Mystery of Ghaith Pharaon: Front Man or Real Investor?

RICHMOND HILL, Ga. - Ghaith R. Pharaon's riverside estate is the very picture of serenity and quiet, with manicured lawns and live oaks drowsy in the south Georgia sun.

But now there's trouble in paradise. The Saudi financier, described by Forbes magazine as "once a near billionaire," is a man under siege. Federal prosecutors in New York are probing his ties to the Luxembourg-based Bank of Credit and Commerce International, which has been found guilty of money laundering in Florida for drug dealers.

BCCI is also under investigation for illegally acquiring the Washington-based First American Bankshares Inc.

Interwoven Links

So entwined are various business relationships between BCCI and Mr. Pharaon that it is hard to tell where one leaves off and the other begins. In the late 1980s, for example, Mr. Pharaon took loans from BCCI and used the proceeds to maintain his ownership of Independence Bank (assets: $668 million) of Encino, Calif.

Just last month, however, the Federal Reserve Board essentially concluded that Mr. Pharaon was fronting for BCCI in the deal. The Fed, knowing that BCCI never properly applied to buy Independence Bank, ordered that the stake must be sold.

But Mr. Pharaon, who wants to keep his holding in Independence Bank, told the American Banker he is now negotiating to pay back the $19 million in BCCI loans he used to fund his investment. It remains unclear where Mr. Pharaon - who has been chronically short of cash since 1986 - will raise the funds.

Some Believable Reports

The Fed's action on the Independence Bank deal only lends further credence to recent press reports alleging that Mr. Pharaon, 50, is a front man for BCCI and its Pakistani founder, Agha Hasan Abedi.

The reports accuse Mr. Pharaon of acting as a conduit for illegal BCCI investments in U.S. financial institutions, including not only Independence Bank, but also the former National Bank of Georgia in Atlanta and the now-failed CenTrust Bank in Miami.

Eager to refute these charges, Mr. Pharaon recently agreed to talk to the American Banker at his 1,875-acre estate in south Georgia, his first extensive interview in years.

A Heated Denial

Perched on a sofa in the study of his white-columned mansion, which once belonged to Henry Ford, Mr. Pharaon heatedly contended that he is simply a former BCCI shareholder and borrower. Unfortunately, many of his assertions about events over the past decade are difficult - if not impossible - to confirm independently.

The original source of Mr. Pharaon's wealth is believed to be his Saudi Arabia-based construction firm, Redec, which thrived during the oil boom years of the 1970s by running hotels and supplying buidling materials like cement.

But over the past dozen years or so, as his relationship with BCCI grew closer, Mr. Pharaon's dealings seemed to become more complicated; he was expanding his investment outside Saudi Arabia.

Relationships in Question

Even former employees of Interredec, Mr. Pharaon's U.S.-based holding company, are unsure of his true financial relationship with Mr. Abedi. Says one: "When people say Pharaon had independent wealth, one never knew. It was an incestuous relationship where you never really knew where Abedi finished and Pharaon began."

Mr. Pharaon said he first met BCCI's Mr. Abedi in Cairo in late 1977 or 1978. He dates his close association with BCCI to 1979, when Muslim extremists stormed the Grand Mosque in Mecca. The specter of political instability in Saudi Arabia made Mr. Pharaon's European bankers nervous.

"Within days, many of the western bankers just dried up lines of credit that had been available to us on a rollover basis for years upon years," Mr. Pharaon said.

Abedi to the Rescue

Mr. Abedi came to the rescue. Mr. Pharaon said BCCI spent about $20 million buying loans from every bank that wanted to drop its connections to Redec. At the time, Mr. Pharaon was Saudi Arabia's biggest supplier of building materials.

"Had [Mr. Abedi] not done so at that particular time, perhaps I would not have had the lucky fortune that I have today," Mr. Pharaon said. "I was really grateful to him that he did take that particular stand."

It is clear that Mr. Pharaon demonstrated his gratitude on several levels. He began investing in BCCI and, by 1985, was the largest shareholder, owning 16%. He said he sold that stake a year later to the National Commercial Bank of Saudi Arabia, Jiddah.

Compliance with Regulators

In addition to his direct investment in BCCI, Mr. Pharaon freely acknowledges he relied on BCCI's "expertise" in his own bank investments.

After some negative experiences investing in small banks in Detroit and Houston during the mid-1970s, Mr. Pharaon had resolved that his next bank purchase would be one that had been thoroughly scrutinized by the regulators, "a bank that you knew nothing would come to hurt you except for what you did with it yourself."

Such an opportunity presented itself in 1979, when Mr. Abedi introduced him to Bert Lance, President Jimmy Carter's former budget director. Mr Lance sold him the Atlanta-based National Bank of Georgia (1979 assets: $400 million), which had been scrubbed clean by the regulators during their investigations of Mr. Lance's banking interests.

Mr. Pharaon, who bought his Georgia home in 1981, said he ultimately paid about $20 million for NBG, or 80% of book value. He injected another $20 million in capital and in 1987 sold the bank, which by then had $1.6 billion in assets, to First American for $220 million, or 2.5 times book.

Gratitude to Abedi

"I, by the grace of God, made a lot of money out of it and I'm grateful to Mr. Abedi for having introduced me to Bert Lance," Mr. Pharaon said.

Press reports have suggested a BCCI role in financing Mr. Pharaon's purchase of NBG from Mr. Lance, but Mr. Pharaon says the money came from Redec, his Saudi holding company.

The fact that Mr. Pharaon reaped such a huge profit selling NBG to First American in 1987 has stirred controversy, largely because Mr. Pharaon has well-known ties to BCCI. And it is BCCI, after all, that has allegedly secretly controlled First American since 1978.

Invitations Declined

Mr. Pharaon indicated that BCCI did finance $80 million of the $220 million purchase price that First American paid for National Bank of Georgia, but he says BCCI played no other role in the sale. He added that he never held a financial stake in First American himself, although he was once invited in by the shareholders.

Mr. Pharaon said he avoided joining the First American group because he was aware of the controversy surrounding their original acquisition of the bank in 1978. The Securities and Exchange Commission sued the Arab investors at the time, alleging they had avoided disclosure requirements.

The First American shareholding group included two sons of Sheik Zayid bin Sultan, the ruler of Abu Dhabi, acting as proxies for their father. It also included Faisal Saud al-Fulaij, the former chairman of Kuwaiti Airlines, and Kamel Adham, the former head of Saudi intelligence and an adviser to the royal family in Saudi Arabia.

The group purchased First American with loans from BCCI that recently went into default, making BCCI the owner of the collateral, i.e., First American.

Shareholders Scrutinized

As is the case with Mr. Pharaon, press reports have alleged that the First American shareholders were fronting for BCCI. Mr. Pharaon said he can vouch for at least one of the investors, Mr. Adham, a fellow Saudi and BCCI shareholder. "I know for sure [Mr. Adham] was not a front for anybody. That much I know. I can't speak for the others."

Mr. Pharaon declines to comment on the well-publized predicament of Washington insider Clark Clifford, except to note Mr. Clifford's dual role as BCCI's U.S. attorney and chairman of First American.

"He [Mr. Clifford] was representing BCCI at that time, so he knew more than anybody else that I would think of, basically, about the structure, about ownership, about anything. He represented all the parties."

Mr. Pharaon said he himself met Mr. Clifford only once, for five minutes, having been introduced by Mr. Abedi. He said the two did not discuss business. "I walked into the room and I was presented to him. He's a tall gentleman. I had some talk with him and then I walked out."

In 1985, BCCI identified Independence Bank as a potential acquisition for Mr. Pharaon. He said he financed his $8.5 million purchase with a $12 million loan from First National Bank of Boston, pledging his Independence Bank stock as collateral for the loan.

Sad Development for Redec

The following year, Mr. Pharaon's Saudi company, Redec, foundered in the wake of the collapsing oil economy and was froced to restructure its $350 million debt. First national of Boston, as one of Redec's largest lenders, raised technical problems with the Independence Bank loan, reserving the right to accelerate repayment even though it was not yet in default.

Mr. Pharaon asked BCCI to take First National of Boston's position in the loan at exactly the same terms and conditions, which allowed for two subsequent injections of capital to raise the current amount outstanding to $19 million.

"Since that day, that loan has been kept current and that loan has paid interest," Mr. Pharaon said.

|A One-Man Show'

Mr. Pharaon said he doesn't know what went wrong at BCCI in the late 1980s, when it became involved in money laundering for South American drug dealers. He speculates that Mr. Abedi's 1988 heart transplant and subsequent semiretirement played a role.

"He [Mr. Abedi] was too much of a one-man show," Mr. Pharaon said. "His No. 2 people were truly No. 2 and No. 3. There was nobody who had the contacts, who had the charisma, or perhaps even had the intelligence, of that man. So when he had the heart problem, I think it was the beginning of the end."

The last time Mr. Pharaon saw Mr. Abedi, in Karachi about 10 months ago, the Pakistani banker was in declining health. "I don't think the man is totally lucid," Mr. Pharaon said. "He might have some moments of clarity, but they're very brief, from what his wife tells me."

Because Mr. Pharaon is under investigation by a New York grand jury for alleged BCCI connections to CenTrust, he said he cannot discuss financial aspects of that case, except to say that his $12 million purchase of 24.9% of CenTrust stock in 1988 had been thoroughly investigated by the Federal Home Loan Bank in Atlanta.

Priceless Art

As for the high-flying David L. Paul, Centrust's deposed chairman and chief executive, Mr. Pharaon ruefully notes that he once noticed a painting by Flemish master Peter Paul Rubens, "Portrait of a Man as the God Mars," hanging in Mr. Paul's house.

"He never intimated to me it was [bought with] bank money," Mr. Pharaon said. "He said: |You should buy yourself a similar collections.'

"So, of course, I figured he had bought them with his own money. I didn't believe he had used the bank's money to buy these things."

|He Was a Friend'

Mr. Pharaon lost his CenTrust investment when federal regulators seized the bank last year. But even now, he expresses no bitterness toward Mr. Paul.

The two men and their families had spent vacations together in France, and on their yachts in the Caribbean and Mediterranean, and some of that camaraderie seems to linger still. "He was a friend," Mr. Pharaon said, "and, I must say, he was always gracious to me. I hope I was gracious to him.

"We are all big boys," Mr. Pharaon added, "and we must understand that nobody came and put a gun to my head and said: |Make that investment.' I have made it with my eyes open."

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