Mashreq has sued ING Groep, the biggest financial firm in the Netherlands, over US$43 million (Dh157.9m) losses on investments in "bizarre illiquid securities" which it alleges were made against its expressed wishes.
The Dubai bank filed a suit in New York this week against ING and ING Investment Management claiming fraud, breach of contract and breach of fiduciary duty by the Dutch asset manager.
Mashreq alleges that while investing with ING from 2005 onwards, the Dutch firm ignored its exposure limits on risky assets and funnelled $108m into funding vehicles - which it dubs "roach motels" in its complaint - and that later earned a reputation as the most notorious of the global financial crisis.
"ING proceeded to pack Mashreq's account 70 per cent full of 11 toxic, illiquid 'structured securities' based on pools of loans cast off by investment banks, securities that Mashreq had emphatically instructed ING not to include in the portfolio," the complaint alleges.
Mashreq alleges that in 2006, ING attempted to broaden its investment mandate to allow it to invest in a broader range of securities, including collateralised debt obligations (CDOs) and collateralised loan obligations (CLOs).
"Mashreq emphatically rejected and crossed out ING's key proposal: 'Expressly allow CDOs, CBOs [collateralised bond obligations], CLOs, and other structured products'," the bank said in its complaint. But a revised investment mandate contained "nothing more than trickery designed to convince Mashreq to keep its money with ING," the complaint added.
Some of the most notorious financing vehicles of the global financial crisis, CDOs, CBOs and CLOs were bank funding vehicles that bought up slices of "junk"-rated bank debt and repackaged them as standalone investments, often obtaining "investment grade" credit ratings.
ING invested more than 70 per cent of the portfolio in these securities, which Mashreq said it had expressly forbidden.
Mashreq alleges ING had mixed investments with "respectablesounding names" in its fixed income portfolio in an effort to hide their true nature.
The bank said it later discovered many investments were shell companies registered in Delaware and the Cayman Islands, without approval from the Securities and Exchange Commission.
"They were unregistered, blind, fee-laden pools of below investment-grade loans, rife with conflicts of interest and often avoiding any involvement by outside accountants," Mashreq said.
Many of the securities would not repay their initial investment for more than 10 years, and became impossible to sell as the global financial crisis set in, when banks realised they did not know how to value them. Two of the funding vehicles, into which $14.9m was invested, were wiped out completely.
Mashreq says it was able to salvage its investment in some of the securities when liquidity returned, mitigating its losses to $43m. The bank is seeking a jury trial and punitive damages against ING, in addition to a recovery of its losses.
"As per company policy, at this point we're not going to comment on pending litigation," said a spokesman for ING.
Mashreq becomes the latest Arabian Gulf investor to seek damages for losses in credit derivatives that blew up during the global financial crisis.
Abu Dhabi Commercial Bank is among a group of investors suing Standard & Poor's and Moody's Investors Service for a credit rating of AAA given to an investment vehicle that promptly collapsed at the onset of the crisis. The bank has also filed suits against Credit Suisse, Morgan Stanley and BNY Mellon over other soured investments.
Kuwait's National Industries Group has pursued legal action against Carlyle Group over a $25m structured investment which it alleges was missold.