RPT-Blurred lines at Bahrain's GFH

MANAMA, June 16 Fri Jun 17, 2011 1:59am EDT

MANAMA, June 16 (Reuters) - As with many Gulf-based firms it's difficult to find a strong dividing line between GFH's finances and the personal accounts of its senior managers.

GFH began life as a private equity company. Over the years it created dozens of financial services and real estate companies (and even a coffee shop chain) that funded each other and for which it brought in investors that it then charged fees.

One of the largest banks the company created was First Energy Bank (FEB), for which it raised $1 billion in capital in 2008, mostly from shareholders in Abu Dhabi and Libya. The company was established to invest in energy projects in the Middle East.

From the beginning, Esam Janahi held a 10 percent stake in FEB, which two inside sources have told Reuters he received as a commission, although that is not substantiated by documents that Reuters has seen. He sold his stake last October and used the proceeds to pay back $50 million GFH owed FEB, according to two bankers with direct knowledge of the transaction.

"Paying back the money from his own pocket was part of the stake sale agreement from the very beginning," one of the bankers said. "The central bank and people even higher up (in the government) wanted him to personally sort out the mess he's left behind."

A former employee at a company involved in GFH's many proposed "energy cities" around the region said they were opaque. "Esam Janahi has set up many companies, an energy city here, an energy city there, and they all somehow hold stakes in each other. It's one big mess," said the source.

Corporate governance at GFH was weak to non-existent, according to Bahraini bankers and former GFH employees. They say Janahi was the dominant figure at GFH and information at the firm was guarded by his small entourage. A former GFH executive said he only rarely had access to Janahi and this group of people, which was so isolated that it amounted to a management team within the official management team.

"We learned about many deals and decisions just by looking at the screens," the source told Reuters.

Bankers say things were further complicated because GFH often made investments with firms controlled by Janahi's brothers. Khalid Abdulla-Janahi was the Chairman of Bahraini investment firm Ithmaar , before he was demoted by its main Saudi shareholder in early 2010, after heavy losses and a Reuters report that revealed financial stress at a Geneva-based subsidiary.

"There were so many affiliates (at GFH). Management sold their stakes without telling us -- we didn't know, 'Is this your money or my money?'" said the former GFH executive.

GFH says it has offered stakes in its projects to employees and board members to align their interests with those of the investors. "This is a normal practice across all investment banks," it said.

(Reporting by Frederik Richter and Martin Da Sa'Pinto) (Created by Sara Ledwith)

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