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By John Helmer, Moscow

One day in October the Financial Times newspaper went public with an endorsement of the truthfulness of Sergei Pugachev (lead image). On the same day, further down the Thames Embankment on the Strand, Pugachev was trying to convince the High Court of the same thing. Two reporters of the newspaper, Catherine Belton and Neil Buckley, fell for him. Justice Sir David Richards, the High Court expert on insolvency, didn’t. By British standards of evidence, that makes Belton and Buckley fools, liars, worse.

Pugachev has been a man who needed a beard. An unremarkable figure in Russian business, he tried to appear more than he was. He wasn’t the first to use his access to Kremlin officials, including President Vladimir Putin, in order to take assets from the state; leverage them through state banks into cash; spirit the cash out of the country; lavish some on himself; hide the rest. Pugachev’s scheme was to take two St. Petersburg shipyards, Baltic and Northern, from Defense Ministry control, but not because he wanted to do shipbuilding for a living. Rather, he calculated he could succeed where his predecessors at the shipyards – Vladimir Potanin, Boris Kuzyk, Alexander Nesis — had failed. By leveraging the asset value of the yards and diverting the state ship procurement budget into a pocket bank called Mezhprombank, Pugachev made himself very rich; the shipyards, then the bank very broke.

dangerPugachev has distinguished himself by the size of his leveraging – in 2009 more than half of the Central Bank’s entire unsecured lending to Russian banks was to Pugachev — and by his choice of New Zealand as the hideout for his holdings. The disclosure that Pugachev was hiding vast sums in New Zealand family trusts was first reported in 2005, in a bond prospectus drafted by the bank, Dresdner Kleinwort Wasserstein. The Kiwi connexion was reported here. Pugachev named his NZ trusts after a New Zealand parrot called the kea (above).

A husband-and-wife law firm in Auckland, Patterson Hopkins, which makes a business of creating and representing front companies, testifed in the High Court that William Patterson and his wife were the “sole shareholders” of the Kea trusts; that none of their assets had been placed there by Pugachev; and that no income from the trusts had gone to Pugachev. The court didn’t believe them.

According to the FT’s Belton (below left) and Buckey (right), “Pugachev [centre]– whose business interests once spanned banking, construction and shipbuilding – was a towering figure of those years.”

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Not even Standard & Poors (S&P), the international corporate ratings agency, thought so at the time. In February 2008, it issued a report warning that Mezhprombank’s bank’s lending and capital were highly concentrated among related parties, especially Unified Industrial Corporation, Pugachev’s Moscow holding.

The bank, said S&P, was characterized by “the absence of an accurate strategy for attracting finance; an unclear strategy of development, in particular concerning retail business; insufficiently developed systems of risk-management and high level of risks.” S&P said it wasn’t sure what might happen to the bank’s capital if the financial markets turned “adverse”. By November of 2008, that is exactly what happened. Then too, there were no buyers for the shipyards – and no state underwriting or guarantees for their order-book. As the cash dried up, Pugachev’s other schemes – licences for undug coalmines in Tuva, influence-buying in London with a nephew of the Queen, an evening newspaper in Paris – failed. For more, read here. For readers with a genuine interest in Russian shipbuilding, click.

By May of 2009, the Central Bank had decided to extend no fresh credits to Pugachev, and required him to put up the shipyard assets to collateralize its previously unsecured loans. A Central Bank audit revealed that less than 6% of Mezhprombank’s lending was to entities outside Pugachev’s influence or control. Officials inside Mezhprombank revealed the bank was lending to hundreds of Russian companies, and the funds transferred offshore to parent entities registered in the British Virgin Islands, Liechtenstein, Switzerland, and elsewhere. The business was so preoccupying, Pugachev, a senator representing the Republic of Tuva, didn’t have time left over: he set the chamber record for non-attendance.

Pugachev controlled the scheme through trusts and family members. A detailed analysis by Svetlana Petrova appeared in Vedomosti, the FT’s sister paper in Moscow, in November 2010.

The FT reporters in London haven’t read it. Instead, they endorse Pugachev’s denial of wrongdoing. “He claimed Mezhprombank’s bankruptcy was the result of a Kremlin campaign to seize the controlling stakes he held in Russia’s two biggest and most modern shipyards at a knockdown price. The businessman is preparing to present evidence in a London court that he said will prove the bankruptcy was part of a state ‘raid’ on his empire, as he seeks to fend off a freezing order on his international assets issued in July by Russia’s Deposit Insurance Agency.”

That was printed on October 9. Unaccountably, Belton and Buckely weren’t in the court room on October 8 or 9, when Pugachev’s lawyers made their presentation. Nor have the two reporters read the judgement of Justice Richards, which was issued on October 30. Pugachev tried to keep the court proceedings secret, alleging the Kremlin had sent agents after him, his houses, and his loved ones. The judge dismissed that, declaring “this hearing should to the maximum extent possible be in public.”

richardsAccording to the 60-paragraph ruling by Richards (right), Pugachev is a liar. Here is the full text. High Court judges have a special way of calling people liars. This is how Richards did it to Pugachev.

The judgement records that Pugachev left Russia permanently in early 2011, weeks after Mezhprombank had been declared insolvent on an application by the Central Bank to a Moscow court. The court-appointed liquidator, the state Deposit Insurance Agency (DIA) and the bank itself, declared the deficiency on the bank’s books amounted to Rb70.1 billion (then $2.2 billion). That was roughly double the amount of the unpaid Central Bank loans.

They went to court in Moscow for recovery. Because Pugachev made his home in London, DIA applied to the High Court for a freeze order against Pugachev’s assets worldwide, in order to conserve them for the outcome of the litigation. henderson In July, in a hearing which Pugachev managed to keep secret, Justice Sir Launcelot Henderson (right) agreed to issue the injunction. This freezes assets up to a value of £1,171,490,852. As the DIA pursued what it could find of Pugachev’s assets, the Kea trustees – funded by Pugachev – went to the High Court to challenge the Henderson order, claiming the freeze didn’t apply to them or to the assets the Kea trusts control, because Pugachev didn’t control the trusts.

Henderson’s order of July 11 was an injunction in support of the Russian court proceedings. It was not a ruling on the claims between Pugachev and the liquidators, nor a judgement of Pugachev’s veracity. The Richards judgement, however, is the first ruling by an international court on whether Pugachev is credible.

Referring to Stephen Smith QC, advocate for DIA and Mezhprombank, the judge writes: “Mr Smith submits that the evidence discloses good grounds for supposing that Mr Pugachev is in a position to control assets held within the trust structures. I agree with this submission, on the basis of some of the evidence on which the claimants rely.” Patterson, the NZ trust operative, is dismissed as misleading and unbelievable. “Mr Patterson says nothing to suggest the substantial involvement in the discretionary trusts of anyone other than Mr Pugachev.”

The evidence, now accepted by the London court, is that “one of the trusts indirectly owns Mr Pugachev ‘s principal residence in central London. The evidence shows that, while he is liable to pay a significant amount of rent for his occupation, the rent was allowed to accrue without being paid and, it appears, he can dictate or at the very least influence when, and even perhaps if, it is paid. Further, Mr Pugachev and his family have clearly enjoyed a very expensive lifestyle, but none of his disclosure indicates how it was funded. The absence of such disclosure gives rise to a reasonable inference that it was funded by companies held within one or more of the trusts.”

“There are clearly strong connections between Mr Pugachev and the trusts, but neither he nor the trustees put forward any evidence to establish that they are at arms length. Trustees who conduct the affairs of a trust independently of a defendant whose only interest is as a discretionary or other beneficiary could be expected to come forward with evidence to establish that the trust’s directly or indirectly held assets were not under his control. This evidence does show that Mr Pugachev was accustomed to hold assets within trusts and the trustees in question were based at the same residential address in New Zealand as Mr Patterson and his wife. The claimants also suggested that the trusts may well own a business making artificial blood in the United States but this, it has to be said, was based on very flimsy evidence.”

Richards also issued a warning to Pugachev that if he continues to conceal the truth and hide his assets from accountability to the Russian, and now to the British court, he faces cross-examination – and if he lies, the risk of being held in contempt of the British court, a jailing offence. “The court has jurisdiction to order disclosure relating to the trusts for the purpose of ascertaining the true position, in particular as to the extent, if any, of Mr Pugachev ‘s control of assets held within the trust structures. Where uncertainty exists as to the true position of the assets owned or controlled by a defendant, the court has power to order the cross-examination of the defendant on his affidavits of disclosure. This is not a means of building a case for committal for contempt of court in failing to comply with the court’s order for disclosure but is essentially a form of oral discovery. A defendant may be cross-examined as to his possible ownership or control of assets, which have not been disclosed by him, where there is good reason to do so. Equally, in my view, the court has jurisdiction to order written disclosure.”

Pugachev is appealing. To the Financial Times he has leaked his lawyers’ papers claiming that without counting his trusts, he is worth “no more than about $70 million”. The DIA-Mezhprombank action for recovery, Pugachev charges, involves “illegal and dishonest methods”. The newspaper has not reported Pugachev’s trust scheme, nor the text of the Richards judgement against him.

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