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Lebanon’s biggest Ponzi scheme?

The employees of Dar al-Hadi publishing are jobless and locked out of their offices. The Judicial Police sealed the glass doors of their former workplace with red tape last week following the August 31 arrest of the firm’s owner, Salah Ezzedine, now infamous as “Lebanon’s Madoff.”

“Officers came last Thursday [Sept 3] and seized the company headquarters,” said a person who lives next to the publishing house. “No one has been allowed in since.”

Ezzedine, a prominent Lebanese businessman known for his piety and closeness to Hezbollah, is bankrupt and accused of defrauding scores of investors through a Ponzi scheme like one pulled by Bernard Madoff, a former American financial advisor sentenced to 150 years in prison at the end of June. It seems Ezzedine took investments mainly from those in Lebanon’s Shia community, promising returns of 40 to 50%.

Though many fell for the scheme, such high returns on an investment are rare, and raised suspicion with one economist.

“The fact that Ezzedine promised a 40% return to his clients does not appear to fall into the range of normalcy,” said Nassib Ghobril, chief economist and researcher with the Byblos Bank Group. “Often disproportionate returns are guaranteed in cases of pyramid or Ponzi schemes.”

The exact amount Ezzedine lost is unclear. Initial news reports put the number at $1.9 billion, though an accountant with Dar al-Hadi publishing told NOW he thinks the figure is between $700 million and $1 billion. A banker familiar with the case, however, explained that Ezzedine probably only lost $500 million in actual investment money with $700 million to $1 billion representing losses including expected interest returns.

Amid widespread fear in the Lebanese financial community, Central Bank Governor Riad Salameh recently told the Bloomberg News Agency that Lebanon’s banks did not invest with Ezzedine and will not be affected by the bankruptcy.

“It has nothing to do with the finance or banking industry,” Salameh told Bloomberg. “He had his own investors, and it's a private matter that's outside of the banking industry." 

However, a banker familiar with the case told NOW that Ezzedine’s investors included more than just individual families whose savings are now gone.

“Many real estate owners and large traders in the Dahiyeh who were involved with Ezzedine are now faced with payment obligations and loans to settle, which might cause wider economic repercussions,” said the banker, who spoke anonymously given the sensitivity of this issue.

There were also reports that Hezbollah officials Mohammed Raad, Amin Sherri and Hajj Wafiq Safa lost significant sums in Ezzedine’s bankruptcy and that MP Hussein Hajj Hassan filed a complaint against Ezzedine for bouncing a $200,000 check. Only Safa denied the reports.

“Many party members are afraid to fully admit their losses to avoid questions about the origins of their wealth,” the banker said.

Lebanese authorities are currently investigating Ezzedine’s case.

Judge Said Mizra, whose office is leading the investigation, said on Saturday that it will not be finalized soon. Ezzedine is currently in police custody but has not been charged with any wrongdoing.

In addition to the publishing company, Ezzedine owned the Al-Hadi TV for children television station and was involved with a number of companies tied to energy and base metals.

“He was an honest man who sold future contracts in oil, gold and base metal,” said one of his former employees at Dar al-Hadi.

In late June, Ezzedine paid around $150,000 for rights to export minerals from Gambia through the East Line Company, according to Gambia’s Daily Observer. Attempts to reach both the company and the newspaper were unsuccessful. Ezzedine is also the fund manager and one of three major shareholders in al-Mustathmer, a Beirut-based financial institution that focused on money management and corporate finance.

Mustathmer registered with the Central Bank in April 2007 and offers investors two commodities funds for investment. By the end of 2008, clients had invested nearly $18 million in the two funds. The only non-bank financial institution with more invested in the funds Mustathmer managed at the time was Fidus, which offered over 60 funds that drew $22.9 million in investments, according to the Central Bank.    

The company has an “appetite for high risk/high potential investments,” according to the Oxford Business Group, referring to a $4.5 billion co-investment in Yemen Mustathmer announced in April 2008.

Ali Jachi, one of Mustathmer’s three major shareholders and brother of former Central Bank First Vice Governor Ahmed Jachi, refused to comment on how Ezzedine’s bankruptcy and arrest will impact the financial firm.

Initial news reports said Ezzedine turned himself into authorities on August 31, when he realized he’d gone bankrupt. However, the Beirut-based Central News Agency reported on September 4 that Hezbollah nabbed Ezzedine in “a quick raid” and “questioned him and later handed him to judicial authorities.”

Hezbollah Secretary General Hassan Nasrallah, however, denied the party had any links to Ezzedine in a speech on Monday.

Residents in towns near Tyre and Dahiyeh, however, are not convinced. Numerous reports of people upset with Ezzedine, whom they trusted because of his reputation as a pious man close to the party, have surfaced in the local and international press in recent days.

“People placed their life savings with Ezzedine because of his close connection with Hezbollah, which thus bears a moral responsibility for the bankruptcy scheme,” Ayman, a resident of the Dahiyeh, told NOW.

Matt Nash contributed reporting to this article

  • Xenathebee

    Unfortunately, in every wrongdoing in this country, we have the name of Hezbollah mentioned somewhere, sometime. It seems they have a hand in such a big issue. And who knows maybe Ezzedine himself was tricked into their trap also without him knowing. Anyway, they ruined the economic life of many poor/middle incomere citizens. I hope that with vigorous and honest investigation the truth will be out soon. I hope that these small investors will have their money back or that they would be compensated for their losses.

    September 10, 2009

  • Miumiu

    Mickey Mouse business set up,unbelievable & unsustainable return on the money & failed 'Divine' intervention....GREED & STUPIDITY=TOTAL LOSS

    September 9, 2009