By John Helmer in Moscow
Herbies beats aluminium into profit shares
Herbert Smith, one of the largest billing of the UK law firms, has been forced to reveal this month in the UK High Court that it is charging the Tajikistan government more than $100 million for a 3-year court claim ordered by the Tajik President, Imomali Rakhmonov (Rahmon). Rahmon’s targets are a group of aluminium traders and managers, now based in London, who were ousted from the Tajikistan Aluminium Plant (TadAZ, Talco) after getting too close to the president’s interest in Tajikistan’s principal industry.
The fee numbers and estimates were part of the disclosures that were tabled in a High Court hearing on April 15, 2008, before Mr Justice Tomlinson. Herbert Smith is the law firm acting for the Tajik smelter (Talco), which is wholly owned by the Tajikistan government, and directly supervised by President Rahmon. The estimate of costs from Herbert Smith (aka Herbies in London legal slang) also covers barristers’ fees, which include those of Murray Rosen QC, who is acting for Talco on Herbies’ instructions.
Additional case fee charges of GBP10 million ($20 million) have also been revealed. These are being run up by a British Virgin Islands registered company called CDH, which is a cutout in the complex aluminium trading arrangements devised by Rahmon’s government between Talco and its Norwegian supplier and partner, Hydro Aluminium. CDH is being represented in the High Court by Osborne Clarke.
The total of $120 million represents 5.2% of the Gross Domestic Product of Tajikistan, the poorest of the former Soviet Union member states, in 2005, when Rahmon and the aluminium plant launched the court case against Avaz Nazarov, a Tajik national, who had traded with the plant until Rahmon ousted him in late 2004. After Rahmon’s plant sued Nazarov and the Ansol group of companies, and several others associated with their business, Ansol counter-sued, charging that the plant had defrauded the Nazarov group. Also included at the time in the counter-claim were Oleg Deripaska and Alexander Bulygin, who controlled Russian Aluminium (Rusal), when it persuaded Rahmon to oust Nazarov and Ansol, replacing them with Rusal. Also accused in the counter-claim was President Rahmon’s brother-in-law, Hassan Saduloev, Tajikistan’s most powerful banker.
That action also triggered a contract violation claim by Hydro Aluminium, which took its case to the London Court of Arbitration, claiming a total of $150 million in costs and losses. Herbies represented Talco in that litigation, which ended in a ruling in favour of Hydro. Herbies then represented the plant before the High Court and an appeals court in trying to keep the arbitration judgement against Talco from being published.
Ruling in that case, Justice Morison of the High Court’s Queens Bench Division wrote, in an opinion dated May 18, 2006, that Talco/TadAZ “are not the victims of fraud, they have been the perpetrators of it in this litigation…. [Talco] has been involved in deliberate attempts to mislead the [Arbitration] Tribunal and have committed acts which in this jurisdiction are serious crimes [forgery and attempting to gain a pecuniary advantage by fraud].”
Herbies decline to say how much they billed the Tajiks for that case. The judge was especially critical in his ruling of Simon Bushell, one of the Herbies lawyers involved in the case. “I regret to note,” Morison wrote in his opinion, “that his [Bushell’s] witness statements do not properly disclose who told him various things which he appears to assert are within his own knowledge. It is especially important…that Mr Bushell properly complies with the rules when making his statements…If ever there was a flimsy case, this is it…”
Bushell reports on the Herbies website that his “credentials” include representation of “Tajik Aluminium Plant in English High Court and BVI High Court proceedings alleging fraud and seeking the recovery of damages in excess of US$485m.”
Rusal agreed to settle out of court with Nazarov in 2007. After that, Rahmon and his government instructed Herbies to launch a new suit accusing Rusal of fraud. This was dismissed by the High Court; but as Bushell points out himself, it is currently being pursued in the British Virgin Islands. The costs of this ancillary case were not revealed in the High Court this month; but they are believed to take Herbies’ stake in Tajikistan’s treasury several million dollars beyond the $100 million estimate disclosed on April 15.
The involvement of the London law firm follows the revelation in a February hearing in the High Court that Herbies has been billing its Tajik clients $11 million per month this year.
According to the latest data available and published by Legal Week, in the first half of 2007, Herbies billed a total of $381 million. This placed the firm fifth in rankings of the largest revenue English law firms, but it was also the fastest growing, with fees jumping 26% for the period, compared to the same time in 2006. For all of 2006, Herbies ranked ninth in the UK lawfirm listings with GBP296 million in billings. The firm identified its biggest clients as BP, Credit Suisse, Fortune Brands, Royal & Sun Alliance, Standard Life, and Sumitomo Corporation. There has been little public reference to the Tajik aluminium retainer, and Herbies’ spokesman, Sarah Freeman, was reluctant to answer Mineweb questions about the case. Asked if Talco is Herbies’ largest client, and what fees were earned in the ancillary cases, the spokesman replied: “ our client has asked us not to make any comment on this matter.”
Bushell declined to say how much Herbies charged Talco in the losing defence against Hydro’s claims in 2005-2006. He was also asked to respond to the criticism made of his litigation conduct by Justice Morison; he did not reply.
London sources believe Herbies’ involvement in the Tajik aluminium case may be setting a UK record, if not a world record. Alex Novarese, editor of Legal Week, said “the largest legal fee that I know of for a London-based piece of litigation is the Bank of England’s costs for defending a long-running action related to the collapse of the bank BCCI. The total bill over a period of more than a decade was in the region of £75m for defense counsel (Freshfields). Anything over £20m is very unusual in the UK.”
The revelation of the enormous legal fees Herbies has been earning from Rahmon’s administration contrasts with the desperate poverty the Tajik government has pleaded over the winter months, when electricity supplies to hospitals failed. During this period, Herbies told the High Court it was unsafe for their lawyers to go to Tajikistan.
In his May 2006 judgement, Justice Morison reviewed claims by Herbies that the aluminium plant lacked money to meet the Hydro claims. “The case for alleged impecuniosity is not made out,” the judge wrote. “If the Tajiks themselves do not have the funds, then that may be because, as was suggested in argument, [CDH] has been creaming off the profits for the benefit of people whose identities are as yet unknown.”
Paying out money to London lawyers is not the only record President Rahmon has been setting. As Mineweb reported last month, on March 5, the International Monetary Fund (IMF) took the unprecedented step of announcing that the Tajikistan government and central bank have defaulted on their IMF loan agreements. According to the IMF, at least $79 million had been improperly diverted from a loan for poverty reduction. The IMF said it was calling in repayment of $47.4 million.
In addition, the IMF acknowledged to Mineweb, it had opened a new investigation into the diversion, misreporting, or possible fraud relating to other loan funds. The Asian Development Bank and other multilateral lenders to Tajikistan have reportedly opened separate forensic investigations, looking for $500 million in loans intended to be channeled through the commercial banking system to the cotton sector — next to aluminium, Tajikistan’s main line of business.
In an unusual acknowledgement, the World Bank has admitted to Mineweb that the Bank has opened its own anti-corruption investigation. Annette Dixon, the Bank’s director for Central Asia, was asked if she and her colleagues had been aware at the time of their most recent loan to Tajikistan that the IMF was having the problems that led to the default announcement of March 5. Sidestepping what exactly the Bank knew, and when, Dixon conceded that “we are working closely with the Government of Tajikistan to strengthen governance and address fiduciary concerns”. She also acknowledged that “analytic work has been directed to areas that identify and mitigate the risks of
funds’ mismanagement.” According to Dixon, the World Bank is backing “Tajikistan’s first public expenditure and financial accountability review.”
Dixon admitted that the IMF discoveries have been a major concern. “At the time that the Cotton Sector Recovery Project was approved by the World Bank Board of Directors [May 2007], the IMF and the World Bank were not aware of the issues related to the provision of inaccurate information by the National Bank of Tajikistan (NBT) under the IMF Poverty Reduction and Growth Facility. We strongly support the IMF in requiring a comprehensive audit of the operations of the NBT [National Bank of Tajikistan]”.
Multilateral bankers to Tajikistan have been aware of the ongoing court litigation in London, and statements by the European Bank for Reconstruction and World Bank have referred to the first of the cases – an arbitration proceeding, launched by Hydro against the Tajikistan aluminium plant for contract violations costing $150 million. Hydro won its claim in November 2005.
Dixon appears not to have known that the court costs for Tajikistan will amount to more than $120 million. This is one-third of Tajikistan’s outstanding debt to the World Bank, as of February 29, 2008, totaling $367.7 million. Dixon told Mineweb that in 2007 the government repaid the World Bank $1.28 million; this year, it is due to repay another $1.64 million. According to the World Bank director, Tajikistan’s impoverishment has qualified the government to receive World Bank cash grants instead of loans “due to its high risk of debt distress”.
This month’s High Court hearing also revealed more details of what the judge in the case is calling the “Hydro scheme”. Mineweb has earlier reported the scheme as designed to transfer profits from Tajikistan’s aluminium production – the principal industry and export of the country – to BVI havens, and implicating the Norwegian firm in what critics in Oslo have publicly called questionable business. Ingvild Vaggen Malvik, a member of the Norwegian Parliament’s Commerce Committee, told the Oslo newspaper NA24 late last year that the record of Hydro’s dealings in Tajikistan, “sounds like a story about corruption from the beginning…I get the feeling that this is a company that needs to do some housecleaning. Several things point in the same direction and there are indications that procedures must improve. It is clear that there are many challenges when doing business abroad, especially in regimes such as Tajikistan.”
Hydro spokesman Halvor Molland told Mineweb: “We have seen the press reports about IMF’s findings and actions in Tajikistan. This information will be taken into account by Hydro when assessing our engagement in Tajikistan.” Oslo information suggests there are growing differences between executives inside Hydro over how to handle the problems in Tajikistan and BVI. Last November, Hydro told Mineweb it was clean. “Hydro has a zero tolerance towards corruption and we are following Hydro’s guidelines in all parts of the world where we are doing business. We have spent a lot of time discussing issues concerning transparency and corporate governance with the World Bank and EBRD and other NGO’s.”
In this month’s High Court proceeding, Justice Tomlinson went on record with his concern that details of what he called the Hydro scheme, linking Hydro to Talco, CDH and another BVI cutout, Talco Management Ltd., may have been intentionally wiped from computer records and related evidence, sought for the court to review.
Testimony in the April 15 hearing in London described the Hydro scheme as designed to be loss-making for Tajikistan. “The Hydro settlement agreement,” counsel for the Nazarov group told the court, “meant that Hydro supplied alumina to TadAZ, which then supplied it to CDH, which then supplied it back to TadAZ, and then the aluminium did the same thing…this caused an inevitable loss to TadAZ of, I believe, $27 per ton because there was a discount one way and a premium the other.”
Judge Tomlinson ordered that Herbies conduct a more comprehensive search for documents, substantiating how the scheme was operated. He gave the law firm just one month to produce. “The principal basis is there is a scheme. Plainly there is a document somewhere that sets out a scheme and you have not produced it,” Tomlinson told the lawyers for the Tajikistan plant. He was also critical of Herbies for its conduct in the alleged computer wiping by software identified in court, and admitted by Herbies, as Acronis Privacy Export Suite 9.
“The criticism which is made against you,” Tomlinson said, according to the court transcript, “with which I have some sympathy, at an interlocutory stage is the search for documents has been unduly influenced by persons in respect of whose integrity there is a question-mark….the criticism that is made is that Herbert Smith have not necessarily — I am not saying they have not, but they have not necessarily gone as far as they ought to have done within the bounds of what is possible to satisfy themselves that they have discharged their own duty.”
Tomlinson is the second High Court judge to register criticism of Herbies’ conduct in the Talco case. “Tajik’s approach to litigation,” Justice Morison wrote in his ruling of May 2006, “demonstrates a contempt for the normal constraints which control parties’ conduct in highly charged adversarial proceedings.”
Testimony in the latest hearing indicates that Hydro may be called to give evidence, since it had made claims of fraud against the Tajik plant in the arbitration proceeding in 2005, and since it is party to the new scheme. Counsel for the Nazarov group told Justice Tomlinson that Hydro’s direct evidence should be required for the trial “You have to look not at the Hydro contract award, which was the award in the arbitration with Hydro 1, and not just at the settlement agreement which has been disclosed, which amended the effect of the award, but we have to look at the scheme documents as well to know precisely how TadAZ’s loss interacted with Hydro’s loss or claim and how CDH benefited or not from that. So, in order to understand the quantum of their claim, it’s relevant to that as well.”
Hydro is uncomfortable at the prospect of being summonsed to testify. Spokesman Molland told Mineweb: “Hydro is not a party to the UK High Court proceedings to which you refer and Hydro has not in any way been involved in such proceedings. As such, we are in no position to comment on these proceedings.”