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SERGEI FRANK AND SOVCOMFLOT SUFFER FINAL DISGRACE – UK HIGH COURT ORDERS MULTI-MILLION DOLLAR COMPENSATION

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By John Helmer, Moscow

The Russian state shipping company Sovcomflot and its chief executive Sergei Frank (lead image, right) have been ordered to pay “tens of millions of dollars” in punitive compensation to exiled shipowner, Yury Nikitin (left). A UK High Court judgement late last month concluded a record 11-year litigation by condemning Frank’s dishonesty in fabricating evidence in the case, and freezing hundreds of millions of dollars of Nikitin’s funds. Frank and his Sovcomflot subordinates were judged to have been more culpable than the court’s findings that Nikitin had been dishonest in paying bribes to win new vessel and tanker charter business.

The High Court judgement, which has gone almost unreported in Moscow, was issued on August 26. The 40-page ruling by Justice Sir Stephen Males flatly contradicts international bond and share sale prospectuses which Sovcomflot has been circulating in international markets. The judgement may blackball Frank as unfit to manage or direct an internationally listed company in future.

“The potentially devastating consequences of a freezing order have often been recognised,” ruled Justice Males. “It is only just that those who obtain such orders to which they are not entitled, a fortiori when they are guilty of serious failures to disclose material facts and have pursued claims described by the trial judge as ‘obviously unsustainable’, should be ordered to provide appropriate compensation for losses suffered.”

“If the Kremlin still hopes to privatize Sovcomflot with the sale of shares to international investors,” commented a London investment banker, “it will have to replace Frank, and purge the company and the board of everyone responsible for the London case.”

The pursuit of Nikitin, together with Dmitry Skarga (below, left), the chief executive of Sovcomflot until Frank took the job in 2004, and Tagir Izmaylov [2], former chief executive of the associated company Novoship, has been described [3]by the UK Court of Appeal as “vindictive”. The same judgement was issued by several High Court judges. Sovcomflot’s attempt to appeal was dismissed [4] by the Supreme Court, the UK’s highest tribunal.

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Aiding Frank, according to the evidence in the court papers, were Gennady Timchenko (above, centre), the oligarch who planned to privatize Sovcomflot for his benefit and his family, which is linked by marriage to Frank; Igor Sechin, the former Kremlin official in charge of oil, ports and shipping; and Igor Shuvalov, a former Sovcomflot board chairman who is currently deputy prime minister.

After the British courts dismissed Sovcomflot’s civil fraud claims, criminal charges making the same allegations against Nikitin and Skarga have been continued by Russian prosecutors under Yury Chaika; he has been Prosecutor-General since mid-2006. According to the latest London judgement, extradition applications with these charges have been dismissed by the British authorities, and Nikitin, Skarga and Izmaylov granted exile. They cannot return home.

Frank is permitted to enter the UK. Timchenko cannot; he is currently under US and European Union sanctions. Frank has not been sanctioned [6] so far, though the US began last week to sanction for the first time Russian ports, shipyards and the shipping company, Sovfracht.

Mike Lax (right), the London maritime law specialist who has represented Nikitin,image014 [7] said: “So, after 11 years of litigation, what have Sovcomflot got to show for it? [Nikitin] will have recovered a lot more than he paid out to Sovcomflot, and Sovcomflot are left with a massive bill, not to mention the disruption to manpower and loss of credibility after fighting for so many years. Was it really prudent for SCF to make no provision in their accounts for this outcome?

Lax is referring to the disclaimer which Sovcomflot published in its prospectus for a $750 million bond issued in June. Sovcomflot had told [8] bond buyers it faced no likely chance of having to pay up. “These defendants [Nikitin] are currently seeking damages allegedly suffered as a result of the freezing orders being in an amount that exceeded the sums recovered under the Fiona Judgment. The defendants in the Fiona Litigation filed claims against the Group companies on a variety of bases, claiming between US$ 73.5 and US$ 387.8 million, plus interest until the date of payment. A two-week trial for this claim has been fixed to commence on July 4, 2016, and will include consideration of various procedural filings by the various parties. Management believes that the defendants will more likely than not fail in their claim against the Group, even if they are permitted to proceed with it following the consideration of the procedural issues in the case. Accordingly, the Group will defend its position vigorously, and no provision has been made in the Group’s consolidated financial statements.”

In the last financial report released to the market in its bond prospectus, Sovcomflot said its profit for the first quarter to March 31, 2016, was $103.1 million. In the full year 2015, the bottom-line was a profit of $354.5 million; in 2014, a profit of $83.9 million; and in 2014, a loss of $39.2 million. For the full financial picture, read this [9].

In his ruling Justice Males (right) summarized the case this wayimage016 [10]: “[Nikitin] and companies controlled by him faced claims in this action for damages in excess of US $577 million. Those claims involved wide ranging allegations of bribery, corruption and diversion of assets. They succeeded only to a very limited extent after a trial lasting six months, with judgment being given in December 2010 for some US $16 million plus interest, but otherwise they failed (see the judgment of Andrew Smith J at[2010] EWHC 3199 (Comm), which I shall call the “liability judgment”). Despite dismissing most of the claims against Mr Nikitin, Andrew Smith J made damning findings about his honesty and credibility. So too did Christopher Clarke J in another case in this court, Novoship (UK) Ltd v Nikitin [2012] EWHC 3586 (Comm). In fairness, however, I should add that Andrew Smith J had some equally harsh things to say about the conduct of the claimants (the Russian state owned shipping company OAO Sovcomflot which is the largest Russian owner of tankers and other commercial vessels, together with a number of its subsidiaries) and the honesty and credibility of their witnesses, including Mr Sergei Frank who was the Russian Minister of Transport between 1998 and February 2004 and since October 2004 has been the Director-General of Sovcomflot.”

For the full text of the judgement, click to open. [11]

The first freeze, $225 million, was introduced in August 2005. It was lifted quickly after Nikitin paid into the court $208.5 million. In May 2007 another $278 million was frozen. The new ruling by Males found there was a significant loss for Nikitin on the first order and amount. On the second, the judge decided: “The defendants [Nikitin and his companies] have failed to prove any loss suffered as a result of the 2007 order. Accordingly the question whether the defendants have suffered a loss as a result of the freezing orders arises only in relation to the 2005 order.”

Males ruled “the impropriety of the claimants [Sovcomflot] in obtaining the orders outweighed the misconduct of Mr Nikitin on which the claimants relied…when they applied for the orders, the claimants committed serious and culpable breaches of their duty of full and frank disclosure, both in 2005 and in 2007. In brief, they failed to disclose in 2005 that (1) many of the transactions of which they complained had been considered by and were carried out with the approval of the Executive Board of Sovcomflot and (2) Sovcomflot had had the wrongdoing of which it complained investigated by investigators who had, to Sovcomflot’s knowledge, used unlawful methods to obtain information. In 2007 the claimants misled the court regarding both these matters.”

Regarding court findings on Nikitin’s dishonesty, read this [12].
Regarding the court’s findings of Frank’s dishonesty, read this [13].

Nikitin’s lawyers have argued that his net losses during Frank’s freeze would have been $387 million if he had been free to invest his money in shipping; $121 million if he had invested in a “moderate risk” investment portfolio; or $51 million if he had placed the cash at prevailing money market rates.

Males ruled, as did the judges before him, that “a businessman with Mr Nikitin’s entrepreneurial flair, which he undoubtedly has although it is overlaid by his dishonest conduct, would have made profits from the shipping sector had he been free to deploy his funds.”

“The evidence is clear,” wrote Males, “that the [ship] yards’ willingness and perhaps even enthusiasm to take Mr Nikitin’s money would not have been affected in the slightest by knowledge that he was accused of dishonesty which, in 2005, had not been proved (and in due course was not proved to anything like the extent alleged)… Closer to home, the findings of dishonesty made against Sovcomflot and its Director-General Mr Frank in this action have not prevented it from placing orders for newbuildings with the Korean yards. Nor would the consciences of the broking experts in this case have prevented them from acting as brokers for Mr Nikitin if given the opportunity to do so. I see no reason to think that their attitude was other than typical.”

The judge concluded that for calculating the damages that Sovcomflot must now pay to Nikitin, the first sum frozen of $208.5 million would have been invested in shipping, and the losses calculated accordingly. “I conclude, therefore, that on the balance of probabilities Mr Nikitin would have sought to invest the funds which were in the event lodged in the Lawrence Graham [law firm] account in such a programme.”

The compensation formula ordered by Males against Sovcomflot adds up to between $40 million and $50 million, after interest and legal costs have been included.

The Norwegian maritime publication, Trade Winds, whose editor, Julian Bray, has been a special friend of Frank’s throughout the litigation, reported the outcome of the case in reverse.

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There has been a blackout of the conviction of Frank and of Sovcomflot’s new losses in the Moscow business media.