Email This Post - Print This Post Print This Post

By John Helmer in Moscow

Victor Chernomyrdin, one of the creators of Gazprom and Boris Yeltsin’s prime minister from 1992 to 1998, once famously said :“we wanted to do the best, but it came out as always”.

What the sly duffer meant was: “we tried to serve a better interest than our own, but only fools believe it.” That was what made Chernomyrdin famous, and also rich, in that benighted time.

High state intervention on behalf of Russian wrongdoing in Switzerland wasn’t Chernoyrdin’s subject; but it might well have been so, because the Swiss demonstrated last week that, when it comes to criminal manipulation of their stock market, President Dmitry Medvedev had wanted to do the best — in vain.

During his visit to Berne on September 21, Medvedev attempted to relieve the pressure on Russia’s principal investor in the Swiss stock market, Victor Vekselberg. There was an implied threat from the Kremlin — unless the Swiss dropped, or went soft in two parallel proceedings against Vekselberg by the Financial Market Supervisory Authority (FINMA) and the criminal law department of the Federal Department of Finance (FDF), the flow of Russian cash into Swiss institutions might dry up, or reverse out.

The Swiss were able to agree with Medvedev that there is no problem in their handling Russian money, whatever laws may have been broken before it crosses the border, so long as once inside Swiss bank vaults, it’s the Swiss banks which manage the handling. The problem with Vekselberg is that he used his cash to buy control of two of Switzerland’s most important publicly listed companies – and he won’t leave it to anyone else but himself to run them. According to Vekselberg’s version of the story, he is under attack in Switzerland by the forces of envy, disgruntlement, corporate rivalry, and xenophobia. According to the Swiss government, Vekselberg’s trouble started because he’s been manipulating the Swiss stock market, illegally.

Medvedev’s position-taking on the point was a fizzer. So Finance Minister Alexei Kudrin tried again this past Friday, at the Davos Economic Forum, the annual grand slalom of big-money hustlers. Kudrin told Hans-Rudolf Merz, his Swiss opposite number, that Moscow is “concerned” about the regulatory penalty imposed a few days earlier on Vekselberg for count-1 in the stock market investigations. According to Kudrin: “I do not believe this will improve Swiss-Russian relationships.”

What had happened was that, on the day before, the FDF levied a fine of 40 million Swiss francs ($38 million) on Vekselberg for violating the disclosure, concert-party, and price-rigging rules of the Swiss stock market in 2006, when he and two Austrians bought a controlling stake in the Oerlikon industrial engineering group. The Austrians, Ronny Pecik and Georg Stumpf, were each fined the same amounts. The total , CHF120 million ($113 million), is something of a record in Swiss stock market annals.

The Swiss finance ministry had ruled last December that Vekselberg, Pecik and Stumpf had formed a share-buying group, which should have been disclosed; and that their tactics had shaved the price of the Oerlikon shares they had acquired. At present, Vekselberg is reported to own 45% of Oerlikon; Pecik, another 12%. On disclosure of the long delayed finance ministry ruling against Vekselberg & Co., compounded by other troubles, Oerlikon’s share price dived from 59 francs to 28 francs. At the start of 2006, before Vekselberg’s takeover began, the share price was CHF200. It then ran up to a peak in March of 2007 of CHF764.

Oerlikon’s total debt is currently about CHF2.5 billion ($2.4 billion), and its earnings have been lost to lagging global demand for its machine products. Vekselberg’s scheme to refinance the debt was announced in December; yet to be finalized, this involves a debt for equity swap with the banks, which threatens to dilute minority shareholders. Vekselberg has complained about the timing of the fines – equal to one-quarter of Oerlikon’s current market capitalization of CHF427 million ($402 million) – although he and his lawyers have been pressing for delays in the FDF investigation.

“Of course I am disappointed,” Vekselberg told the press last week. “It was a surprise for me. We don’t see any serious arguments for this decision. We did everything in a timely and transparent way.” He then repeated the warning to the Swiss government that, if it keeps pressing him on the market rules, other Russians may pull out of the market. “People are bound to rethink,” Vekselberg claimed.

A statement by Vekselberg’s Renova holding in Moscow declared: “Renova Group denies these unproven allegations and asserts that it has always meticulously upheld all legal rules within the area of its responsibility and influence, including disclosure laws. The purchase of OC Oerlikon shares in 2006 by Renova was reported properly. The registration of a group with Oerlikon’s other large shareholder Victory was also made, once it became legally necessary in 2008.

“The penalty imposed by the Swiss Federal Department of Finance on Victor Vekselberg wrongfully punishes ordinary market behavior by investors and is arbitrary and biased. This penalty on Mr. Vekselberg was taken immediately after Oerlikon announced the start of negotiations on restructuring its debt with creditor banks and began implementing a major contract on the supply of equipment for the production of solar panels to Russia.

“The decision of the Federal Department of Finance may cause massive damage to the overall investment climate in Switzerland and business of foreign companies in the country. Victor Vekselberg will contest this penal decision of the Swiss Federal Department of Finance in court.”

The Swiss government’s proceeding for the Oerlikon takeover is not the only one threatening Vekselberg. In April of last year, the FDF formally announced that it had “opened criminal administrative proceedings against Ronny Pecik, Georg Stumpf and Viktor Vekselberg on suspicion of violation of their disclosure obligations under the law governing stock exchange transactions while building a stake in Sulzer AG.” Sulzer is another important Swiss manufacturing concern, also publicly listed, and also the target of a Vekselberg takeover. At present, Sulzer has a market cap of CHF3.1 billion. Vekselberg is estimated to own about 31% of the company.

According to the Swiss government announcement, “based on the complaint made by the Swiss Financial Market Supervisory Authority (FINMA) on 2 March 2009, the Criminal Law Division of the FDF came to the conclusion that there were sufficient indications to suspect that Ronny Pecik, Georg Stumpf and Viktor Vekselberg had acted in concert when building a stake in Sulzer AG from November 2006 to April 2007 and in doing so had violated their disclosure obligations. As part of the criminal administrative proceedings, the Criminal Law Division investigates not only the events that incriminate the persons concerned but also those acting in their favour. Unless and until a conviction is secured, the presumption of innocence applies. In view of the extent and complexity of this case, the proceedings will continue for some time to come. The FDF will report on the matter again only when the proceedings have been concluded.”

When Vekselberg & Co. started buying into Sulzer, the share price was CFH62; six months later, when they had what they wanted, the share price had shot up to CHF173. It is now CHF90.

Others already named by the FDF as culpable in the alleged Sulzer stock manipulation include a local bank, the Bank of the Canton of Zurich (ZKB), and Deutsche Bank’s Zurich affiliate. A public charge by the Swiss market regulator last August flatly contradicted the claim by Deutsche Bank’s CEO, Josef Ackermann that “we have done everything right”.

Sources close to FINMA chief, Eugen Haltinger, claim the evidence against Vekselberg is comprehensive and compelling; and that a conviction is likely to be recorded. But Haltinger has been unable to get his political superiors in the Swiss government to finalize the case. If the FDF finds against Vekselberg, an indictment for trial may be issued. And if that ends in a conviction, Vekselberg could be jailed for three years, or fined up to one billion Swiss francs ($970 million). On current calculations, that’s just about what Vekselberg’s stake in Sulzer is worth.

Vekselberg’s Renova holding, and his advisors, defend themselves by saying they have done no wrong in the Sulzer case. They counter-charge that rival shareholders and former senior executives at Sulzer are behind the campaign to prevent them exercising their voting power in the company. According to Vekselberg’s spokesman, Andrei Shtorkh, the Swiss claims are “absolutely unreasonable, as the transaction of the Sulzer shareholding acquisition was carried out in full conformity with the legislation of Switzerland operating at the time.” He adds that the government investigation was triggered by disgruntlement on the part of Ulf Berg, “the chairman of the board of directors of the company at that time [who] was dismissed from his post. He was actively trying to prevent Renova from securing legitimate shareholder rights at the first stage.”
Renova’s published code of business conduct expressly forbids “transactions by employees and representatives of Renova Group companies, whether acting on their own behalf or on behalf of Renova Group companies, are prohibited, if such transactions: create or are highly likely to create a wrong impression about the supply, demand or price in relation to one ore more securities; or enable pricing of one or more securities at an artificially low or artificially high level.”

Vekselberg’s men also acknowledge they know what an illegal concert-party formation is. “Execution of transactions between the companies of Renova Group and persons affiliated to the employees of Renova Group is prohibited,” says the Renova ethics book, “unless when the management of the Corporate Center is notified of such transactions prior to the date of the same and provided that such transactions are approved by it.”

The Oerlikon and Sulzer shenanigans are front-page news in Switzerland; they haven’t been ignored in Moscow either. But they ought to have big news in Hong Kong and Paris last month, when United Company Rusal, the private Russian aluminium monopoly, launched its initial public offering. As chairman of the Rusal board, Vekselberg presided at the first bell of trading in Rusal general depositary receipts on the Paris bourse (aka Euronext exchange). For some reason, however, noone has thought to estimate the Vekselberg risk in Rusal’s share value.

There are 34 mentions of Vekselberg in the recently issued 1,141-page Rusal prospectus, drafted by the Swiss bank Credit Suisse, and the Franco-Swiss house, BNP Paribas. If anyone should know what the Swiss market regulator and finance ministry are charging against Vekselberg, it’s those two.

Then there are the two international lawfirms, Linklaters and Sidley Austin, which are identified in the Rusal prospectus as expert advisors on Hong Kong law. They are bound to have read Sections 116, 129 and 134 of the Securities and Futures Ordinance of Hong Kong, which defines who may, and who may not be, a fit and proper person to run a company listed on the Hong Kong Stock Exchange: http://www.hklii.org/hk/legis/en/ord/571/s129.html#fit_and_proper

Vekselberg is identified in the Rusal prospectus as having merged his aluminium group, SUAL, into Rusal in 2007. From that merger, Vekselberg and his SUAL partner Len Blavatnik took a combined 18% stake in Rusal, making them together the second shareholding bloc in Rusal after the controlling stakeholder, Oleg Deripaska. Subsequently, Deripaska’s default on debts owed to Mikhail Prokhorov have elevated Prokhorov to the rank of second shareholder, and the SUAL group to third place. Vekselberg’s stake was slightly bigger than Blavatnik’s – 6.4% compared to 5.4%. Following the IPO and sale of 1.6 billion new Rusal shares, the prospectus reports that Vekselberg and Blavatnik own together 15.86%. Prokhorov owns 17.1%, and Deripaska, 47.6%.

The prospectus recites the career history of the 53-year old, Ukrainian born Vekselberg, and details the chain of companies – TCO Holdings, TZ Columbus Services, SUAL Partners, Renova Holdings, and Renova Metals and Mining Limited – through which Vekselberg owns his stake in Rusal. Concluding, the prospectus claims “Mr. Vekselberg has not held any directorship in any public companies the securities of which are listed on any securities market in Hong Kong or overseas in the past three years. Mr. Vekselberg was nominated as a non-executive Director of the Company by SUAL Partners as shareholder of the Company. Save as disclosed above, there is no other information which is required to be disclosed pursuant to any of the requirements under Rules 13.51(2)(h) to 13.51(2)(v) of the Listing Rules” (Rusal Prospectus, page 264).

A little further on in the small print, the Rusal prospectus concedes that the Swiss litigation targeting Vekselberg must be disclosed to new sharebuyers of Rusal. Here’s what is said:

“Litigation Involving Mr. Vekselberg
The Swiss Financial Market Supervisory Authority (formerly the Eidgenössische
Bankenkommission) (“FINMA”) commenced two administrative proceedings (eingreifendes Verwaltungsverfahren) against Mr. Vekselberg in the context of acquisitions of shares in OC Oerlikon Corporation AG (“Oerlikon”) and Sulzer AG (“Sulzer”), in relation to Oerlikon, on 20 June 2007 and, in relation to Sulzer, on 28 February 2007. The proceedings relate to an alleged failure by Mr. Vekselberg and other investors to comply with disclosure obligations under the relevant Swiss statutory provisions arising out of the above acquisitions. Both proceedings are currently with the Swiss Federal Department of Finance (Eidgenössisches Finanzdepartement) (the “EFD”). The proceedings have been and continue to be vigorously contested by Mr. Vekselberg. On 2 April 2009, the EFD issued a final protocol in the Oerlikon proceedings, stating that Mr. Vekselberg and other investors had violated their disclosure duties. The EFD may now render its administrative order for penalty (Strafbescheid) in the Oerlikon proceedings. It is not known when the EFD will issue the final protocol in the Sulzer proceedings. Accordingly, it is currently uncertain whether, and if so when, an administrative order for penalty will be issued by the EFD. If an administrative order for penalty is appealed, the order becomes an indictment before the Swiss Federal Criminal Tribunal (Bundesstrafgericht) for judicial decision.

The maximum penalty that it is expected could be imposed by EFD on Mr. Vekselberg in this respect is double the stock exchange price of the non-disclosed holdings at the date of the alleged non-compliance.”

This falls a little short of what was publicly disclosed at the time in Switzerland. It isn’t clear from the Swiss government announcements how the CHF120 million fine in the Oerlikon case was calculated in relation to the non-disclosed holdings in 2006-2007. But the size of the penalty risk in the Sulzer case, and the risk of a criminal conviction, aren’t made as clear as the disclosures in Switzerland.

If the prospectus falls a little short on that score, Vekselberg and his Rusal comrades might certainly say the point is arguable.

What can’t be argued in their favour is what they have left out of the prospectus of litigation that is currently proceeding against Vekselberg in at least two other international jurisdictions, and the meaning of the charges.

Vekselberg can’t have overlooked the first of them, because it is a racketeering case that has been before the US federal courts for a decade. According to the amended complaint of 2005, Vekselberg (Blavatnik, Renova, and many others) are charged with “a massive racketeering scheme to take over a substantial portion of the Russian oil industry…Through that illegal scheme, defendants took from Norex [the Canada-based plaintiff] control of Yugraneft, a Russian oil company, illegally obtaining much of Norex’s ownership of Yugraneft asnd reducing it from the controlling majority shareholder to a powerless minority shareholder… After the illegal takeover, Defendants have diverted profits from Yugraneft and also have deprived Norex of dividends from Yugraneft to which it is entitled.”

See details of Norex court claim, http://www.2shared.com/file/11044603/dc4195c0/JDASTI3001.html

Vekselberg has said he is innocent of Norex’s allegations of wrongdoing, and he has challenged the jurisdiction of the US courts to consider the case. Over the years, he has won some of the decisions; he has lost others. But the case is still pending, and oral argument on the jurisdiction issue was held before the Second Circuit Court of Appeal on February 4, 2009. A ruling is expected any time now. The liability to Vekselberg and his co-defendants in that case is $1.5 billion in damages. No reference to it can be found in the Rusal prospectus.

There is another claim against Vekselberg, which is also missing from the Rusal prospectus. This is proceeding in the courts of Cayman Island, and has been filed against Vekselberg’s holding Renova by Brian Gilbertson. The well-known South African was chief executive of Billiton, then BHP Billiton, and then Vedanta Resources, before he agreed to become Vekselberg’s appointee as chief executive of SUAL in 2004. When SUAL was merged into Rusal in 2007, Vekselberg nominated Gilbertson to become the new chairman of Rusal, before taking the chair for himself. Gilbertson charges Renova and Vekselberg with defaulting on a promised investment in a large joint venture. Renova is charging Gilbertson with going it alone, after Vekselberg and Gilbertson could not agree on their investment vehicle.

There is no trace in the prospectus of the exposure of Vekselberg’s reputation and pocket to the Gilbertson claim.

Leave a Reply