MOSCOW – It used to be said about a fraudster in Australia that he was too crooked to lie straight in bed. Until now, however crooked the Russian oligarchs – the handful of men who seized control of Russia’s oil and mineral wealth a decade ago – may have seemed, the lure of their money has overwhelmed the inhibitions of investors, bankers, non¬-executive directors, and managers from jumping into the same bed. Until now, they had reason to believe they could get in and out swiftly, and make a clean getaway.
A class-action lawsuit, filed last week in a federal court in New York, changes these calculations.
According to a 26-page statement of claim by lawyers for Rothwell Holdings Ltd., a Caribbean-registered investor fund, for nine months of last year, the controlling shareholders of oil company Yukos; the company’s chief financial officer; Yukos’s authorized representatives in the UK and US; and the company auditor, Price WaterhoiseCoopers (PwC), connived to lie, cheat, and swindle investors who purchased Yukos’s Russian shares, or its American Depositary Shares, each of which represents 4 units of the common stock. Among others named individually in the lawsuit are shareholders Mikhail Khodorkovsky, Platon Lebedev, and Valery Sjhakhnovsky, and CFO Bruce Misamore.
At the heart of the US claim against them is the massive tax evasion for which Yukos has already been held liable in a Moscow court, and which Yukos has conceded in a letter to Prime Minister Mikhail Fradkov. The jurisdiction of the New (York court was granted by Yukos, when it registered its ADS issue for market purchase, and submitted thereby to US securities regulations. It was not safe to commit fiscal crimes in its homeland if by so doing, and by subsequent concealment and misreporting, Yukos took investors’ cash on the territory of the US, violating their rights under US law.
“In order to overstate its earnings and to understate its tax liability for the period,” the US complaint alleges that “Yukos engaged in an illegal tax evasion scheme by creating fake organizations in the oil and after-product movement chain and further by registering these fake organizations in territories with preferential tax treatment. Defendants’ scheme was designed to avoid (payment of the following types of taxes: profit tax, value-added tax, motorway user tax, tax on the sales of petroleum, and oils and lubricants and housing stock and social amenities maintenance tax on the amount of receipts from oil and after-product sales.”:
The shareholders and managers, aided and abetted by auditors at PriceWaterhouseCoopers (PwC), then “materially misled the investing public, thereby inflating the price of Yukos Securities by publicly issuing false and misleading statements and omitting to disclose material facts necessary to make defendants’ statements, as set forth herein, not false and misleading! Said statements and omissions were materially false and misleading in that they failed to disclose material adverse information and misrepresented the truth about the Company, its business and operations, as alleged herein.”
Since the arrests in Moscow last July and October of Lebedev and Khodorkovsky, the details of the crimes alleged against them have been well-known. That Shakhnovsky has already pleaded guilty to the charges against him in Moscow is also documented. But the international financial newspapers, which have touted for the oligarchs and benefited from their largesse, have editorialized against the charges against the Yukos group), calling them a politically motivated frameup, and intimating their wrongdoing was minor compared to the human rights violations alleged against Russia’s President Vladimir Putin and his prosecutors. It is thus not surprising that the Financial Times of London buried the details of the new US court claim in a single sentence
What is more than novel about the new lawsuit is that it threatens to put an end to all attempts by the Russian; oligarchs to cash out of their vulnerable Russian assets into UK oil US-registered securities, and launder the proceeds of their; Russian crimes into ostensibly clean western bank accounts, real estate, and other forms of wealth. For as everyone knows, thel massive tax evasion that was practiced at Yukos has been the standard operating procedure for the building of all the Russian oil, mineral, metal and mining fortunes that have been amassed bylthe likes of Roman Abramovich, Oleg Deripaska, Vladimir Potanin, Victor Vekselberg, and Mikhail Fridman.
Thus, if the Yukos investors win their claim in US federal court, lenders, investors, and even employees and; contractors of the other oligarchs risk facing parallel claims for fraud, based on what they have concealed (or had a duty to disclose) about the real operations of their companies. Indeed, Rothwell Holdings and US investors in Yukos do not even have to win ja court ruling, in order to detonate a bomb of due diligence and liability under the plans of the other oligarchs, whether or not they are) prosecuted in Moscow, pay tax reparations, or negotiate an amnesty with the Kremlin.
For now, the threat of this litigation casts an immediate shadow over every transaction by Abramovich in spending cash derived from his oil company Sibneft and other Russian companies that are subject already to, or may soon be facing, charges of tax evasion. Tax investigations of Sibneft have already gotten under way. They include a scheme of tax preferences issued joy Abramovich in his capacity as Governor of the Chukotka region to companies in which he had a financial interest. More than once, Abramovich has declared himself innocent of the charges against him, and Russian prosecutors have been hesitant to lay the type of indictment against him and Sibneft, which has been prosecuted against the Yukos group. Nonetheless, if Abramovich obtains funds from investors or lenders on the basis of artificially inflating the value of his Russian assets, and of illegally shielding: his cashflow from legitimate Russian taxation, then the potential legal liabilities of doing business with him become serious.
A similar shadow also falls over the year-long negotiations by Oleg Deripaska’s Russian Aluminium (Rusal) to borrow $800 million from a syndicate of international banks; over Vladimir Potanin’s attempt to acquire shares in the South African mining company Gold Fields Ltd. through borrowings from Citibank; and; over Victor Vekselberg’s plan to float his SUAL International corporation under the leadership of Brian Gilbertson, and trade its shares with those of another Johannesburg or London-listed company. The most heavily indebted of the oligarch companies — Deripaska’s Rusal is estimated to owe at least $2.5 billion at the; moment – are the most vulnerable to the new standard of disclosure and liability set by the New York court claim. The declared ambitions of these companies to retire their bank debt with unsecured Eurobonds, or issue IPOs in London or New York, face protracted delays.
Non-Russians who have been engaged to manage these companies, sit on their boards of directors, direct their legal and accounting departments, negotiate their borrowings, plan their mergers and acquisitions, or persuade investors to buy their shares and bonds, should no longer feel financially secure. What western executive would risk his reputation and personal fortune in taking a position in these enterprises that would expose them to the type of liability claim now filed against Yukos CFO Misamore? What insurance company would write a policy to protect them, in the event of a comparable lawsuit in future?
According to the New York court documents, Misamore is alleged to be one of several defendants who “participated in the drafting, preparation, and/or approval of the various; public and shareholder and investor reports and other communications complained of herein and were aware of, or recklessly disregarded, the misstatements contained therein and omissions therefrom, and were aware of their materially false and misleading nature. Because of their Board membership and/or executive and managerial positions with Yukos, each of the Individual Defendants had access to the adverse undisclosed information about Yukos’ business prospects and financial condition .und performance as particularized herein and knew (or recklessly disregarded) that these adverse facts rendered the positive representations made by or about Yukos and its business issued or adopted by the Company materially false and misleading.”
Misamore will have his day in court to explain what he knew, what he didn’t know, and what he could have been expected to know about the flow of Yukos funds. For the time: being, Yukos is officially not commenting on the allegation:’.. Misamore is on the list of defendants, say lawyers involved in the case, because he provides a means of compelling discovery, according to the US rules of evidence (and perjury); and because his insurance cover provides a means of recovery, in the event that Yukos itself goes into bankruptcy.
The naming of PwC, and the charges against the audit company for its role in misrepresenting the true state of Yukos’s accounts, are the first time an international auditor has been charged with liability in a case of Russian corporate malfeasance. They have not been able to make a clean getaway in the best known cases of American corporate fraud, but they have nt)t been charged by Russian prosecutors to date. For as long as it takes to resolve Rothwell’s claim against PwC, this case opens up the possibility of litigation against accountancy firms, as well as law firms, by investors or lenders in many other cases.
“PWC’s responsibility as Yukos’ independent auditor,” asserts the New York plaintiffs, included determining “sufficient competent evidential matter … to afford a reasonable basis for an opinion regarding the financial statements under audit” as to “the fairness with which they present, in all material respects, financial position, results of operations, and its cash flows in conformity with generally accepted accounting principles.”
By attacking PwC for failing this duty, the US claimants have punched a hole in the bubble of corporate transparency that has protected and promoted the oligarchs since: the Russian financial crisis of 1998. For as long as the corporate assets of the oligarchs cannot be valued without taking into account their hidden and uncertain tax liabilities, and auditors like PwC cannot warrant their balance-sheets as a fair and accurate presentation of their financial position, it will be impossible for the oligarchs to cash out of their assets on the international market. And without that cash as their lifeline, the oligarchs are likely to wither away.