Project finance: Oman’s Blue City advisers sued

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By:
Chloe Hayward
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Oman’s landmark Blue City project has been dragged into a legal dispute after one of the project’s financial advisers was sued last month.

More on Oman's Blue City

Switzerland’s Oppenheimer Investments (OIAG) is being sued in the US District Court for the Southern District of New York for fraud in connection with its work as financial adviser to the Al Sawadi Investment & Tourism Company (ASIT), an Omani company in charge of the huge project.

The plaintiffs, Jacques Allouf, a former employee of an OIAG affiliate, and ECO Munich, a real estate finance specialist based in Atlanta, allege that OIAG founders Samuel Grossmann and Conrad Stampfli falsely claimed affiliation with South Africa’s Oppenheimer family to gain credibility with them and other business partners. In addition, they allege that OIAG has failed to pay fees for services provided by the plaintiffs that relate to the successful closing of the deal.

Defence

Grossmann and Stampfli, together with fellow defendant Jerald Belofsky, chief operating officer of Oppenheimer North America, an OIAG affiliate, each deny all of the accusations. "Oppenheimer Investments will vigorously defend the lawsuit and take appropriate legal action against ECO Munich... and Mr Allouf, including obtaining repayment of certain monies already paid to which they were not entitled," read a press statement by them.

The Blue City Project is a joint effort of Omani and Bahraini private sector investors and developers. The project is a planned, self-contained metropolis that will not only include leisure and tourist facilities but also hopes to open two hospitals and a university within the 34 sq km of coastal land. The project has been split into several phases due to be put in place over a 20-year period and cost up to $20 billion.

On November 6 the first round of financing for the project closed. The $925 million construction loan, backed by securitization, was arranged and structured by Bear Stearns with support from Standard Chartered, and was sponsored by AAJ Holdings Company and Cyclone LLS.

OAIG was the financial adviser to ASIT and supervised the structuring and placing of the transaction. According to the plaintiffs, this was done jointly with them through Oppenheimer North America (ONA), which was formed just ahead of the Blue City project and employed Allouf.

Allouf and ECO Munich claim that they are still owed fees for working on the Blue City project and on April 3 filed for monies that they say they are due. However, in a written statement the defendants say that the plaintiffs "never provided the services in connection with the project for which they are claiming payment". It adds: "The lawsuit and the press release issued by their attorneys are simply an attempt to obtain payments to which they are not entitled."

The plaintiffs want the case heard in a New York court with a jury although the arbitration contract signed by all parties states that any disputes should be settled in Zurich, where Oppenheimer is based. However, according to the plaintiffs, if a false affiliation with the South African Oppenheimer family is proven true then this contract will become invalid.

Claims

The defendants state in their press release: "Contrary to these parties’ allegations, Oppenheimer Investments has never claimed to be affiliated with the South African Oppenheimer family." However, the plaintiffs say Grossmann made such a representation: "One can just look at the office that we allege in the complaint – it looks like a South African tourist office complete with ostrich eggs in a bowl on one table," says Charles Lee, a partner at McCarter & English in New York, who is representing the plaintiffs.

He adds: "The representation that Mr. Grossmann had ties with the South African family had a substantial effect on my clients. They chose to do business with Mr Grossmann because of this representation, without it he would have just been another person with no reputation or track record."

Another point of dispute relates to allegations of financial discrepancies. The plaintiffs claim that just before the Blue City deal closed, the deal’s sponsor, AAJ Holding, a Bahrain property developer, received a payment of more than $1 million from OIAG to prevent it from going insolvent. If it had gone insolvent then the bond deal could not have closed.

"So far OIAG have said they could not pay my client’s fees because they had to support AAJ holding against insolvency to ensure that the bond closed successfully. This meant the deal wasn’t as profitable as expected and therefore they could not pay the fees," says Lee. The defendants deny any knowledge of this claim in a press release: "There were no financial irregularities with respect to the Blue City Project and ECO Munich."

"While I do not believe it is appropriate to discuss the details of a private civil contract dispute in public," says James Ringer, the attorney representing OIAG, "I can tell you that it is OIAG’s position that the allegations made by the plaintiffs are without merit and before July 3 [the deadline set by the District Court for the Southern District of New York for OAIG to respond to the plaintiff’s filings], we will ask the court to throw the case out and compel the parties to proceed with arbitration as required by the contract."

A spokesperson at Blue City told Euromoney: "Blue City is very happy with their financial advisers for the current phase. No decision has been made as to who the advisers and bankers will be on the next phase of financing. This needs to be discussed, and after the strategic review a decision will be made."

Blue City continues: "The Blue City project has not been affected by this lawsuit as it is completely irrelevant to us. The main thing for us is to focus on the progress of the project. Investors haven’t been affected. They trust the project and they trust the political and economic regime in Oman. That is why they came into the project in the first place. The project is on schedule and the construction programme is going well."

Lee says: "I think time will tell. If I was an investor [in Blue City] then I would want to know more about the circumstances. We don’t allege any wrongdoings by the Omanis or by Bear Stearns – they deserve fair appraisal for a successful deal but it may be that the Blue City project was duped in just the same way that our clients were."

A spokesperson at Bear Stearns says: "We are aware of the existence of litigation but neither the borrower nor the sole arranger [Bear Stearns] of the 2006 bond are party to legal proceedings."