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By John Helmer in Moscow

De Beers’s arsenal resists Usmanov attack on the Grib pipe and the Arsenal pitch.

A public relations blitz under way this month in London and the UK media has produced charges and counter-charges involving Alisher Usmanov, an iron-ore and steel magnate. He is accused of conspiring with other Russians to defraud a De Beers-affiliated company of its 40% stake in, and several hundred millions of dollars in future profits from, the only major diamond deposit newly discovered in northwestern Russia.

Usmanov has had run-ins with the London press before. The first time, in 2003 and 2004, was when he started buying shares of the then Anglo-Dutch steelmaker Corus, and was rebuffed by the Corus board, which went on to sell itself to Tata of India. Usmanov found his champion at the time at the Financial Times. He also pocketed a substantial profit from the rise in the Corus share price.

This time Usmanov has been after possible control of the Arsenal Football Club. As the Corus board had done before them, the Arsenal shareholding defenders have attempted to persuade the London newspapers to publish items from Usmanov’s past career, thereby deterring shareholders from selling out, and creating an atmosphere hostile to Usmanov’s involvement in the affairs of the football club.

As Usmanov had done before, he found his champion in a Moscow-based correspondent for the Sunday Times. What the latter omitted to report was a detailed dossier of court files from Sweden to the United States, the existence and meaning of which Usmanov has gone to great public care and private expense to deny. The wording of Usmanov’s denials is subtle; the only way to understand that is to read the court documents themselves.

De Beers isn’t providing them. The diamond group is carefully avoiding being drawn publicly on the conflict, although it is indirectly connected to Arsenal through Sir Chips Keswick. A former Hambros banker, Keswick sits on both the De Beers and Arsenal boards. Keswick was last reported as owning 20 shares of Arsenal, amounting to 0.032% of the issued stock.

Usmanov owns a 23% shareholding in Arsenal, and has said he would continue to buy shares if other major shareholders wanted to sell, and if the price is right.

But according to the published terms of a lock-down agreement just signed, Usmanov’s opponents on the Arsenal board, led by chairman Peter Hill-Wood, have announced: “Members of the board are committed long-term shareholders, and to strengthen the current position they have entered into a new agreement which replaces the existing lock-down agreement. Under the new agreement, the board members have agreed not to dispose of any of their interests in the club before April 18, 2009, other than to certain permitted persons, such as close family. After that date, for the remainder of the term of the agreement, they can only sell their shares to another person if the other parties to the agreement do not wish to buy them.”

In the game between Usmanov and De Beers, Mineweb has been calling the ball-by-ball action for several years. The direct negotiations between them came to nothing. Arbitration in Stockholm began in 1998, and is continuing. Court actions have followed in Sweden, the US, and Russia. Usmanov has been listed on the schedule to give a deposition in Colorado; it hasn’t happened yet.

What makes the latest Arsenal case of interest to mining industry and mining finance readers is the extent to which the London market has become the world’s most costly reputation laundry. Buying football clubs impacts on mine finance and corporate broking, because it is one of the prices to be paid for making reputations, allegedly tarnished by purported scandals elsewhere, popular and bankable.

City banks are obligated to fill out Know-Your-Client forms. These can be expedited by the kind of acquaintance that develops in the VIP boxes at football matches. In the case of a loan Usmanov procured from Standard Bank, South Africa’s dominant lender, yachting was the recreation that was KYC positive.

Whether Usmanov’s conduct in the affair of the Grib diamond project ought to impact on the future of English steel and of English football appears to have been decided. It did, and it does; although the lockdown agreement has obviated the necessity for the Arsenal board to say more.

The bedrock in the case of De Beers versus Usmanov is that Usmanov has been named in US court papers as one of the principals in the affair of the Grib pipe; that several billion dollars in costs, damages, and compensation are at stake in both Denver, Colorado, and Stockholm; and that if you are a target of Usmanov’s interest — Mineweb has also reported on Usmanov’s interest in Australian iron-ore and precious metals — the playbook of his management footwork is a must-read.

The Grib diamond pipe was first discovered in 1996 by a joint venture of Canadian and Russian prospectors. Subsequent sampling and valuation, conducted by De Beers, have identified 98 million tonnes of kimberlite to a depth of 500 metres, containing an estimated 67 million recoverable carats. The grade has been estimated at 69 carats per 100 tonnes. The original De Beers valuation was $79/carat, amounting to $5.3 billion. This valuation has moved up with diamond prices to more than $7 billion today.

For several years, Usmanov and partner, Vagit Alekperov, chairman of LUKoil, have been facing the charge that they conspired in a scheme of “unjust enrichment”; the details have been filed in federal US court, as well as in the district court of Denver, Colorado; and in arbitral and court proceedings in Stockholm, Sweden. The plaintiff is Archangel Diamond Corporation (ADC). A Canadian listed diamond mining junior, ADC was initially directed by venture miners. The Oppenheimer family bought a stake, and then sold it to De Beers, which accumulated additional shares to become the controlling shareholder.

According to an October 9 report by Moscow news agency Interfax, Usmanov has denied reports that ADC, now a subsidiary of De Beers, had filed a lawsuit against him. According to Interfax, “Alisher Usmanov is not and has never been a defendant in claims from Archangel Diamond Corporation. ADC previously made a contrived attempt to involve A. Usmanov as a party in the case, which was rejected in arbitration proceedings in Stockholm,” the billionaire’s press service said in a statement issued Monday evening. ADC lost all of its lawsuits against Arkhangelskgeoldobycha (AGD), which is now a subsidiary of Lukoil (RTS: LKOH), the press service said. AGD won court hearings both in Russia, and in the U.S. state of Colorado. The case in Colorado is continuing only against Lukoil on procedural grounds,” the statement said.”

A promotional interview with Usmanov, reported by Mark Franchetti of the Sunday Times of London on October 14, did not report the existence of the US and Swedish court documents.

Usmanov’s claims are misleading. The caption pages of the filings by ADC in US federal and Denver District Court refer to LUKoil and Arkhangelskgeoldobycha (AGD) as defendants. Usmanov is explicitly named as a “co-venturer” with LUKoil and Alekperov; and as the co-controlling shareholder of VA Investment LLC “a company which managed and controlled [defendant] AGD”. The charges cited in the court filings include “fraud, breach of express and implied contract, civil conspiracy, intentional interference with contract, breach of fiduciary duty, and unjust enrichment…”

ADC is claiming that it has lost more than $30 million in its investment in the deposit, and more than $400 million in profits which it would earn from its 40% stake in the Grib mine venture. In court filings, it is claiming $1.2 billion in triple compensatory damages, and $3.6 billion in punitive damages. Colorodo is the venue because LUKoil operates petrol stations in the jurisdiction; and because ADC’s operating office and chief executive were located in Denver at the time, and conducted negotiations with LUKoil, AGD, Usmanov, and Alekperov from there.

Usmanov is accused in the US court documents of having “operated and controlled AGD during the time periods described herein”; to have “served as the Deputy Chairman of AGD and represented AGD in negotiations and communications”; and to have controlled AGD through other entities in which he had control, including Mapo Bank, Interfin Services, and AGD Invest.

The US courts have so far considered only jurisdictional issues, and there has been no trial on the substance of the charges. The case is still pending.

In Sweden, where ADC has filed for breach of contract, the initial panel of arbitrators accepted jurisdiction, and then heard testimony in the case. A switch of votes on the panel, in suspicious circumstances, then reversed the jurisdiction ruling. ADC appealed to the Swedish courts, and in February 2004, the Stockholm District Court upheld ADC’s appeal, reversed the tribunal ruling, and ordered a rehearing of the charges. In a blow against the credibility of AGD, it was ordered to pay ADC’s costs. That case is also still proceeding.

Russian court litigation in the case, to which Usmanov refers in his London media defence, is described by ADC in the US court documents as “seek[ing] to take advantage of the notoriously corrupt Russian court system”.

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