Today the defense team for Mikhail Khodorkovsky is running a letter, bearing the signature of Robert Amsterdam, in the global edition of the Financial Times. The story has been covered by Dow Jones and some other news outlets. Below is the full text of the letter.
An open letter to the boards of directors, management, auditors, and shareholders of Rosneft, Gazprom, Eni, Enel, and other purchasers of Yukos assets.
RE: Russia’s obligation to seize your assets?
Beginning in December 2004 with the sham tax auction of Yukos’s main production subsidiary Yuganskneftegaz, management and lawyers and shareholder representatives for major oil companies as well as private investors have had to evaluate the risk of purchasing Yukos assets and, subsequently, the oil produced by one of the prior production subsidiaries. This dilemma continued during the illegitimate Yukos bankruptcy where the receiver liquidated the company’s assets through a series of auctions. Actions for damages resulting from the expropriation of Yukos have been filed by Yukos shareholders, e.g., the Hulley and Yukos Universal Energy Charter Treaty case and minority shareholders under bilateral investment treaty cases, as well as an action filed by ex-Yukos western management before the European Court of Human Rights and defenses asserted in other actions.
The independent courts and tribunals that have reviewed the auctionshave so far ruled in favor of the claimants. The ECHR has found theYukos Management claims admissible, and a Dutch court has refused torecognize the professed “rights” of the bankruptcy receiver or thebankruptcy purchasers to assume ownership and exercise managementcontrol over Yukos Finance, BV, a Yukos subsidiary with assets in theNetherlands, and reinstated prior Yukos management. In particular, theDutch court ruled that the Yukos bankruptcy contravened the”fundamental principles of due process of law” as set forth in theEuropean Convention on Human Rights.
As Mikhail B. Khodorkovsky stated to the Khamovnichesky DistrictCourt on 27 April and 13 March 2009, the current charges against himand Platon L. Lebedev create a far broader risk than previouslydiscussed or envisioned. Now, the foregoing as well as many of thosewho did business with Yukos between 1997 and 2004 face another risk -the Russian Procuracy and direct legal action seeking the disgorgementof any benefit from doing business with Yukos. If Messrs. Khodorkovskyand Lebedev are convicted in the current trial, which, given the purelypolitical nature of the meritless charges, must be anticipated, thenthe Procuracy will have the obligation, not merely the option, toretrieve the so-called “proceeds” of the purported criminal conduct.The legal theory flows from the allegations that Messrs. Khodorkovskyand Lebedev, as leaders of an “organized criminal group” embezzled allof the oil production from Yukos’s three production subsidiaries,Yuganskneftegaz, Samarneftegaz and Tomskneft, and then used theproceeds from these sales to finance the expansion of the company’s oilproduction and the acquisition of corporate assets. The current chargesallege that the bigger Yukos became, the more the “organized criminalgroup” victimized the production subsidiaries and enhanced its abilityto embezzle even more oil and further, by selling the “embezzled” oiland engaging in money laundering, to conceal the proceeds of thecriminal activity.
Messrs. Khodorkovsky and Lebedev also are charged with embezzlingand laundering shares held by VNK in six subsidiaries. Therefore, itfollows from this charge that VNK, and presumably its shareholders,were victimized and are entitled to restitution for their damages.Moreover, the revenues Yukos generated by virtue of the embezzlement ofthese shares constitutes the alleged proceeds of criminal activity andthose funds are subject to forfeiture. The sale of those ex-VNKsubsidiaries in connection with the Yukos liquidation may be in doubtbecause, under the prosecution’s embezzlement theory, Yukos never hadlegitimate title in the assets and thus the bankruptcy court could notconvey legitimate title to the purchasers.
In Russia, similar to the money laundering laws adopted in manyjurisdictions, a money laundering conviction is a predicate for theProcuracy to take action to forfeit any property which constitutes oris derived from the proceeds traceable to criminal conduct such asembezzlement or the related money laundering. Since the Procuracy’sassertion is that Messrs Khodorkovsky and Lebedev embezzled all of theoil in conjunction with the original acquisition at the wellhead fromthe production subsidiaries, then all of the Yukos oil sales andsubsequent transactions and revenues generated are the proceeds of thecrime and are subject to recapture. The Procuracy can easily argue thatthere was a “substantial connection” between the Yukos assets and theembezzlement and money laundering as charged.
Under the Procuracy’s logic, every expenditure made by Yukosmanagement between 1998 and 2004 in connection with transforming Yukosfrom a debt-ridden and poorly performing company to one of the leadingvertically integrated oil companies in the world and the crown jewel ofthe Russian economy was done with what the Procuracy now characterizesas the proceeds of a crime or in furtherance of a criminal scheme.Thus, acquisitions of the shares in companies such as Mazeikiunafta,Transpetrol or Rospan are subject to reversal. The oil sales were madewith the proceeds of crime and the acquisitions were a means oflaundering the money and furthering the alleged criminal activity.Similarly, the dividends paid to shareholders also could be targeted.Thus, the same minority shareholders who lost billions of dollars as aresult of the attack against Yukos may now find themselves to be thetargets of a forfeiture action for the disgorgement of what thegovernment now characterizes as the proceeds of crime engaged in by theorganized criminal group. With each of these examples, the Procuracycan argue that the acquisitions and/or payments were made to conceal,legitimize or disguise the original embezzlement.
In tracing the proceeds of the alleged crime, i.e., the sale of theembezzled oil, law enforcement authorities are not limited to those whodirectly received funds as part of the facilitation of the crime ormoney laundering. The Procuracy will also look to the assets which weresold in the Yukos liquidations. Since each of these assets wasdeveloped with the proceeds of the alleged criminal activity, theProcuracy, if it is to comply with Russian law, must seek theirforfeiture as proceeds of the crime. Moreover, the purchasers of theassets may not be able to claim that they are bona fide purchasersentitled to rely upon the bankruptcy auction to convey proper titlebecause the Russian authorities had publicly announced their intentionto bring embezzlement and money laundering charges against MessrsKhodorkovsky and Lebedev almost 4 years before the current trial began,which encompassed the period of time that most of these assets wereacquired. The Procuracy can use its own public announcements todemonstrate that each purchaser was on notice that the asset was aproceed of criminal activity.
Finally, there is the question of whether the Procuracy will engagein forfeiture actions against the purchasers of Yukos oil, since theoil is the actual proceeds of the embezzlement. As such, the oil is apotential proper target for an action to recover embezzled property. Tothe extent the Procuracy cannot trace the proceeds or the launderedfunds, the purchasers are an alternative target.
Every person or entity that conducted business with Yukos between1998 and 2004, the shareholders who received dividend payments, and thepurchasers of assets through the liquidation initially should thinkthis parade of horribles is absurd. However, they would be mistaken tofind comfort in that initial conclusion. The trial currently beingconducted in the Khamovnichesky District court of the City of Moscow isanother act in what can best be described as the theater of the absurdknown as the Khodorkovsky/Yukos Affair. The matter has to be placed incontext. Two men are on trial and accused, inter alia, of takingphysical possession of 350 million metric tons of oil. This is theequivalent of approximately one entire year of Russia’s oil productionor, if placed in railcars, enough oil to comprise a train that wouldcircle the earth three times. And they allegedly did so without anygovernment agency, the company auditors, or the lawyers that conducteddue diligence for Exxon/Mobil or Chevron/Texaco noticing. CertainRussian authorities went to great lengths to expropriate Yukos andconvert Russia’s leading businessmen into criminals. A wide-rangingseries of forfeiture actions as described above would be consistentwith the mind-set of authorities who will pursue these embezzlement andmoney laundering charges. The law is used as a vehicle to continue tofurther political ends no matter how facially absurd or intellectuallydishonest.
Rather than enhanced adherence to the rule of law, the secondKhodorkovsky and Lebedev trial reveals the extremes the authoritieswill go to satisfy their political and corrupt motives. They came forMessrs. Khordokovsky and Lebedev, as well as Yukos, first and, havingachieved their objectives, now set their sights on new targets. Thus,under these circumstances, it is perfectly reasonable that, despitelacking legitimate legal grounds, if the authorities conclude it suitstheir political purposes or otherwise tends to legitimize the currentprosecutorial farce, they will come for the assets of those who didbusiness with Yukos or acquired its assets.
Robert R. Amsterdam