There is no better wake-up call for lazy investors and cynical executives than the saga of Damas International, which last week was revealed to be more convoluted and parlous than previously thought.
Rather than look at the case as an individual incident at a company in Dubai, it should become the definitive guide for the region on how not to make the transition from a family-owned firm to a publicly traded company.
The beginnings of the story are well known. Three sons of the third generation of a 104-year-old jewellery business are held responsible by the regulator of the Dubai International Financial Centre for withdrawing Dh365 million of cash (US$99.3m) and nearly two tonnes of gold from Damas without shareholder approval. After being fined and censured, they resign their executive positions and sign a deal to pay back the company.
But that was more than a year ago. To date, no funds have been paid by the brothers, and the company has not yet come up with a comprehensive agreement between all the parties that will enable it to restructure its debts.
The reason is only now becoming clear. On top of the money the brothers withdrew from the company, they also borrowed Dh1.2 billion from banks, bringing their total obligations to Dh1.8bn. This has held up negotiations between Damas and its banks because about 80 per cent of the brothers' creditors are the same as the creditors of the company.
A complicated web links the three groups - Damas, the brothers and the banks. Some of the brothers' borrowings are guaranteed by Damas assets. The sheer complexity of this arrangement and the involvement of other parties is the reason the situation has taken so long to resolve, although officials from Damas say a final agreement is near.
What comes next will be the painful sale of assets the brothers bought over the years. These include investments in stocks, a shopping mall in Turkey, a hospital in Kuwait and a good deal of property in the UAE. Even with a recovery in the regional markets, these properties and assets are likely to be sold at a discount from the original investment.
Throughout the Gulf, corporate governance is a catchphrase that is often blazed in headlines or bandied about at conferences. It takes a real-world example to truly explain how risky it is not to have strict guidelines in place.
The Damas story, which is far from over, is like a jewel of some kind - each facet representing another consequence of the company's weak safeguards. The problems may have existed well before the company made a public offering of stock in 2008, but they began to affect ordinary and institutional investors and the larger reputation of Dubai only after that point.
A close reading of the enforceable undertaking by the Dubai Financial Services Authority (DFSA) chronicles the problems in detail. The first contravention of its regulations began at the inception of Damas as a publicly traded company.
In July 2008, the Abdullah brothers' advisers informed them they would not be able to find enough investors to subscribe to the minimum 25 per cent free float requirement of the Dubai International Financial Exchange (now known as Nasdaq Dubai). One brother then placed about $100m with Dubai Investment Group, part of the Dubai Holding conglomerate, to invest in Damas's initial public offering (IPO).
Not only did this misrepresent interest in the Damas IPO to everyday investors, but it also left Damas with a large investment in its own stock without board approval. Even for a major corporation, $100m is no small amount of money.
Other transactions disclosed by the DFSA raise questions about whether the company conducted any due diligence on its investments.
For instance, a company owned by the brothers called Damas Real Estate (which had no connection to Damas International) purchased land in Sharjah for Dh5.1m in early 2005. The brothers then used "funds belonging to the Damas Group" to erect a building on the property. Then in March 2009, one brother brought a proposal to the board of Damas to buy the building. It was eventually acquired for Dh85m.
But the DFSA said the brothers did not tell the board they had developed the property with Damas's own funds and that "an important reason for bringing the proposal to the board on this date was in order that the amount of the Abdullah brothers' drawings from [Damas] could be reduced prior to the end of the … financial year".
They did the same thing with another building in the Dubai Multi Commodities Centre free zone. Two plots of land the brothers had bought through one of their companies were sold to Damas for Dh46m without disclosing to the board the full details of their ownership and reasons for bringing the deal before the board.
The Abdullah brothers have yet to speak about the DFSA's enforceable undertaking, which stripped them of their positions at the company.
In the end, they could become the biggest victims of their own violations. After the sale of their assets under the agreement with Damas and the banks, they could even be forced to sell their 51 per cent stake in the company that their grandfather founded.