By John Helmer, Moscow
On October 12, 2004, Sergei Frank, a former federal Minister of Transport, was appointed chief executive of Sovcomflot, Russia’s largest oil tanker company and one of the top five in the world. Frank confirmed, said the company on its website, “that the Company’s management will take all necessary steps to enhance the Company’s business by ensuring accurate fulfillment of its earlier made obligations and plans. At its best effort the Company will continue to provide the customer-focused quality service.”
A month later, on November 17, 2004, Igor Shuvalov, then an assistant to President Vladimir Putin, was appointed chairman of the Sovcomflot board of directors. He said at the time, according to the company announcement, that “Sovcomflot should get involved more actively in developing “energy dialogue” co-operation between Russia and EU, Russia and the USA covering as well as other countries aimed at meeting the demands of the Russian growing foreign trade. It is also important to achieve increase of capitalization of the company and further improvement of its managing structure.”
Thus did the duo set sail together, one hand each on the helm. Within six months, their other hands did something foolhardy. Frank and Shuvalov decided to launch the most costly court case ever pursued by a state-owned Russian company in the High Court of the United Kingdom. The objective was to destroy opposition and deter criticism within the Russian maritime sector and the federal government of the Frank-Shuvalov scheme for merging Sovcomflot with Novorossiysk Shipping Company; privatizing the combination; and selling its shares in the international market at a premium capitalization, in which those who arranged the scheme would share.
On December 10, 2010, and then again on March 24, 2011, after five years of litigation, Frank was ruled by Justice Andrew Smith to have been “dishonest”; a perjurer in his own testimony and a procurer of the false testimony of others against three men – Dmitry Skarga, his predecessor as Sovcomflot’s chief executive; Yury Nikitin, the former chartering partner of Sovcomflot; and Tagir Izmaylov (aka Izmailov), the former chief executive of Novoship.
Frank says he is innocent and is waiting for the UK Court of Appeal to rule again, even though the dishonesty judgement is not being challenged in his appeal.
The High Court rulings are the most detailed, and also the most damning ever issued by the High Court against a state-owned Russian corporation and its state-appointed managers. When the compensation claims of Skarga, Nikitin, and Izmaylov are finalized, the case penalties (more than $200 million at last count) may also turn out to be the largest ever awarded by a British court against a Russian state corporation.
In the meantime, from 2004 to 2007 — roughly the same time Frank and Shuvalov were assembling their fraud claims against their nautical adversaries in the London court — Shuvalov and his wife, Olga Shuvalova, were making a $119 million gain on a loan and investment scheme with shares of the Anglo-Dutch steelmaker Corus. One of the first published investigations of this dealmaking appeared in December 2011.
That report details how deftly Shuvalov arranged an offshore trust which started with zero in its bank account and wound up in mid-2007 with more than $100 million. “From 2001 to 2005, according to a knowledgable source, Sevenkey was owned by another Bahamas corporation that, in turn, was owned by a trust for the benefit of…Shuvalov. In a reshuffling, says the source, Sevenkey was held for Shuvalov’s benefit for the next few years by his former partners at his old law firm, ALM. Then, in January 2008, corporate records show, Sevenkey’s ownership shifted again so that its shares were held by a British Virgin Islands corporation, Radcliff Business, owned in turn by another BVI company, Severin Enterprises–whose sole shareholder was Shuvalov’s wife, Olga Shuvalova.”
A follow-up in the Wall Street Journal reports that Shuvalov was able to invest $17.7 million in 2004 to buy Gazprom shares through the intermediation of Suleiman Kerimov, whose holding appeared (then and later) to be the stakeholder. When Kerimov sold out of Gazprom in 2008, and distributed the proceeds to his committee of investors, the Shuvalovs reportedly realized $80 million. The newspaper also reports Shuvalov’s spokesman as saying: “I’ve unswervingly followed the rules and principles of conflict of interest. For a lawyer, that’s sacred.”
His takings, he added, have been his guarantee. “my wealth from work as a private entrepreneur before entering government has allowed me to be independent of the special-interest groups as a public servant.”
A source close to the Sovcomflot litigation says there is no sign in the newly reported evidence of money-making by Shuvalov that he profited from his position on the Sovcomflot board. Defenders of Shuvalov, along with his own carefully worded reference to the “rules and principles of conflict of interest”, also point out that the disclosures do not reveal violations of Russian law. Unstated is that Russian law applies different standards for prosecuting and proving bribery from the standards applied in British and American law.
If the new Shuvalov evidence were to be presented in the UK High Court, and Shuvalov were subject to British law, would his defence hold up? That isn’t likely to happen, not least because the dealmaking Shuvalov did with his patrons took place either in Russia or in offshore havens.
That is not the standard, though, which Sovcomflot has wanted to apply in attacking those opposed to the Frank-Shuvalov merger and float scheme for their shipping company. It is clear from the courtroom testimony and also from the court judgements, that Shuvalov and Frank knew that the charges they were bringing against Skarga, Nikitin, and Izmaylov in the High Court between 2005 and 2010 could not have been brought in the Russian courts, because they weren’t violations of Russian law.
In his rulings, Justice Smith has carefully distinguished between what actions, allegations and evidence were subject to Russian law, and what under British law. Because he then acquitted the three defendants on most of Sovcomflot’s charges, Frank is appealing to have the British standard adopted throughout.
Justice Smith explained: “the defendants [Skarga, Nikitin, Izmaylov] for their part are entitled to invoke “factors relating to the parties” (see section 12(2) of the 1995 Act), and so they rely upon the facts that Sovcomflot is the parent company of a nationalised Russian group of strategic importance and that the defendants are for the most part Russian individuals or companies said to be owned or controlled by Russians. These factors seem to me of more importance than the terms of the agreements with third parties through which the schemes were implemented, and, had I not concluded that the general rule requires the application of Russian law, I would have accepted the defendants’ submission that the secondary rule applies and that English or any other law is displaced in favour of Russian law.” (Par 173 of the December 10, 2010, judgement).
The judge went on: “The nature of the bribery allegations made by the claimants [Sovcomflot] to my mind strengthens the defendants’ contention that Russian law applies to issues where the 1995 Act determines the governing law. Bribery includes not only payments and the provision of benefits but also the promise of them.” (Par 177)
In a further hearing when Sovcomflot sought leave to appeal, Smith again rejected the Frank-Shuvalov attempt to bring in British law.
That’s the standard Shuvalov now wants not to be applied to himself on the ground that whatever money he was given, whatever he did with it, and whatever he agreed with its sources, no promise of benefits was asked of him, and no promise given by him. He means that there’s no evidence of either to satisfy Russian law.