Thread by @patrick_novum

Remember Abraaj? The Abraaj Group was the PE industry's biggest scandal, lighting billions of dollars in investor's monies on fire and embroiling the Gates Foundation and some of the biggest investors globally in what was essentially a confidence scam.

A 🧵...(1/20)

Full credit to @william_louch and @ClarkWriting on their outstanding book #TheKeyMan which is a must read for any investor, especially those who tend to be swayed by appearances.

Below is a non-affiliate link. (2/20)

amzn.asia/d/3iDxOER

Arif Naqvi started his private equity firm Abraaj promising investors the opportunity to do good in the emerging markets, while making a tidy profit at the same time.

Because who doesn't want to feel good about being rich?

(3/20)

But what Arif was really running was nothing short of a confidence trick, by:

1. Spending heavily on public relations campaigns
2. Recruiting celebrities to impress investors
3. Throwing lavish parties and living a lavish lifestyle

(4/20)

Now spending investors' monies to impress investors is always going to be your mouth writing checks that your ass can't cash, so Arif had to dip into many places to cover many holes and one of them was the Abraaj Private Equity Fund IV's account.

(5/20)

Unfortunately, by June 30, 2016, Fund IV was due to be audited by @KPMG and the bank account that was supposed to be filled with billions, was short some $194 million.

(6/20)

So Arif, who sat on the board of low-cost airline Air Arabia, had the carrier lend Abraaj $195 million, which Arif then had transferred to Fund IV's bank account, just days before the KPMG audit.

(7/20)

By July 5, 2016, when the KPMG audit was complete. The $195 million was spirited back out of Fund IV's accounts and repaid to Air Arabia for a cool $4.9 million fee.

$4.9 million for a 13-day loan is good business where you can get it.

(8/20)

KPMG's auditors were later criticized that had they inspected the history of transactions at Fund IV's bank accounts, they would have noticed the sudden infusion of cash just days before the audit and that ought to have raised questions.

(9/20)

But why would they? As the auditors took a snapshot of the bank account statement, all of the monies appeared to be there, there was no real reason to doubt or suspect Arif at the time or Abraaj.

And so investors AND auditors took it that the money was there.

(10/20)

The problem of course with just audits is that these are snapshots in time, some quarterly, some annually.

And time and time again, companies and fund managers have shown an uncanny knack of moving monies around to keep the show going.

(11/20)

Which is why some have touted blockchain's transparency with respect to exchange reserves in this convoluted "Proof of Reserves" method to best audits.

(12/20)

Again, this is a confidence trick. Like how a magician asks the audience to pay attention to one thing, while doing another.

(13/20)

But the @SECGov is wise to such tricks and is warning investors not to be taken in.

It's true that watching exchange wallet attestations, we can paint a picture of flows in and out - those are the questions that the exchange wants you to ask.

(14/20)

sec.gov/oiea/investor-…

The real questions that we should be asking are:

- what are the asset and liabilities?
- what portion of the exchange's assets are treated as Treasury Stock?
- How are such "Treasury Stock" tokens marked to market?

(15/20)

- is there any comingling of client and investor monies?

@chainargos has proved previously that just using "Proof of Reserves" mistakes can and will be made.

(16/20)

bloomberg.com/news/articles/…

The problem is that audits alone aren't enough because they only provide a snapshot in time of how things are at the moment and companies and managers have shown repeatedly a knack of moving money around like a three card monty so that only they know where the queen is.

(17/20)

But blockchain wallet monitoring isn't a panacea either - sure you can watch the flows in and out of the wallet, but what do they mean?

(18/20)

Surely a combination of both audits and on-chain evidence would provide a more acceptable movement towards a version of the truth that appears more objective?

(19/20)

But maybe they never really were interested in the truth to begin with?

(20/20) FIN