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DwB_1735

By John Helmer, Moscow

The Bible is clear on what horny musclemen like Samson should beware. If they want to go bed with Delilah types, they may wake up without their hair on.

Oleg Deripaska, control shareholder of the Russian aluminium monopoly Rusal and of Russian Machines, a holding of automobile and automotive component manufacturers, is suing Morgan Stanley, the US investment bank, for cheating him of billions of dollars of profit in order to make a quick profit itself of “tens of millions of dollars”. The claims, kept sealed by a New York federal court judge until recently, reveal inside dealing between Deripaska and Canadian businessman Frank Stronach, which Canadian investment institutions and the Canadian press had tried to oppose when their deal was first made in 2007.

Deripaska is now accusing Morgan Stanley of insider dealing in a jury trial under way this month. The trial has required Deripaska and his long-time money manager, Gulzhan Moldazhanova, to face cross-examination in a US court for the first time. Deripaska testified by videolink yesterday; Moldazhanova was on the stand on Monday and Tuesday.

The lawsuit commenced in the US federal district court in Manhattan on August 3, 2012. That was almost four years after Deripaska’s 20% shareholding in the Canadian automotive parts maker, Magna International, had been sold in October 2008 for $748 million. Magna was controlled then, and until September 2010, by its founder Frank Stronach. In 2007 Deripaska and Stronach devised their plan for Deripaska to take over Magna from Stronach. The press announcements stopped well short of revealing their intentions. Deripaska paid almost $1.6 — $1.229 billion in borrowed funds, $340 million in direct share purchases. Security for the 2-year loan was the share package.

Magna headquarters

Magna headquarters in Aurora, Ontario, in 2007

For its loan security the initiating lender, BNP Paribas, required Deripaska to meet margin calls; that is, repay in cash such amounts as the collateral shareholding might lose in market value if the Magna share price started falling. At the start of the deal, the share was worth about $55. If it dropped to $44, the bank could demand repayment of the entire loan.

StronachThis year the Canadian-listed Magna shares have been trading between C$56 and C$74. This week the share price is C$63, with a market capitalization of C$25.5 billion. If Deripaska still owned it, the 20% shareholding might be worth just over C$5 billion ($3.8 billion) – double what he paid in 2007. But Canadian analysts report the reason Magna has gained in value for shareholders is that Stronach (right) was forced out in September 2010 with a share payment of $870 million. That sum was bitterly contested by shareholders who sought to stop it in proceedings at the local market regulator, the Ontario Securities Commission, and in the Canadian courts. Stronach defeated them. He went on to take another $53 million at least in “consulting fees and bonuses” until 2014.

“Magna’s share price has more than tripled since Stronach left the building,” according to this analysis. “It’s no doubt a reflection of the company’s laser-like focus on its core auto parts business—which has driven sales and profits to new heights—and away from Stronach’s former grand diversions, be they horse-racing, theme parks or, at one point, even launching an airline.”

FIVE-YEAR TRAJECTORY OF MAGNA SHARE PRICE

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Source: http://www.bloomberg.com/quote/MG:CN

THE DERIPASKA-STRONACH IMPACT ON THE MAGNA SHARE PRICE

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Source: http://www.macleans.ca/economy/business/when-paying-the-boss-to-leave-pays-off/

Stronach’s deal with Deripaska in 2007 was more than a diversion, as the New York court papers reveal for the first time.

In his lawsuit Deripaska is claiming that after he borrowed $1.2 billion to finance the share purchase, and invested some of his own cash, Morgan Stanley illegally and secretly arranged to sell off the Magna shares which had been pledged as collateral. That, Deripaska alleges, pre-empted Deripaska’s bid to refinance his loan with Russian state bank money, heading off margin calls and bankruptcy.
In October 2008 Deripaska had told Morgan Stanley his Magna investment would be protected by then-Prime Minister Vladimir Putin with a billion-dollar bail-out from Vnesheconombank (VEB).

According to Deripaska’s court claim, Morgan Stanley decided to sell the Magna share collateral, shorting the share value in expectation of a sudden price decline, then dumping the shares without meeting the contractual obligation, according to the Deripaska version, “to maximize the value of the collateral, as it was required to do.” According to the court papers, “Morgan Stanley unjustly profited from risk-free trades based on inside information, reaping tens of millions of dollars in profits and fees.” Deripaska has estimated the damages “in excess of $800 million.”

In telephone calls, emails and signed statements in the first days of October 2008, Deripaska, Moldazhanova, and their associates assured the bankers that Putin would underwrite the refinancing but they needed time to arrange the details. At the same time that month in 2008, Putin and VEB were agreeing to save Rusal from defaulting on $4.5 billion in loans to another consortium of international banks. Morgan Stanley didn’t believe Deripaska.

In the amended court claim Deripaska presented to the US court on April 16, 2014, the nominal plaintiff was Veleron, a company registered in The Netherlands. It was wholly owned by Russian Machines, which was itself a 100% subsidiary of Basic Element (BasEl), Deripaska’s Moscow holding company. According to the claim, “BasEl is a diversified industrial group made up of over 100 companies and facilities located in 21 countries, across five continents…Many companies in the BasEl group hold leading positions across their respective sectors, including RUSAL, the world’s largest producer of aluminium…” Nowhere in the claim is Deripaska’s name mentioned. Part 1 of the claim in the claim in the court file, read this. For Part 2 of the claim in the court file, read this.

But Deripaska is identified as the central figure in the case. This appears in the court ruling of July 23, 2015. He is named by the judge as the “entire” owner of Basic Element. Veleron is identified in the Morgan Stanley communications as “Oleg Deripaska’s vehicle”. According to the judge in the case, when the Magna share price started falling, and Veleron, Russian Machines and Basic Element ran out of cash to meet the bank margin calls, “to frustrate BNP’s ability to collect on its award, Deripaska promptly placed that corporation into insolvency proceedings in Russia.” It is also revealed that Morgan Stanley executives were telling each other how influential Deripaska was with their bosses. “[We are] concerned if we decline any restructuring proposal without even defining terms that may work for us. Basic Element/Deripaska is a relationship in which many people internally invested. [sic] The principal is in contact with JJM [i.e., John J. Mack, Morgan Stanley’s Chief Executive, below right] directly … This [selloff of Magna shares] will erase the investment we made into this account – one of the largest in our region.” For the full text, read this.

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Deripaska’s supporters inside Morgan Stanley are also revealed to have been overruled by others in the bank, and to have told Deripaska so privately. “Those individuals met with Deripaska after October 3, they apologized to Deripaska for Morgan Stanley’s “betrayal” -which Deripaska himself found surprising.”

The presiding judge in the case is Colleen McMahon. In her judgement of July 23, she could no find evidence that the special favour mid-level Morgan Stanley executives were showing towards Deripaska was based on any order, policy, or even trust from their superiors. “Nothing in the record,” the judge said, “evidences any sort of pre-existing relationship of trust and confidence between Morgan Stanley and Deripaska. In fact, the record is barren of any evidence that would explain what sort of relationship the bank had with Deripaska and his entities.” There is no suggestion that the bankers who trusted Deripaska may have had their own reasons – a concern high-level bank sources in London have reported in connection with financing their banks have provided Rusal.

Judge O’ConnorAccording to Judge McMahon (right), “I have no idea what the “pay to play/relationship investment with deripaska” [Morgan Stanley email] refers to; it might have been nothing more than the cultivation of a potential client, in the hope of doing business together some day. There is no indication that Deripaska ever retained Morgan Stanley on any deal or confided anything to the bank in confidence; Deripaska plainly viewed Morgan Stanley as just one more bank competing for his business… He certainly did not seem to feel that Morgan Stanley had misbehaved during the Magna meltdown.”

The judge also put into the public record remarks of Deripaska’s taken during his deposition in July of 2014. An innuendo, implying misconduct by the bankers, comes from Deripaska. “Banks wants to make money, you know, out of any, you know, business they have with their client … When [Morgan Stanley employees] came [to talk about the Magna deal], they came in same number like you [Morgan Stanley’s counsel at Deripaska’ s deposition]. You have five, six people on a desk. They put your business card. You just recognize them maybe next time if they’re not fired yet from the bank for different circumstances. And we talk generally about business.”

In his New York court claim, Deripaska describes the Magna share purchase of 2007 “as the first step in a long-term strategic alliance between Russian Machines and Magna which would include the sharing of technology and management…[It] was of national significance for Russia, given the boost it would bring to the Russian automotive manufacturing sector.”

When the crisis of September 2008 struck, the value of his shareholdings plummeted, and Deripaska ran out of cash to meet bank loan demands, he told the bankers, as he also told the Kremlin, that they could count on a Kremlin rescue. That was because – according to Deripaska’s New York court claim – “the Russian government appreciated the significance of the strategic investment in the Russian economy [of the Magna deal] and would take all reasonable steps to protect the investment and, with it, the development of the Russian automotive industry”. For the story of the state bailout of Rusal, read this.

But was this true — was Deripaska bluffing the bank lenders, and also the Kremlin? Was his deal with Stronach a private scheme to enrich them both with cash from the international banks, on a strategic undertaking from the Russian state, which didn’t exist?

Seven banks named in the August 2012 claim by Veleron as defendants were involved in the 2007 financing of the purchase of the Magna shareholding. They were the Royal Bank of Scotland, Natixis, Credit Suisse, BNP Paribas, ABN Amro, Fortis, and Morgan Stanley. Three months later, in November of 2012, the first four banks won dismissals by the court for lack of jurisdiction in the US. ABN Amro and Fortis were removed from the lawsuit in April 2014. The court papers were sealed at the start, and not released until April 16, 2014. At that point, Deripaska filed an amended complaint.

The court files reveal objections the judge has recorded to the tactics of Deripaska’s lawyers, Kasowitz Benson and Fox Rothschild, for “not disclosing evidence in a timely manner”. On July 23, Judge McMahon rejected a bid by Morgan Stanley to dismiss the case entirely, but she also dismissed most of Veleron’s claims. In a ruling of April 2014, the judge noted the application to the US court against most of the banks was inappropriate. “These [loan] agreements were negotiated and signed in Europe. At least two of them are governed by the law of Ontario [Magna’s headquarters]…and the entire deal was plainly and explicitly structured to avoid litigating in a US court.” As for the allegation of securities fraud, she attacked the competence of Deripaska’s lawyers, saying: “it is among the least artfully pleaded complaints of its genre that I have ever seen.” She has agreed to let a single charge, that of insider trading, to go to jury trial. This is now under way.

Deripaska and Moldazhanova have been subpoenaed to testify in court. They were the principal decision-makers in Moscow when Russian Machines defaulted on the bank margin calls, and when Morgan Stanley decided to sell the shares.

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Modazhanova has been personally and financially close to Deripaska since 1995 when, according to her own resume, she “joined Aluminprodukt as a secretary”. Rusal reports paying her $222,000 in director’s fee last year, $211,000 in 2013. She is also chief executive of Basic Element. For more than fifteen years she has supervised Deripaska’s cashflow schemes in Russia and abroad.

Both of them submitted to questioning by lawyers for Morgan Stanley and their depositions were taken on July 15 and 16, 2014. Since then they have tried to fight off having to appear in court. The judge has ruled that they must appear. The last time Deripaska testified in an international court was on November 29, 2011, in the UK High Court; he was appearing for Roman Abramovich against Boris Berezovsky. Moldazhanova, who testified on November 9 and 10, has never been cross-examined in an international court before.

Eric Reguly, a Toronto presser, was commissioned to write this promo for Moldazhanova as the Magna takeover began: “She has surprised her colleagues in the past with her ability to learn about new industries on the fly and please a demanding boss,” according to Reguly. “Tough and fair are the words most often used to describe her… There is little doubt she will rise among the ranks of the world’s most powerful women.”

When another Toronto newspaper questioned Stronach’s fitness to run Magna, and the lawfulness of his share operations, it reported that Stronach was “erratic and unaccountable”. He was manipulating his relatively small shareholding stake in the publicly listed Magna to exercise personal control. The 2007 deal between Stronach and Deripaska was enriching the two of them, the newspaper charged, but damaging Magna and its public shareholders.

According to this report, Deripaska’s deal with Stronach “speaks to the impotence of Canada’s shareholders’ rights movement”. The reporter claimed that Deripaska had bought effective control of Magna with a fraction of its market price, acquiring a 42% stake in a new entity he and Stronach operated to control 68% of Magna.

The deal was eased by insider dealings, the newspaper said, and minority shareholders later charged in litigation to stop the transaction. The insider elements allegedly included direct cash payments Deripaska made of $150 million to Stronach himself, and $16.5 million in bonuses to five non-family executives of Magna. “The rationale of the deal is peculiar in the extreme,” the Toronto Star reported, calling it no more than an “estate-planning scheme by the 74-year old Stronach.”

In July Judge McMahon made public for the first time the terms of their scheme, reading them from confidential bank loan documents into the public record. “The Transaction involves the creation of a joint venture holding company “Newco”… capitalized by Frank Stronach and other existing senior executives of Magna with Class B senior voting shares of Magna, and take a number of Class A subordinated voting shares in return for N ewco shares. The end effect, taking into account the above mentioned capitalization and the subscription by Newco II of the 20 million Shares, is that Newco will hold approximately 16.5% of the economic value of Magna, and 68.8% of the voting rights. Veleron will also be issued shares in Newco in return for i) the provision of the USDI.54 billion financing to Newco II mentioned above and ii) a cash payment of USD75 million. Such shareholding in Newco will give Oleg Deripaska indirectly 25.5% of the voting interest and 6.9% of the economic interest in Magna, but more importantly, following various contractual arrangements between the shareholders of Newco, an effective joint control of Magna with the Stronach family.”

The “contractual arrangements” between Deripaska and Stronach have not yet been disclosed publicly. They are likely to be revealed in the court trial.

In the last days of September 2008, Deripaska is saying he won the agreement of BNP to avoid default on his $1.2 billion loan by a Kremlin-backed restructuring of the loan; that, Deripaska promised, would be delivered by October 15. Deripaska, his claim sheet says, had “written to the Russian Prime Minister [then Putin] requesting financial assistance from the VEB to protect Russian Machines’ strategic investment in Magna. Given the importance of the Russian Machines-Magna partnership to the Russian economy, BNP knew or should have known that a VEB-backed early repayment was, in fact, a viable and realistic probability.”

Putin with Deripaska

Putin with Deripaska, September 2008

BNP agreed on September 30, 2008, according to Deripaska’s court papers, but only on condition the associated banks also agreed. He is charging Morgan Stanley with ignoring that deal, and secretly profiting on its own by selling the shares.

The court has judged that the banks didn’t believe Deripaska’s undertakings on Putin’s behalf. With BNP, they insisted on conditions requiring Deripaska to prove Putin’s agreement, and VEB’s financial commitment to the bailout. They also demanded that Deripaska put up personal money of his own.

At Section 115, pages 29 and 30 of Deripaska’s claim sheet of August 2014, these conditions are revealed for the first time. They were set out by a letter of BNP to BasEl on October 2:

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In his submission to the court, Deripaska called these “additional outlandish terms for effectuating a restructuring.”The detail and the severity of the terms reveal that Deripaska’s bankers were calling his bluff. They appear not to have believed he would be able to persuade Putin to save the personal position he and Stronach had set up for themselves. They suspected the Kremlin didn’t think Magna was quite as strategic for Russia as Deripaska claimed. They insisted Deripaska put his hand in his own pocket to cover his mouth.

At Morgan Stanley, according to the interpretation by Judge McMahon, it was decided that if money was to be lost when the Magna shares tanked on the market, and if the Russians intended to default, the bank was obliged to act swiftly and premptively to cut its losses. “From the get-go,” writes O’Connor, “Morgan Stanley was not an enthusiastic participant in restructuring talks… In fact, Morgan Stanley wanted to pull the plug on the loan; but it wanted one of the other hedging banks or BNP to be the first to say no to restructuring.”

According to the judge, Morgan Stanley made a profit on its Magna share trading, a loss on its obligations to BNP, and a modest net profit. “As the loan could not be repaid in full from the proceeds of the liquidation, Morgan Stanley was required to pay BNP $6.6 million under the Swap… However, by covering its short positions in the ABB, Morgan Stanley had mitigated its loss on the Swap to the extent of $4.59 million, leaving it with an overall loss of approximately $2 million on the Swap… For its services as disposal agent, Morgan Stanley was paid a fee of $9,466,433.50… It also earned $590,000 in commissions as a result of the liquidation…All in all, Morgan Stanley made about $8 million under its various contracts with BNP regarding Veleron/Magna.”

In Veleron’s court claim, it is charged that Morgan Stanley’s violation of its contractual duties, breach of secrecy, market manipulation and insider dealing had “reap[ed] tens of millions of dollars in profits and fees while causing Veleron to be damaged in an amount in excess of $800 million”.

The judge has reported that a total of $748 million was recouped for the loan from the sale of the collateral. That left a deficiency of $79 million owing from Veleron to BNP. Veleron refused to pay, so BNP went to the London Court of International Arbitration to enforce Deripaska’s repayment guarantee through Russian Machines. That was a confidential proceeding. According to the US court, the London arbitrator “found the guarantee to be valid and binding and held Russian Machines liable for the entire deficiency. To frustrate BNP’s ability to collect on its award, Deripaska promptly placed that corporation into insolvency proceedings in Russia.”

In subsequent open UK court proceedings, BNP has accused Deripaska of colluding with the Russian courts to invalidate the Russian Machines guarantee, and prevent the collection of its debt; with the elapse of time this had grown to $80 million. Between 2010 and 2012 the High Court in London and the Court of Appeal have ruled against Deripaska. For more details, read this.

In New York McMahon has now dismissed most of Velderon’s charges against Morgan Stanley, including one of market manipulation in the Magna share selloff. But she has also rejected Morgan Stanley’s motion to dismiss the case entirely, accusing the bank’s lawyers of “pure pettifoggery” – “rarely have I heard a sillier argument.” She has ruled: “After a full review of the record submitted by the parties and the arguments they have briefed, my instincts are for the most part confirmed; while Veleron’s market manipulation claim must be dismissed, its insider trading claim is very much alive.”

Lawyers in the case say the two-week trial will wind up on Thursday when closing arguments are presented.

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