By John Helmer in Moscow
Mechel today confirmed reports that the company is the target of a shareholder lawsuit, alleging that the company and its controlling shareholder, Igor Zyuzin, have failed to disclose material information affecting Mechel’s share price to the market.
Before news of the lawsuit filed Wednesday reached the market, Mechel’s share rose 10% on the day to $5.38. It has risen 20% over the past week, and 68% over the previous month. The steel, coal, and ferroalloy group’s current market capitalization is $2.2 billion.
In a report released Monday on Russian prospects in the global steel environment, Rob Edwards, Renaissance Capital’s steel analyst, said: “We have cut our target price for Mechel from $13/share to $9/share, reflecting current market conditions and 2009 uncertainties. We think Mechel represents the most attractive play on a risk/reward basis in the Russian metals and mining sector for investors seeking maximum upside potential among riskier names.”
Wire services reported overnight that the new lawsuit names Mechel and Zyuzin as co-defendants. The plaintiff is reported to be Dean Frederick, a Mechel shareholder. However, the lawfirm initiating the claim, Coughlin Stoia Geller Rudman and Robbins, is believed to be pursuing a class action, on behalf of a much larger group of minority shareholders of the New York Stock Exchange (NYSE) and US-regulated Russian steelmaker. The lawfirm, which has offices throughout the US, lists 39 pending class-action cases involving securities market claims. The Mechel filing is not yet listed on the law firm’s website.
Coughlin Stoia’s website reports that it is currently investigating the Bernard Madoff securities fraud “on behalf of large institutional and individual clients”, and advertises for shareholders who believe they may have been hurt by securities fraud to make contact.
A source at Coughlin Stoia confirmed the firm’s participation in the lawsuit, and identified two attorneys as managing the case — David Rosenfeld and Sam Redman. They did not return calls.
Another New York attorney, Darren Check of the firm Barroway Topaz Kessler Meltzer & Check, said he is one of the filers of the complaint against Mechel. But he claimed he has not heard of Coughlin Stoia, and does not know of any court filing they may have made. The two law firms appear to be competing for shareholder plaintiffs in the case.
A Dow Jones wire service report quotes from the Coughlin Stoia claim, reportedly filed in the US federal court for the southern district of New York (Manhattan): “As a result of defendants’ wrongful acts and omissions, and the precipitous decline in the market value of the company’s securities, plaintiff and other class members have suffered significant losses and damages.” The class of potential claimants, according to the report, covers purchasers of Mechel’s securities between Ocober 2, 2007, and July 25, 2008.
A Reuters agency report says the claim alleges that “financial statements were materially false and misleading at all relevant times.”
Mechel spokesman Ilya Zhitomirsky told CRU Steel News: “We still have not seen the files of the case, that’s why we can’t make comments ad rem. We do not understand what this charge is based on. The company financial reports are issued in due time; they pass the tightest control and audit procedures in accordance with the standards set by the United States Securities and Exchange Commission (SEC), the Sarbanes-Oxley Act and the New York Stock Exchange. The Company also publicly discloses all substantial facts and any shareholder with any concern may address directly to the head office of the Company and have additional information and comments. Many shareholders do that.”
Ahead of this week’s New York court claim, a US shareholder of Mechel told CRU Steel News that, despite its NYSE listing and SEC regulation, Mechel has been able to benefit from its Russian status to observe a different, lower standard of disclosure than is required for US companies. He believes that the rule applying to Mechel for disclosure of “material” information was proposed for change last year by the SEC, but not adopted.
The source told CRU Steel News: “If Mechel were a US company, they would likely be deemed a “large accelerated filer” and be required 1) file their annual reports on Form 10-K within 60 days of their year-end 2) file their quarterly interim financial statement on Form 10-Q within 35 days and 3) be required to disclose on Form 8-k “certain events” (often thought to be “material”) within 2 to 4 days of occurrence.”
“However, because they are a ‘foreign private issuer’ (a very specific term), their SEC filing requirements are 1) file with the SEC their annual report on Form 20-F within 4 months of their year end 2) file with the SEC interim financial on Form 6-k only if these interim financial statement were a) made public as a result of a required home-country filing b) made public through a required filing with a stock exchange where their securities are traded c) made public to foreign shareholders. 3) file with the SEC “certain events” on Form 6-k (similar to material disclosures by ‘domestic issuers’ on Form 8-K) but only if the information is a) made public as a result of a required home-country filing b) made public through a required filing with a stock exchange where their securities are traded c) made public to foreign shareholders.”
The source also noted: “to illustrate how much less the foreign private issuer disclosure regulation is, even if the company were to have a disagreement with their auditor (a relatively serious event), that in and of itself would do trigger a SEC filing. The new rules adopted in September 2008, say that it is not until 2010 for example, when calendar year ‘private foreign issuers’ must promptly disclose changes in or disagreements with a certifying accountant that this will require disclosure of substantially the same information as that currently required of US issuers. However, with regards to other ‘8-k’ type events, it doesn’t change.”
Last autumn, Mechel was investigated in Moscow for price-fixing in the coking coal market by the Federal Antimonopoly Service (FAS); fined; and ordered to cut its supply price by 15%. The action followed withering public criticism of Zyuzin by Prime Minister Vladimir Putin. Since then Mechel has applied for state bailout funds, and also for protective duties against imports of coking coal and stainless steel. The Putin publicity triggered a sharp cut in Mechel’s share price. Despite the recent gains, the company’s market cap remains 89% below its level of a year ago.
Zyuzin’s former partner and co-shareholder in the establishment of the steel and mining group, Vladimir Iorikh, has also been considering litigation in New York. Iorikh has complained at reporting on Mechel by the New York Times last July, following one of Putin’s public attacks on Zyuzin. The US newspaper made allegations about Iorikh’s sale of his shares to Zyuzin, and his exit from the company, which Iorikh says are false.