Marlwood Commercial Inc v Kozeny & Ors

The 1^st, 3^rd and 4^th Defendants apply for an order that the stay of these actions be lifted, that the proceedings be dismissed and/or struck out pursuant to CPR Part 24 and/or that the worldwide freezing orders made by Longmore J. on 17 December 1999 and 17 February 2000 be discharged and for other relief. They contend that these massive actions have no real prospect of success and that the applications for the freezing injunctions were not made on the basis of full and frank disclosure. The 2^nd Defendant has played no part in these applications.

The Republic of Azerbaijan is an independent (former Soviet) republic situated on the Caspian Sea to the north of Iran. The capital is Baku. The country possesses large oil reserves. In March 1997, the Azeri Government issued each of its citizens with a book of four privatisation vouchers which would entitle the citizen to subscribe for shares in forthcoming privatisations of state owned companies. The most significant by far was to be the State Oil Company of Azerbaijan (“SOCAR”). However, there was never any certainty that any privatisation would actually go ahead although it appears to have been widely believed that SOCAR would be privatised. The vouchers were freely tradeable within Azerbaijan and many citizens took the opportunity to sell their vouchers in return for some ready cash. There was a limit of 100,000 books of vouchers per person or entity but that limit could easily be evaded by setting up nominee corporate entities to hold the vouchers.

Foreigners were able to buy vouchers as well, but they also had to acquire so-called options issued by the State Property Committee (“SPC”). The President of the SPC was Mr Nadir Nasibov. The Deputy Chairman was Mr Barat Nuriyev, who had held a university professorship at an earlier stage of his career and appears to have been known to at least some of his acquaintances as “the Professor”. Four options were required for each book of four vouchers. This enabled the Government to control the number of vouchers in foreign hands and to raise an additional premium from foreigners in international currency. Foreigners were also subject to a limit of 100,000 books/400,000 vouchers, but there was no limit on the number of options that could be held. By March 1998, 7.2 million of the 8 million books of vouchers available had been issued by the Government and some 18,236,000 options sold. Until October 1997, the SPC had charged approximately US$0.60 per option but this rose to about $1.00. In March 1999, it rose to about $25.00 per option

Mr Viktor Kozeny is a Czech national and an entrepreneurial businessman and speculator. He had had prior involvement in a similar Czech privatisation and gained a somewhat controversial reputation. He saw an opportunity to make very large profits from the purchase of Azeri vouchers and the eventual sale of SOCAR. Through the 3^rd Defendant, Oily Rock Group Limited (“Oily Rock”), a company incorporated in the British Virgin Islands (“BVI”), he set about buying huge quantities of vouchers and options. Oily Rock appears to have been substantially owned and controlled by Mr Kozeny through Daventree Ltd, NC Legal Services Ltd and Audia Investment Ltd.

In 1997 and 1998, Oily Rock and associated companies had acquired some 7,840,000 vouchers at a cost of some US$ 150 million. It had also acquired 15,727,000 options. These vouchers and options had been acquired for cash, literally – Mr Kozeny had flown millions of US$ banknotes packed in suitcases on private aeroplanes into Azerbaijan. Most, if not all, of the cash had come via Dr Hans Bodmer, a Swiss lawyer and a partner in von Meiss Blum & Partners of Zurich (“vMB”).

Mr Kozeny decided to bring other foreign investors into the vouchers/options market, ostensibly so that together they would have a controlling interest in SOCAR once it was privatised. He had already largely cornered the market in options, but he wanted to go further.

His first (at least his first successful) approach was to Omega Advisors Inc. (“Omega Advisors”), a substantial investment company based in New York. Mr Kozeny’s introduction was to Mr Leon Cooperman, the Chairman and Chief Executive Officer of Omega Advisors. Mr Cooperman assigned the project to Mr Clayton Lewis, head of emerging markets at Omega Advisors, who was assisted by Mr Paul Swigart. Mr Lewis was also interested in making a parallel investment through a company he controlled, Pharos Capital Management LP (Pharos Capital”). Mr Lewis’s due diligence included a trip to Baku where he met Heydar Aliyev, the then President of Azerbaijan, and Mr Nasibov and Mr Nuriyev, respectively President and Deputy Chairman of the SPC. According to Mr Lewis’s affidavit sworn on 9 January 2001, he wanted to verify what Mr Kozeny was saying, namely that the Azerbaijan Government was encouraging investment from abroad, that Mr Kozeny was on good terms with the Azeris and that they supported his involvement. Whilst in Baku he was shown the vouchers and options held by Oily Rock and Minaret (see below) in a strong room. Mr Lewis recommended that Omega Advisors undertake the investment.

On 24 March 1998, a Letter of Intent (“the Letter of Intent”) was signed by Omega Advisors, Pharos Capital, Oily Rock and Minaret Group Ltd (“Minaret”), another BVI company controlled by Mr Kozeny. Mr Lewis signed for Omega Advisors. Essentially the parties agreed to use their best efforts to negotiate a co-investment agreement providing for the purchase of vouchers and options on behalf of Omega Advisors and Pharos Capital and to co-operate in relation to any Azeri privatisation auctions, and in the subsequent ownership and sale of privatised companies. The agreement envisaged that Omega Advisors would establish a number of BVI companies such as Omega Group Holdings Ltd (“Omega Group” also known as “Omega Baku”) and that Oily Rock would be appointed agent to purchase vouchers and options for these companies. Minaret was to act as custodian. Clause 1 of the Letter of Intent provided, inter alia, as follows:

Co-Investment Agreement Omega and Oily Rock shall use their best efforts to prepare and negotiate the definitive terms of a co-investment agreement between Omega Baku and Oily Rock. … Such Co-Investment Agreement shall contain provisions setting forth the relative rights and obligations of the parties including, but not limited to, the following:

Omega Baku will appoint Oily Rock as its agent to purchase Vouchers [defined to include corresponding options] on behalf of the Voucher holding companies to be formed by [Omega Advisors and Pharos] for prices agreed by Omega Baku and Oily Rock in advance provided, however, that the price paid by Omega Baku for such Vouchers shall be the best price available to Oily Rock and shall in any event not exceed the price paid by Oily Rock for such Vouchers purchased for its own account or the accounts of its affiliates or other clients in similar transactions and at similar times … Oily Rock will not charge Omega Baku any mark-ups or commissions on the Vouchers purchased for Omega Baku’s account, except for those fees, expenses and commissions expressly agreed to by the parties in their Co-Investment Agreement and Custodian Agreement … Vouchers for the Voucher Holding Companies will be delivered by Oily Rock to Minaret as custodian of the Vouchers for the Voucher Holding Companies pursuant to the terms of a custodian agreement to be negotiated by the parties hereto. … None of the Vouchers to be purchased by Oily Rock on behalf of the Voucher Holding Companies will be Vouchers currently owned by Oily Rock or its affiliates or other clients without the prior written approval of Omega Baku.”

By Clause 1.1 (i) (ii) Oily Rock agreed that it and its affiliates, directors, officers, employees and agents would, in matters relating to its performance of its obligations to Omega Baku, comply with all applicable laws and regulations of the United States, Azerbaijan and any other applicable jurisdiction:

Omega Advisors attached great importance to the provision preventing Oily Rock from selling its own vouchers and options to the Voucher Holding Companies. The purpose of the venture was for Omega Advisors to purchase additional vouchers and options and then for Omega Advisors and Oily Rock to combine their strengths, not for Oily Rock to be able to realise a profit by transferring its vouchers or options to Omega Advisors and so reduce its exposure.

In order to satisfy them on this score, Omega Advisors were provided with a letter dated 24 March 1998 from Grant Thornton SA of Zurich purporting to show that Oily Rock held 1,960,000 vouchers and 7,840,000 “options with vouchers” and 300,000 extra options. The vouchers had been purchased at prices between $11.50 and $98.72, the majority in the past few months in block trades at higher than existing prices.

Mr Lewis plainly regarded these investments as having extraordinary profit potential. So did Mr Cooperman who is recorded as having said that he had a high degree of confidence that it was a “ten bagger” by which he apparently meant it could show a ten-fold return. On the basis of a detailed investment memorandum prepared by Mr Lewis and Mr Swigart dated 22 March 1998 and the Grant Thornton letter, with the concurrence of the investment committee, Mr Cooperman authorised an investment of up to 2.5% of the net funds under investment of Omega Advisors.

On behalf of Omega Advisors, Dr Bodmer of vMB established the following subsidiaries in the BVI to act as investment vehicles for the purpose of acquiring and holding privatisation vouchers and options through wholly owned subsidiaries: Omega Group Holdings Ltd (also called “Omega Baku”), Pine Street Investment Ltd, Helendale Trading Corp, Pinford Portfolio Inc and Telos Finance Ltd. I shall refer to this group collectively as “the Omega Claimants”.

On 30 April 1998, the Omega Claimants signed a Co-Investment Agreement with Oily Rock and Minaret and a custodian agreement with Minaret and Oily Rock. Omega Advisors was not a party. Shona Louise White and Kay-Linda Richardson signed for the Omega Claimants as nominee Directors in the BVI, and Mr Kozeny for Oily Rock and Minaret.

Clause 2 of the Co-Investment Agreement provided as follows:

It is to be noted:

The provision in the earlier Letter of Intent providing that Oily Rock would not charge Omega Baku any mark-ups or commissions on the Vouchers purchased for Omega Baku’s account, except for those fees, expenses and commissions expressly agreed to in the Co-Investment Agreement and Custodian Agreement was not repeated. However, by clause 6, the full consideration for Oily Rock’s services was to be a complex call option over a portion of the vouchers, and there was no other provision for fees, expenses and commissions.

The provision preventing Oily Rock and its Affiliates and Clients was modified in respect of clients, so as to confine the prohibition to clients for which Oily Rock exercised investment discretion.

The Custodian Agreement established the following procedure for the purchase of vouchers:

Omega Group would establish a number of voucher holding companies which would establish US$ accounts at Hyposwiss Swiss Mortgage and Commercial Bank in Zurich;

Minaret would give notice that it had vouchers for purchase, setting forth the description, amount and price or price ranges of the vouchers to be purchased;

Omega Group had the option of instructing Minaret to purchase the vouchers on behalf of the voucher holding companies by giving a purchase request to Minaret and arranging the transfer of funds to a purchase account held by Minaret;

Upon receipt of the purchase request and funds, Minaret would execute the purchase request within 2 days. It also undertook to use its best endeavours to purchase options corresponding with the number of vouchers purchased;

If the vouchers could not be purchased, the funds would be returned;

All vouchers purchased would be held by Minaret in its vault in Baku for safekeeping and a trade confirmation would be issued.

American Investment Group Inc is a major Delaware corporation which carries on business in the provision of financial services and insurance. It owns National Union Fire Insurance Company (“National Union”). AIG Global Investment Corporation (“AIG Global”) is a New Jersey corporation which provides institutional asset management services for companies within the AIG Group. AIG Global’s managing director was Mr David Pinkerton. He was approached by Mr Lewis on 24 March 1998 and a meeting ensued between Mr Pinkerton, Mr Lewis and Mr Cooperman at Omega Advisors’ offices. AIG appears to have been provided with copies of the Letter of Intent and the Grant Thornton letter sometime in April or May 1998.

AIG had concerns about Mr Kozeny’s character and reputation, and enquiries were made, inter alios, of Mr Frank Wisner, Vice-Chairman of AIG and a former US Ambassador, Mr Shafik Gabr, an Egyptian businessman, and Senator George Mitchell – the latter two were investors in Oily Rock. On the basis of a memorandum dated 22 May 1998 which had been prepared by Mr Rajveer Ranawat and approved by Mr Pinkerton, AIG Global’s investment committee, consisting of Mr Pinkerton and three other senior officers, approved an investment of $15 million. It is clear that AIG Global had high hopes of making a very large profit from this investment.

On behalf of AIG Global, Dr Bodmer of vMB established Marlwood Commercial Inc (“Marlwood”) to act as an investment vehicle for the purpose of acquiring and holding privatisation vouchers and options through wholly owned subsidiaries. Marlwood was wholly owned by National Union and managed by Pharos Capital pursuant to a management agreement dated 4 June 1998. Mr Lewis was a director of Marlwood from 9 April 1998 until 23 April 1999 and during that period he had overall control of the investments.

AIG approved the Co-Investment Agreement and the Custodian Agreement, and on 8 June 1998 Marlwood entered into the first Assumption Agreement with Oily Rock and Minaret whereby it became bound to the Co-Investment and Custodian Agreements.

On behalf of Omega Advisors, Mr Lewis also approached the investment board of Columbia University, the prestigious New York university which has investment funds at its disposal which would be the envy of any British University. The first approach appears to have been to Mr Bruce Dresdner, Vice-President for Investments. Mr Steve Lehman, Senior Investment Officer, and Ms Elizabeth Wagner, Associate Investment Officer, became involved. Mr Lewis is recorded as having said on 6 April 1998 that there were “no pay offs” or “inside information”. A letter of intent was provided to the University on 8 April. Mr Lewis attended a meeting of the Investment Steering Committee of the Trustees held on 9 April.

After the presentation, the committee decided to proceed with an investment and on 10 April 1998 Mr Dresdner informed Omega Advisors that the University was prepared to invest $15 million.

On behalf of Columbia University, Dr Bodmer of vMB established Water Street Management Ltd (“Water Street”) in the BVI to act as an investment vehicle for the purpose of acquiring and holding privatisation vouchers and options through wholly owned subsidiaries. Water Street executed the Co-Investment Agreement and the Custodian Agreement on about 8 May 1998.

A small trial investment in vouchers was made on behalf of Omega Group on 20 March 1998 before the investment memorandum had been prepared and the Letter of Intent signed. Between March and July 1998, Minaret purchased the following vouchers and options in the names of the voucher holding companies (Footnote: ¹) nominated by the Claimants:

The procedure for the purchases followed that contemplated by the Custodian Agreement. Minaret gave notice that vouchers and options were available for purchase. The Claimants elected to purchase vouchers and options and put Minaret in funds to do so via an account at Hyposwiss controlled by Dr Bodmer, or direct to accounts held by Minaret at BNP Zurich and Hyposwiss. The purchases were effected and a trade confirmation was issued. Each trade confirmation was numbered and signed normally by Mr Thomas Farrell and Ms Tagieva for Minaret.

The investments in vouchers and options turned out, however, to be a complete fiasco. In the event, the privatisation of SOCAR never went ahead and the vouchers and options in which so much money had been invested proved to be utterly worthless. The Claimants lost the entirety of their investment.

According to the Omega Claimants (Footnote: ²), the trigger for their investigations was the discovery in August 1998 that the proceeds to the Azeri Government from the sale of options ($13.5m) were very significantly lower than the Omega Claimants, Pharos Capital and AIG Global had spent on options ($96,173,800). Mr Farrell gave an explanation which initially satisfied the Omega Claimants, but subsequent investigations revealed that the options had not been purchased from the Azeri Government, but from companies controlled by Mr Kozeny and for sums far in excess of what Mr Kozeny had paid for them.

According to the Consolidated Particulars of Claim and the Consolidated Reply, between July and October 1997, Oily Rock had purchased 1,367,297 books of vouchers at a total cost of $59,989,592. In order to get round the limits imposed by the Azeri authorities on the number of vouchers that could be held by any one entity, 45 BVI companies were established as subsidiaries of Oily Rock to hold vouchers and options. In September and October 1997, 15,727,000 options were purchased at a cost of no more than $11 million and the options and vouchers were distributed amongst the 45 companies.

The requirement was that a foreign investor purchased four options for each book of four vouchers. For the 1,367,297 books, Oily Rock and its subsidiaries needed 5,469,188 options. It therefore had a surplus of some 10.2 million options. Later Oily Rock purchased some additional vouchers, but it was still left with a surplus of some 9.25 million options.

By March 1998, Oily Rock and Mr Kozeny were financially over-extended and chronically short of cash. Large sums of money had been spent supporting Mr Kozeny’s extravagant personal life style which included owning properties in Eaton Square and Aspen, Colorado, a substantial yacht and a private jet aircraft, quite apart from the cost of purchasing vouchers.

The options purchased by the Claimants starting from 6 April 1998 came from the stock of 15,727,000 options held by Oily Rock and the 45 BVC companies. The price paid by the Claimants was $25 per option and the total sum received by Oily Rock for the sale of its options was some $83 million. According to the Claimants, Oily Rock had actually paid on average $0.3966 per option sold, so the $83 million was almost entirely profit for Oily Rock after deducting the nominal purchase cost.

At the request of Mr Kozeny, Grant Thornton produced a letter (see paragraph 11 above) which overstated the number of vouchers held by Oily Rock by about 300,000 and grossly understated the number of options held. The surplus of options over vouchers was not 340,000 but 9,246,556. The purpose of this was to deceive the Claimants into believing that Oily Rock had no significant surplus of options, and so would not be selling its own options to the Claimants.

Marlwood issued a claim form on 17 December 1999. The Omega Claimants issued a Claim form on 17 February 2000. Water Street joined the Omega Proceedings on 30 January 2001. In the Consolidated Particulars of Claim, the following main heads of claim are advanced:

Fraudulent misrepresentation/deceit.

Breach of Fiduciary Duty

Misappropriation/Account

$36.436 m was applied for the personal benefit of Mr Kozeny;

$34.717m was paid for voucher purchases for Oily Rock;

$38.910m was paid for voucher purchases for other persons apart from the Claimants;

$31.806m was disposed of in Baku other than in the purchase of vouchers and options;

$1m was disposed of by the 2^nd Defendant;

Breach of contract and inducement

Conspiracy

A freezing injunction was granted in favour of Marlwood by Longmore J. on 17 December 1999. The application was supported by affidavits from David Pinkerton, Richard Blaksley, and David Wyld (2). A further order was granted in favour of the Omega Claimants by Longmore J. on 17 February 2000. The application was supported by affidavits from Eric Vincent (2), Leon Cooperman, Colin Caomin and David Wyld.

With the service of the Defence of the 1^st, 3^rd and 4^th Defendants in July 2000, a very different and colourful story emerged of fraud, corruption and bribery of Azeri officials at the very highest levels of Government. Essentially (and I summarise), Mr Kozeny relates the following account of what actually happened.

Oily Rock, through the 2^nd Defendant and Mr Farrell, who were its representatives based in Baku, started to purchase vouchers in early July 1997. They did so in cash at street markets direct from Azeri citizens. Shortly thereafter, they were forced to buy vouchers direct from the Chechen mafia led by the self-styled Chechen ambassador to Azerbaijan, Ali Asayev, also known as “the Uncle”. From late July 1997, President Aliyev, removed Mr Asayev from the market, and Mr Kozeny was told by Nadir Nasibov and Barat Nuriyev of the SPC that in future all purchases of vouchers should be effected through Mr Nuriyev’s brother.

By this time, huge sums in cash were arriving in Baku. Normally these were flown in packed in suitcases each containing up to $5 million. There was usually $20-30 million stored in cash in Minaret’s strong-room in Baku. In the summer of 1997, two Russian couriers were arrested by the Azeri KGB in possession of $2m of Oily Rock’s cash and 3-6,000 vouchers. The head of the KGB suggested that Mr Kozeny should meet with President Aliyev and he did so. At the meeting, the President welcomed Mr Kozeny’s presence in Azerbaijan and Oily Rock’s investment in his country’s privatisation scheme. He emphasised, however, that it was illegal for a foreign entity to own vouchers without holding corresponding options. Mr Kozeny was told to go and see the President’s son who was in charge of SOCAR, and then Mr Nasibov at the SPC.

Mr Kozeny had several further meetings with President Aliyev during which the President confirmed his intention to privatise a number of State owned organisations, including SOCAR. He encouraged Mr Kozeny to continue to purchase vouchers and Oily Rock did so at a cost exceeding $155 million, which was paid in cash.

Meanwhile, Mr Kozeny, accompanied by Dr Bodmer of vMB, met President Aliyev’s son, and Mr Nasibov and his deputy Mr Barat Nuriyev, also known as “the Professor”. They were told that the options would have to be bought through the SPC and that these would be registered. The maximum holding was 400,000 per person or entity, although any number of nominee companies could be used.

Mr Kozeny arranged for the purchase of some 16 million options from the SPC – he saw an opportunity to buy a large number of options at a relatively cheap price: 12,204,000 were acquired for about $0.60 each and another 3,523,000 at a price of about $1.10 each. The average price paid was $0.71 each. Oily Rock controlled 15,727,000 of the 18,236,000 options issued by the SPC.

Because of the limit placed on the number of options and the fact that (unlike the vouchers) they were registered, Mr Kozeny acting for Oily Rock instructed Dr Bodmer to establish 45 bearer share companies to hold the options and vouchers purchased by Oily Rock. Dr Bodmer duly did so, and vMB held the bearer shares. By November 1997, Oily Rock had purchased 1,407,937 vouchers.

“In or about October 1997 President Aliyev (acting through Nadir Nasibov and Barat Nuriyev) made it plain to Mr Kozeny that any foreign investment in the Azeri privatisation scheme and the ability to maintain such investment was dependent on his continued goodwill. It was also made clear to Mr Kozeny that the President and his associates (“the Azeri interests”) wished to have a two-thirds participation in the investments being arranged by Mr Kozeny, although they had insufficient personal finances to acquire that interest. The Azeri interests wished to participate in relation to two thirds of both the vouchers and the options which had been and were to be acquired by Oily Rock and the Option Holders. As far as these Defendants are aware, the Azeri interests comprised the President, his daughter, his son Ilham Aliyev, Nadir Nasibov and Barat Nuriyev.” (Footnote: ⁴)

Mr Kozeny acceded to these demands and it was agreed that the beneficial ownership of 10,484,666 options would be transferred to the “Azeri interests”. Three holding companies were formed by vMB to hold these interests: Enkridge Holding Inc., Cudina Financial SA, Estoria Portfolio SA. These companies were in turn owned by trusts known as Petrus, Latour, Pomerol and Rioja, the so-called Wine Trusts. The Azeri interests were the beneficiaries of these Trusts.

Mr Kozeny believed that the simplest means of transferring two thirds of the vouchers and options to the Azeri interests was simply to transfer the bearer shares in 30 of the 45 companies to the Azeri interests. He left it to Dr Bodmer to arrange this. To dress up these transfers, a sham loan facility of $100 million each was made available to Enkridge, Cudina and Estoria by a company called Jemur Holdings Limited.

In the event, the mechanism was not acceptable to the Azeri interests. In about March 1998, following discussions between Mr Kozeny, Dr Bodmer and Barat Nuriyev, the vouchers originally owned by Azeri interests were re-acquired by Oily Rock. A further 2,897,666 options were also acquired from the Azeri interests. However, the remaining 7.587 million options were beneficially owned by Azeri interests.

Omega Advisors were aware from an early stage of the Azeri interests. Indeed Mr Cooperman asked if “the big man”, meaning President Aliyev, was “in on the deal”, to which Mr Kozeny said yes, along with his son and others. Mr Cooperman’s response was to smile and to say that if the President made this a “10 bagger”, meaning (according to Mr Kozeny) a $10 billion return, then the President would be a hero. Mr Cooperman was keen for the President to be involved because it would give assurance that the privatisation would go ahead.

Mr Lewis and Mr Swigart visited Baku in April 1998. They met President Aliyev and Messrs Nasibov and Nuriyev. Their primary concern was to ensure that Mr Kozeny had cornered the market, that the President supported Mr Kozeny’s position, and that he and his associates were personally involved. When they visited the vault they were shown the three files of options and told that two-thirds belonged to “our friends”.

Omega Advisors started buying vouchers on about 20 March 1998. Mr Kozeny enquired of President Aliyev as to whose options should be sold, and he was told that they should come from the Azeri interests’ holding and that the sale price would be $25.

In April 1998, Mr Lewis visited Mr Kozeny at his Aspen residence. In the course of that meeting, Mr Lewis was told that the Government had stopped issuing options but a private deal was possible “with our friends”. Mr Kozeny explicitly confirmed that the sellers would be on the Azeri side. Mr Lewis was happy with the price of $25 because it was slightly less than the then official SPC price of c.$26. This was evidenced by a copy of the agenda for the Aspen Meeting which included the entries “Private deal with Azeri possible” and “Prof price $25 for up to 4m/i.e 5% discount” beside which Mr Kozeny noted “Clay OK”.

Omega Advisors, AIG and Columbia University were well aware that the Azeri interests were participating on the deal and that senior Azeri Government officials would have to be provided with a substantial financial incentive.

Omega Advisors started buying options on 6 April 1998. They did so from the Azeri interests at a price of $25 per option. By April 1998, Mr Kozeny and Mr Nuriyev decided to merge Oily Rock and the Azeri interests and, in anticipation of this, each party would receive part of the proceeds of the option sales to the Claimants. This decision was sealed at a dinner in Baku on 25 April 1998, attended by Mr Lewis, at which the Azeris were specifically referred to as “our partners”. Pursuant to these arrangements, and as recorded in a Reconciliation Document, of the $93,368,800 which had been paid by the Claimants:

$12.55 million was paid to Mr Nuriyev referred to as “the Professor”;

$20 million was paid to payees on behalf of the Azeri interests;

A further $18.9 million was paid to other payees on behalf of the Azeri interests.

On the basis of these facts, the Defendants put forward the following Defences, inter alia:

The Claimants knew that senior Government officials were personally involved in their investment in the Azeri privatisation scheme alongside Oily Rock, and that significant financial incentives were involved. By so investing, each of the Claimants (and Messrs Cooperman, Lewis, Swigart, Vincent, Wisner, Pinkerton and Ranawat inter alios) corrupted senior Azeri Government officials with a view to obtaining a significant stake in SOCAR and in return for “inside information”. This corruption was an offence at common law and/or pursuant to section 1(2) of the Public Bodies Corrupt Practices Act 1889 and/or section 1(1) of the Prevention of Corruption Act 1906 (as amended by the 1916 Act). It can also be presumed to be an offence under the laws of Azerbaijan. It was also an offence in the United States under §78dd-2 of the Foreign Corrupt Practices Act 1977. In the premises, none of the agreements (including the Letter of Intent) was capable of being enforced against any of the Defendants;

Further the tortious causes of action could not be enforced because they all depended upon establishing the existence and enforceability of the agreements and/or because they were directly connected to the illegal conduct of Omega Advisors, AIG and the Claimants.

The options purchased by the Claimants were not Oily Rock’s “vouchers” within the meaning of the clause 1.1(a) of the Letter of Intent or clause 2.2 of the Co-Investment Agreement and there was no breach of these. There was no fraudulent misrepresentation.

As to the plea of misapplication of the Claimants’ monies, it was denied. “These Defendants reserve the right to plead in detail to these paragraphs upon receipt of a forensic accountant’s report and/or a full account from vMB with regard to the monies allegedly received and/or paid out by vMB (Footnote: ⁵).”

The Claimants served a compendious Reply challenging many of the allegations made by the Defendants. I will mention some of the more detailed points later in this judgment and it is enough to record that the Reply emphasised the following main points:

It denied that any Azeri official had received any corrupt payment.

Alternatively, the Claimants did not know of any corrupt payments or financial incentives to any Azeri officials. This denial extended to Mr Lewis.

On 6 September 2001, Peter Gross QC, sitting as a deputy judge of the High Court, restrained Mr Kozeny from prosecuting proceedings in New York and from serving or enforcing subpoenas against Mr Maurice Greenberg, Mr Cooperman, Mr Ed Matthews, Mr Frank Wisner, Mr Pinkerton, Mr Vincent and Mr Swigart, and also restrained proceedings against Mr Lewis and Pharos Finance in New Jersey. This was on terms that the Claimants undertook to use their best endeavours to produce witness statements from these individuals, plus Mr Aaron Fleck and Mr Frederick Bourke when the time came for the exchange of witness statements.

By early 2002, it was apparent that the United States District Attorney for the Southern District of New York, which includes New York City, and the New York District Attorney were investigating possible criminal conduct. This included possible criminal conduct by Mr Kozeny, Oily Rock and Minaret, but I do not think it was confined to them. It is now known that the FBI was involved in the investigation.

Mr Kozeny was advised that he was likely to suffer serious prejudice if these proceedings continued and he applied for a stay. On 6 March 2002, Cresswell J. ordered by consent that, pending the conclusion of criminal investigations being undertaken by the United States District Attorney and, if instituted, criminal proceedings against the 1^st, 3^rd or 4^th Defendants, or until further order, the proceedings be stayed. The Court gave permission to any party to apply to remove the stay on 14 days’ notice.

There have been a series of what can properly be called, without exaggeration, dramatic developments since the stay was granted. The developments fall under four heads:

Criminal proceedings in New York and elsewhere.

Evidence served by the Claimants including the Nuriyev affidavit and the vMB memorandum.

The New York action against Lewis.

Material disclosed by the Claimants.

§78dd-2 of the Foreign Corrupt Practices Act (“FCPA”) provides, inter alia, as follows:

(i) influencing any act or decision of such foreign official in his official capacity (ii) inducing such foreign official to do or omit to do any act in violation of the lawful duty of such official, or (iii) securing any improper advantage; or

inducing such foreign official to use his influence with a foreign government or instrumentality thereof to affect or influence any act or decision of such government or instrumentality,

§78dd-3 of the FCPA provides, inter alia, as follows:

(i) influencing any act or decision of such foreign official in his official capacity (ii) inducing such foreign official to do or omit to do any act in violation of the lawful duty of such official, or (iii) securing any improper advantage; or

inducing such foreign official to use his influence with a foreign government or instrumentality thereof to affect or influence any act or decision of such government or instrumentality,

At the relevant time, the penalty for violations involved a maximum term of imprisonment of 5 years plus 3 years of supervised release, plus substantial fines.

On 10 March 2003, Mr Farrell appeared before the Honorable Richard M Berman, District Judge in the United States District Court of the Southern District of New York and, having been sworn, pleaded guilty to two counts of:

Conspiring to make corrupt payments to Government officials of the Republic of Azerbaijan in violation of the FCPA;

A substantive violation of the FCPA by offering or paying money or things of value to foreign officials.

The plea was pursuant to a co-operation agreement with the United States District Attorney dated 7 March 2003, the terms of which are secret. In return for co-operation, the District Attorney agreed that, if substantial assistance was given, his Office would file a memorandum with the Court that Mr Farrell be sentenced pursuant to Section 5K1.1. of the sentencing guidelines of the US Sentencing Commission – in substance this could lead to a reduced sentence on the grounds of co-operation provided to the prosecution authorities.

In the allocution stage of the hearing, Mr Farrell answered on oath a number of questions from the learned Judge. He admitted:

Sentence was adjourned and Mr Farrell remained on bail which was enlarged to permit him to reside in St Petersburg, Russia. The proceedings were sealed and so remained secret.

On 10 February 2004, Mr Lewis appeared before the Honorable Naomi Reice Buchwald, District Judge in the United States District Court of the Southern District of New York and, having been sworn, pleaded guilty to two counts of:

Conspiring to make corrupt payments to Government officials of the Republic of Azerbaijan in violation of the FCPA ;

A substantive violation of the FCPA.

This plea was also pursuant to a co-operation agreement with the United States District Attorney, the terms of which are secret. It appears to have been along the same lines as Mr Farrell’s.

In the allocution stage of the hearing, Mr Lewis answered on oath a number of questions from the learned Judge. He admitted that he knew that Mr Kozeny had entered into arrangements with Azeri officials which gave those officials a financial interest in the privatisation, although he was not aware of the details.

Sentence was adjourned and Mr Lewis remained on bail, with permission to travel abroad with the approval of federal Pre-Trial Services.

Mr Lewis had sworn an affidavit in these proceedings on 9 January 2001 in support of Pharos Finance’s application to be joined as Claimants in the proceedings. On 21 September 2005, he re-swore that affidavit and withdrew a number of assertions including:

An indictment was filed under seal on 5 August 2003 against Dr Bodmer, at a time when he was in Switzerland, from where he could not have been extradited. Shortly afterwards, he travelled to South Korea on behalf of an international sports federation. The indictment was unsealed and he was arrested there. As District Judge Scheindlin recorded in United States of America v. Hans Bodmer 342 F.Supp.2d 176:

On 8 October 2004, Dr Bodmer appeared before the Honorable Frank Maas, District Judge in the United States District Court of the Southern District of New York and, having been sworn, pleaded guilty to a single count of conspiring with others to launder money instruments in connection with a scheme to acquire interests in the state oil company of Azerbaijan contrary to Title 18 of the US Code, section 1956(h). This offence carried a maximum prison sentence of 20 years, the unlawful activity being a violation of the FCPA.

This plea was also pursuant to a co-operation agreement with the United States District Attorney dated 6 October 2004, the terms of which are secret. It appears to have been along the same lines as Mr Farrell’s.

In the allocution stage of the hearing, Dr Bodmer answered on oath a number of questions from the learned Judge. He admitted:

Sentence was adjourned and Dr Bodmer was released from effective house arrest (Footnote: ¹¹) and allowed to return to Switzerland from where he was allowed to travel abroad with the permission of the US Government.

On 6 October 2005, an indictment charging Mr Kozeny, Mr Pinkerton and another investor Mr Bourke with conspiracy to breach the FCPA and related crimes, including money laundering, was unsealed. Mr Pinkerton and Mr Bourke were arraigned before the United States District Court of the Southern District of New York. Mr Pinkerton pleaded not guilty. In a letter to Macfarlanes, the Claimants’ solicitors, his attorney, Mr Barry Berke of Kramer Levin Naftalis & Krankei LLP, stated that the charges will be vigorously contested at trial. Mr Bourke also pleaded not guilty.

Mr Kozeny is resident in the Bahamas. Following the unsealing of the indictment, a request was made by the US Government to extradite him to stand trial in the United States. On 5 October 2005 he was arrested and he is presently in custody in the Bahamas. He is contesting extradition on technical and legal grounds. I am told that he does not substantially challenge the factual case against him.

The extradition application was supported by an affidavit by Jonathan S. Abernethy, an Assistant United States Attorney, sworn on 7 December 2005. The affidavit produces a copy of the Amended Defence in the Omega Claimants action 2000 Folio no. 199 and relies on its contents as showing Mr Kozeny’s corruption.

The Abernethy affidavit also exhibited an affidavit of Thomas Farrell sworn on 21 November 2005. The opening paragraphs of the affidavit make it clear that it was provided pursuant to the co-operation agreement with the Office of the United States Attorney. In the course of this affidavit, Mr Farrell deposes to the negotiation and agreement to transfer to Azeri officials two-thirds of Oily Rock’s vouchers and options and two-thirds of the profits arising from Mr Kozeny’s investment in the privatisation (Footnote: ¹²). At paragraphs 33-35 , Mr Farrell deposed as follows:

In other parts of his affidavit, Mr Farrell deposed to extravagant gifts purchased for President Aliyev and reckless shopping sprees for members of his family involving over $1 million a time funded by Mr Kozeny.

The Abernethy affidavit also exhibited an affidavit sworn by Mr Lewis on 22 November 2005 pursuant to his co-operation agreement. In it, he deposed (Footnote: ¹³):

The Abernethy affidavit also exhibited an affidavit sworn by Dr Bodmer on 24 November 2005 pursuant to his co-operation agreement. In this affidavit, Dr Bodmer confirmed and expanded upon what he had said in his plea allocution. He deposed (Footnote: ¹⁵):

Mr Lewis supplemented his evidence with a further affidavit sworn on 14 February 2006 where he confirmed that he had previously lied on a number of occasions about his relationship with Mr Kozeny, including in his affidavit to this Court sworn on 5 January 2001.

On 6 February 2006, Macfarlanes unexpectedly received an affidavit, redacted in parts, sworn by Barat Nuriyev on 7 January 2004. The lengthy affidavit appears to have been sworn in connection with the New York criminal proceedings against Dr Bodmer. In the affidavit Mr Nuriyev vigorously denies having acted corruptly and all allegations of illegality. He admits that he helped Mr Kozeny’s group to collect vouchers but he asserts that he did so without profit and as part of the SPC’s duty to create an atmosphere of favourable conditions for foreign participants at the privatisation of state owned enterprises. He claims that he thought that at least 40% of the shares in SOCAR should go to the Azeri nation in order not to have local problems in the future. He was concerned that Mr Kozeny would buy up all the vouchers. There was a gentleman’s agreement about a one thirds/two thirds split and he decided to create a vehicle to prevent Mr Kozeny buying all the vouchers. At one stage the $300 million credit facilities in favour of Cudina, Estoria and Enkridge were to be used for this purpose. However, as I understand his evidence (Footnote: ¹⁶), that all ceased to be necessary, because Mr Nuriyev concluded that Mr Kozeny actually lacked the resources to buy up so many vouchers that Azeri interests would be prejudiced. He kept a close eye on the vouchers and options purchased by Mr Kozeny and his co-investors and he knew exactly what they had spent. Not a cent was paid in favour of Azeri officials.

There are, however, some fairly remarkable features in his evidence. Perhaps most startling is the evidence about his personal finances. He states at paragraph 3 that “his little savings” consisted of about $10,000, which he invested in the voucher market through his brother. In due course, he decided to have three family trusts set up, one for himself, one for Mr Nasibov and one for them jointly and these were established by Dr Bodmer, but nothing went into them. At the beginning of 1998, Dr Bodmer established some bank accounts in Switzerland in the names of 4 or 5 offshore companies, beneficially owned by Mr Nuriyev and other people. By that time vMB client accounts held a “few million US dollars belonging to the mentioned people including me” (Footnote: ¹⁷). The affidavit is rather confusing as to what sums were owned by Mr Nuriyev but he appears to say that he had a “few million dollars in those accounts” (Footnote: ¹⁸). He is equivocal about whether he received the $12.55 million paid to the “Professor” according to the Reconciliation Document. At one point, according to his account, he seems to have had 60,000 books vouchers of his own which he says were worth around $78 per book (Footnote: ¹⁹), which would be equivalent to $4.7 million. He appears to say that the money came from the sale of “flour my friends bought from Ankara”. There must have been a lot of flour. I do not understand from his evidence how his “little savings” of $10,000 were transformed into a potential fortune, whether of c$5m or much more. It is only fair to add that, on his evidence, the value was not realised before the market collapsed.

Mr Nuriyev also exhibited a draft memorandum dated 9 October 2001 prepared by Mr Schmidt of vMB for Dr Bodmer. The memorandum appears to confirm that Enkridge, Cudina and Estoria were established as holding vehicles for trusts beneficially owned by Mr Nuriyev and Mr Nasibov.

The memorandum concludes:

On 1 February 2006, Omega Advisors and other Omega companies, including the Omega Claimants, issued a complaint in the United States District Court in the Southern District of New York against Mr Lewis. In the proceedings, it is alleged that Mr Lewis committed fraud and breaches of contract and fiduciary duty and that, in an effort to shield himself from liability, he transferred some $15 million to secret trusts. In essence the Plaintiffs’ case is that Lewis concealed his knowledge of Kozeny’s corrupt relationships from the Plaintiffs and instead gave false assurances that the transactions were entirely proper. They claim compensatory damages in excess of US $465 million and punitive damages.

In the course of argument, I was shown a number of documents disclosed by the Claimants in this action. It would extend an already lengthy judgment if I described all of them. As against AIG Global and Marlwood, particular reliance was placed on:

The AIG Investment Memorandum which records at page 4 “According to Omega, [Victor Kozeny] has established close relationships with President Alief [sic] and has been given access to information not available in the market. It is not possible to verify the extent of this relationship”.

A handwritten note by Mr Ranawat of AIG Global which appears to read:

A note by Mr Pinkerton which included the following:

In the light of these developments and new evidence, the 1^st, 3^rd and 4^th Defendants apply for orders:

On 2 March 2006, shortly before the hearing I made a Tomlin Order by consent that the claims by Pharos Finance (Mr Lewis’s company) be stayed. By the terms of the agreement annexed to the Order, Pharos Finance agreed to discontinue the proceedings forthwith and to pay £250,000 costs.

At the outset of the hearing I agreed to lift the stay de bene esse so as to allow the argument to proceed, on the basis that, if appropriate, the stay could be re-imposed after judgment. Otherwise, it was difficult to see how the main applications could be argued.

Mr Richard Millett QC for the 1^st, 3^rd and 4^th Defendants submitted to me that the Letter of Intent and the Co-Investment agreements were illegal and so unenforceable and the Claimants could have no claim against Mr Kozeny for deceit. There can be no action for deceit where the complaint is that the false representation induced the representee to enter a contract which is illegal and unenforceable and where the deceit goes to the manner of intended performance of the contract.

Second, and alternatively, even if it were arguable that the Claimants did not know of the fact of the Azeri interests and the actual corruption of the senior Azeri officials involved, they did know, or at least wilfully turned a blind eye (such as to amount to knowledge) to the fact that the Letter of Intent, the Co-investment Agreements and the related agreements were all designed to obtain for the Claimants the benefits of the fact that Mr Kozeny had access to government officials at the highest level which other potential foreign investors did not have. The purpose of the agreements was the trafficking by Oily Rock and Minaret of Mr Kozeny’s influence over or with the Azeri officials. As such, these agreements were contrary to public policy.

Third it was submitted that the claim in deceit was bound to fail or stood no reasonable prospect of success because Mr Lewis was, as was incontrovertible, told expressly by Mr Kozeny of the Azeri interests and the 1/3rd 2/3rd split of vouchers and options between Oily Rock and the Azeri interests

In those circumstances, he submitted that I should dismiss the actions, but even if, for whatever reason, I was not satisfied that the claim had no real prospect of success, I should in any event discharge the freezing injunctions on the grounds either (i) that the Claimants have no good arguable case (a higher threshold than Part 24) or (ii) that there was serious non-disclosure.

Mr Dominic Dowley QC for the Claimants submitted that the applications were wholly inappropriate. They required the Court to determine at this interlocutory stage and without a trial that the Defendants’ case is bound to succeed at trial. It was inappropriate for the Court to try to resolve complex issues of hotly disputed fact at this stage. Further the law on the effect of illegality and knowledge of illegality on a Claimants’ claim is complex and in some respects unclear, especially where the Claimant alleges that the Defendant has defrauded him, and the result will always be heavily dependant on the findings of fact in the particular case. The case should go for trial and the freezing injunctions maintained.

The starting point is that this is an application for summary judgment against the Claimants under CPR Part 24 made before trial. It is not a mini-trial. The Defendants have to show that the action has no real prospect of succeeding. It is enough for the Claimants to show some real, as opposed to false, fanciful or imaginary chance of success (International Finance Corporation v. Utexafrica Sprl [2001] CLC 1361 and ED&F Man Liquid Products Ltd v. Patel [2003] EWCA Civ 472). The Claimants do not have to show that they will probably succeed at trial. The overall burden of proof is on the Defendants to establish that there are grounds to believe that the Claimants have no real prospect of success, and that there is no other reason for trial. If the Defendants adduce credible evidence in support of the application, the Claimants may become under an evidential burden of showing some real prospect of success or some other reason for a trial, but the standard of proof is not high – see generally the notes at §24.2.6 of the White Book.

In Swain v. Hillman [2001] 1 All ER 156, Lord Woolf MR gave this further guidance, which was quoted with approval by Lord Hope in the Three Rivers case [2001] UKHL/16, [2003] 2 AC 1 at §93:

Mr Dowley’s first submission was that it would be wholly inappropriate for the Court at a summary hearing to convict unrepresented persons of serious criminal offences. Obviously, sitting in the Commercial Court, I have no jurisdiction to convict anyone, but he is right that I should not make any finding of criminal misconduct at this stage, unless there is overwhelming and conclusive evidence – that is evidence which is really unanswerable. Any other approach would be obviously unjust.

On that basis, in my judgment, it would be wholly inappropriate for me to make adverse findings of grave misconduct against those who have not been convicted of any criminal offence (and in most cases not even charged), all the more so where they have put in witness statements challenging that they had any knowledge of any corruption, as have Mr Vincent, Mr Frank Wisner and Mr Cooperman. There is also the categoric letter from Mr Pinkerton’s attorney. So I decline to find at this stage that Mr Cooperman, Mr Swigart, Mr Vincent, Mr Wisner, Mr Pinkerton or Mr Ranawat knew that there was corruption of Azeri officials. I am also satisfied that there is a fully arguable case that the other members of the Investment Committee of AIG Global had no such knowledge: see also the witness statement of Win J. Neuger. The same applies to the Trustees of Columbia University responsible for making investments: see the witness statement of Bruce M. Dresdner, formerly Vice-President for Investments of the Trustees of Columbia University. That is not to say that some of them at least have not got a serious case to answer. In particular, there are some troubling documents disclosed by AIG Global, some of which I have already referred to in paragraph 89.

In my judgment, however, the position is quite different with those who have been convicted of offences of conspiring to make corrupt payments to Government officials of the Republic of Azerbaijan in violation of the FCPA or of conspiring to launder money, following pleas of guilty in the United States. Mr Farrell, Mr Lewis and Dr Bodmer have been so convicted. Their pleas of guilty were only accepted after painstaking enquiries by the Judges and were made on oath. I am uncomfortable about the circumstances in which Dr Bodmer found himself – incommunicado in South Korea and then under virtual house arrest in the United States – but he was represented by counsel at the hearing before Judge Maas and had ample opportunity to assert his innocence. I am sure that very careful consideration was given before he entered a guilty plea. Moreover, after getting back home to Switzerland, he has not sought to recant or repeat an earlier statement that the allegation that he was involved in bribery “ist doch ein grosses Märchen” – viz it is just a great fairytale. On the contrary, he has repeated and developed his admissions in his affidavit sworn on 24 November 2005.

So in my judgment it is established beyond reasonable doubt at this stage that Mr Farrell, Mr Lewis and Dr Bodmer were involved in corrupting Azeri officials. In the light of their pleas of guilty and his own repeated admissions, it is also clearly established at this stage that Mr Kozeny was involved in the corruption as well – indeed he was obviously the architect of the entire corrupt scheme. It would be entirely fanciful to think that the Court would reach different conclusions at the end of a full trial.

In my view it is not necessary for me to identify at this stage which Azeri officials were corrupted. I am sure that there was corruption at a high level. Mr Nuriyev has a great deal of explaining to do – in particular how it is that his wealth apparently increased exponentially over a short period – and there is strong evidence that President Aliyev and Mr Nasibov were in receipt of bribes, but I am not prepared to make a positive finding of corruption against any particular Azeri official at this summary stage.

I am sceptical however as to whether Mr Kozeny, Mr Farrell, Mr Lewis and Dr Bodmer are being truthful about exactly what form the corruption took. I regard Mr Kozeny, on his own admissions and in the light of the pleas of guilty by his associates, as a thoroughly dishonest man. He has every incentive to lie and exaggerate what happened in order to try and avoid liability for payment of very large sums to the Claimants. He wants to retain his ill-gotten gains.

Mr Farrell, Mr Lewis and Dr Bodmer are in an uncomfortable position awaiting sentence. They have a strong incentive to give the United States Attorney what he wants, in the hope that he will support them before the sentencing judge and that, having helped bring the main villain to book, their sentences will be greatly reduced. Mr Millett urged on me that they had every incentive to tell the truth, because that was a term of the co-operation agreement. But, as against that, they are on their own admission dishonest men, and the incentive to exaggerate is obvious: cf. the observation by Simon Brown LJ in R. v. Bailey [1993] 3 All ER 513, 523j, in the context of evidence from one prisoner against another, that these are men who tend not to have shrunk from trickery and a good deal worse, and always have strong reasons of self-interest for seeking to ingratiate themselves with those who may be in a position to reward them. As Lord Hope put it in Benedetto v. The Queen [2001] 1 WLR 1545 at §32, witnesses in this category tend to have no interest whatever in the proper course of justice. I think that Mr Farrell, Mr Lewis and Dr Bodmer are in a very similar position. Their evidence must be treated with very considerable reserve.

I have no doubt that Mr Kozeny paid substantial bribes in cash and benefits in kind to Azeri officials. My scepticism is as to the allegation that, as part of this bribery, Mr Kozeny agreed to transfer two-thirds of Oily Rock’s vouchers and options to the Azeri officials, and then, having unscrambled this arrangement, to give them a two-thirds interest in Oily Rock. These admissions conveniently dovetail with the defence of these actions, and Mr Dowley demonstrated that there were real doubts as to whether this account is true.

First, the Defendants’ own accounting documents do not support their account of events.

A very detailed spread sheet was produced by Oily Rock probably between late June and late July 1998 (Footnote: ²⁰), and provided to Mr Vincent by Ms Tagieva at a much later stage. It appears to provide a full inventory of Oily Rock’s vouchers and options, cross referenced to the trades with the Claimants and the payments. There is no mention of any third party interest of any sort. The vouchers, options and cash appear to be treated throughout as Oily Rock’s. Yet if it were correct that the options and vouchers were being sold by Azeri interests from what was their two-thirds, the inventory could have been expected to show this.

In a spread sheet entitled “Arsenal Audit Trail” (Footnote: ²¹), Mr Farrell kept what appears to be a running account of the cash received in Baku. It shows some of the cash going out to Baku and into the Oily Rock safe, and some of it then going out to the client safe and being used for the purchase of vouchers, although there is no obvious match with the figures in the trade confirmations issued to the Claimants by Minaret. Of the money kept in the Oily Rock safe, the spread sheet evidences that some was used to buy vouchers for Minaret Group, some on the payment of large commissions and much on expenditure for Oily Rock’s benefit. Some of the commissions (e.g. those paid to “Uncle/Khan”) would be consistent with large bribes being paid, but there is no evidence of the money received in Baku being treated as largely belonging to Azeri interests for the vouchers and options sold by them. On the contrary, Minaret and Oily Rock appear to have treated the money as theirs and to have used it for their own/Mr Kozeny’s purposes.

But by no means all the money went out to Baku. To take three examples:

On 16 April 1998, $20,190,020 was transferred from the vMB controlled Hyposwiss account to Minaret’s account. Of this, $7 million was flown out to Baku and, according to the Arsenal Audit trail spreadsheet, spent on the purchase of vouchers from “Khan” although it cannot be correlated with the trade purchase confirmations. $6.64 million was spent on Mr Kozeny personally according to contemporary correspondence (Footnote: ²²) – on the basis of another accounting document headed “Oily Rock Reconciliation of Profit Account” (Footnote: ²³) – mainly on his Aspen home. The balance of $6.3 million appears to have been disbursed on various matters which have yet to be explained.

Between 22 April and 8 May 1998, some $74.5 million was received from the Claimants by vMB. Of this some $10 million appears to have gone out in cash to Baku. From this payment, $6 million was spent on vouchers from “Khan” according to the Arsenal Audit trail spreadsheet, although this cannot be correlated with the trade purchase confirmations. The remaining $4 million (and other money in the client safe) was transferred as “commission” to Oily Rock. Most of that was used to buy vouchers for Oily Rock. The balance of $64.5 million did not go out to Baku and appears to have been transferred out of the vMB accounts very quickly. $7 million can be traced to Daventree, a company controlled by Mr Kozeny.

Out of payments totalling $15 million credited to Minaret on 15 June 1998, $11 million was used to discharge Mr Kozeny’s indebtedness to Alfa Bank and $3.4 million went to pay for the Aspen home, the yacht and Mr Kozeny’s attorney in the Bahamas.

Second, many of the payments which the Defendants claim were payments to officials for the sale of options do not seem to be such. Paragraph 101 of the Consolidated Defence sets out a series of payments which, it is contended, were for Azeri interests. Some may have been – for instance the payment of $12.55 million in the Reconciliation Documents attributed to the “Professor”, although these seem to pre-date the purchase of options. But other payments do not seem to be to Azeri interests. For instance:

The payment of $11 million to Lukoil Marine – a large Russian oil company – may have been connected with the purchase of vouchers, but appears on its face to have nothing to do with a sale by Azeri interests.

Other large payments to Chase Manhattan Bank and Banque Nationale de Paris have no obvious connection with any Azeri official and are not cross-referenced in any accounting document to the purchase of options.

Third, on 8 September 1998, Oily Rock and the 45 companies, acting by Mr Kozeny, pledged all their assets in favour of the liquidator of Harvardsky Holdings as security for guarantees of two bills totalling CzK 9,880,104,000 or approximately $300 million. This appears to have been to placate some Czech investors who had invested in a previous Kozeny venture involving privatisations in the Czech Republic. This pledge would be inconsistent with Azeri interests owning two-thirds of the 45 companies or a two-thirds share in Oily Rock. That is not to say that there is no evidence that any of the 45 companies were transferred to Azeri interests. A “Chart 2” (Footnote: ²⁴) has been produced by Mr Nuriyev which may evidence which companies were transferred, but it is far from compelling in showing that anything was actually transferred to the Azeri interests.

Fourth, in a document headed “Funding List Draft 05.03.99” disclosed by the Defendants there is a list of what appears to be the shareholders in Oily Rock together with their funding/subscriptions. Most of the shares appear to be owned by companies controlled by Mr Kozeny. There is no evidence from this document of any Azeri interest, although the merger of interests is supposed to have been agreed on 25 April 1998, nearly a year earlier. There is another document dated 19 August 1999 headed “list of issued shares as per 27.4.99” which lists a share certificate no. 66 for 276 million shares, apparently issued pursuant to a resolution dated 15 February 1999, but the shareholder is not identified. This was long after the venture had collapsed and at a time when the Claimants were pressing hard for explanations. These documents provide little support for the proposition that Azeri interests held a two-thirds interest in Oily Rock.

Fifth, at the allocution hearings, Mr Farrell, Mr Lewis and Dr Bodmer were by no means consistent as to what they said had occurred. Mr Farrell said that an official had been promised two-thirds of the profits from the privatisation of SOCAR and that bribes had been paid in wire transfers and cash. Mr Lewis referred only to bribes of 2%, in itself a very large sum, but small by comparison with Mr Kozeny’s case. Dr Bodmer referred to the transfer of two-thirds of the vouchers and options for the benefit of the Azeri interests. Now, according to the affidavits exhibited to Mr Abernethy’s affidavit they tell a much more consistent account. There are serious questions as to why that is so.

Finally, I find the scale of the alleged bribery difficult to believe. I have no difficulty accepting that there were large cash payments and benefits in kind, but to transfer in addition two thirds of the vouchers and options to officials and then to swap them for a two-thirds interest in Oily Rock, when the officials had paid nothing, does seem extraordinarily and recklessly generous. I seriously doubt that Mr Kozeny would have given away so much of “the action”.

This is an application for summary judgment, not a trial. At this stage I think there are real and genuine issues to be tried as to whether Mr Kozeny ever agreed to transfer two-thirds of the options and vouchers to Azeri interests, whether he agreed to transfer two-thirds of the 45 companies and whether he agreed to transfer a two-thirds interest in Oily Rock. I cannot see that the fact that the Omega Claimants have commenced proceedings against Mr Lewis in New York in any way precludes the Claimants from raising the issue here. I regard these proceedings as being to a large measure protective.

Given these conclusions, I now turn to consider:

The merits of the claim in deceit, the other tortious claims, the claim for breach of fiduciary duty and the claim for breach of contract;

The merits of the accounting claim;

The consequences of the bribery on the Claimants’ claims.

Mr Millett submitted that there was no actionable case in deceit. In essence, the Claimants’ case was that Mr Kozeny lied about (i) the amount of vouchers and options owned by Oily Rock as represented by the Defendants in the Agreements (via the Grant Thornton letter of 24 March 1998); and (ii) that it was his intention, as per Clause 1.1(a) of the Letter of Intent and Clause 2.2 of the Co-Investment Agreement, that Oily Rock would not sell vouchers and options to the Claimants which were currently owned by Oily Rock or its “affiliates” or other clients over which it exercised investment discretion, without prior approval of (in essence) the Claimants. He submitted that in the light of the fact that Mr Lewis was told expressly by Mr Kozeny of the Azeri Interests and the one-third/two-thirds split of vouchers and options between Oily Rock and the Azeri interests (see e.g. paragraphs 16 to 20 of the Lewis extradition affidavit), which was (he said) incontrovertible, the pleaded claim for deceit against Mr Kozeny is bound to fail, or does not stand any reasonable chance of success.

In the light of my findings, I disagree with the proposition that it is incontrovertible that Mr Lewis was told of the one-thirds/two-thirds split. At this stage, in my view it has not been established that there ever was such a split, let alone that Mr Lewis was told about it. Indeed, Mr Lewis’s amended affidavit maintains the allegation that he was lied to by Mr Kozeny. I think it equally possible that this is all a smoke-screen put up to try and get round the case that Kozeny appears to have sold his own options to the Claimants, when that is exactly what he had promised from the outset he would not do. It is a viable inference that this is what he always intended to do, and that he lied to the Claimants. It will be for the trial judge to reach a conclusion having heard all the evidence.

Mr Millett addressed a number of other arguments about causation. He said, if Mr Lewis was prepared to lie about the legitimacy of the deal as a whole, he would have continued to lie, had he been told about Mr Kozeny’s true intention to sell his own options. I think this proposition rather doubtful. Wearing his Pharos hat, I would have expected Mr Lewis to have reacted very strongly, had he thought that Mr Kozeny was using Pharos’s investment to realise a huge profit for himself and reduce his exposure. In any event, these arguments go far beyond what can properly be decided on a summary application. In my view, they are issues for a trial judge.

On the same basis, I consider that the Claimants have viable claims in conspiracy, and for breaches of fiduciary duty and breach of contract.

There was a good deal of argument at the hearing, and in written submissions exchanged thereafter, as to the nature of the accounts claim that could properly be maintained by the Claimants. Mr Millett submitted that the Claimants got exactly what they paid for – there is, he says, no pleaded claim that the vouchers and the options were purchased for anything other than the market price. If the Claimants got $183 million worth of vouchers and options, what, he asks rhetorically, did they lose? His answer is nothing. This is not, he asserts, a defalcation where a fiduciary has “run off” with the money entrusted to him. The money applied for the benefit of Mr Kozeny was not the Claimants’ money. It is what Mr Kozeny did with the secret profit he earned (assuming that is that it was a secret profit).

Again in my judgment many of these arguments trespass into the province of the trial judge. There is a viable case for an account in respect of the money paid to Minaret for the purchase of options and vouchers. It is not an answer, or at least not a complete answer, that the Claimants got the vouchers and options they paid for, because, quite apart from general agency law, under the terms of the Letter of Intent and the Co-Investment Agreement and the Custodian Agreement, Oily Rock was obliged to pay the best price available for vouchers, and it is further strongly arguable that Oily Rock and Minaret were not entitled to charge any kind of mark-up or commission. So, if Oily Rock was actually purchasing vouchers for less than it had indicated to the Claimants, then it would obviously be liable to account for the balance to the Claimants. Whether that is what was actually happening will be a matter for trial. Quite apart from the options issue, the Claimants have raised a serious case as to whether the monies advanced for the payment of vouchers were really spent on them. It is striking that the trade confirmations do not seem to match up with the actual purchases. The answer may lie in the fact, as contended by the Defendants, that Oily Rock was acting as a broker, making block purchases of vouchers rather then buying them on a matched bargain basis, but such a case is not supported at least by the spread sheets produced so far by the Defendants. They give the impression that only a fraction of the money paid for the purchase of vouchers was actually spent on them – the rest was spent on other things for the benefit of Mr Kozeny. If the trial judge concludes that this is correct, then an account would be a remedy that might well be ordered.

There is force in the supplementary argument that Mr Kozeny was not a party to any of the contracts, and would not be an accounting party, but if he was orchestrating what (on this assumption) would be a scam or racket, it is highly likely that the pleaded case in constructive trust will succeed against him.

Mr Millett addressed a separate argument in relation to the options. He argued that no accounting remedy was available in relation to the purchase of options. It was “hornbook” law that where a fiduciary has sold his own property to his principal, the transaction can be rescinded but, if there is no rescission, an account of profits is not available, unless there was a fiduciary relationship in existence at the time when the property was first purchased: Burland v. Earle (PC) [1902] AC 83 and Cook v. Deeks (PC) [1916] AC 554. In Burland, the president of the company purchased lithographic plant at auction for $21,564. He later sold it on to the company for $60,000. The Privy Council concluded (at p.99) that he was under no legal obligation to account for the profit, although they were prepared to accept that the transaction might have been rescinded. In Cook (at p. 563-546) Lord Buckmaster LC summarised the position as follows:

So, Mr Millett argued, there could be no obligation to account in relation to the options, where these had been purchased by Oily Rock long before there was any fiduciary relationship with the Claimants.

Mr Dowley had two ripostes. First he submitted that these cases do not sit easily with Bentley v. Craven (1853) 18 Beav. 75, where one partner earned a profit selling sugar to the partnership from stock which he had earlier purchased for himself. Sir John Romilly MR held that the principal could “repudiate the transaction altogether, or, adopting it, may claim for himself the benefit made by his agent”. However, as I read the case, the sugar was purchased whilst the partnership was in existence and the case does not conflict with Burland.

His second point was more powerful. He referred to distinguished academic comment in Goff & Jones on The Law of Restitution (6^th ed. at §33-011) which questions whether these authorities are any longer good law:

Again, I really do not think this is an appropriate occasion to decide this interesting issue. The Claimants’ claim for an account in relation to the options seems to me to be fully arguable, especially against an agent who had no business under the terms of the contracts in selling his own options to the Claimants (assuming that is what happened). It will be much better for the facts to be found first, before deciding what remedies are available to the Claimants.

So ultimately, in my judgment, the critical issue in these applications is whether the proven corruption means that the Claimants’ otherwise viable claims are doomed to fail at trial. I have found that it is established beyond reasonable doubt that Mr Kozeny was involved in bribing senior Azeri government officials on a large scale. Dr Bodmer assisted him in these acts of bribery. The bribery was for two purposes. First, to protect Mr Kozeny/Oily Rock’s ability to purchase vouchers and options in large quantities. Second, as an incentive to the officials to go ahead with the privatisation of SOCAR on which all hopes of large profit depended. Mr Lewis came to know about the bribery and appreciated that he could take advantage of it, in that it improved the prospects of an ultimate profit.

Mr Dowley properly drew my attention to the fact that section 1(2) of the Public Bodies Corrupt Practices Act 1889 and section 1(1) of the Prevention of Corruption Act 1906 (as amended by the 1916 Act) had no application to bribes paid abroad, until these sections were amended by the section 108(2) and (3) of the Anti-Terrorism, Crime & Security Act 2001 which came into force on 14 February 2002 (SI/2002/228 art.2), that is after the events in question here.

However, whilst this may mean that Mr Kozeny committed no criminal offence in English law, it is abundantly clear that in civil law this corruption would be regarded as immoral and contrary to English public policy. In Lemenda Trading Co Ltd v. Africa Middle East Petroleum Co [1988] QB 448, Phillips J. held that a contract to use personal influence on a foreign official, particularly where it was not apparent to the official that the person using his influence was charging for doing so, was contrary to English public policy if the same public policy applied in the country of performance. The contract in that case was to use influence on a Qatari minister in circumstances where it was essential that the minister should be unaware of the influencer’s pecuniary interest. The Court held the contract to be unenforceable.

If a contract as in Lemenda is unenforceable, a fortiori a contract to bribe a foreign official would be void as contrary to English public policy. It matters not that at the time it did not constitute a criminal offence in this jurisdiction. Further, even at this stage, I would assume that bribery was a criminal offence in Azerbaijan – no evidence to the contrary has been proffered. This Court will not enforce a contract the performance of which involves an unlawful act in a foreign and friendly country: Ralli Brothers v. Compania Naviera Sota Y Aznar [1920] 1 KB 614. An English contract will also be held invalid on account of illegality if the real object and the intention of the parties necessitates them joining in an endeavour to perform in a foreign and friendly country some act which is illegal by the law of that country notwithstanding the fact that there may be, in a certain event, alternative modes or places of performing which permit the contract to be performed legally: Foster v. Driscoll [1929] 1 K.B. 47.

Two key issues arise:

Is the knowledge of Mr Lewis or Dr Bodmer to be attributed to the Claimants?

If so, does the illegality, of which the Claimants would then be treated as having been aware, mean that their claims in these proceedings are so tainted or, as Mr Millett put it, so inextricably linked with the corruption, that the Court should decline to entertain them?

Mr Lewis was a partner of Omega Advisors and served as head of emerging markets. He signed the Letter of Intent for Omega Advisors. Under the terms of the Custodian Agreement it was he who gave instructions, as the Claimants’ investment manager, for the purchase of vouchers and options on behalf of the voucher holding companies. He performed this role not only for the Omega Claimants but for Marlwood, the AIG Global company and its voucher holding company, and for Water Street Management, the Columbia University company and its voucher holding company. He was a director of all the Claimants. He was not an employee of the Claimants, nor was he an employee of AIG or any of its subsidiaries including AIG Global, or of Columbia University.

On this basis, Mr Millett contends that Mr Lewis was one of the central directing minds of the Claimants which existed for the sole purpose of purchasing the vouchers and options, and subsequently the shares in privatised Azeri corporations. His knowledge is the knowledge of the Claimants.

Dr Bodmer was responsible for setting up the Claimant companies in the BVI. He bought them off the shelf and the cash was largely paid to accounts controlled by him in Switzerland. He was, Mr Millett submits, “the launderer”. He says that Dr Bodmer was acting for corrupt common clients in a common design and his knowledge that bribery was taking place is also to be attributed to the Claimants.

Mr Dowley disputed that Mr Lewis was the directing mind of the Claimant companies. They were really nominee companies. The investment decisions were made by others:

As regards Omega, Mr Lewis’s function was to identify and, if appropriate, recommend investment opportunities to Omega’s investment committee; but he had no authority to take any decision;

In the case of AIG, he made the introduction of the investment proposal to them. The due diligence was undertaken by Mr Pinkerton and Mr Ranawat of AIG and the decision to invest was taken by the Investment Committee overseeing the Alternative Investment Group. Mr Lewis never at any time, or in any way, had any authority to act on behalf of AIG or Marlwood with respect to the decision to make the investment.

In the case of Columbia University, Mr Lewis solely effected the introduction of the investment proposal to them. It is clear that Lewis had no authority to act on behalf of Columbia University or Water Street in any way at any time (Footnote: ²⁵). There is clear documentary evidence that Mr Lewis made a fraudulent misrepresentation to the representatives of Columbia University when promoting the investment to them telling them that there were “no pay-offs (Footnote: ²⁶). Thus (regardless of whether there was in fact any corruption), Lewis was engaged in defrauding Columbia University.

Moreover, Mr Lewis was constrained as to how he could act under the agreements. He had no authority as investment manager to deviate from the terms of the written agreements. Any such decision would have to be made by the investors. He was not exercising independent judgment: cf. El Ajou (infra) at p.706 c.

Mr Dowley submitted that the principles underlying the attribution of acts and knowledge to companies (such as the Claimants) were set out in Meridian Global Funds Management Asia Ltd v. Securities Commission [1995] AC 500 PC. However, as Lord Hoffmann said in Meridian, at page 511G:

Mr Dowley also drew my attention to Article 97 of Bowstead and Reynolds on Agency (17th ed.) where the editors state: “The law in this area is constituted by a plethora of cases which are extremely difficult to reduce to any order.” He reminded me of the despairing comment by Palles C.B. in Taylor v. Yorkshire Insurance Co [1913] 2 IR 1 at 21:

He submitted that if, as I have found to have been established, either Mr Lewis or Dr Bodmer knew that Mr Kozeny had corrupted Azeri officials, and failed to pass that knowledge to the Claimants, then they were joining with Kozeny in his scheme to defraud the Claimants. It was a well-established principle that a company or principal will not be deemed to have the knowledge of a servant, officer or agent who is engaged in defrauding the company or principal – see Vaughan Williams LJ in In re Hampshire Land Co [1896] 2 Ch 743, 749 (CA) and Viscount Dunedin in JC Houghton & Co v Northard Lowe & Wills [1928] AC 1 (HL) at p.14:

As regards Dr Bodmer, he submitted additionally that it does not follow because he knew that there was corruption, this should be imputed to the client. A lawyer who learns information from a client does not fix another client with knowledge of that information: Royal Bank of Scotland plc v. Etridge (No.2) [2002] 2 AC 773 at §§76-78. Thus, where a solicitor, in the course of a transaction on his client’s behalf, became a party to a fraud on the client, that did not fix the client with knowledge of the fraud (see Cave v Cave (1880) 15 Ch D 639 and Bowstead and Reynolds on Agency (17th ed.) at §8-216, illustration (9)). Dr Bodmer and vMB were Mr Kozeny’s lawyers. Their role in relation to the Claimants consisted primarily of setting up their investment vehicles. There was no basis for imputing any guilty knowledge Dr Bodmer may have had to any of the Claimants.

Again I remind myself that this is not a mini-trial, but a summary application. In my judgment, there is sufficient substance to Mr Dowley’s arguments that it would be wholly inappropriate for me to hold at this interlocutory stage that Mr Lewis’s knowledge of the bribery should be attributed to the Claimants. On the assumption that he kept it to himself and did not tell his principals, he was acting in grave breach of duty to the Claimants and to Omega Advisors, AIG Global and Columbia University, the real investors. The bribery ought to have been disclosed in the clearest terms, not least because clause 13.2 of the Co-Investment Agreements positively required that Oily Rock would comply with Azeri law, the FCPA 1977 and other anti-corruption laws, as did the Letter of Intent and the Custodian Agreement. These are not to be treated as some formalistic requirement or sham designed to conceal the true intention of the parties.

The extent of the Hampshire Land exception is a matter of considerable difficulty and uncertainty. In Arab Bank plc v. Zurich Insurance Co. [1999] I Lloyd’s Reps 262, Rix J. stated the principle to be derived from Hampshire Land and the subsequent authorities very widely. He said (at p.281 col.2):

On the facts, he held that the insurance claimant was also a victim, even if only a secondary victim, of the assumed fraud. Although the cases often involved fraud, Hampshire Land itself did not necessarily do so, and he noted that in Group Jose Re [1996] 1 Lloyd’s Reps 345, Saville LJ was prepared (at p. 367) to accept, as a working definition of the scope of the principle that a Court will not infer that a company has knowledge of a fact known to an agent, where, because of the agent’s fraud or other breach of duty, it would be contrary to justice and common sense to draw such an inference. Rix J. held:

The breadth of the conclusion as expressed by Rix J. is controversial but, in my judgment, it is properly arguable that the Claimants are secondary victims of Mr Lewis’s dishonesty and that his knowledge should not be attributed to them. All the more so, when he was acting in more than one capacity – he had a personal interest in the investments through his parallel investment vehicle, Pharos Finance. The time to debate in this Court and in higher Courts, whether Mr Lewis’s knowledge of the bribery (and possibly the involvement of others in corrupt acts) should be attributed to the Claimants, is after a proper trial when all the facts have been found, not at a summary hearing, on the basis of assumed facts.

As regards, Dr Bodmer, the case that his knowledge should be attributed to the Claimants is, in my judgment, bad on the facts I am prepared to assume at this stage. He was principally acting as the lawyer for Mr Kozeny, Oily Rock and Minaret. His knowledge of, and participation in, the bribery derived from that relationship. Assuming, as I do, that he did not pass on his knowledge, I see no basis for imputing his knowledge to the Claimants: cf El Ajou (supra) at pp. 703-704.

In the light of my conclusions on attribution of knowledge, the question whether the illegality of which the Claimants were aware means that their claims in these proceedings are so inextricably linked with the corruption that the Court should decline to entertain them, does not arise, save in one respect to which I will turn at the end of this section. Nevertheless, I have heard a good deal of argument on the effect of illegality, and I shall state my conclusions.

The assumption I must now make is that the Claimants did know that Mr Kozeny was bribing Azeri officials and that the purpose of this bribery was to enable the Claimants and the co-venturers to corner the market without official objection and to encourage the officials to proceed with the privatisation of SOCAR, which was essential if the investments in vouchers and options were to be profitable.

Mr Millett submitted that, in those circumstances, it was clear law that neither party can sue on a contract if:

The Claimants’ investments were made through Oily Rock acting as their agent under the Letter of Intent (if contractual at all) and the Co-Investment Agreement and related agreements. The essence of those agreements was that Oily Rock would act as the Claimants’ agent in acquiring and then managing the vouchers and options. Both Oily Rock and the Claimants knew and intended the following as both the purpose and the manner of performance of the agreements:

If the Letter of Intent, the Co-Investment Agreement and Custodian Agreement were illegal and so unenforceable, then the Claimants have no claim against Mr Kozeny for deceit. There can be no action for deceit where the complaint is that the false representation induced the representee to enter a contract which is illegal and unenforceable, and where the deceit goes to the manner of intended performance of the contract. He submitted that this was a case rather like Everet v. Williams (reported in (1893) Vol. 35 LQR 197), the famous 18^th century case of the two highwaymen, in which the claim for an accounting of the spoils of robbery was dismissed as scandalous and impertinent, the Plaintiff’s solicitors sent to Fleet Prison pending payment of a large fine, and his junior counsel ordered to pay the costs personally. In this case the illegality and immoral nature of the contracts between the Claimants and Oily Rock and Minaret were so closely connected with the deceit that to allow the Claimants to succeed in the tort of deceit against Mr Kozeny will necessitate the Court allowing itself to be made the instrument of enforcement of obligations arising out of an illegal contract in which the Claimants are implicated.

In support of his argument, Mr Millett cited Scott v. Brown Doering McNab [1892] 2 QB 724 in which the parties had been involved in an attempt to deceive the public into believing that there was a market for particular shares and that they were trading at a premium. The Plaintiff brought an action against the broker on the grounds that they had delivered their own shares to him, rather than purchasing them on the Stock Market – the facts bear a considerable resemblance to the facts alleged in this case. The Court of Appeal held that as the action was based on an illegal contract, it could not be maintained. In a well known passage, Lindley LJ said (at p.728):

Lopes LJ held (at p.732) that the Plaintiffs could not present their case without necessarily disclosing the unlawful purpose in furtherance of which the contract was entered into. In those circumstances the Plaintiffs were disentitled to any relief. A.L Smith LJ said (at p.735):

Mr Millett next cited Burrows v. Rhodes and Jameson [1899] 1 QB 816. The Plaintiff had been wounded in the infamous Jameson Raid and claimed damages for his injuries against Cecil Rhodes and Jameson, alleging that they had fraudulently misrepresented that the detachment in which he served was about to be engaged in active service of a lawful nature. As a result the Plaintiff agreed to extend his period of service which had been about to expire. A preliminary issue was heard in the Divisional Court as to whether the action was maintainable given that the Raid was illegal under the Foreign Enlistment Act 1870. It was assumed that the Plaintiff was innocent of all knowledge of wrong on his part. The Defendants nevertheless argued that it was immaterial whether the Plaintiff had guilty knowledge; he was particeps criminis and he could not be heard to complain of the Defendants’ “original and deeper-dyed fraud”. Grantham J thought that it was impossible to imagine a grosser perversion of English justice. He went on (at p.825):

Next Mr Millett cited Thackwell v. Barclays Bank [1986] 1 All ER 676, in which one of the fraudsters had forged the Plaintiff’s signature on the finance company’s cheque and paid it into his own company’s account. The Plaintiff sued the Bank for negligence and conversion. The Bank’s defence of ex turpi causa action non oritur succeeded. Having cited Scott, Hutchison J adopted as helpful counsel’s argument that one of the threads running through the cases concerned with the principle ex turpi causa was the “conscience test.” The test “involved the court looking at the quality of the illegality relied on by the defendant and all the surrounding circumstances, without fine distinctions, and seeking to answer two questions: first, whether there had been illegality of which the court should take notice and, second, whether in all the circumstances it would be an affront to the public conscience if by affording him the relief sought the court was seen to be indirectly assisting or encouraging the plaintiff in his criminal act.” The learned Judge endorsed counsel’s concession that if the Plaintiff was party to the fraudulent financing transaction, then he could not recover because public policy would prevent his doing so, just as it would prevent a burglar from whom goods were snatched by a third party just as the burglar left the victim’s house from maintaining an action in conversion against the third party. The cheque was the proceeds of the crime.

The conscience test proposed in Thackwell was approved in Saunders v. Edwards [1987] 1 WLR 1116 (CA) where the Plaintiffs had purchased a flat from the Defendant. The contract dishonestly inflated the value of the chattels sold, and deflated the price of the flat, in order to reduce stamp duty. In the course of pre-contractual negotiations, the Defendant had fraudulently and falsely represented that a roof terrace was part of the property for sale. The Court of Appeal held that, despite the illegality, the claim for fraudulent misrepresentation succeeded. Kerr LJ said (at p.1125):

Nicholls LJ agreed, but cautioned:

Bingham LJ also advocated a pragmatic approach:

Next he cited Cross v. Kirkby The Times April 5 2000, where a hunt saboteur was struck with his own baseball bat and injured in the course of a violent incident in which he was the aggressor. On appeal self-defence succeeded but the Court also upheld an ex turpi causa defence. Beldam LJ held (at §76) that the principle applied when the Claimants’ claim was so closely connected or inextricably bound up with his own criminal or illegal conduct that the Court could not permit him to recover without appearing to condone the conduct. Judge LJ used very similar language at §103.

He also referred me to Hewison v. Meridian Shipping PTE [2002] EWCA Civ 1821, [2003] ICR 766 where a seaman was injured as a result of negligence for which his employer was responsible. However, he had fraudulently concealed his epilepsy and, had that been disclosed, he would not have been able to work at sea. The Court of Appeal declined to allow him to recover damages for lost earnings as a seaman. Clarke LJ considered that the right approach was to ask whether the Claimant’s unlawful act was a collateral illegality in the performance of the contract, or part of the Claimant’s case. Tuckey LJ said at §51:

Finally he cited Clunis v. Camden and Islington Health Authority [1998] QB 978 where the Claimant had a history of mental disorder. He killed a young man and pleaded guilty of manslaughter by reason of diminished responsibility. He then sued the health authority for negligently failing to treat him properly, and alleged that this negligence had led to the killing and his consequent detention. The claim was held to be barred on grounds of public policy. The Claimant had been convicted of a serious criminal offence and public policy prevented the Court entertaining the claim unless the Claimant did not know the nature and quality of the act or that what he was doing was wrong. His plea meant that he must be taken as knowing he was doing an unlawful act.

Drawing these authorities together, Mr Millett submitted that the deceit alleged was founded centrally on an implied representation in the co-investment agreement. The Claimants could not prove the misrepresentation without proving and relying on the contract. The bribery and corruption were not just part of the story; they were the adventure itself.

Mr Dowley responded that the question as to when the Court will refuse to assist a claimant whose conduct is alleged to have been unlawful or improper is heavily dependent upon the facts of the particular case. In the present case, the Court could not reach a conclusion that the Claimants or any of them should not be permitted to succeed on the grounds of illegality in connection with the transactions until the Court has satisfied itself as to at least the following:

What exactly did each of the Claimants know about such corruption?

To what extent, if at all, did each individual Claimant condone or participate in such corruption? Included in this consideration is the question whether any knowledge on the part of Mr Lewis or Dr Bodmer – both engaged in dishonesty towards the Claimants in conjunction with the Defendants – should preclude any of the Claimants from pursuing their claims.

What part did the Defendants play in such corruption?

What was the degree of connection of such corruption and the knowledge or participation of each Claimant in such corruption with the loss and damage suffered by each Claimant?

The law relating to the effect that knowledge of or participation in criminal conduct may have on a claimant’s claim is not settled: see Clerk & Lindsell on Torts, 19^th Ed.§§3-02 to 3-26 for an extensive discussion of the relevant principles and authorities. But what was plain was that the circumstances of the individual case are of paramount importance. A basic principle is that a plaintiff is entitled to enforce his rights provided that he is not forced to plead or rely on his own illegal conduct.

He particularly relied on Tinsley v. Milligan [1994] 1 AC 340 (HL), where two single women purchased a house together and vested it in the sole name of the Plaintiff in order to assist in the perpetration of a DSS fraud. After a falling out, the Plaintiff sought possession and the Defendant counterclaimed for a declaration that the property was held in trust for the parties in equal shares. The Court of Appeal held that the counterclaim succeeded on the grounds that in the circumstances the public conscience would not be affronted if it were to succeed. The House of Lords by a majority dismissed the appeal, but upheld the counterclaim on different grounds. Lord Browne-Wilkinson expressing the majority view said (at pages 369A and 376F):

This approach was not confined to property cases. The public conscience test that had been applied in cases such as Thackwell and Saunders was wrong and has not been followed in other non-property cases since Tinsley – see Clunis at pages 988-989 and Hewison at §§23-26. In Standard Chartered Bank v. Pakistan Shipping Corporation (No. 2) [2000] I Lloyd’s Reps 218, the shippers and the ship-owners connived in the issuance of a bill of lading and other documents which falsely stated the date of shipment. The documents were presented to the Bank. The Bank’s checkers lied separately to the issuing bank about the date on which the documents had been presented for payment. Did this preclude the Bank from bringing a claim in deceit against the shippers and ship-owners? The Court of Appeal held not. In a judgment with which Ward LJ agreed, Aldous LJ held, after quoting Tinsley:

Mr Dowley argued that the Claimants’ case did not depend on pleading or relying on their own illegal conduct. The claim was unaffected by any illegality.

Although it scarcely featured in Mr Millett’s submissions, Tinsley is now the leading authority and, in my judgment, one needs to be cautious in applying the reasoning in pre-Tinsley authority, although it by no means follows that those cases would be differently decided today. Following Hewison, Clunis, Standard Chartered Bank, and Cross, the test of public conscience has no application in tort or contract cases, any more than it does in property cases. There is but one single principle that applies across the board – the Court will not lend its aid to someone who founds his action upon an immoral or illegal act. However, I think the test is not so easy to apply in cases outside the property field. The test cannot be confined to an examination of the Claimant’s pleading to see how he founds his case. It will often be perfectly possible to frame the claim in a way that refers to no illegality or immorality – Mr Cross’s claim for assault could be pleaded without reference to the surrounding circumstances and the events immediately preceding it, and Mr Hewison had no need to refer to his epilepsy or his dishonest concealment of it. So, the circumstances of the illegality may not emerge from the Claimant’s pleading. They may emerge from the Defendant’s case, or from the evidence. Indeed the point may be raised by the Court of its own motion.

Further there is a qualitative decision to be made. The mere proof of illegality will not cause the Court “to draw up its skirts and refuse all assistance to the plaintiff”. The illegality or immorality must be central to the case, and not merely collateral.

If Mr Lewis’ knowledge of the bribery is to be attributed to the Claimants, how does that leave their claims? The point can be tested by looking at the Pharos Finance claim which has been discontinued. Given that Mr Lewis’ knowledge was plainly to be attributed to Pharos Finance – effectively it was his company – could that company have maintained its claims given his knowledge of the bribery?

First the bribery would, in my judgment taint all the contracts. The contractual undertaking recorded in them that there would be no acts of corruption (see for instance clause 1.1(i)(ii) of the Letter of Intent) would turn out simply to be window-dressing for the outside world. The real but unstated agreement was that the parties knew and expected that bribery was taking place. The contracts should be treated as providing that bribery was not only permitted but intended. No contract containing any such provision could conceivably be enforced. Whilst it is true (on the facts established so far) that the Claimants’ money was not being used in the bribery, they would be taking advantage of known bribery by their agent, and bribery was one object, or at least a known incident, of the joint venture for which the contracts provided the framework.

Second, the payment of bribes was not peripheral to the venture, but central to its whole economics. The payment of bribes made it possible for the co-venturers to accumulate huge quantities of vouchers and options without official objection, and gave the parties the confidence that the purchase of vouchers and options was worthwhile because the officials would eventually agree that SOCAR be privatised.

Third (if relevant) bribery is a pernicious practice and a very serious crime of which this Court must take a grave view. It can properly be said to be a cancer in business and political life, because it is impossible for honest businessmen to compete with bribers, and because officials entrusted with making decisions on behalf of their principals do so in their own self-interest rather than objectively in the best interests of their principal. In those circumstances, in my judgment this Court would decline to enforce the contracts if the Claimants are to be treated as knowing that Azeri officials were being bribed by their agent.

How does that affect the claim in deceit? In a sense the deceit is separate from the bribery, but looking again at Pharos Finance’s position, the result of the deceit by Mr Kozeny was that Pharos Finance was induced to enter into a venture which Mr Lewis and Pharos Finance knew involved the payment of bribes. If the underlying contract would be unenforceable for known illegality, I do not see how a deceit claim could be maintained in relation to a fraudulent misrepresentation leading to the conclusion of that contract. The point can be tested this way. Assume that two men agree to commit a robbery, could one of them maintain a claim in deceit against the other if he had been lied to as to some aspect of the venture – for instance whether the proposed victim was armed and so able to defend himself, and the robber had sustained injury in the course of the robbery? The answer must obviously be not: – cf. Burrows where the very deceit was as to the legality of the venture. It is commonplace that criminals lie to each other as well as to the outside world. The Court will not offer its assistance to them.

So if Mr Lewis’ knowledge of the corruption is to be attributed to the Claimants, I consider that the Court should decline to entertain the deceit claim on the grounds that the alleged deceit is so closely involved with the illegal venture: ex turpi causa action non oritur. The same applies to the conspiracy and breach of fiduciary duty claims.

The account claim is possibly less clear cut. At one end of the scale it is clear that the Courts would not be willing to adjudicate on disputes on how the profits were to be shared between the co-venturers. Nor do I think they would entertain a dispute about the handling of money between the Oily Rock safe and the client safe in Baku: that is too close to adjudicating the division of the swag – cf. Everet v Williams. But if the Claimants were able to prove outright theft of money before it even left Switzerland, as they may be able to do, then it might be that the theft was not so inextricably linked with the illegality that the Court should decline to adjudicate. The Court’s attitude will very much depend on the facts and in my judgment this is a matter for the trial judge to decide once the facts have been found.

Mr Millett had one further point. He submitted that, quite apart from knowledge of bribery derived from Mr Lewis or Dr Bodmer, the Claimants, Omega Advisors, AIG Global and Columbia University knew, or at least turned a blind eye to, the fact that the Agreements were all designed to obtain the benefit of the fact that Mr Kozeny had access to government officials at the highest level which other potential foreign investors did not have. The purpose of the agreements was the trafficking by Oily Rock and Minaret of Mr Kozeny’s influence over or with the Azeri officials.

It was a recognised head of English public policy that the Court will not enforce a contract for the sale of influence, and particularly where the influence is to be used to obtain contracts or other benefits from persons in a public position: see Norman v. Cole (1800) 3 Esp 253, Montefiore v. Menday Motor Components Ltd [1918] 2 KB 241, Lemenda (supra) and Tekron Resources v. Guinea Investment Co [2004] 2 Lloyd’s Rep 26.

In my judgment, the mere fact that Mr Kozeny had good relations at the highest level of the Azeri Government, and better relations than other Western businessmen, could not of itself render the Agreements contrary to public policy. There would need to be something more. The vice that existed in Lemenda was that, unknown to the Qatari Government official, the Plaintiffs were being paid to influence him. The contracts between the Claimants and the Defendants are not in themselves contracts to exact payment for the use of personal influence on Government officials, and I cannot possibly find at this interlocutory stage that, to the knowledge of the Claimants, they were entering into arrangements which involved improper influence on the Azeri Government. That can only be decided after the evidence has been considered at the trial.

Finally it is submitted that I should set aside the freezing injunctions granted by Longmore J in favour of Marlwood and the Omega Claimants. Two reasons were advanced by Mr Millett:

Even if the Claimants had a sufficiently arguable case to survive a Part 24 application, in the light of the facts that have now emerged, they could no longer satisfy the more exacting test of a good arguable case required for the grant of a freezing injunction;

There had been serious non-disclosure to Longmore J.

The arguments were addressed briefly at the hearing, and I will also deal with the points shortly.

There are certainly much more substantial questions surrounding the Claimants’ case as a result of what has been revealed recently. These events have added substance to a defence which might have seemed highly improbable, but I still think the Claimants satisfy the good arguable case criterion needed for a freezing order: they have a seriously arguable case, certainly one that is a good deal more than barely capable of serious argument (cf Mustill J in the Niedersachen [1983] 2 Lloyd’s Reps 600, 605).

Mr Millett further submitted that the Claimants should have disclosed but failed to do so:

In a supplementary argument, he added that the Court should have been told that key documents had been created by Mr Nuriyev in circumstances where the Claimants had accused him of having stolen $20 million of the $97 million they said Mr Kozeny had stolen from them.

It was the duty of the Claimants to make “a full and fair disclosure of all the material facts” in their applications for ex parte relief before Longmore J (see R v Kensington Income Tax Commissioners ex p Princess Edmond de Polignac [1917] 1 KB 486 at 514). The material facts are those which it is material for the judge to know in dealing with the application as made: materiality is to be decided by the court (p.504). But, in Brink’s Mat Ltd v Elcombe [1988] 1 WLR 1350 CA at 1360, Slade LJ cautioned:

I am not satisfied that there was any failure to make full and fair disclosure. Much of Mr Millett’s argument depends on what knowledge the Claimants actually had, one of the key issues in the case. The accusations against Mr Vincent in particular are unproven at this stage. Mr Lewis had been dismissed by Omega Advisors in 1998, over a year before the litigation commenced. On the Claimants’ case, no-one involved in the applications for the freezing orders on behalf of AIG or Omega – Columbia, joining the action later did not apply for a freezing order – had any actual knowledge or suspicion of any illegality or corruption. Even if Mr Lewis’s or Dr Bodmer’s knowledge (or believed knowledge) were to be imputed to either the AIG or Omega Claimants, that could not found a complaint of non-disclosure. Since ex hypothesi the AIG and Omega Claimants would not actually have had any relevant knowledge, there was nothing that they could have disclosed. In her witness statement, Ms Bailey made a series of complaints of non-disclosure of material documents but analysis revealed that, of the documents in existence at the time and in the Claimants’ possession, most were disclosed.

Moreover, and strikingly, following the commencement of the Marlwood action, it emerged that Mr Kozeny was contending that there had been breaches of the Foreign Corrupt Practices Act by AIG. On the application for the Omega injunction, this was fairly disclosed to Longmore J. He nonetheless granted the application.

I would add that, as a matter of discretion, I would be exceedingly reluctant to discharge these injunctions. Mr Kozeny has attempted and failed to obtain a release of monies from under the freezing orders in order to pay his legal fees in December 2000. On that occasion, Morison J effectively found that he was not being truthful to the Court about the availability of assets and that he had significant assets available to him to enable him to retain legal representation in these proceedings and worldwide. I am sure he was right. These assets have never been disclosed. I do not know whether the injunction has nevertheless been effective to freeze assets. If it has and if these injunctions were lifted, I have no doubt that the money would immediately be moved into a jurisdiction where there was no hope of ever recovering it. The Claimants’ claims, if sound, would be rendered utterly nugatory.

In the ultimate result, this application joins that long list of heroic attempts to achieve a summary disposal of a large case which fail because the Court cannot determine everything (or at least not enough) at a summary stage and the case ought to go to trial. I dismiss the applications for summary judgment against the Claimants and I decline to set aside the freezing injunctions. I will hear further argument about whether it is appropriate to reinstate the stay.