Fiona Trust Holding Corporation & Ors v Privalov & Ors

This is a further skirmish in this large scale litigation in which the Claimants who are all part of the Sovcomflot group of companies claim to be victims of a conspiracy to defraud them of substantial sums of money.

The principal individuals at whom the Claimants direct their complaints are the 1^st, 2^nd and 3^rd Defendants. The initial Defendant was Mr Privalov (“Privalov”). He was Managing Director of the 2^nd Claimant, being an English company responsible for the sale and purchase of vessels for the Sovcomflot fleet. The claim against him has been settled. Mr Skarga (“Skarga”), the 2^nd Defendant, was formerly Director General of Sovcomflot. He was joined to the proceedings in August 2005. He is presently resident in England and, indeed, resides with the 3^rd Defendant.

The 3^rd Defendant Mr Nikitin, (“Nikitin”), is a Russian businessman. He lives in England. He was also joined to the proceedings in August 2005. At the same time a worldwide freezing order was granted against him and other of his various companies, who are also defendants to the proceedings. This freezing order was discharged in September 2005 pursuant to a consent order whereby Nikitin transferred $208.5million in cash to his solicitors to hold as security, together with a charge over his residence valued at $16.5million.

Nikitin (and the various defendant companies which he controls) filed a defence in November 2005 (and amended in December). Skarga did not accept service of the proceedings until February 2006. He has yet to file a defence on the basis (agreed by the Claimants) that it should await the completion of proposed amendments to the particulars of claim.

By an application notice dated 12 June 2006, the Claimants sought to add two further claims (together with additional Claimants and defendants associated with them). For convenience they have been entitled the “RCB claim” and the “time charter claim”. By an application notice dated 7 July 2006, the Claimants sought to add a further claim (together with additional parties). For convenience, it has been called “the Clarkson Commission claim”. The application also sought a freezing injunction in respect of all three new claims against both Skarga and Nikitin.

On 14 July, the court ordered that the applications as regard the amendment relating to the time charter claims and the application for a stay of the arbitration proceedings be determined first. The matter came on for hearing before Morison J in July 2006. On 12 October, the judge granted permission to add the time charter claim and the associated additional parties. He also granted an injunction against the charterers so as to restrain them from continuing the arbitrations and refused a stay of the proceedings. (These latter orders are the subject of an appeal.)

The application to amend the particulars of claim with regard to the RCB claim and the Clarkson Commission claim and the application for the freezing orders came before the court on 17 October 2006. The primary focus of the hearing was the application for freezing orders: the defendants did not assert a positive case that the amendments should not be allowed. Despite the restriction on the scope of the hearing, it adjourned part heard after two days. The resumed hearing was thereafter fixed for 18 December.

However on 12 December, applications were issued on behalf of Skarga and Nikitin (and his associated defendants) seeking additional disclosure from the Claimants and a further adjournment of the earlier applications pending provision of the material. (In the event the argument relating to the disclosure application occupied the bulk of the time reserved for the resumed hearing and the hearing in respect of the applications was accordingly adjourned in any event.)

It is important to set out the context in which the disclosure applications arose. One of the issues raised by Mr Dunning QC in his submissions in opposition to the freezing orders being sought against Skarga was to the effect that “there is prima facie evidence that the Claimants have instigated investigations which have been conducted unlawfully”.

Indeed in a vast statement dated 18 September prepared by Mr Lax on behalf of the Nikitin defendants there is the following section:

“78.

Mr Nikitin advises that he was told both by Credit Suisse and by American Express that attempts had been made in the spring/summer of 2005 to obtain information as to his financial affairs by parties ringing up the banks pretending to be Mr Nikitin. I attach an e-mail dated 22 April 2005 from someone claiming to be Michael Baum (a manager at the Wegelin bank, Switzerland, in charge of Mr Nikitin’s account) to company agents, Panazur, who held corporate records of Mr Nikitin’s companies, requesting records which “Michael Baum” claimed to have mislaid. However, Mr Baum has advised Mr Nikitin that the electronic signature on this document was forged. The message had not come from Michael Baum at all but from someone else. The e-mail address to which the response was to have been given was not Mr Baum’s e-mail address. Fortunately, someone at Panazur was suspicious and called up Mr Baum who confirmed that the e-mail was fraudulent.

79.

As regards American Express, I have listened to a recording of someone pretending to be Mr Nikitin telephoning American Express to obtain financial information. This recording was made by American Express on or about 23 May 2005, not long before the injunction was obtained against Mr Privalov and sent to my clients as an audio file attached to an e-mail. It demonstrates that the person impersonating Mr Nikitin already had obtained a considerable amount of information as to Mr Nikitin’s financial position. He apparently already had some financial records to which he referred in an attempt to by-pass security questions raised by Amex. He also knew the name “Mike Baum” who is the person at the Wegelin Bank in charge of Mr Nikitin’s accounts there although in the heat of the moment, the fraudster mistakenly gave this name as the identity of the person handling Mr Nikitin’s affairs at Credit Suisse.

80.

The matter was put in the hands of the Swiss police by the banks concerned but nothing more has been heard.

81.

The Claimants have been coy about the source of some of the documents obtained by them. This is borne out by the transcript of the ex parte application for the freezing order against Mr Nikitin. On page 32 of the transcript for 31 August 2001, counsel for the Claimants refers to “.. documents which we have got on the basis that we do not disclose the source without an order of the court. Mr Shepherd has said that from his knowledge he does not believe these have been obtained illegally ..”. Yet all of the above suggests that illegal attempts were made – and it would appear, with some success – to obtain documents from both M5 Privalov and Mr Nikitin.

82.

…..

The Swiss Proceedings

83.

As mentioned above, Mr Nikitin has recently learned of an attempt by the Russian General Prosecutor to obtain documents and information from Switzerland. Some of the documents already in the Prosecutor’s hands at the time of the application (made in November/December 2005 although only granted in May 2006 and only notified to Mr Nikitin by his banks in June 2006), such as banking documents from Mr Nikitin’s bank, are likely to have been obtained illegally. It is reasonable to infer from the below evidence that these documents came from Sovcomflot.

Statements from Mr Mednikov, Mr Burima and Mr Sharikov provided to the Russian Prosecutor

84.

I attach translations of certain documents received from Swiss Lawyers instructed by Mr Nikitin. They include statements dated 5, 8 and 9 August 2005 (ie shortly before the ex parte application before this court in August 2005) from Mr Mednikov, Mr Burima and Mr Sharikov, all on the Executive Board of Sovcomflot. They were amongst the documents sent by the Russian Prosecutor to the Swiss Prosecutor in December 2005.

85.

Mr Mednikov is, as already mentioned, the current vice president and chief legal adviser for Sovcomflot. On page 4 of his statement, he refers to Mr Nikitin’s bank, Wegelin. He refers to “credit card transactions” of “the above persons” (ie Mr Privalov, Mr Wettern, Mr Nikitin and Senator Skarga) that he had apparently been investigating. He states that “.. it has been found that though the credit card issued in May 2003 in Skarga’s name is replenished from the number account, its statements are sent to Premium Nafta Products company, controlled by Nikitin.”

86.

I have been advised by Mr Nikitin that the above statement is untrue. If there had been any truth in it, no doubt the Claimants would have referred to it in these proceedings. Senator Skarga had had a business credit card while working for Kinex but that card was stopped when Senator Skarga left the Group in 2000. Nonetheless, it is interesting that confidential information – even though incorrect – should find its way into the hands of a representative of the Russian State.

87.

After 5 pages of evidence from Mr Mednikov, the Prosecutor asks Mr Mednikov what documents he has confirming all of the facts to which he has referred. Mr Mednikov answers:

“I have in my possession copies of the specified documents and am prepared to present them to the investigation authorities…. I received them from February 2005 to the present time from English Legal firm Ince & Co, namely from Stuart Shepherd, as well as from English legal firm “Richards Butler …”

88.

This is curious since Richards Butler have not featured at all in these proceedings. Their involvement in this matter is nowhere explained. It is likely, however, having regard to what is set out below, that someone must have instructed private detectives on behalf of Sovcomflot.

89.

Included amongst the Russian Prosecutor’s papers are private banking documents, copies of which are attached. The first document evidences a transfer on 1 March 2005 of funds ($200,000) from Mr Nikitin’s Milmont account in Wegelin to another of his accounts with Credit Suisse. Mr Nikitin advises that the Credit Suisse account was used to pay off his own (not anyone else’s) credit card transactions and so was replenished from time to time for this purpose. The second page contains confidential information about Mr Nikitin’s Mastercard. The third page contains confidential information about an account number in the name of Mr Nikitin. The fourth page contains account details of Milmont, Sisterhood and Meino. The fifth page contains details of credit cards said to have been held by “YP”, presumably Yuri Privalov, and “DS” presumably Senator Skarga, and the last page contains details of further accounts in the name of Mr Nikitin. As mentioned above, the only credit card belonging to Senator Skarga of which Mr Nikitin ever had any knowledge was a business card issued to him when Senator Skarga worked at Kinex, but which was cancelled upon Senator Skarga’s departure from Kinex in 2000.

90.

Having regard to the above passages of Mr Mednikov’s statement, it is likely that the above confidential banking information, and the fraudulent attempt to suggest that Senator Skarga’s credit card was paid through Credit Suisse by PNP, emanated from Mr Mednikov or someone else at his request. The above banking information can only have been obtained illegally, and having regard to the above mentioned attempts it is reasonably clear that some of the attempts at least were successful. Swiss lawyers instructed on Mr Nikitin’s behalf advise that the Russian Prosecutor claims to have received the documents from the Russian Ministry of Interior Affairs. However, the only stamps on the documents are those of the Russian General Prosecutor. These Swiss lawyers are currently engaged in correspondence with Credit Suisse to obtain further information about the leakage of information to unknown persons, which information appears to have ended up with Mr Mednikov/the Russian Prosecutor.”

One of the exhibits to this section of the statement was a document referring to a Swiss Mastercard with an inception date of 1 May 2003. This, it emerged much later, was part of a document that had been tendered by the Russian Prosecutor’s office to the Swiss authorities as support for the proposition that Skarga had a Swiss Bank credit card which, although not used, was to be paid by Premium Nafta Products, a Nikitin company. (The document as exhibited did not in fact refer to Skarga.)

As the Claimants understood it, it was this document which was said to support what the defendants described as a “fraudulent attempt” on the part of Mr Mednikov to suggest that Skarga had a credit card paid through Credit Suisse by PNP. The specific response to this was contained in Mr Shepherd’s eighth Affidavit on behalf of the Claimants sworn on the 11 October, ie shortly before the initial hearing. This exhibited an unredacted version of the document (which the Claimants understood had been redacted by the prosecutor in Switzerland). The un-redacted version was headed by Skarga’s name. It made reference to “Project Sturgeon No 6” and was said to represent the result of a “full profile” and history of the account since inception.

Production of this document was made in the context of more general observations by Mr Shepherd as regards the complaint that there had been illegal attempts to obtain details of the banking affairs of Nikitin as follows:

“193.

It is alleged by Mr Lax that my clients are to be held responsible for fraudulent attempts to obtain information about Mr Nikitin’s financial affairs. The Claimants are not responsible as alleged or at all.

194.

It is correct that the Claimants have utilised the services of professional investigators. However I can assure the Court that at no stage have the Claimants or any individual associated with them instructed such investigators to use any unlawful means of obtaining information, nor has it been suggested to the Claimants that information would be or has been so acquired.

195.

My clients have no idea whether the matters of which complaint is made by Mr Lax have anything to do with the investigators that they have instructed or who have been instructed on their behalf. Should it be proved that this activity was unlawful and was the responsibility of any investigator associated with the Claimants, I am informed by Mr Frank that that company will immediately cease to retain instructions from the Claimants.”

At the initial hearing, Mr Dunning QC submitted that the un-redacted document relating to the credit card was clearly part of a report by a firm of private investigators. In his submissions in October he went on as follows:-

“There is no way in which private investigators can have obtained this information without one of three things happening: either deception, or bribery of a Swiss card employee, or by hacking into the account through the Internet.”

In the circumstances it was submitted by Mr Dunning QC that either the claimant should exhibit the whole report in so far as it touched on Skarga or allow the court to draw the inference that despite extensive and illegal investigations there was no material to support the contention that Skarga had (as the Claimants contend) received bribes and/or had assets outside Russia. In any event he submitted that the court should “pause” and consider whether “if it was to grant injunctive relief, would that give the appearance of condoning the collection or the attempted collection of evidence by illegal means”.

On 20 October 2006, the day after the initial hearing was adjourned, the solicitors for Skarga and Nikitin each wrote to the Claimants’ solicitors reiterating many of the points canvassed above but adding for good measure the proposition that the Claimants’ solicitors themselves must have instigated the illegal enquiries or at least must have been aware of their nature. Accordingly the Claimants and/or their solicitors, the Defendants maintained, were prima facie in breach of the Data Protection Act 1998.

The letter went on to cite the judgment of Rix J in Dubai Aluminium v Al Alawi [1999]I Lloyds Reports 478 to the effect that, in the event of illegal conduct in investigatory work, the work product would fall outside the legitimate area of legal professional privilege. In the circumstances, the Defendants pressed for :

In response, on 9 November 2006, the Claimants duly produced copies of the private investigator’s reports (an additional one was produced on 15 December). Those reports were heavily redacted, the redactions said to reflect irrelevant material primarily relating to persons other that Skarga and Nikitin.

This led over a month later, and very shortly before the resumed hearing, to the issuance of the present application. The elaborate form of the Order sought is as follows:-

“1.

The Respondents disclose to the Applicant (“Mr Skarga”) forthwith copies of those documents falling within the following categories:

(1)

All documents relating to and/or evidencing the instructions given to all entities and/or individuals instructed to carry out investigations into the financial and/or other affairs of Mr Skarga (to the present day) in unredacted form, including for the avoidance of doubt but not limited to: (a) all instructions passing between any entities and/or individuals involved in any such investigations; (b) all instructions given to and/or passing between Hart Security Ltd, Modus International BVI, The Corporate Intelligence Service Ltd, Ince & Co and Richards Butler.

(2)

All reports and other documents received by the Respondents (to the present day) relating to and/or evidencing the investigations into the financial and/or other affairs of Mr Skarga, in unredacted form, including but not limited to:

a.

The 17 April 2005 Project Sturgeon update referred to in the 1 June 2005 Project Sturgeon update.

b.

An unredacted version of the “Summary of Follow-Up Actions” relating to “Sturgeon 6” contained in the 1 June 2005 Project Sturgeon update.

c.

Unredacted documentation relating to and/or evidencing Project Sturgeon 3.

d.

All documentation relating to and/or evidencing meetings between representatives of the Respondents and any individual and/or entity instructed to investigate the financial and/or other affairs of Mr Skarga.

e.

All documentation relating to and/or evidencing all investigations into the financial and/or other affairs of Mr Skarga from 1 June 2005 to the present day.

(3)

If it is the Respondents’ position that at some point in time the investigations into the financial and/or other affairs of Mr Skarga has ceased, then and for the avoidance of doubt (and though also covered by (2) above) all documentation relating to and/or evidencing:

a.

The instructions given to cease such investigations;

b.

The reasons for ceasing such investigations;

c.

The date when such investigations ceased.

2.

The Respondents provide a full, frank and proper explanation, by way of Affidavit, explaining (and supported by reference to the documents requested above) within [ ] days:

(1)

When individuals and/or entities were first instructed to investigate the financial and/or other affairs of Mr Skarga;

(2)

The identity of all entities and/or individuals involved directly or indirectly in giving and/or receiving instructions for the purposes of investigating the personal financial and/or other affairs of Mr Skarga.

(3)

The substance of: (a) any oral instructions given to the entities and/or individuals additional to written instructions (of which disclosure is sought) and (b) any information provided orally to the Respondents and/or their solicitors by those individuals and/or entities.

(4)

What is Mr Shepherd’s explanation as to why those entities and/or individuals instructed (directly or indirectly) to investigate the personal financial and/or other affairs of Mr Skarga would have used unlawful means to obtain information relating to the personal financial and/or other affairs of Mr Skarga if they had been instructed to use lawful means.

(5)

Whether the investigations into the financial and/or other affairs of Mr Skarga continue and if not when they were stopped and for what reason;

(6)

Verification that full disclosure of all of the disclosure requested in Paragraph 1 has been given.

(7)

An explanation for the misleading and wrong assertions set out at Paragraphs 193-195 of the Eighth Affidavit of Mr Shepherd;

(8)

An explanation as to the evidential basis of the assertion in Paragraph 49 of the Sixth Affidavit of Mr Shepherd that Mr Skarga is likely to have substantial assets outside of Russia.

(9)

An explanation as to the evidential basis for asserting in the Particulars of Claim, that Mr Skarga was beneficially interested in Sisterhood Participation Corporation (which assertion was later withdrawn).

(10)

An explanation for the role and involvement of Richards Butler in the investigations into the personal financial and/or other affairs of Mr Skarga.

3.

The Respondents’ application against the Applicant for freezing and disclosure relief, made by Application Notice dated 7 July 2006, be adjourned until such time as the Respondents have complied with paragraphs 1 and 2 above.”

In support of their application for this far reaching Order the Defendants relied on the following matters:

On the Defendants’ case these considerations alone justified a thorough and informed review of the manner in which those investigations had been conducted since they would have been illegal by both Swiss and English law and would support the proposition that Mr Shepherd’s Affidavit was less than frank if not untruthful, an important consideration it was submitted in the context of an application for a freezing order.

Furthermore it was also submitted that the redactions in the disclosed reports were impermissible. The assertion of irrelevance was not, it was submitted, made out:-

Thus it was submitted that given that the issue of bribery and consequent accretion of assets were at the heart of the case, it was inappropriate to leave judgment as to the relevance of any material to the Claimants: see GE Capital Group Ltd v Bankers Trust [1995] 1WLR 172. This was all the more so where the Claimants’ disclaimer of responsibility for illegal investigation was unconvincing.

The starting point is the scope of the court’s jurisdiction to order disclosure in the present circumstances. The general obligation of disclosure under CPR Part 31 usually arises after both the close of pleadings and the subsequent case management conference: see Admiralty and Commercial Court Guide Section E and Appendix 8.

It is of course open to the court to order disclosure at any stage of the proceedings, including for the purpose of interlocutory proceedings. But it is well established under the previous procedural rules that such a power should be exercised sparingly and only for such documents as can be shown to be necessary for the fair disposal of the application; see Rome v Punjab National Bank [1989] 2 All England Reports 136. There are no reasons for concluding that any different approach is appropriate under the provisions of CPR: see Disclosure, Matthews and Malek 2^nd Edition Para 2.68.

The Defendants accept that this is the proper approach but contend that it is necessary for the purposes of this application to investigate in depth the nature of the enquiries undertaken, the extent to which they were illegal, the identity of those responsible for arranging the investigations, the scope of any lack of frankness in the affidavit evidence and the extent to which criminal liabilities have accordingly accrued.

I am unable to accept that submission. My reasons are as follows:-

As regards the redacted material, I am un-persuaded that the Claimants’ assertion that only irrelevant material has been removed should not be accepted, certainly for the purposes of the present application:

For all these reasons I refuse the application.