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By John Helmer in Moscow

Fate of Rusal shareholding hinges on evidence in UK, Swiss and Israeli courts

In what is shaping up as the most significant case against the Russian business oligarchy ever argued in an international court, Oleg Deripaska, Russia’s richest man, has told the UK High Court, in his defence, that he didn’t have a business partnership with Michael Cherney (Mikhail Chernoy), but he did sign an agreement with him in London, and he did pay him about $250 million.

Missed by newspapers and wire services, which failed to read the transcripts and several thousand pages of evidence presented in the High Court during two days of hearings on April 30 and May 1, Deripaska’s new defence strategy is the ancient one of the pot calling the kettle black.

Deripaska is claiming that Cherney extorted his signature, plus the payoff, in return for protection. No evidence was presented to substantiate this claim, except for references to a Russian gangster named Anton Malevsky. A parachute enthusiast, Malevsky was killed in a jumping accident in South Africa on November 6, 2001.

Mineweb has verified the cause of Malevsky’s death, according to SA Police Inspector H.J. van Wyk, and an Interpol telecopy from Pretoria: “on approaching the landing site, the wind whirled the parachute out of control and caused the landing to be fatal.”

This was just seven months after Deripaska — according to his lawyer’s presentation to the High Court — claims he agreed with Cherney, under pressure from Malevsky. Dead men don’t tell tales, but in this case their widows can. Malevsky’s wife was reported in the High Court testimony to have said that Malevsky was Deripaska’s friend and associate.

According to the High Court transcript of proceedings for April 30, Geoffrey Vos QC, acting for Cherney, explained that, regarding Malevsky “Deripaska said, ‘I know this person only by name, I have seen his name in the press’.” Mr Cherney describes this as a blatant lie and he does so because of the evidence; apart from Mr Cherney’s own knowledge that they were friends, that is Mr Malevsky and Mr Deripaska, because of the I would say uncontradicted and uncontradictable evidence of Mrs Malevskaya, Malevsky’s widow, at tab 34, where she says they were friends, Mr Deripaska let him have a house in Moscow, they used to play pool together, they had lunches, dinners and social events and she saw Deripaska only recently at a birthday party in Moscow, and he sat down at the table for 20 minutes.”

Readers with an interest in knowing exactly how close Deripaska is to the Malevsky family, may read this:

http://johnhelmer.net/wp-content/uploads/2008/05/jmalevskaya-ws.pdf

As Cherney’s advocate told Lord Clarke on the bench: “The whole thing is extraordinary, and demonstrates that Mr Deripaska is not a man who can easily be believed.”

More categorical than Malevsky’s windfall, however, is a ruling on the evidence issued on January 9, this year, by a three-judge panel of the Federal Supreme Court of Switzerland. This judgement ends a 12-year process of Swiss police, intelligence agency, and prosecutor investigation of criminal allegations against Cherney – and it ends with Cherney’s exoneration. The link with Malevsky, which Deripaska is now alleging in his case against Cherney in the London court, is dismissed by the appellate panel in Geneva.

The origins of the criminal investigation by the Swiss go back to 1996, when Cherney was accused of being a member of a criminal organization headed by Malevsky, and known in Moscow as the Izmailovo gang. Then three years later, in June 1999, the London based Trans World Metals group, owned by the Reuben brothers, asked the Swiss prosecutor to investigate their charge that Deripaska, and two associates, Joseph Karam and Walter Niggli, were engaged in fraud, mismanagement and breach of trust. Rulings by the Swiss investigators that there was insufficient evidence to proceed with either an arrest or a criminal trial were appealed by the Geneva prosecutor’s office, which kept the case going over the decade.

A settlement between Deripaska and the Trans World group is reported in June of 2005, ending the Reuben claim with a sizeable payout from Deripaska. But Cherney and Karam appealed, claiming they wanted the case and allegations definitively quashed, and not merely dropped. Exoneration was then sought by the appeal to the federal Swiss court, comprising judges Schneider, Wiprachtiger, and Ferrari.

Their ruling explains that the allegations of criminality against Cherney originated in claims involving Malevsky and Iskander Makhmudov – a Russian copper oligarch – which first appeared in a Swiss police report, dated August 16, 1997. Subsequently, the Swiss judges ruled, “the [Geneva] Appeal Court does not appear to have tried to establish the existence of substantial signs that the group of companies controlled by the appellant [Cherney] did in itself constitute a criminal organisation…”.

“There is no real knowledge of the vague suspicions mentioned in that document [court ruling of February 2007]. Reference is simply made there to a previous report by the Federal Police Department, dated 16 August 1997, which does not provide anmy more specific details, and to future reports the ultimate existence of which is unknown….” Referring to a fresh Swiss police report of August 10, 2000, the judges dismiss its value. “That report…cannot therefore , by referring to itself, back up those very suspicions that are intended to be confirmed.”

On such flimsy evidence – “which do not provide any tangible element of proof to support the allegations made therein” – now rests Deripaska’s defence against Cherney’s London claim for his trust stake in Rusal. According to the Swiss panel, the entire Swiss investigation of Cherney “inferred untenable conclusions [and] succumbed to arbitrariness.” The Geneva ruling ends on a note of vindication. “Michael Cherney is successful.” The court also awarded him costs.

An implication from the ruling is that, according to evidence reviewed by the Swiss courts and prosecutors regarding an aluminium trading company called Bluzwed, Deripaska used Malevsky as a business partner.

The full texts of the official French language and English translation of the Swiss court ruling can be read at:

http://johnhelmer.net/wp-content/uploads/2008/05/swissfedcourtdecision090108.pdf

http://johnhelmer.net/wp-content/uploads/2008/05/swissjudgment_january08.pdf

With the current price of aluminium rising again to the $3,000 threshold, but Deripaska’s prime asset United Company Rusal mired in uncertainty, the Cherney challenge is the first transparent due diligence Deripaska has ever faced. The documents in evidence including lists of company names; diagrams of cashflow schemes and tax minimization; even expert reports on Deripaska’s pen and handwriting.

According to Vos, for Cherney, “Deripaska became an express and implied or an inferred trustee of 20 per cent of Rusal for Cherney; Deripaska then converted the shares that he held for Mr Cherney in Rusal to shares in UCR [United Company Rusal], and as we plead, Deripaska therefore held 20 per cent of 66 per cent of UCR on trust for Cherney, and that actually makes, if you do the maths, 13.2 per cent of UCR that he held after March 2007 for Cherney.”

Stewart, Deripaska’s advocate, described the Cherney-Deripaska documents of agreement as “rather strange”. Responding, Justice Clarke said: “They are rather strange on any view, particularly strange on your client’s [Deripaska’s] explanation, which is that these are all — your client’s explanation as I understand it is that it’s simply a way of paying some protection money — paying off some protection money, it has nothing to do with Sibal or Rusal.”

Stewart, for Deripaska, then told the judge: “My Lord, so there is no mystery about it, my client’s case in this respect is that we were never partners. The allegation, the documents — you will look in vain throughout the 18 files to see a single rouble passing from Mr Cherney to Mr Deripaska.”

The judge was apparently less than convinced: “Wait a moment. Just sticking on what we were on, I made the aside remark that the agreement was very odd from your client’s point of view as well because if this is a payment of protection money, why is it dressed up as a sale of shares which the defendant [Deripaska] didn’t own to somebody who was not bound to buy them?”

Deripaska’s defence, replied Stewart, is complicated: “If it is the case that we are vulnerable to an accusation because we have been paying money to Mr Cherney for a period of time, and although Mr Cherney can’t produce a partnership deed and can’t show that he produced any money, he can produce some various documents showing that various payments have passed through Liechtenstein and other places and we seek to pay him off, it’s scarcely surprising in those circumstances that one should have an agreement which looks a little odd.”

“I would submit, with respect, that the existence of an odd agreement in those circumstances is far more consistent with the true position than the existence of an agreement where apparently there is a genuine partnership between partners but doesn’t actually refer to the right bits. I accept proposition that these agreements are odd,but I don’t accept that they are any odder on my client’s case than on my learned friend’s case.”

After listening to both lawyers, Lord Clarke noted: “Well, something happened.One may be left dealing with which is the least improbable in order to decide which is much the better of the argument out of two improbable stories.” The Swiss appeals court judgement suggests the answer.

Whatever the High Court ruling to come in a few weeks’ time, Deripaska appears to have already lost a key test of credibility, on which depends the veracity of covenants relating to Cherney which he has signed to the European Bank for Reconstruction and Development; and of undertakings he would be obliged to sign, if the Financial Services Authority (FSA), the London listing regulator, is to find him a fit person to occupy a director’s seat on a London Stock Exchange listed company. Moving a Rusal listing to Hong Kong, which has been intimated by some Rusal officials, compounds the credibility problem, without reinforcing the security of Rusal’s shareholding.

The outcome in London is now so uncertain for Deripaska that he is reluctant to enter the UK personally to testify; although all his former partners in the Rusal business – Cherney, Boris Berezovsky, Roman Abramovich – have no comparable qualms. Berezovsky is suing Abramovich in the High Court for cheating him of a multi-billion dollar stake in the assets that were merged into Rusal in 2000.

Whether Deripaska appears in person or not, Lord Clarke must now pore through the transcripts of lawyers’ presentations, and the evidence, to determine whether an arguable case has been made that Deripaska made a contract in London on March 10, 2001, with Cherney, and now owes him proceeds amounting to at least $4 billion. The second part of the judge’s task is to determine whether that contract, negotiated and written down in Russian, brings the two into the jurisdiction of UK law, and the UK courts.

The Financial Times report of the proceedings mentioned that Deripaska “denies any obligation to Mr Cherney”, and then spelled out the criminal allegation. Strangely, though it had been explicitly referred to in the testimony, the FT’s version omitted to report the Swiss court ruling of January 9.

Since then, this claim against Cherney becomes actionable. And so Cherney has issued writs for defamation. These name Deripaska and a group of alleged associates, and they appear in a court claim, case no 1191/08, dated February 14, in the Tel Aviv court in Israel. Among Deripaska’s alleged associates, most of whom appear to be Israelis of Russian origin, there is Andrei Kalitin. He is a Moscow-based journalist, and author of a book recently published in Russian, called Vremya Ch (“Time of Ch[ernoy]”).

The allegations in the Israeli court documents are that Deripaska engaged a group of private detectives, PR men, lobbyists, and reporters to blacken Cherney’s reputation; undermine his credibility before the UK High Court; and lobby the Israeli government to revoke Cherney’s citizenship and residency. It is also alleged in the court claim that the group arranged through Kalitin to penetrate computer files of a Cherney aide.

One of the defendants accused, an Israeli private detective named Aviv Mor, admitted in his defence, submitted to the court on April 8, that he had been working for Deripaska. According to Mor’s submission to the court, “as a part [of] his professional and ethical commitment Defendant 5 [Mor] does not disclose the identity of his clients, the targets and the objects of his investigations or his work methods. However, since such information had already been disclosed during the aforesaid police investigation, the Defendant 5 will state that he indeed carried out private investigation for the Defendant 1 [Deripaska], although everything was done in compliance with the rules, the license and in the framework of law. The police did not prove otherwise and the police investigation did not bring any results.”

Something strange then followed in Israel. Eight days after Mor signed his defence statement, on April 16 he sent a fresh statement to the court, claiming he had made a mistake, and had not meant to implicate Deripaska. “The Defendant 5 is hereby honored to inform the Honorable Court that a clerical error occurred in clauses 16 and 19 of the Statement of Defense filed on his behalf in the above mentioned case on 08.04.2008. The error is as follows: in any place in the above clauses where the Defendant 1 is mentioned, Defendant 3 was meant.” Defendant 1 is Deripaska; defendant 3 is Avigdor Eskin.

Lord Clarke is expected to give judgement before the autumn.

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