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By John Helmer, Moscow

Yury Privalov, the Sovcomflot shipping manager charged with embezzlement from the company, has been sentenced to four and a half years in prison, and fined Rb1 million ($32,250), Judge Natalia Morovoza ruled this evening in the Dorogomilovsky court of Moscow. Privalov was not in court to hear the verdict; he is reported by his lawyer as having had a “hypertensive emergency” on Sunday evening, and been hospitalized at the Bakulev Scientific Centre for Cardiovascular Surgery.

Morozova began reading the judgement at 10 am on Monday, and continued reading the 300-page document until 8 pm. A guilty verdict was not in doubt, as Privalov had already pleaded guilty. There was no testing of the evidence in court; and no cross-examination of witnesses. The prosecution had requested a sentence of six years’ imprisonment and a fine of Rb1 million. Sovcomflot had requested Privalov’s discharge on a non-custodial sentence. The jail term announced by Morozova includes the 22 months already served by Privalov in a Swiss prison between 2006 and 2008, when he was challenging extradition to Russia.

Sovcomflot’s chief counsel, Vladimir Medvednikov, and company lawyer Sergei Polevoy had testified in court in two hearings on September 7 and 10 that Privalov was instrumental in Sovcomflot’s recovery of $150 million. The figure was also presented to the judge by state prosecutor, Elena Zinovenkova.

There is no evidence to substantiate this number in Sovcomflot’s financial reports. Instead, Sovcomflot’s auditor, Ernst &Young, has reported in the notes to the consolidated statements for 2011 that following the UK High Court litigation, in which Privalov testified as a witness for the shipping company against former executives, “the Group was successful on a number of claims, and unsuccessful on a number of others.” According to the audited financial report, just $56 million, including $17.8 million of interest, has been received by Sovcomflot, and accounted as “other non-operating income and interest income respectively.”

As for the returns from Privalov, the Moscow court was told by prosecutor Zinovenkova that Privalov had made “partial reparation”of $4 million, including the sale of his London home worth an estimated $2 million. Polevoy for Sovcomflot told the judge the same thing.

Sovcomflot booked the first $2 million before it began issuing detailed audited financial reports. This year, in the report for 2011, the company told shareholders that “a settlement was reached pursuant to which a charge has been granted over a residential property.” That appears to be the London house, which “has been recognized in the income statement for the period ended 31 December 2011.” In her verdict, the judge said Privalov had not returned all of the stolen funds.

The alacrity with which Sovcomflot has recorded incoming funds from the protracted litigation isn’t matched on the outgoings and liabilities side of the balance-sheet. Indicated in the accounts, but not documented to the Moscow court, is evidence that Sovcomflot has spent more money in its litigation in London and Moscow than it has recovered. The High Court claims were initiated in 2005, but not until 2010 has Sovcomflot acknowledged that for 2010 and 2011 it spent $42 million “relating to legal costs and provisions for the costs of certain of the defendants in the unsuccessful claims”. The reference to provisions is to about £15 million in costs and indemnity the High Court ordered Sovcomflot to pay Dmitry Skarga, the former chief executive of Sovcomflot, and Tagir Izmailov, the former chief executive of Novorossiiysk Shipping Company. Sovcomflot has booked the sum in its expense accounts, but it has not yet paid the court-ordered amounts to Skarga and Izmailov.

Sovcomflot’s earlier legal costs for the UK litigation between 2005 and 2010 have not been itemized, nor are the costs of the ongoing litigation in London identified in this year’s accounts. If the bill for lawyers, detectives and accountants whom Sovcomflot has retained for its court cases in London is booked as “other non-operating expenses”, then in the six months to June 30, another $5.7 million has been spent. The aggregate almost certainly exceeds the $56 million of recoveries.

In addition, the financial reports admit that the shipping company is facing claims from former chartering partner Yury Nikitin for $184.1 million “in compensation”, admits the Sovcomflot’s auditor notes, “for the losses allegedly suffered by [Nikitin and his companies] because of immobilisation of these funds [due to freezing orders obtained by Sovcomflot].”

The High Court has ruled that this claim must be delayed until after Sovcomflot’s appeal against some elements of the judgements already issued is resolved. That means a delay until next year. However, Sovcomflot is refusing to set aside money for paying the claim, should it lose to Nikitin. “Management is of the opinion that the application is without merit, the claimed amount is speculative, and the likelihood of this claim being successful is remote…Accordingly, no provision has been made.”

Another legal liability towards Nikitin which Sovcomflot’s auditors have acknowledged has so far cost the company a security deposit of $13.1 million. This is currently lodged in the federal US district court of Norfolk, Virgina. Note 26 of the financial statements for 2011 admits this is “in relation to the arrest of one of the Group’s vessels in the United States, as a result of a claim advanced by the charterers of the vessel at the time, relating to the grounding of the vessel in the Suez Canal in November”. The vessel was the oil tanker Tropic Brilliance. Under charter to Henriot Finance, a Nikitin company, on November 6, 2004, it ran aground in the canal after a rudder and steering failure. Fault and liability for that are in contention in the court case. On June 1, 2006, a Sovcomflot-group company paid the security money into the Virginia court to allow release from arrest of the Tropic Brilliance.

That the incident took place, not long after the tanker had undergone partial repairs, is certain; it was the first vessel to run aground in the Suez Canal in thirty years. In arbitration in the UK, supported by the US court arrest, Nikitin is seeking $9.6 million in losses, plus costs of recovery and six years of interest payments. This adjudication is also stalled by the Court of Appeal proceedings. According to Sovcomflot’s financial report, “management is of the opinion that the claim is without merit…Accordingly, no provision has been made against this account.”

In Dorogomilovsky court yesterday evening, Privalov’s lawyer Vladimir Emelyanov said the verdict was unfair and will be appealed.

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