HULLEY ENTERPRISES LTD. et al v. RUSSIAN - Docket Alarm

HULLEY ENTERPRISES LTD. et al v. RUSSIAN - Docket Alarm

Case 1:14-cv-01996-BAH Document 147-3 Filed 08/17/16 Page 1 of 5 UNITED STATES DISTRICT COURT DISTRICT OF COLUMBIA __________________________________...

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Case 1:14-cv-01996-BAH Document 147-3 Filed 08/17/16 Page 1 of 5

UNITED STATES DISTRICT COURT DISTRICT OF COLUMBIA ________________________________________ ) ) ) ) ) Petitioners, ) ) v. ) ) THE RUSSIAN FEDERATION, ) ) Respondent. ) ________________________________________ ) HULLEY ENTERPRISES LTD., YUKOS UNIVERSAL LTD., AND VETERAN PETROLEUM LTD.,

Case No. 1:14-cv-01996-BAH

THE RUSSIAN FEDERATION’S MOTION FOR LEAVE TO FILE A SUR-REPLY IN OPPOSITION TO PETITIONERS’ MOTION TO STAY

Exhibit C: Michael Goldhaber’s Column in The American Lawyer Dated June 22, 2016

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The Global Lawyer: To Dodge $50 Billion Bill, Russia Conies Cleal on Sale of the CeniLiy IL.art.ocm Case 1:14-cv-01996-BAH Document 147-3 Filed 08/17/16 Page 2 of 5

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The Global Lawyer: To Dodge $50 Billion Bill, Russia Comes Clean on Sale of the Century By Michael D. Goldhaber Publlshecl: Jun 22,2016

In 1995-1996, Mikhail Khodorkovsky and his friends paid the state at most half a billion dollars for Yukos Oil Co., which was publicly valued in 1997 at $6 billion. Between 2003 and 2007, Russia took back the assets by driving Yukos into bankruptcy through politicized charges of tax evasion. The controlling shareholders have fought Russia in arbitration ever since.

Observers have long wondered what impelled Russia to sell2 percent of the world's oil reserves for a fraction of its worth. Now it seems that the dark secret ofYukos' privatization has been hiding in the case files all along. In papers filed this month in Washington, D.C., federal court, Russia spotlights a 2007 "confession" by Yukos' preprivatization president, asserting that Khodorkovsky won the cooperation ofYukos' four top state managers in the sale by promising to take care of them. Russia shows that Khodorkovsky and friends later gave the socalled red directors 15 percent of their proceeds from Yukos' New York stock offering through a shell company set up by the Panamanian law firm Mossack Fonseca. Russia argues that this was a billion-dollar bribe, and it s1rips the investment of any right to protection. In 2014, Yukos' controlling shareholders won a $50 billion mm:d against Russia for expropriation, only to see it set aside this April on jurisdictional grounds pending two f

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The Global Lawyer: To Dcxlga $50 Bill ioo Bill, Russia Com asFiled Clem a1 Sale of the Century I Law.can Case 1:14-cv-01996-BAH Document 147-3 08/17/16 Page 3 of 5 further appeals in Dutch court.

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Russia says the alleged bribe gives judges another reason to set aside the $50 billion, and renders it unenforceable. "This thing has gone beyond stench," says Carolyn Lamm of White & Case, which has supplanted Cleary Gottlieb Steen & Hamilton as Russia's counsel in the case. Khodorkovsky responded by posting the contract to pay the red directors on Facebook, scornfully suggesting that taking care of the old management when a company changes hands is a legal standard practice worldwide: "Who is not stupid, he knows." Claimants' counsel Emmanuel Gaillard of Shearman & Sterling dismisses the story as stale propaganda. "They're [PR] geniuses," he says. "They recycle old stuff and call it new evidence." Gaillard is correct that most of the evidence is old, but that is not the same thing as saying that it was known. The most direct evidence of a bribe is a 2007 statement to Russian prosecutors by Sergey Muravlenko, the West Siberian "oilnik" who served as Yukos president under state ownership. "Khodorkovsky came to me" when the Yukos auction was announced, Muravlenko told the prosecutors. "In order to win, Khodorkovsky needed the support from the team of managers of "YUK.OS, i.e., our team.... Khodorkovsky verbally promised that our material interests ... will be taken into consideration. We agreed to cooperate with him." While preparing in 2002 for an offering on the New York Stock Exchange, Yukos' auditor recounts, Khodorkovsky disclosed the oral agreement to the deal advisers from Cleary Gottlieb, Akin Gump and Clifford Chance. (Khodorkovsky said in his Facebook post that ironically, White & Case played a role as well. Lamm says, "We did fmancing on some other company that has nothing to do with anything.") The auditor told Russia that hundreds of millions of dollars had already been paid to the four red directors. In addition, the controlling shareholders now drew up a contract promising 15 percent of their stock sale proceeds. Russia estimates that these new payments amounted to between $1 billion and $2 billion. Bank records show over $600 million in deposits made under the agreement to Tempo Finance Ltd., a shell set up by Mossack Fonseca for Muravlenko and his colleagues Youry Golubev, Vlktor K.azakov and Vlktor Ivanenko. Yukos' controlling shareholders told its auditor that these payments were for services to the company (as opposed to them). The contract said it was for "many years active and fruitful production activity." "I struggled to believe that/' Douglas Miller ofPricewaterhouseCoopers said in a 2009 U.S. court affidavit. "I've never seen a company compensate management that, for lack of a better term, generously." As one Clifford Chance lawyer emailed another at the time, "No one gives away $1B without a reason, not even someone who already has $8B." Miller, the auditor, told the Russian prosecutor that he suspected that the payments were for winning the privatization auction or consolidating control of the company. When he voiced that suspicion, Miller told the prosecutor, Khodorkovsky replied that he could be imprisoned if he shared the true reasons for the payments. Shortly after Russian prosecutors showed Muravlenko's account to Miller, in June 2007, PwC took the unprecedented step of withdrawing 10 years of audit opinions. One of the concerns that PwC expressed in its withdrawal letter was that Yukos management misled the auditor as to why the red directors were paid. Yukos argues that PwC withdrew under the pressure of its own Russian criminal prosecution, which was then dropped. In their $50 billion award, the arbitrators spent many pages discussing PwC's motives, but ultimately drew "no conclusions" as to its professional conduct. To the arbitrators, Yukos' "extraordinarily generous compensation" was "only an accounting issue.'' Any stench of bribery was perfumed in arid euphemism, and went unnoticed.

So why did evidence of bribery go unpressed at every step from the time Yukos' troubles began in 2003 until now? In particular, why did Vladimir Putin-who as the panel persuasively showed, persecuted Yukos in a cynical political vendetta-never charge Khodorkovsky with the one crime the whole world would fmd

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The Global Lawyer: To Dcxlga $50 Bill ioo Bill, Russia Com asFiled Clem a1 Sale of the Century I Law.can Case 1:14-cv-01996-BAH Document 147-3 08/17/16 Page 4 of 5

plausible? One possibility is that Putin was loathe to expose the system ofkleptocracy that has allowed some of his closest associates to amass a secret fortune. The alleged bribe takers are members of Russia's ruling class-Muravlenko and Kazakov have been longtime members of the Duma, and Ivanenko served briefly as head of the KGB's successor agency in 1991. Like many Russian officials and their families, they like to hide their wealth in shell companies that pop up in the Panama Papers. In keeping their alleged crime quiet, perhaps Putin was following the kleptocrats' code of omerta. Russia's longtime lawyers at Cleary Gottlieb did initially make ''unclean hands" a prominent part of their case. But the arbitrators signaled during hearings that they were not inclined to pursue that line of inquiry. Crucially, the tribunal accepted that the claimants making the protected investment in 2002 were distinct from the entities that bought Yukos on suspicious terms in the state's 1995 "sale of the century." White & Case's chief innovation was to connect the corporate dots between 1995 and 2002, with the help of a finance professor from MIT, and to ~ a continuous chain of control. Russia argues that claimants deceived the tribunal by obscuring Yukos' early ownership. Claimants say it was never a secret who bought Yukos in 1995. Unveiling the claimants' corporate structure does not make the evidence ofbribery new, but it does make it newly relevant. Lamm says that unclean hands only came to the fore before the Dutch set-aside hearing because that's when White & Case entered the case. She says the bribery story is only emerging now because the D.C. judge asked them to focus on law, and they had too much dirt to fit into their brief last fall. Gaillard says that the timing is driven by public relations, and no court will take an interest in these recycled allegations. White & Case was the right firm to approach if Russia was ready to selectively shine a light on state corruption. Lamm has co-authored at least four articles on the topic, and in cases like Metal-Tech v. Uzbekistan, has made it part of her standard playbook. As arbitrator Brigitte Stem acerbically said at an International Bar Association panel in 2013, the two most common arbitral approaches toward corruption have been "Wash your hands" and "Close your eyes." But World Duty Free v. Kenya concluded in 2006 that an investment treaty tribunal has an obligation to investigate corruption when evidence emerges, and that an investment made illegally deserves no protection. In 2013, Metal-Tech reasoned that red flags-the use of offshore shell companies to hide large payments, for examplecan shift to the claimants the burden of showing that legitimate services were performed in return for their payments. On the basis of that and one witness statement, the Metal-Tech panel concluded that bribery had occurred, and took it as a complete jurisdictional defense. Although a court had never before established corruption during the annulment or enforcement of a treaty arbitration, Siemens AG abandoned its $217 million award against Argentina during the annulment after irrefutable evidence emerged in the companies' settlement with U.S. corruption prosecutors. Practitioners such as King & Spalding's Aloysius Llamzon, author of"Corruption in International Investment Arbitration," worry that making corruption a complete defense to arbitration creates a moral hazard: potentially incentivizing states to commit corruption and then pillage investors' assets with impunity. Llamzon's solution is for arbitrators to only give states the benefit of the defense if they prosecute the perpetrators. The Global Lawyer submits that adjudicators presented with newly developed or newly relevant evidence of bribery should invoke their extraordinary powers to hold fact-finding hearings. Claimants argue that Muravlenko's and Miller's statements weren't credible because they came in the context of heavy-handed Russian investigations. If that's the case, let a Dutch or U.S. judge call them as witnesses, and assess their credibility directly. Establish the truth-but if Russia won't prosecute the bribe-takers, don't give them the benefit of the defense. In practice, however, the U.S. court is apt to let the Dutch judges decide-and those judges are likelier to affrrm

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The Global Lawyer: To Dcxlga $50 Bill ioo Bill, Russia Com asFiled Clem a1 Sale of the Century I Law.can Case 1:14-cv-01996-BAH Document 147-3 08/17/16 Page 5 of 5 the set-aside on dry jurisdictional grounds than to blaze a new path in a historically and morally-tangled thicket. At the same time, a court that doesn't mention bribery may still be influenced by bribery allegations. The odds that Russia will dodge the $50 billion bullet continue to rise.

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Although French case law might allow enforcement of an arbitral award even after it has been set aside, Russia is doing its best to choke off that path to recovery through diplomatic pressure. On June 8, the French National Assembly voted in favor of a bill requiring a foreign state to approve the freezing of its assets. https://euobserver.com/foreign/133743 The French Senate began debating the bill June 22. It would be a sad outcome if the corruption of Boris Yeltsin's era ends up helping to insulate the corrupt Vladimir Putin from accountability for his attack on the rule of law. Isn't there an irony in Putin using corruption as a shield? "I can't put the entire Russian system on trial," said Lamm. "All I can put on trial is what went on here." "I'm not speaking on behalf ofPutin," said her client, Andrey Kondakov of the International Center for Legal Protection. "We're defending Russian taxpayers and little Russian kids who can think of better things to do with $50 billion." The problem is that the money in Russia has never gone to the kids. The Yukos case has finally exposed how kleptocrats and oligarchs collude to keep the money for themselves.

© Copyright 2016. ALM Media Properties, LLC. All rights reserved.

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