports, the Fund’s audited financial statements, or otherwise.

In December 2016, Abraaj Investment Management transferred $100 million of Abraaj Health Fund money from an Abraaj Health Fund Bank Account to an Abraaj Holdings bank account, and $40 million to an Abraaj Investment Management bank account.

These transfers were in addition to the management fees and expense reimbursements to which Abraaj Investment Management was entitled. As a required signatory for all bank transfers over $75 million, Naqvi at least approved the $100 million transfer to Abraaj Holdings.

On January 3, 2017, the Abraaj Group’s Managing Director of Finance informed Naqvi and the Abraaj Group’s Head of Finance and Operations by email that Abraaj Holdings was expected to have a cash shortfall of $85 million by the end of March 2017.

The Managing Director noted that this cash shortfall would occur despite the $140 million recently taken from the Abraaj Health Fund, which he described in the email as $128.5 million “borrowed” from the Abraaj Health Fund, and an $11.5 million “receivable” involving Abraaj Holdings. Neither the loan nor the receivable were disclosed to the Fund, its investors, or the LPAC on Abraaj Investment Management’s Quarterly Report, it continues.

It has been further claimed by SEC that Abraaj Health Fund investors for the fourth quarter of 2016, the Fund’s audited financial statements for the period ending June 30, 2017, or otherwise. 24. The Managing Director further noted in his January 3, 2017 email that the Abraaj Health Fund’s cash requirements for the first quarter of 2017 were approximately $173 million if it included all investments identified in Abraaj Investment Management’s prior drawdown notices to investors. The Managing Director, however, noted that the Abraaj Health Fund only had an available balance of $111.5 million. Despite this approximately $62 million shortfall, the Managing Director did not recommend that they return the $140 million already misappropriated by Abraaj Holdings and Abraaj Investment Management.

On February 16, 2017, the Managing Director emailed Naqvi and the Finance Head a portion of Abraaj Holdings’ cash balance spreadsheet, and he concluded that the Abraaj Group would have a cash shortfall of $4.2 million that month and so they would draw $5 million from the Abraaj Health Fund to cover it.

Abraaj Investment Management’s March 2017 transferred totalling $24 million in Abraaj Health Fund money were not disclosed to the Fund, its investors, or the LPAC in Abraaj Investment Management’s Quarterly Reports to investors for the first quarter of 2017, the Fund’s audited financial statements for the period ending June 30, 2017, or otherwise. Abraaj Investment Management’s Quarterly Report for the first quarter of 2017, reported that it received only $4.2 million in management fees and had no Fund expenses in that quarter.

In total, from December 2016, through at least September 2017, Abraaj Investment Management – with the knowledge and authorization of Naqvi – transferred at least $230 million from Abraaj Health Fund Bank Accounts to Abraaj Holdings and Abraaj Investment Management that was not authorized pursuant to the HFLPA. This money was comingled with other Abraaj Holdings’ and Abraaj Investment Management’s funds and used as needed for Abraaj Holdings’ and Abraaj Investment Management’s corporate expenses or other non-Abraaj Health Fund purposes, SEC alleges.

Ultimately, the Abraaj Health Fund’s audited financial statements for the period ending June 30, 2017, reported that the Fund had $167 million in cash in an Abraaj Health Fund Bank Account. The financial statements further reported that this amount consisted of the uninvested capital drawdowns from the Fund’s limited partners.

On July 19, 2017, which was shortly after the Fund’s June 30, 2017 period-end, Abraaj Investment Management and Naqvi authorized the transfer of $196 million back to the Airline, which left only about $28 million in the Abraaj Health Fund Bank Account authorized at least this transfer because he was a required signatory on all transfers over $75 million.

Defendants also made misleading statements directly to Abraaj Health Fund investors. By October 2017, Abraaj Health Fund investors were raising concerns with Abraaj Investment Management about the whereabouts of their capital contributions, as they had contributed $544 million, but only approximately $265 million had actually been invested.

In or around February 2018, Naqvi admitted to the head of investments at one United States investor that Abraaj Health Fund capital contributions were used for Abraaj Holdings’ and Abraaj Investment Management’s general corporate purposes.

In late 2017 and early 2018, following months of investor demands with regard to the location of their cash capital contributions, Abraaj Investment Management ultimately returned much of the money it misappropriated, as well as over $13 million in interest to the Abraaj Health Fund investors.

Naqvi knew, was reckless in not knowing, or should have known that using Abraaj Health Fund money to fund cash shortfalls at Abraaj Holdings and Abraaj Investment Management and failing to disclose these cash transfers and the conflicts of interest that they created in Abraaj Investment Management’s 2016 and 2017 Quarterly Reports,

The SEC claimed that by engaging in the acts and conduct alleged in this complaint, Abraaj Investment Management and Naqvi, directly or indirectly, instrumentalities of interstate commerce, while acting as investment advisers, employed devices, schemes, or artifices to defraud any client or prospective client, with scienter.

Abraaj Investment Management and Naqvi breached their fiduciary duties to the Abraaj Health Fund and engaged in fraudulent conduct that violated Section 206(1) of the Advisers Act, 15 USC § 80b-6(1), by knowingly or recklessly misappropriating millions of dollars of Fund money, failing to disclose to the Fund that the money had been transferred to Abraaj Investment Management and Abraaj Holdings, and failing to disclose the conflicts of interests they created.

The SEC has prayed the court to issue a final judgment, ordering Abraaj Investment management Limited and Arif Naqvi to disgorge all ill-gotten gains, with prejudgment interest, as a result of the conduct alleged in this Complaint.

It has been further requested to the court to order defendants to pay civil monetary penalties pursuant to Section 209(e), the Advisers Act, 5 USC § 80b-209(e) and permanently enjoin them and their agents, servants, employees and attorneys from committing future violations of Section 206(1), (2), and (4) of the Advisers Act, 15 U.S.C. §§ 80b-6(1), (2), & (4), and Rule 206(4)-8(b) thereunder, 17 CFR § 275.206(4)-8(b).