How a Gulf Hospital Chain Unleashed Scandal in London

(Bloomberg) -- A financial scandal has swept through London and the United Arab Emirates, centered on allegations of fraud at the two core companies of the Abu Dhabi-based tycoon Bavaguthu Raghuram Shetty. Both NMC Health Plc and Finablr Plc have had their shares suspended in London, with NMC losing its place in the FTSE 100 index of leading U.K.-listed companies. It’s been a dramatic turnaround, triggered by a report from the short seller Muddy Waters Capital LLC, for a once multibillion-dollar group that has shaken investor confidence in the Middle Eastern business world and prompted questions about the oversight of London-listed companies.

1. What happened at NMC Health?

The Muddy Waters report on Dec. 17 raised concerns that the Middle East’s largest hospital operator had overpaid for assets, inflated cash balances and understated debt. NMC shares plunged, falling by more than 60% by the time they were halted on the London Stock Exchange in February -- barely 2 1/2 years after joining the likes of HSBC Holdings Plc and AstraZeneca Plc in the FTSE 100. NMC dropped a bombshell in March, disclosing $2.7 billion in previously unreported debt that it said may have been used for purposes not approved by the board. It then bumped up that figure to more than $4 billion, trebling what NMC had originally disclosed as debt. An investigation instigated by NMC founder Shetty uncovered “serious fraud and wrongdoing.”

2. What about Finablr?

The NMC revelations immediately shone a light on its sister company, the owner of foreign-currency chains Travelex Holdings Ltd. and UAE Exchange. In March, Finablr’s board began an investigation into some $100 million of checks to third parties. In April, the group disclosed about $1.3 billion in debt, four times more than previously reported, most of which was used without the board’s knowledge. Its shares, down more than 90% since the end of 2019, were suspended in February. Problems at Finablr led its UAE Exchange unit to default on a foreign-exchange loan of about $300 million, according to people familiar with the matter, prompting the U.A.E. central bank to assume control of its operations in the country.

3. How has Shetty responded?

The 77-year-old says he was a victim of fraud, accusing former employees of setting up companies in his name, forging his signature to execute transactions and using false accounts. He also says members of his management team put together false and misleading statements about the performance of his private companies. The jet-setting, vintage car-lover, whose shares in NMC and Finablr were worth $2.4 billion before the Muddy Waters report, has resigned from the NMC and Travelex boards. Shetty said he is sharing information and his findings with the authorities, law enforcement agencies and the various boards of his companies.

4. What’s the history?

Shetty moved to Abu Dhabi from India in 1973 and two years later founded NMC — the name stands for New Medical Center — as a small clinic and pharmacy. He became one of the best-known foreign entrepreneurs in the Middle East as he built NMC into an organization with around 200 hospitals or clinics, mostly in the U.A.E., as well as other businesses. He created Finablr in 2017 to consolidate his financial brands before listing it in London in 2019. Shetty was planning a London initial public offering of his pharmaceutical company.

5. Who else is investigating?

The U.K.’s Financial Conduct Authority opened a formal probe in February. An investigation by NMC itself, led by former FBI director Louis Freeh, uncovered discrepancies in the group’s bank statements. That resulted in the firing of NMC’s chief executive officer and a member of its treasury team. Freeh’s review uncovered a supply-chain financing arrangement apparently used by Shetty and a major shareholder that was guaranteed by NMC but had not been board-approved or disclosed in line with listing rules. In April, just two years after its market value soared to more than $10 billion, NMC was placed in administration -- similar to Chapter 11 bankruptcy -- by a London court. Most of its senior management is no longer at the company.

6. How did the auditor miss this?

NMC’s auditor Ernst & Young LLP never publicly raised concerns over NMC’s statements. The U.K. accounting regulator has opened a probe into Ernst & Young’s audit of NMC’s 2018 financial statements. Ernst & Young, which is also under investigation for its auditing of the collapsed Thomas Cook Group Plc, resigned as Finablr’s auditor in March citing concerns over the composition of its board and corporate governance. A swath of U.K. auditing scandals, including the 2018 collapse of Carillon Plc with no warning from its auditor, has pushed the government to promise reforms to the audit market.

7. Who is affected by this crisis?

Shareholders risk being wiped out. NMC’s lenders -- including international heavyweights such as Standard Chartered Plc -- are holding talks to recover some of their $6.6 billion in liabilities. NMC’s administrator, Alvarez & Marsal Inc., says the group’s hospitals are operating as normal, though a company executive warned that placing NMC in administration risked lives at a time health care providers are battling a global pandemic. One likely scenario is that, once NMC is restructured and investigations are concluded, a buyer will take over its assets. Both private equity giant KKR & Co. and an Italian hospital operator considered bidding for NMC after the crisis blew up. Sales of subsidiaries such as NMC’s fertility clinics are also an option. Finablr has hired an investment bank to look into options that include a potential revamp of its debt and sale of assets. Travelex, the U.K. company formed in the 1970s and acquired by Shetty in 2015, is seeking offers while also dealing with the fallout from the pandemic and a costly cyberattack.

8. Is corporate governance an issue in the Gulf region?

The troubles at NMC and Finablr sparked fresh concerns following the collapse of Dubai-based Abraaj Capital, the region’s dominant private equity firm for a decade. Last year, the Dubai Financial Services Authority fined two Abraaj Group companies a combined $315 million for deceiving investors and misappropriating funds. The scandals in Dubai and now neighboring Abu Dhabi are a blow to two financial centers vying for regional hegemony.

The Reference Shelf

• A QuickTake on the downfall of Abraaj Group.
• Jet-setting Shetty had it all -- then Carson Block came along.
• NMC creditors get together.

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