By John Helmer in Moscow
A fresh bid has been launched in the United States to prevent De Beers from liquidating its Russian affiliate, Archangel Diamond Corporation (ADC), and calling off legal proceedings in Denver, Colorado, and in Stockholm to recover ADC’s mining right from two Russian companies charged with fraudulently expropriating it.
Also exposed to the scrutiny of the US court for the first time is the text of a proposal by De Beers to compel the ADC board of directors to block shareholder vote and approval on terms for paying ADC’s debts and restructuring the company; to accept the elimination, without compensation, of ADC’s minority shareholders; and to make ADC appear to be responsible for halting the litigation.
Documents filed in the US Bankruptcy Court in Denver on June 26 identify James Passin, Bruce Marks, and Clive Hartz. Passin represents the Cayman Island-registered Firebird Global Master Fund, which says it is owed €76,547 ($107,709) for a business loan to ADC. After De Beers, whose Luxemburg subsidiary Cencan holds 59% of ADC’s shares, Firebird is the next largest shareholder of ADC with about 18%. In the filing, Marks, whose lawfirm Marks & Sokolov is based in Philadelphia and Moscow, has been ADC’s lead attorney in the US litigation, and is owed $135,000. Hartz, a property developer in Western Australia, claims that ADC owes him $50,000 in unpaid director’s fees. Hartz is a small shareholder in ADC, and has served for many years as an independent on the ADC board, which is dominated by De Beers’s placemen. None of the three would respond to requests for comment on the record.
The publicly accessible petition has been filed in Denver, because the principal asset, which shareholders believe ADC still retains, is its legal case for compensation against the two alleged Russian raiders, Arkhangelskgeoldobycha (AGD) and LUKoil. AGD is wholly owned by LUKoil, one of Russia’s leading oil producers and exporters. Two well-known Russian businessmen, Vagit Alekperov, the chief executive of LUKoil, and Alisher Usmanov, a metals and mining magnate, are named in the US court papers as having participated with the two defendant companies in “a scheme of fraud, breach of express and implied contract, civil conpsiracy, intentional interference with contract, breach of fiduciary duty, and unjust enrichment”. ADC is claiming recovery of $30 million in investment, $400 million in its share of profits, and another $800 million in potential profits.
AGD and LUKoil, Alekperov and Usmanov all deny culpability, and have argued that the Colorado court has no jurisdiction over the claims. The Russians also argue that the Russian courts take priority, and have dismissed ADC’s claims. The recent US court record suggests there may be substantial evidence of LUKoil’s opperations in Colorado, if discovery orders issued by the Colorado judge are implemented. The three petitioners believe that ADC is at an advantageous point in the proceedings, and should not pull out now.
At stake is the Grib diamond pipe, discovered at Verkhotina, in the Arkhangelsk region of northwestern Russia, in 1996. Drilling, sampling and assaying by De Beers have estimated the value of the diamond deposit at between $8.2 billion and $9.7 billion at the diamond prices prevailing in the first quarter of 2008. ADC’s stake in the original project was 40%.
In January of this year, De Beers called off a joint venture with LUKoil to resolve the legal conflict, and revive the mining project over the next five years.
Since then, however, according to a source, who follows the company’s internal management closely, and others who have tried negotiating for a buyout of De Beers’s shares in ADC, “the De Beers management have been in a state of panic. Even more importantly, they do not have any money. My hunch is that whatever has been proposed is intended to stop the immediate cash-burn, and save face.”
Between January and May, the De Beers group managing director Gareth Penny, and shareholder and head of Canadian operations and mining, Jonathan Oppenheimer, rejected at least one proposal to buy De Beers out of ADC by paying the $9.9 million loan due from ADC to the Cencan subsidiary. Then on May 12, Cencan sent ADC a three-page letter offering “additional financial support to ADC in the context of restucturing of ADC” under the Canadian bankruptcy and insolvency statute. The letter offered to to $200,000 for “restructuring expenses and disbursements”, and up to $800,000 to pay off the first sum, and then unsecured ADC creditors.
DeBeers insisted, however, on several conditions for the offer, the outcome of which, the letter declared, “would result in Cencan owning 100% of the issued and outstanding shares of ADC, and ADC would cease to be a public company.” The ADC board was told that De Beers wanted “to ensure that no ADC shareholder approval of the transactions contemplated by the Proposal is required”. The board was also obliged to give its assent “without the need for an ADC shareholder vote.”
The letter made clear that, because Cencan would not agree to fund the arbitration proceedings against AGD in Stockholm, or the US case against AGD and LUKoil in Colorado, ADC should raise the money on its own to keep litigating. Alternatively, if it could not, “ADC should give consideration to terminating the Arbitration and the Litigation.., to the satisfaction of Cencan prior to the filing [of Cencan’s proposal].”
Penny and Oppenheimer were asked to explain why they had made these demands. They refused. They were also asked to explain their reason for abandoning the legal proceedings, and to say whether they consider it to be lawful, proper and right for the De Beers group to propose a reorganization of ADC on the conditions set out in the May 12 letter. Their spokesman told PolishedPrices.com they would not comment. De Beers is highly sensitive to its image in the US, following years of negotiations over diamond cartel claims by the federal anti-trust authorities
As PolishedPrices.com has subsequently reported, in June the Elliott Management Corporation of London and New York, a hedge fund specializing in litigation against deep-pocket targets, proposed to ADC to spend about $13 million, clearing the Cencan loan, buying De Beers out, and funding the ongoing proceedings. After due diligence last month, Elliott modified its proposal, reduced the cash offer, but continued to back ADC in litigating against the Russians. The modified offer was rejected, and Elliott withdrew. Further proposals to preserve the litigation were also turned down by the De Beers directors of ADC.
By then, however, Hartz had resigned from the board in protest at the liquidation terms of the De Beers proposal. His participation in the June 26 bankruptcy petition is the first public acknowledgement of his opposition to De Beers.
Smaller stakeholders in ADC are not less furious. According to one, “the only way to get anything that resembles a fair result for the minority shareholders is to write to both the judge in the LUKoil case and the Bankruptcy Court.” ADC’s only official statement on the bankruptcy move has been to acknowledge to the market that the application was filed last Friday.
Speculation that De Beers may be concealing a bilateral arrangement with AGD and LUKoil has been fueled by the disclosure on AGD’s website that it has contracted with a De Beers service unit for technical work for payment of $847,518. A source close to ADC told PolishedPrices.com that the contract was a brief one; that it ended in March; and that he is not aware of any extension. Acting head of AGD, Maxim Meschyarkov, did not respond to a request for information about his company’s current relations with the De Beers group. Penny and Oppenheimer decline to say if they know of any forward undertakings or understandings De Beers may have with the Russians.
Legal experts believe De Beers will do everything it can to keep out of the US courts, and to avoid facing claims by the three petitioners of wrongful conduct towards the ADC minorities. There is also no telling whether De Beers will attempt to put a stop to the new US court challenge by paying ADC’s creditors out, or to move the proceedings to Canada, where ADC board chairman and longtime De Beers supporter, Robert Shirriff, served until this year as a director of the Ontario Securities Commission.