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By John Helmer, Moscow

Oleg Deripaska demanded, and received from Roman Abramovich, a warranty that in his takeover of Rusal shares, he wasn’t buying stolen goods. Testimony by Deripaska’s London lawyer, Paul Hauser, followed in the UK High Court last week with details which Deripaska himself claimed in his testimony he couldn’t remember at all.

The testimony ought to revise, dramatically, the history of the so-called Russian aluminium wars. Until now, it has been accepted that those who ended up with the goods bravely fought off gangs of primitive thieves and homicidal thugs acting on their own initiative.

In the Anglo-American criminal code, if you don’t have policemen for friends, bad memory and faulty history aren’t a defence in a certain category of cases of stealing. But in order to be convicted of receiving stolen property, the prosecutor must demonstrate that you knew, or had good reason to know that the goods were stolen at the time you purchased or received them; or that you purchased or accepted the goods with the intention of aiding the thief. The UK Theft Act of 1968 says that if you’re pinched, you face a stretch of up to 14 years in prison.

With witnesses to wind up on December 9, after nine weeks of trial of Berezovsky v Abramovich, the presiding judge, Justice Dame Elizabeth Gloster, may rule that Berezovsky and Abramovich were shareholding partners in the Russian oil company Sibneft (now state owned and called Gazpromneft); as well as in the aluminium company Rusal (Berezovsky’s case). She may rule that they weren’t partners in either company, but that Abramovich paid Berezovsky to influence the Kremlin for their common business benefit (Abramovich’s defence). Alternatively, the judge may make a split decision, ruling that Berezovsky wasn’t Abramovich’s partner in Sibneft, but was in Rusal, where the paper trail evidenced in court is stronger.

And then there’s another option – the judge may decide the evidence is compelling that Berezovsky, Abramovich and Deripaska were indeed shareholding or equity partners; but award no compensation on the ground that the partnership involved violations of UK law. She may then pass the buck to the Director of Public Prosecutions to decide how strong the evidence is for prosecuting one, two or all three of them, dispatching bobbies to their London mansions to take them down to the police station.

The doctrine the judge may opt to rely on is a venerable one. Here’s the current law book version:

“Illegal Contracts are void ab initio at common law provided the illegality was present at the time the contract was formed and an exception does not apply. The exceptions to illegal contracts (the contract will not be held to be void ab initio) are:
1. the parties were not in pari delicto
2. where a party genuinely repents and repudiates the contract prior to performance
3. where the claim for relief may be framed in a manner that does not refer to the illegality otherwise present in the contract.
Where a contract has been tainted by illegality and lawful provisions exist within it, unless one of the foregoing exceptions apply the entire contract will be void ab initio.
Contracts that are illegal in their performance may or may not be void. The remedy of damages may be available to the innocent party for breach of contract. Knowledge or notice of the illegality is a central consideration.
Contracts dealing with the following subject are illegal and void ab initio at common law:
1. contracts that are in restraint of trade
2. contracts that attempt to oust the jurisdiction of the courts
3. contracts that are damaging to the institution of marriage
4. that to commit a crime, tort or fraud
5. threatening to damage foreign relations or safety of the public in the UK
6. pervert the course of justice, such as a contract to commit perjury
7. causing corruption in public life (payment for knighthoods)
8. promoting sexual immorality (a prostitute hiring a bus for the purpose of attracting clientele)

When he climbed into the witness box on November 22, Paul Hauser was making a public appearance which as Deripaska’s solicitor at the Bryan Cave law firm, he has tried to avoid since October 1999, when he was first hired by Deripaska. Unlike his client, Hauser suffered no memory loss – at least, none he confessed to the judge.

Deripaska was represented in the courtroom by more lawyers, including Paul Stanley QC; it has been his job to object to any questioning of witnesses, the answers to which might prejudice Deripaska’s defence when he faces trial in a few weeks’ time on charges by Michael Cherney that he stole Cherney’s 13% stake in the aluminium company.
 

Deripaska pleads innocent to that charge.

But what did Deripaska tell Hauser to do one year before he signed his March 2001 contract with Cherney? That was on March 15, 2000, when Deripaska’s company, GSA of Cyprus, bought a 50% shareholding in Russian Aluminium (Rusal) from Roman Abramovich’s company, Runicom, at the same time merging aluminium production assets Deripaska claimed to own at the time in the Russian company, Siberian Aluminium (Sibal) into the larger Rusal holding.

Hauser explained to the judge there were several preliminary meetings to fix that deal, starting in London on March 11 with Alexander Bulygin, Deripaska’s chief operating officer and head of Sibal; then on March 13 with Stalbek Mishakov, another Deripaska lawyer, and Eugene Tenenbaum, Abramovich’s accountant. On the next afternoon, March 14, Hauser said there was a long meeting in Moscow with Tenenbaum and two other Abramovich assistants; Deripaska was present in another room. According to Hauser, there was no mention in these negotiations of Berezovsky and Patarkatsishvili as selling stakeholders.

But Deripaska insisted on this warranty: “The Vendor and the Other Selling shareholders [selling to Rusal] are together the legal and beneficial owners of 100 per cent of the shares of the Companies, which shares are owned free from all encumbrances, charges and liens…” Asked who the “other selling shareholders” were, Hauser agreed that they might have included unnamed Abramovich companies, but also went beyond them. So who were they? Hauser claims the term was used for people or entities he didn’t know. Having negotiated for several days in London, and talked until just before dawn in Moscow, Hauser claimed, as he told the judge: “We didn’t have time to conduct the due diligence…I suspect this particular clause was probably negotiated about 1 or 2 o’clock in the morning, and we finalised the document about 5.00 am. I think we were probably the only people who were up in Moscow at that time. It would have been rather difficult for me to have come to the bottom of it.”
 

That Hauser failed to ask for enough time to do due diligence, and that Deripaska let his lawyer off the hook because he was sleepy are equally unbelievable. So Hauser went on to claim that the Deripaska wanted the warranty, not to prove who the other owners might be, but to make sure he could present the warranty as his defence, in the event he was sued later on.

“We”, Hauser testified, “had to take account of the possibility that there were still interests that were being held outside of Mr Abramovich’s group that he was still in the process of completing purchases from….The third problem we had, and we discussed this expressly, was the ongoing suspicion on the part of my client that perhaps Trans-World still had an interest in some of the assets that Mr Abramovich had said he had acquired. One of the things that we were most insistent upon was to ensure that this share purchase and sale agreement was in all respects enforceable, even if it transpired that Trans-World still had some sort of an interest.”

“So the fact of the matter is,” Hauser went on, “ ‘other selling shareholders’, the definition was drafted in the widest possible way to make absolutely certain that Mr Deripaska got what it was he thought he was buying, and that’s the reason we drafted it that way.”

But Hauser’s testimony indicates that Deripaska already knew that Trans-World and the stakeholders in Krasnoyarsk, Achinsk and Bratsk smelters were retaining certain interests, after the sale. One clue: the purchase price provided in the first Rusal deal was too little – $400 million for the aluminium smelter and power plant in Krasnoyarsk, and for the Achinsk alumina smelter, and another $175 million for the Bratsk smelter, the largest such production line in the world. A second clue: in the years which followed Deripaska’s and Abramovich’s establishment of Rusal, Deripaska has been successfully sued by the Reuben brothers of Trans-World, by Anatoly Bykov of Krasnoyarsk, and by the Zhivilo brothers of the Novokuznetsk smelter, all for the same reason. They accused Deripaska of stealing their share of aluminium sales revenues from the smelters they had owned, after the spring 2000 sale to Rusal. In each case, Deripaska has had to concede, and pay up.
 

So the legal guarantee Hauser had gotten sleepless over in March of 2000 turned out to be worthless in the courts of Switzerland and the British Virgin Islands. The UK High Court has already ruled that Cherney’s case against Deripaksa for thieving has “a reasonable prospect of success”. The High Court trial of The evidence in this case starts next April.

When the Bratsk smelter was added to the Rusal formation in May of 2000, Hauser says he inserted the same warranty. “My objective was to make sure that this transaction, just as the previous agreement, was not torpedoed or in any way affected by someone showing up, or claiming an interest, or it subsequently being determined that some other group company in the Abramovich group had an interest in, or held shares, or that in some respect the purchase of some of these underlying assets hadn’t yet completed….frankly, had I resolved them or not I still would have drafted the document as I had.”

That’s another clue that Deripaska knew what he intended to do to the other claimants, and that it didn’t matter what he told Hauser in advance, or what Hauser did by way of “due diligence”. Says the latter: “I needed to ensure that this document was legally enforceable whatever happened, and if someone climbed out of the woodwork, …I needed to have that language included in the agreement to make sure that no matter what had happened, no matter what the underlying position was, no matter how the shares of the underlying companies were owned, this document remained effective.” In retrospect, what Deripaska told Hauser, and what Hauser got into the sale and purchase agreement with Abramovich turned out to be anything but effective when tested in litigation.

David Reuben testified on October 26 in the same court that he wouldn’t agree to sell his stake at all to Deripaska, because he didn’t trust him to honour the transaction terms. That sellers like Reuben also expected to retain a share of the revenues of the aluminium traded by the plants they were selling, after the sale, hasn’t been mentioned in court, at least not yet.

Hauser wasn’t asked questions about what he knew of the reasons the sellers of the Russian smelters – Krasnoyarsk, Achinsk, and Bratsk – were doing so, and why they were ready to accept a price far below the sales revenue, earnings, and market potential of their assets. Before Hauser’s appearance on the stand, there were hints in earlier witness statements that Abramovich and Deripaska had been putting pressure on the sellers to give up and get out.
 

Following Hauser on to the witness stand, one of the original sellers, Vasily Anisimov (top right), testified that the pressures came from gangsters and also from the regional Krasnoyarsk governor, Alexander Lebed (bottom right), as well as from local police and prosecutors.

“I did not divest from Krasnoyarsk,” Anisimov told the judge. “The situation was such that other people created conditions for us that forced us out of this business and therefore we were forced to sell our assets, because the situation in Krasnoyarsk was very complex from all points of view. From the point of view of Governor Lebed and the authorities of Krasnoyarsk region there was pressure and there was a very difficult situation with the criminal gangs that were very strong in Krasnoyarsk.” Anisimov was hinting that both the forces of law and order and the gangsters were employed for the same purpose, and possibly by the same people. But Anisimov is careful not to name these “other people”.

“The governor [Lebed],” Anisimov went on to provide more detail since Lebed is now dead, “ordered law enforcement authorities to come with raids to the plant wearing masks, and particularly when our main raw material, alumina, that was supplied by our enterprises, this alumina would stay at railway junctions for weeks and weeks and weeks, and they would find all kinds of pretexts why we couldn’t unload it, they said that there would be bombs there or something, and the situation didn’t allow us to operate.”

It isn’t the purpose of either side in the current trial to prove who corrupted Lebed and forced the sale of the assets that Abramovich purchased for an artificially low price, only to triple it when he resold to Deripaska two years later in 2003. But that the first sale was forced in such a way as to trigger worry on Deripaska’s part that he would face court claims after the deal — that is now incontrovertible, thanks to Deripaska’s loyal solicitor (right).

Hauser was again one of Deripaska’s lawyers for the September 17, 2003, sale and purchase agreement for Deripaska to buy back from Abramovich a 25% shareholding in Rusal — this time between Madison Equities, an Abramovich company, and Baufinanz, a Deripaska entity.

And he was legal advisor to Deripaska for third and final sale and purchase agreement, dated July 20, 2004, when the final 25% stake went to Deripaska, this time via Cliren Investment, an Abramovich vehicle, and Eagle Capital Group, a Deripaska entity.

As part of the third transaction, Hauser has testified he was instructed by Deripaska at several meetings, starting on May 31, 2003. The document produced from these discussions, dated July 20, 2004, was titled “Beneficial Owner Deed of Release DR/BP”. The text read out in court, and confirmed by Hauser, was: “RA [Abramovich] provides guarantee [to Deripaska] with regard to the representation and warranty that the Beneficiaries (B&B) are the ultimate beneficiaries of 25% of RA’s shares.” Hauser acknowledged that he had been approached by lawyers for Badri Patarkatsishvili, and told that he had a 25% interest in Abramovich’s 50%.

Hauser went on to testify to memos he had written, more meetings he held, and additional warranties, undertakings and representations he arranged to be signed, all dealing with claims to half of what Deripaska was buying from Abramovich, which was claimed by Patarkatsishvili and Berezovsky. At one point, Hauser confirms that he wrote a note to one of Abramovich’s advisors, saying: “I’m not trying to be paranoid about the world at large nor am I raising theoretical issues about things that are unlikely ever to occur. I have a specific issue that I need to address which is B2.” B2, Hauser told the court, was Berezovsky; B1 was Patarkatsishvili.

Deripaska was anticipating problems with stakeholders he knew better than those two. But he also suspected these two might prove more troublesome inside Russia than the others, like Cherney and Reuben, who were lived outside. So why did Hauser prepare one after another of these ambiguously worded warranties, starting in 2000 and concluding in 2004, without ever trying to get to the bottom of who really owned title to Deripaska’s Rusal assets? Because Deripaska didn’t want his lawyer investigating what he had done, what he had signed, and what he intended to do to make Rusal appear to be his exclusive property.

Hauser gives the game away. “In the following years, it was likely that Mr Deripaska would attempt to list Rusal. There would be an IPO, and Mr De Cort [Abramovich advisor] made it very clear that he didn’t want Mr Abramovich to have to assume liabilities in connection with the listing. Of course, as far as I was concerned, the arguments as to why Mr De Cort didn’t want Mr Abramovich to give warranties as to ownership were precisely the reasons why I wanted Mr Abramovich to give warranties or someone to give warranties as to beneficial ownership….”

“I don’t think that we obtained a title warranty from any of Mr Abramovich’s [companies]. At the time we did the first [25% share sale] deal in 2003, I was insistent that I wanted a release of all claims from Mr Abramovich based upon the previous management of Rusal. It was important that I had that because effectively we wanted to draw a line beyond which there would be no further claims. Once Mr Abramovich had sold his shares to Mr Deripaska, that was the end of it. So as far as I was concerned, the fact that I wanted a title representation and warranty back to 15 March 2000 was because I needed that in order to buttress the release that I had gotten in the first instance from Mr Abramovich in 2003, and then, critically, the second release that I received from Mr Patarkatsishvili in 2004.

If I hadn’t had the representation and warranty as to beneficial ownership back to 15 March 2000 then it always raised the possibility that some third party might show up, claim to have had an interest some time during that period, and then had asserted a claim against Mr Deripaska relating to the management of Rusalat that time.”

In the prospectus Deripaska presented to the Hong Kong Stock Exchange on December 31, 2009, when he finally attempted to sell shares on the open, public market, there is no reference to Abramovich as having sold Deripaska his shares, and no mention of the original sellers who have testified now in the High Court – Reuben, Anisimov, Berezovsky. Here’s the prospectus.

The potted asset and title history Deripaska presented to potential buying shareholders in the prospectus came to just four sentences on page 86: “In 2000, Sibirsky Aluminium and Millhouse Capital agreed to manage jointly the aluminium and alumina assets they controlled. At that time, Millhouse Capital managed majority interests in the Bratsk aluminium smelter, the Krasnoyarsk aluminium smelter and the Achinsk alumina refinery in Russia…In 2003, companies related to Mr. Deripaska increased their stake in those companies under common management to 75% by acquiring half of the interest managed by Millhouse Capital… In 2004, the consolidation of RUSAL’s ownership by companies related to Mr. Deripaska was completed with the acquisition of the remaining 25% equity interest in RUSAL managed by Millhouse Capital.”

The names Abramovich, Berezovsky, Patarkatsishvili, Reuben, Anisimov and Cherney, do appear in the prospectus — but only at the very end, after page 1,118. They are part of Appendix X, which is a copy of the High Court ruling by Justice Christopher Clarke in favour of Cherney, ordering Deripaska to face trial for fraud and theft.

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