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By John Helmer in Moscow

The US federal district court judge hearing the multi-billion dollar damage claim by Archangel Diamond Corporation (ADC) against LUKoil has been replaced this week in Colorado, after an ADC shareholder discovered that the judge, Christine Arguello, had once worked for a law firm which has been associated with LUKoil.

John Diamond, a veteran ADC shareholder, discovered Arguello’s conflict from her previous association with the law firm Davis Graham and Stubbs. She had received the ADC case assignment on February 3. The conflict was pointed out in a letter by ADC’s lawyers to the judge on March 15; Arguello issued her recusal statement two days later. Questions have been asked why the judge did not recuse herself earlier.

ADC has been pursuing its half-stake in the Russian Grib diamond pipe for more than a decade, charging Lukoil, its chief executive Vagit Alekperov and his partner, Alisher Usmanov, with illegally denying ADC its licence and project rights. John Diamond, an American, has been an active ADC shareholder for much of this time.

The Grib pipe, at Verkhotina, in northwestern Russia’s Arkhangelsk region, was assayed by De Beers several years ago, and on those data it is the one of the world’s largest undeveloped diamond deposits. First discovered in 1996, a total of 68 boreholes totaling 19,557 meters were completed by ADC, before the alleged asset raid by the Russians halted work. A resource estimate prepared in 2000 by ADC counted 98 million tonnes of kimberlite to a depth of 500 metres, containing an estimated 67 million recoverable carats. The grade has been estimated by De Beers from 69 to 82 carats per 100 tonnes. Depending on valuations which have moved with oscillating prices for rough, the asset value of the diamonds to be mined is between $5 billion and $7 billion.

Last year, after a shareholder revolt against De Beers’s involuntary bankruptcy plan for ADC, it was agreed with the US Bankruptcy Court that ADC’s remaining assets, including this litigation claim, would be transferred to a liquidating trust, which would continue the fight against LUKoil. If successful in or out of court, the trust would then distribute the costs and compensation award among creditors and shareholders.

The scheme, a voluntary bankruptcy procedure, was proposed by ADC’s principal lawyer, Bruce Marks, and two minority investors, Firebird Global Master Fund, a US investor, and Clive Hartz, an Australian who resigned from the ADC board in protest against the De Beers bankruptcy scheme. They acted together after De Beers had threatened ADC with foreclosure on a loan of almost $10 million, and the abandonment of the two legal claims ADC has been waging since 1998 — in the Colorado District Court, and in the Stockholm international arbitration tribunal.

Both proceedings were suspended between April 2008 and January 2009, when De Beers and LUKoil attempted to work together in a joint mining venture for the Grib pipe. That collapsed when the Kremlin’s Foreign Investment Control Committee imposed conditions raising the cost and the unpredictability of the investment. Exactly what the deal-killing conditions were, and who lobbied for them, have never been disclosed.

Although ADC then resumed prosecuting LUKoil, the Stockholm arbitration proceeding was abandoned last year by De Beers; the US court case continues.

Firebird has agreed to advance at least $1 million to continue this litigation against LUKoil, and last December, the US Bankruptcy Court ruled to endorse the trust plan. The month before, Marks had moved to shift the litigation against LUKoil from the Colorado state court in Denver, which has been hearing the argument on jurisdiction since 2001, to federal court, where damage awards under the federal US racketeering statute can be substantially higher. On December 22, LUKoil filed its opposition to this move.

Judge Arguello had been appointed to rule on these issues. Her removal, and the appointment of a new judge, have set back the timetable in the case by at least six weeks.

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