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The 421-page ruling of UK High Court Justice Andrew Smith, issued on Friday in London, dismisses all charges and claims pursued for the past five years against Dmitry Skarga, former chief executive of Sovcomflot, and Tagir Izmaylov, his counterpart at Novorossiysk Shipping Company (Novoship).The consequences are dramatic for the Russian government. The judgement makes impossible the public listing of Sovcomflot shares in any international market because of the evidence disclosed that the company lies to its auditors, falsifies financial records, encourages perjury, and knowingly engages corrupt officials for the purpose of fabricating schemes of personal vengeance and wrongful enrichment.
The UK Bribery Act, which comes into force in April as well as the listing rules for both the London Stock Exchange and the Hong Kong Stock Exchange, will expose Sovcomflot’s chief executive, Sergei Frank (2nd left image) , to a level of scrutiny he is unlikely to withstand, following Justice Smith’s ruling that Frank had repeatedly lied in his testimony; had fabricated the case against Skarga and Izmaylov after squads of private detectives he despatched had failed to uncover incriminating evidence; procured false witnesses; filed his claims in London because Russian law precluded his company from pursuing them in the Russian courts; made a practice of concealing his decisions from other responsible Sovcomflot officials; and pursued Skarga and Izmaylov vindictively to prevent them from opposing his scheme for merging Sovcomflot with Novoship, and selling shares in a much bigger IPO than his predecessors, acting on the advice of JP Morgan, had recommended to the government.
“There is no support for the evidence of Mr. Frank, whom, for reasons that I shall explain, I do not regard as a reliable witness,” Justice Smith ruled at sect. 201 of the ruling, which was released publicly. The claims against Skarga, he concluded, “are to be dismissed” (sect.1563). Likewise: “The claims against Mr. Izmaylov are to be dismissed. [And] the claims against the other defendants are to be dismissed in so far as they are based upon these schemes: the RCB scheme, the SLB arrangements scheme, the termination of the SLB arrangements scheme, the newbuildings scheme, the Sovcomflot time charters scheme, the Sawyer commissions scheme, the NSC time charters scheme and the “Romea Champion” commission scheme.”
Frank, who launched the High Court lawsuits in 2005, one year after he had replaced Skarga at Sovcomflot, is ruled to have lied when he appeared for testimony in the court in October of 2009. The judge gave several examples of Frank’s lying: “No evidence significantly corroborates Mr. Frank’s account of what he was told by Mr. Terekhin and Mr. Van Boetzelaer, and I do not accept that he was told anything about what Mr. Skarga had done or transactions for which he was responsible or which were concluded while he was in office that lends any support to the allegations against the defendants” (sect.212). “Mr. Frank said that the [Project Sturgeon] investigation [into claims against Skarga] was arranged by Sovcomflot’s “legal team under Mr. Mednikov”, but Mr. Frank was party with Mr. Mednikov to instructing Modus after the meeting with Mr. Privalov. It is clear, despite Mr. Frank’s denial, that he met with Modus on 13 March 2005″ (sec.224). “Mr. Frank denied any recollection of the meeting, but after he had completed his evidence there was disclosed a handwritten note of Ince & Co that made it clear that he had attended it. He was fully aware of the activities of the investigators and his evidence to the contrary was dishonest”(sect.228).
The High Court ruling also implies that Frank shares culpability with Igor Shuvalov (2nd right image), currently a deputy prime minister of the Russian government. In the judgement, Justice Smith does not probe the financial or other motives for the collaboration between Frank and Shuvalov, but he concludes that they combined together to force Skarga and Izmaylov out of their shipping companies; Shuvalov became chairman of the Sovcomflot board just weeks after Frank took operational control from Skarga. He remained in charge during the period when, according to Justice Smith, the company used criminal methods – extortion, property break-ins, data theft, perjury, threats of violence – to pursue its campaign of intimidation.
According to Justice Smith, “at about the end of July or the beginning of August 2004, Mr. Frank recommended to the Ministry of Economy and Trade a merger between Sovcomflot and NSC [Novoship]. In about the middle of September, Mr. Igor Shuvalov, who was then Chief Economic Advisor to the Russian President and was designated to be the new Chairman of Sovcomflot, supported the merger proposal, and decided that Mr. Frank should replace Mr. Skarga as Director-General of Sovcomflot in order to pursue the policy.”
The fight over who will eventually control Russia’s oil tanker fleet and sea transport of Russian oil exports has yet to be completed, because the merger was only the first of several steps. The Frank-Shuvalov plan also involves the sale of part, possibly 25%, of the consolidated Sovcomflot stake to a Russian investor, designated as “strategic”, according to announcements from the government since the trial testimony wound up months ago. A second shareholding, perhaps another 25%, is slated for an initial public offering (IPO). If, as has been speculated publicly in Moscow, oligarch Gennady Timchenko is selected as the government’s candidate to be the new “strategic investor”, then Justice Smith’s findings from the evidence reveal the extent to which Timchenko backed the attack on Skarga and Izmaylov, and also against Yury Nikitin, the third of the defendants in the lawsuit, and a former business partner of Timchenko’s.
The text of the judgement also provides hitherto unpublished detail on how Timchenko’s oil trading company Gunvor developed; how and when Timchenko fell out with his original shareholding partners; and the tactics Timchenko and his rivals used in their competition.
“Mr. Timchenko’s relations with Mr. Malov and Mr. Katkov [two of the original Gunvor shareholders],” reports the judge, “deteriorated and in the spring or summer of 2003 the Kinex partners decided to end their collaborative ventures and to go their separate ways. Mr. Nikitin attributed this, at least in part, to Mr. Timchenko’s belief that, because he enjoyed a good relationship with President Putin, he did not need to include Mr. Malov and Mr. Katkov in his new enterprises, including the business of Gunvor International which he set up in 2002. Further, Mr. Malov and Mr. Katkov resented that Mr. Tornqvist, whom Mr. Timchenko had introduced into the business, was, as they saw it, improperly exploiting his position. For whatever reason, the collaboration behind Kinex ended in acrimony. Messrs Malov and Katkov planned to disrupt Mr. Timchenko’s business by gaining control of the companies that owned the rail link from Kirishi refinery to Estonia, the shares in which were held equally by Mr. Timchenko, Mr. Malov, Mr. Katkov and Mr. Nikitin. When Mr. Timchenko heard of the plan, he sought to acquire Mr. Nikitin’s shares, but Mr. Nikitin preferred to sell them to Mr. Malov and Mr. Katkov and in return he acquired their shipping interests. Mr. Nikitin’s evidence was that Mr. Timchenko threatened revenge, and I accept that he did make some aggressive threats against Mr. Nikitin.”
While the Sovcomflot case was proceeding, Timchenko has sued in the London courts to compel newspapers to withdraw claims about his purported relationship with Putin. In a text drafted by his aide, Kurt Suntay, and their London PR advisors, Timchenko claims: “My career of more than 20 years in the oil industry has not been built on favours or political connections. Furthermore, Gunvor is what it seems: an efficient oil trader, built over 10 years on the back of superior logistics, transport, reliability and price. When it comes to price – ask our rivals and study our record in open tenders. The truth is there for all to see.”
In the High Court judgement on the Sovcomflot claims, Nikitin emerges vindicated on most of the charges. “Mr.Nikitin’s businesses,” runs the judgement, “continued to be enormously profitable. Undoubtedly this was not least because of the profitable arrangements that PNP and other Standard Maritime defendants made with Sovcomflot and, to a lesser extent, with NSC, but this in itself does not mean that the arrangements were improper. There was a remarkable and sustained boom in the shipping market over this period, until it suffered a crash of unprecedented severity in 2009. The strength of the market took by surprise many who were experienced and respected in it, and many commentators were sceptical about whether prices would remain so strong for so long. Those such as Mr. Nikitin who committed themselves to investment in it were able to earn enormous profits” (sect 192).
But after examining expert testimony on the murky way in which international shipping brokers conduct their business, buy, sell, finance, and charter ships, and collect commissions, the judge ruled that Nikitin and two firms of London brokers, Clarksons and Galbraith’s Ltd., had arranged commissions which, although normal in practice and value, were concealed from Sovcomflot. Clarksons has already settled with Sovcomflot to repay these payments. The judge has ordered the lawyers to come back to court to determine how much is owed.
The judgement provides a detailed analysis of dozens of transactions by Sovcomflot and its related companies. The judge also reviews the strategic options Sovcomflot faced as it tried to clear Soviet-era debts, renew an obsolete tanker fleet, and put Russian exports of oil on Russian ships. The history of Sovcomflot dealmaking involves buying and selling existing vessels; ordering new ships for the fleet; chartering vessels for spot and long-term rates; refinancing and repaying Sovcomflot’s debts; and much other business. Together, the judge has provided the first-ever public analysis of the way in which a Russian state maritime company is operated, its secrets, its manipulation of outside auditors, its mismanagement, and its corruption.
The transactions for which Nikitin has been judged liable, and the repayment to be ordered, represent a small fraction of the total claims Frank took to court. “The [Sovcomflot] claims against Mr. Nikitin and the Standard Maritime defendants,”recorded the judge, “succeed in respect of the Sovcomflot Clarkson commissions scheme, the Tam commissions scheme, the hull no 1231 commission scheme, the Norstar commissions scheme, the NSC Clarkson commissions scheme and the Galbraith’s commissions scheme, and the claimants are entitled to damages and to an account or equitable compensation. I shall invite counsel to address me upon the precise terms of the relief to which the claimants are entitled in light of my judgment, including my conclusion that the claimants are to give credit in respect of $15 million paid under the Fiona/Clarkson settlement agreement, but not in respect of other sums paid under that and other settlement agreements.”
According to judge’s own published calculations, a total of $642 million was claimed by Sovcomflot; $50.4 million has been counted against Nikitin. In a statement last Friday, Nikitin has announced that he may have to pay “around $32m out of the $850m claim. This comes to less than 5 per cent of the total claims. Mr Nikitin does not accept this part of the judgment.”
The crux of Frank’s lawsuit, the alleged conspiracy between Nikitin and Skarga, has been dismissed. “I do not consider, ruled Justice Smith, “that the claimants have shown that the history of the sale to Primal Tankers and of the termination of the SLB arrangements provides evidence of dishonest collusion between Mr. Skarga and Mr. Nikitin” (sect. 890).
The primary reason for the collapse of Frank’s prosecution of his predecessors is that the High Court found that his two key company witnesses, Igor Borisenko and Yury Privalov, had lied their heads off, and had been both threatened and rewarded by Frank for doing so. Borisenko was charged by the judge with being a serial fraudster and embezzler who had been actively stealing from Sovcomflot when he was its chief financial officer, long before Skarga arrived to take charge. Privalov was similarly judged; he had been head of Sovcomflot’s London operations.
According to the judge, “I have concluded that neither was an honest witness and that I cannot rely upon their evidence in so far as it supports the claimants’ contentions, unless it is corroborated” – and it wasn’t (sect. 285). “Although Mr. Borisenko, on his own account, received large sums to assist in defrauding Sovcomflot, he is still employed by them and has been treated extraordinarily generously by them and in particular by Mr. Frank. The defendants said that in return he has given untruthful evidence against Mr. Skarga and Mr. Nikitin. I accept that submission” (sect. 299).
Procuring false testimony and paying bribes for it, which Frank is here accused of doing, are crimes in England.
Sovcomflot’s lawyer, Vladimir Mednikov, whom the court ruling judges to have lied in his evidence, has issued a statement that “we are very disappointed, however, that Mr Justice Smith did not find the other defendants liable, and are also evaluating whether to launch an appeal. SCF Group operates a policy of zero tolerance towards corruption and is fully committed to transparent management processes and good corporate governance.”
The company statement also repeats allegations of wrongdoing against Skarga and Izmaylov which have now been dismissed.
There is no acknowledgement of the company-wide condemnation by the High Court, and the meretriciousness of Mednekov’s legal department identified by Justice Smith: “[Sovcomflot’s] witness statements were shown in cross-examination to be distinctly unreliable. Even in the case of a witness such as Mr. Nikolay Lipka, the Head of Sovcomflot’s Legal Department, who gave honest answers in cross-examination, his oral evidence departed so far from his statement that I cannot accept that the statement had ever represented his real account of events or that he understood it in proper detail when he verified it “(sect.36).
According to the company response by Mednikov, “the [UK] Serious Fraud Office (SFO) has requested and been provided with copies of documents relating to the transactions involving the SCF Group and Mr Nikitin, which were the subject of these proceedings”. The innuendo is that Nikitin faces the investigation. But the revelation in the High Court judgement is that Frank may now be the target of criminal investigation by the UK authorities.
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