By John Helmer in Moscow
Court documents and testimony, presented recently in the Colorado District Сourt in Denver, expose substantial new evidence that LUKoil has operated a significant business in the state. The new evidence, secret until now, stretches back for ten years, and shows a flow of cash every month from an alleged front company in Colorado to a LUKoil company in Israel. The evidence reinforceS the likelihood that LUKoil and its Russian subsidiary, Arkhangelskgeoldobycha (AGD), will be ordered to face trial on charges of defrauding Archangel Diamond Corporation (ADC) of its rights to develop the Grib diamond mine project.
ADC is a Toronto-registered company which in 1996, in partnership with AGD, discovered the Grib pipe in the Verkhotina licence area of Arkhangelsk. Drilling, sampling and assaying by De Beers have estimated the value of the diamond deposit at between $8.2 billion and $9.7 billion at the diamond prices prevailing in the first quarter of 2008. ADC’s stake in the original project was 40%. Through a cutout in Luxembourg, De Beers holds a control stake of 54% in ADC, plus a $10 million loan that was called for repayment in May.
In addition to its stake in the future Grib mine project, ADC’s biggest current asset is its US lawsuit against LUKoil. This claims recovery of $30 million in investment, $400 million in ADC’s share of profits, and another $800 million in potential profits.
The newly disclosed evidence appears in a transcript of court proceedings on May 12; the transcript was made available after De Beers attempted to halt the court case, and put ADC into bankruptcy. Jonathan Oppenheimer and Gareth Penny have been asked to explain why they appear determined to stop the legal proceedings against LUKoil and AGD, now that, according to the latest evidence, they are close to a judicial order to commence trial. They refuse to respond.
The new evidence was presented to District Judge Anne Mansfield by ADC’s lawyer, Bruce Marks, a specialist on Russian racketeering. Marks presented the judge with invoices, and claimed that since 1998 until the present, LUKoil has been using a local company called DS Engineering to bill thousands of dollars every month for engineering and other services performed for LUKoil. DS Engineering, Marks said, was “nothing more than a pass-through account.” Cash was moved in both directions, he added — from Colorado to Moscow, and from Moscow to Colorado. Documents for one month, October 2001, showed $32,000 in cash invoiced and paid by LUKoil for running a variety of business operations in Colorado.
Referring to “this unusual conduit to pay people for the services that they’re providing them,” Marks said it “certainly looks to us like they’re [LUKoil are]an employer here in Colorado of approximately 20 people.” in response to a question from the judge whether the work done for LUKoil was done in Colorado or Russia, Marks said both.
Marks also told the judge that in order to evade the jurisdiction of the court, LUKoil had tried concealing the evidence. “This is all information that LUKOIL should have produced to us when we asked for documents regarding business LUKOIL does in Colorado. And they refused to produce those documents and that’s why we’re here today.” Marks also provided the judge with additional evidence that LUKoil had tried to conceal that the money that moved between Colorado and Israel was in fact payments for services provided to LUKoil in Colorado, using dummy names for front companies.
LUKoil’s attorney, Frederick Baumann, told the judge in the hearing “there is no contact whatsoever between the facts of the plaintiff’s claims and the State of Colorado.” For that reason, he urged the judge to reject the jurisdiction of the state court over the ADC claim, and put an end to the litigation. “LUKOIL did not transact businesses in the state of Colorado,” Baumann said. “[It] did not have any employees, contracts, bank accounts, all the other factors that the courts have looked at in determining personal jurisdiction.”
Judge Mansfield disagreed. On May 12, she overruled LUKoil’s objections, and ordered that “LUKOIL shall produce all information and documents responsive to all ADC’s interrogatories and requests for production in its “possession, custody and control,” including that of its subsidiaries, including, but not limited to, the “Lukoil Companies” such as Lukoil International, GmbH; Lukoil Investholding GmbH; Lukoil Americas, LLC; Lukoil Cayman Trading, Ltd.; Nexus Acquisition, LLC; Nexus Acquisition II, LLC; and, Nexus Fuels, Inc.” from January 1, 1997 to the date of filing the Complaint.” An order was also issued authorizing ADC’s lawyers to issue subpoenas for evidence out of Colorado state.
If the judge had dismissed ADC’s application, the court case would have had little chance of succeeding. However, her May 12 orders apply serious pressure on LUKoil either to disclose, and risk trial on the substance of ADC’s charges; or else to negotiate a settlement on ADC’s terms. This in turn has renewed the pressure on De Beers to call off its attempt to liquidate ADC.
On May 12, the very same day that ADC’s lawyers won their biggest courtroom victory in the decade-long fight for Grib, De Beers issued a letter to ADC setting out its liquidation ultimatum. This declared ADC to be insolvent. In exchange for $200,000, De Beers told ADC to terminate the proceedings against LUKoil. According to the De Beers letter, “Cencan [the Luxembourg subsidiary of De Beers] will not fund the legal proceedings against OAO LUIKoil in the state of Colorado nor any contracts or agreements relating thereto.”
To keep the courtroom fight alive, minority shareholders and creditors of ADC have now moved against De Beers, initiating an independent bankruptcy petition to preempt the Cencan ultimatum. Documents filed in the US Bankruptcy Court in Denver on June 26 identify Marks as one of the petitioners, plus James Passin and Clive Hartz. Passin represents the Cayman Island-registered Firebird Global Master Fund, which says it is owed €76,547 ($107,709) for a business loan to ADC. After De Beers, Firebird is the next largest shareholder of ADC with about 18%. In the filing, Marks, whose lawfirm Marks & Sokolov is based in Philadelphia and Moscow, has been ADC’s lead attorney in the US litigation, and is owed $135,000.
In her summing-up from the bench, Judge Mansfield said: “I’ve read all of the briefs. I’ve read the case. I understand that the case has been going on for a very long time. I understand that what you’re trying to do is you’re trying to establish jurisdiction, general jurisdiction over this company…What I’d like to do is try to get to the point where we can talk about what kind of discovery is reasonable to establish continuous — the continuous nature of doing business in Colorado.”