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By John Helmer

Sergey Frank, Sovcomflot’s chief executive, has testified in the High Court that he knew nothing about an illegal information- gathering operation, targeted against his rival and former CEO, Dmitry Skarga, but that the figure in charge, who is referred to in the court evidence, may have been Russia’s Deputy Prime Minister, Igor Shuvalov, chairman of the SCF board until last year.

Frank and his company charge Skarga and SCF’s former chartering partner, Yury Nikitin, with fraudulent ship sale and lease-back transactions, and receiving kickbacks on hull sales and shipyard orders. The lawsuit was initiated almost four years ago, after Frank, a federal transport minister, had been dropped from the government, and appointed to the shipping company instead. Skarga was then moved by the Kremlin to the Federation Council, the upper house of parliament, to be Senator for Volgograd.

In June 2005, referring to Nikitin and Skarga, Frank claimed in an interview at his office with Fairplay that “Mickey Mouse intermediaries” were to blame for “long fixes” — long-term charters of the SCF oil tanker fleet — instead of the more lucrative spot-market fixes, which Frank claimed had lifted the company’s fleet operating revenues by 9% in the first quarter of that year, his first in charge of the fleet company. Frank also charged in the Fairplay interview that the sale of four Suezmax tankers by “the previous management” was “a mistake”. Frank then told Fairplay that he had appointed “lawyers and auditors [who] are analyzing [the deals].” He named Moore Stephens as the auditors he had commissioned.

The Moore Stephens reports, which have been submitted to the High Court in evidence, are dated April 29, 2005, and July 28, 2005. Attached to the first report dealing with the sale of four newbuild hulls, a letter addressed to Frank concluded: “based on the work we carried out during our audit, no evidence came to our notice that would indicate improper conduct by the management of Sovcomflot…”

Attached to the second report, dealing with the sale and lease-back of four tankers, a letter signed by Moore Stephens to Frank, also dated July 28, 2005, concludes: “no evidence came to our notice that would indicate improper conduct by the management of Sovcomflot…in connection with the sale and leaseback transactions.” The auditors also found that “no other large or [un]usual payments, commissions, or settlements came to our attention.” On the issue of whether the deals had been arranged at below market value, Moore Stephens told Frank: “we have seen no evidence that indicates there was any impropriety…”

The High Court is now hearing evidence that, when Frank failed to find the evidence he was looking for, he started Operation Sturgeon. This was a secret engagement of two detective firms, Modus and Hart. Hart, according to the court testimony, was part-owned by Nicholas Fairfax (pictured far right), a London protege of Frank’s, and today a London-based director of Sovcomflot. According to Skarga, during his term in office he refused several times to employ Fairfax.

At Frank’s direction, and with Fairfax’s involvement, the court was told on Friday that “the claimants [SCF], we know, have spent hundreds of thousands of pounds — during the course of cross-examination your Lordship will see some of the invoices — and they have deployed means both lawful and unlawful, available to them and to the Russian state in general, to find evidence that would implicate Mr Skarga in receiving bribes or secret payments from Mr Nikitin, or Mr Nikitin in paying such bribes.” According to the court testimony, Operation Sturgeon has involved break-ins and raids on private homes and offices; a raid on the home of Nikitin’s mother; seizures of computer hard drives; and illicit penetration of computers and bank account data in the UK.

Under questioning yesterday in the London court, Frank admitted that he knew of the investigations, but had nothing to do with giving them orders to operate illegally. “I was briefed from time to time by the legal team about that,” Frank said in court. But when asked whether “you personally continued to be involved in giving instructions to the investigators, and you knew jolly well [what they were doing]”, Frank claimed he knew nothing.

Asked then about a meeting between the detectives and the “chairman of Sovcomflot” on March 13, 2005, Frank said: “I am not the Chairman of Sovcomflot; I am the CEO of Sovcomflot.” The chairman at the time, Frank told the presiding judge, Justice Andrew Smith, was “Mr Shuvalov. But it is very difficult to imagine that he met with the people.” Pressed by further documentary evidence that it had been Frank, who had discussed the operation with the detectives, Frank insisted it was not him. “Maybe they are referring to the Chairman of Sovcomflot. I am not sure. I am not the Chairman, sir.”

Skarga and Nikitin say the charges against them have been fabricated as part of a personal and political vendetta, after Frank had tried, but failed to block the then 29-year old Skarga’s appointment to run SCF in 2000. The trial, which is scheduled to hear witnesses and shipping experts over several months, is expected to focus on whether the rise and fall of the oil tanker market was the conspiracy Frank and Sovcomflot claim it to be, in retrospect.

As the chart illustrates, when Skarga took over management of Sovcomflot in 2000, the tanker index went into decline. During that period, Sovcomflot contracted tankers on long-term charter rates to conserve income against the risk of a deeper downturn; the rates, according to Moore Stephens, reflected the going rates at the time. After Frank took over, however, the tanker rates shot up to record highs. But Frank found himself unable to terminate or convert the long-term charter contracts to take advantage of the spot market. For this, he not only blamed Skarga in media interviews. He initiated the investigations that have led to this week’s trial in London. Only now tanker rates have plummeted to a much lower level than during Skarga’s tenure.

But now Frank is claiming public credit in the official reports of the company for maintaining roughly 60% of the fleet on long-term charter contracts. According to Sovcomflot’s latest financial report, issued on September 23, Frank claims “the first half of this year proved to be a challenging time for the shipping industry. However the scale of the Group’s operations and our conservative chartering policy, combined with our industrial projects that provide considerable forward contract cover, allowed us to be much less impacted than many other players.” For “conservative chartering policy” and “forward contract cover” in Frank-speak, read Frank’s criticism of Skarga in 2005 for using “a pricing model [that cost company revenues] a substantial discount”.

In the court proceedings on Friday, the lawyers for the defence told the judge that Frank had not been acting alone, and that supporting him was Gennady Timchenko, one of the most powerful businessmen in Russia. Timchenko was identified in the court proceedings on October 2 as the “shadow client” in Sovcomflot’s lawsuit. He was described as “part of a faction…that is bringing this claim….”

On October 5, Timchenko was again named in court. This time, Frank was asked to explain how it could have happened that he, the Minister of Transport, was overruled when he backed a rival candidate to run Sovcomflot, and Skarga won the job instead. “There were three people who were promoting the appointment of Mr Skarga, all right,” Skarga’s barrister Graham Dunning told the judge. “There was Mr Timchenko, who knew Mr Putin from the time when Mr Putin was the Deputy Mayor of St Petersburg. There was Mr Sechin, and there was Mr German Gref, the Minister of Economic Development; and those three were pushing for Mr Skarga to be appointed as Director General of Sovcomflot.”

Frank was asked to confirm. He replied that he didn’t know. “I can agree with you,Mr Dunning, that Mr Gref was the second person who has been enthusiastic about the promotion of Mr Skarga, but as for the two other gentlemen which you mentioned, I don’t have any information at all that they are behind this promotion.”

The involvement in evidence of Prime Minister Vladimir Putin; Deputy Prime Minister Igor Sechin; former minister German Gref, now head of the state savings bank, Sberbank; as well as Deputy Prime Minister Shuvalov, raises the stakes for Frank, and for the Russian government, as the evidence of a political plot to exact vengeance and financial advantage from oil tankers is presented. According to Dunning, “I suggest that what happened is that you [Frank] gave your consent because Mr Sechin gave you a choice: either consent or resign.” Frank replied: “No, this is really wrong and funny statement. I never spoke with Mr Sechin on this issue. I don’t know that you have the facts really to prove your allegations.”

At this point, Justice Smith announced that this is exactly what he will have to uncover, as the case proceeds.

Guide to illustration:
According to public records retrieved in Luxembourg and France, the Hotel Club de Cavaliere, which is open to the public at Lavandou, near St. Tropez, is owned by Sogeco, a company whose ownership is divided between Gennady Timchenko and his wife, Elena Timchenko. The Luxembourg company register identifies them as co-owners when Sogeco Participations was established and registered on December 14, 2004. Subsequent French corporate records identify Elena Timchenko as the legal representative of Sogeco Holding, and President of SAS Le Club de Cavaliere. By a legal process of merger dated July 31, 2005, and signed by Mrs Timchenko, she became the principal manager of the hotel business, and with her husband, the principal beneficiaries of the hotel’s profits.

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