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NOVOSHIP WINS DAMNING UK HIGH COURT VERDICT AGAINST YURY NIKITIN, JUDGEMENT OF CORRUPTION FORCES DISGORGEMENT OF $169 MILLION IN PROFITS

By John Helmer, Moscow

The UK High Court ruled today that Yury Nikitin, a London-based Russian shipping entrepreneur, had engaged in corruption and “dishonest assistance” in order to secure profitable charters from Novoship UK (NOUK). At the time, Novoship was an independent Russian shipping company; since 2007 it has been a subsidiary of the state-owned Sovcomflot.

The 157-page judgement by Justice Christopher Clarke found that bribes had been paid to Nikitin by Vladimir Mikhaylyuk, when the latter was general manager for Novoship in London between 2002 and 2005. Nikitin’s defence that this was not corruption on his part was dismissed by the judge as unconvincing and implausible on the facts. Justice Clarke also condemned Nikitin to repay all charter profits he had made where there were findings of corruption.

Coverage of the court testimony and cross-examination of witnesses and evidence last May can be read here [1]. Clarke’s judgement can be read in full here [2].

In a detailed accounting of the charter profits made by Nikitin’s companies, the court has concluded that he should repay $108.2 million. Mikhaylyuk, who did not appear in the proceeding, along with a co-conspirator, Wilmer Ruperti, a Venezuelan shipping entrepreneur who also stayed away from court, were ordered to repay $57.9 million.

Mikhaylyuk was also convicted of defrauding Novoship in an employment termination claim, decided originally in Mikhaylyuk’s favour by an out of court agreement in June 2006. He was ordered to repay his winnings of £151,750 ($245,000).

Without accepting cross-examination in court, Mikhaylyuk had submitted to the judge that the case was being fabricated against him for political reasons. In May, at the start of the court hearings, Clarke issued a preliminary ruling [3] which discussed the political involvement of government officials, prosecutors, and others in the case against Nikitin. In the final judgement, Clarke rejected Mikhaylyuk’s political claims. “The Court is not in general concerned with political motivations (a somewhat elastic concept) unless they cause it to doubt the accuracy or credibility of evidence or the reliability of its conclusions. I am satisfied that the claims which I have accepted are founded on reliable evidence, much of which is documentary, and on inferences which are sound in the absence of evidence in the witness box from those who could be expected to give evidence in rebuttal.”

Clarke’s judgement against Nikitin is unusual because he does not (repeat not) find that Nikitin paid bribes. Rather, he concludes that Nikitin participated in a bribery scheme, instigated by Mikhaylyuk, and mediated by Ruperti, in which Nikitin received illegal and secret payments in connection with vessel charters in which he was not directly involved. This illegal and corrupt scheme, the judge has ruled, corrupted the charters Nikitin subsequently agreed with Novoship through Mikhaylyuk.

Knowing participation in a dishonest scheme, and “dishonest assistance” are the counts against Nikitin, which trigger the $108 million liability award. According to Clarke, “Mr Nikitin dishonestly assisted Mr Mikhaylyuk in that breach of duty because he negotiated the Henriot Finance charters, when he knew: i) that [Nikitin company] Amon, his alter ego, had dishonestly received the secret PDVSA charter commission payments made by Mr Ruperti at Mr Mikhaylyuk’s direction (and had thereby assisted Mr Mikhaylyuk in the latter’s breach of fiduciary duty); and ii) that, in negotiating the Henriot Finance charters with Mr Mikhaylyuk and arranging for Henriot Finance to enter into them, he [Nikitin] was continuing a relationship which was corrupt in inception and had not been cleansed” Sect 509, page 127.

The subtlety and complexity of the ruling here can easily be missed or misunderstood. It will be appealed, and the UK Court of Appeal may decide to narrow the meaning of corruption and the application of the penalties against it. If the Clarke judgement stands against Nikitin on this evidence, it can be applied to a great many other cases where the corruption alleged is to be found, not in the initiation or payment of bribes as such, but in participation in a scheme, whose dishonesty and illegality are known in advance (or should have been known).

“Put more shortly, the Henriot Finance charters were negotiated between (i) an agent (Mr Mikhaylyuk) who had been bribed in connection with a separate but contemporaneous set of transactions which the agent had carried out while acting for the same principal (NOUK); and (ii) a third party (Mr Nikitin) whom, in the first set of transactions, the agent had caused his briber (Mr Ruperti) to pay. In such circumstances the beneficiary of the bribe, and now third party, must account for the profits that have resulted from charters which were negotiated by the agent. The fact that in the second transaction the agent is acting for a different set of associated ship owning companies makes no difference” (Sect 512, page 128).

“Amon [Nikitin] was party to the bribery in the sense that it received the money. But, in respect of those charters, it was not the briber nor did it (or Mr Nikitin) make any profit for which they should account. In the case of the Henriot Finance charters Mr Nikitin and Henriot Finance were not bribers but dishonest assistants to Mr Mikhaylyuk in respect of his breach of duty and are liable to account for the reasons set out above” Sect 523, page 130.

Nikitin defended his conduct in his testimony on the stand and through his lawyer, Steven Berry QC. Their argument was that Nikitin had not bribed Mikhaylyuk, so the evidence against Mikhaylyuk should not convict him. Clarke rules against: “Mr Berry’s submissions were powerfully and cogently expressed; but I do not agree with them” Sect. 503, page 126.

“The question is,” concludes Clarke, “whether the dishonest assister [Nikitin] is in a similar position, so far as his profits are concerned, as the fiduciary [Mikhaylyuk] is in respect of his” Sect 513, page 128.

The judge’s ruling goes further than convicting Nikitin and the others of acting corruptly. According to the court, Nikitin should give up all the profit made on vessel charters touched by bribery. “Mr Mikhaylyuk,” according to Clarke, “was in breach of his fiduciary duty when negotiating the Henriot Finance charters, and Mr Nikitin and Henriot Finance dishonestly assisted that breach. The latter two are liable to account for the profits made by them from these charters. It is no defence to say that the charters were at commercial rates and not disadvantageous to the owners; or that, if there had been no breach of fiduciary duty, they would have been made anyway and at the same rates or that Henriot Finance would have made the same profit anyway by the charter of other vessels…”

The UK judge’s ruling that corruption irreversibly contaminates business judgement, and that proof of corruption requires the disgorgement of the proceeds is a revolutionary one in the Russian situation. “Dishonest assistance” may turn out to be one of the conditions, or pre-conditions, in which much of Russia’s business is conducted. Clarke again: “[Nikitin] made large profits because he judged the market well but that does not alter the fact that the source of those profits was the chartering of vessels through a bribed agent by his company when he, via another company, was the beneficiary of the bribe.”

Sovcomflot commented from Moscow that the “judgement clearly endorses NOUK’s conviction that it had been the victim of fraud and that the decision to litigate against the defendants was the right one.” After Justice Andrew Smith ruled in an earlier High Court case that Nikitin was not culpable in most of the charter deals he arranged with the Sovcomflot subsidiary Fiona Trust, Sovcomflot has appealed [4]. A hearing by the UK Court of Appeal is scheduled for next March.