Saudi Arabia Focus
Lessons Learned from a Precedent-Setting Victory in Securities Disputes in KSA
Law Update: Issue 356 - Saudi Arabia
Mohammed NegmSenior Counsel,Dispute Resolution
Saeed AlqahtaniSenior Associate,Dispute Resolution
The securities market is a complex and dynamic industry that can present unique legal challenges. It is important to note that not all securities have a statute of limitation, which can complicate legal disputes in some situations. In this context, our law firm recently represented an investment bank in a securities dispute case related to compensation for damages. The case was heard by the Committee for The Resolution of Security Disputes in Saudi Arabia (“CRSD”).The plaintiff was seeking compensation for the lost profits of their inheritor due to alleged violations by our client. After a thorough legal analysis, our team was able to successfully defend our client's interests, and we achieved a significant victory. In this article, we will provide an overview of the case and explain how our legal strategy contributed to the positive outcome.
The transaction in the case began in 2005 when our client, acting as a distributor for a real estate fund in the US market, presented investment opportunities to one of his investor clients in Saudi Arabia to subscribe to this fund. The investor subscribed at that time, and in 2008 he subscribed to the fund again as he did find it a good investment and profits. However, the subprime mortgage crisis occurred in America and the fund collapsed like others. The investor did not object at that time as he knew that it was a profitable and risky investment. However, in mid-2021, our client was surprised when the heirs of the deceased investor filed a case against him before CRSD, requesting compensation for the deceased investor’s losses in this fund. They claimed that our client did not fulfil his duty to conduct the appropriateness test to determine whether or not the deceased has got the knowledge and experience he needs to understand the risks carried by the fund. They also claimed he was elderly and had little education. This fund had a high risk, but our client did not disclose that. They requested that our client be ordered to pay a sum of forty million Saudi riyals, which is the value of the investment of the deceased in the fund, in addition to 15% of this amount as compensation for the damages.
This type of case does not have a statute of limitation in Saudi law in spite of more than thirteen years have passed and most of the parties involved were no longer present.
At that time, the client turned to us, and the case was not easy for us. This type of case does not have a statute of limitation in Saudi law in spite of more than thirteen years have passed and most of the parties involved were no longer present. Therefore, we started meeting with our client who cooperated with us in obtaining all information we needed, and we started preparing a defense plan.
One of the most important defense points we worked on was based on even though this type of case has no statute of limitation before the CRSD, there are different regulations in Saudi Arabia that stipulate a specific period in which companies are required to keep documents and their records (document retention). Filing a lawsuit after the expiration of these periods would make it difficult for the defendant to prove the validity or denial of any claim. Indeed, the CRSD responded to this defense by stating that since the legal period for document retention is expired, and since it was proven to the CRSD that the plaintiffs' request to join the fund, which is the subject of the case, was made on May 17, 2005, and the legal period for document retention that the accused party was required to comply with under Paragraph 8 of the General Rules of Trading - in effect at the time - was twelve months, which stipulates that the member must record customer instructions for the stock market. This includes, for example, but is not limited to, written instructions, verbal instructions over the phone, and electronic instructions over the Internet. The bank must keep records for at least twelve months from the date of receipt of the customer's instructions. If there is any dispute regarding any of these instructions, the bank must retain these documents until the dispute is finally resolved. This obligates the bank to retain the documents until May 17, 2006, and on June 28, 2005, the Authorised Persons Regulations was issued by the decision of the Capital Market Authority Council, which made the legal period for document retention that the bank was required to comply with, regarding those instructions, ten years. The plaintiffs filed their complaint on June 15, 2021, which is after the expiration of ten years.
We also pointed out that the deceased investor was an experienced investor who knew the risks involved in investing, and that our client had provided all the necessary information about the fund's risks. We argued that the deceased investor had subscribed to the fund twice, which indicated that he was aware of the risks and was willing to take them. The plaintiffs of the deceased investor failed to provide sufficient evidence to prove their claims against our client.
After presenting our defense, the committee decided in favor of our client and dismissed the case against the bank. The heirs did not like the ruling, so they appealed to the Appeal Committee, which upheld the ruling for the same reasons.
In summary, the ruling was a resounding triumph for our clients and exemplified our unwavering dedication to delivering exceptional legal services. Our team displayed relentless efforts to exhaust all legal avenues at our disposal, and we are gratified by the outcome. We are convinced that our success will establish a benchmark for future Securities dispute cases, and we eagerly anticipate the opportunity to maintain our standard of excellence in representing our clients.
For further information, please contact Mohammed Negm and Saeed Alqahtani.
Published in March 2023.
