Otkritie International Investment Management Ltd & Ors v Urumov & Ors

There is before the court an application by the claimants to cross-examine the 5^th defendant, Mr. Pinaev, and his wife, Ms. Kovarska, the 19th defendant (together “the defendants”) on the disclosure they have each given pursuant to disclosure orders made ancilliary to proprietary and freezing injunctions granted by Flaux and Cooke JJ. It is alleged that the disclosure given by the defendants is seriously inadequate and that cross-examination is necessary to make the disclosure orders effective.

There were two parts to the overall disclosure order made against these defendants reflecting the fact that there were two different injunctions: one a proprietary injunction and the other a non-proprietary freezing injunction order. The order ancillary to the proprietary injunction requires disclosure of the location, nature and value of all assets which represent, in whole or in part, or are derived from the sum of US$213,468,750 which the claimants allege represents the proceeds of fraud. The disclosure obligation in respect of the non-proprietary freezing injunction requires disclosure of assets with a value in excess of £10,000.

The claimants are companies within the Otkritie Group which carries on business as a financial services provider. The two frauds which the claimants say give rise to their proprietary claims have been called the “Sign-on Fee Fraud” and the “Argentinian Warrants Fraud”. The claimants’ case in respect of the Sign-On Fee Fraud is that in September and October 2010 during negotiations with the first defendant, Mr Urumov, to recruit him and a team of fixed income traders then working at Knight Capital, Mr Urumov represented that each member of the five-person team; (i) was entitled to a guaranteed bonus of US$5 million from Knight Capital; (ii) would require a sign-on bonus of US$5 million from the claimants; and (iii) had executed documents in order to receive a US$5 million sign-on fee from the claimants. In the result, a sign-on fee of US$25 million was agreed and paid to Mr Urumov but in truth Mr Urumov had arranged to pay far less than US$5 million of the US$25 million for distribution amongst the team and he kept the balance (US$20.5 million) from which he paid bribes of US$5.7million to Mr Pinaev (via Rossmore Corporate Ltd) and US$6.4 million to Mr Kondratyuk (via F O Firmly Oceans Corporation).

As for the Argentinian Warrants Fraud, the claimants’ case is as follows. In March 2011, the 2^nd claimant (“OSL”) purchased 1.65 billion Argentinian Government GDP warrants from an intermediary, Adamant Capital Partners AD (“Adamant”), for US$213.47 million. In August 2011, it was discovered that the claimants had been the victim of a massive fraud. OSL had been led to believe there was a forward trade when purchasing the warrants but there was no such trade and the warrants were worth only about US$53 million. In February 2011, OSL had been caused by Mr Urumov, inter alios, to enter into a ‘sucker trade’ to buy a small quantity of warrants from Adamant acting as an intermediary which were resold to a buyer arranged by, inter alios, Mr Urumov and Mr Pinaev and Mr Kondratyukso so as to give the appearance of a profit to OSL of US$2.4 million. The 13^th defendant, Mr Jemai, at the behest of Messrs Urumov and Pinaev, then manipulated OSL’s trading systems so that the Argentinian peso to US$ exchange rate was changed to the false rate of 1:1. Mr Pinaev had contacted Bloomberg (the operator of the trading platform) and used “test” tickets beforehand to learn how this could be done. Mr Urumov arranged for a friendly third party to purchase the warrants in the sucker trade at a loss (and thereby allow OSL to make a profit), with that loss being funded from the proceeds of the Sign-On Fee Fraud. OSL was then caused to enter into the much larger trade to acquire 1.65 billion warrants, for which purpose Mr Jemai again manipulated the Argentine peso/US$ exchange rate. OSL was falsely told by Mr Urumov that: (i) the warrants were to be sold on to Threadneedle, a financial institution in London, under a forward contract, giving the appearance of an essentially risk-free and profitable trade; and (ii) there were confirmations of the trade from Threadneedle on the Bloomberg electronic trading system.

Between 14 and 18 March 2011, OSL paid Adamant US$213.47 million for the warrants from which sum the following, inter alia, transfers were made: (i) Adamant credited the US$213.47 million (less its ‘commission’ of US$495,000) to a trading account at Snoras Bank in Lithuania in the name of a Bahamian entity, Gemini Investment Fund Ltd (“Gemini”); (ii) Gemini transferred US$151 million to its account at Latvijas Krajbanka (“LKB”) (a subsidiary of Snoras, incorporated in Latvia); (iii) between 16 and 18 March 2011, US$120 million was then transferred in two tranches from Gemini’s account at LKB to the account of Arcutes Holding Inc (“Arcutes”) held at Bordier et Cie., a Swiss private bank, Arcutes being jointly owned by Mr Urumov, Mr Pinaev and Mr Kondratyuk; (iv) US$36.5 million was paid out of the Arcutes account by cash transfers to Mr Urumov’s company, Sun Rose Trading SA; (v) a further US$36.5 million was paid by cash transfers to Mr Pinaev’s company, Pleator Holdings Inc (“Pleator”).

Mr Pinaev denies that he was party to the frauds alleged against him but admits that: (i) he contacted Bloomberg to find out how to complete a trade ticket for the warrants in US dollars rather than Argentine pesos; (ii) he set up ‘test’ tickets on the Bloomberg system altering the US dollar/Argentine peso exchange rate; (iii) he made arrangements for Adamant to purchase the warrants as a ‘switch’ counterparty. He also admits that he received US$36.5 million via Pleator but says that he received these funds to invest on behalf of a hedge fund run by Gemini pursuant to an arrangement made by Mr Kondratyuk. He further admits that: (i) the US$36.5 million was received by Pleator through the sale and purchase of bank notes in order to disguise which company had received those funds; and (ii) he signed a sale and purchase agreement which purported to show that the US$36.5 million derived from the sale of shares in a company called Ural Pharma.

Mr. Pinaev also admits that he received US$5.67million from Mr. Urumov in connection with the employment of Mr. Urumov by the claimants, which sum he (Mr. Pinaev) did not disclose to the claimants. Mr. Pinaev asserts that this payment was a form of compensation from Mr. Urumov for lost bonus opportunities and in return for introducing Mr. Urumov to the claimants.

It is accepted by the claimants for the purposes of this application that the defendants would have owned assets worth about US$13million in 2010. It is also common ground that between December 2010 and March 2011 Mr Pinaev received a further US$42.5 million made up of the US$36.5 million received via Pleator and the US$5.6 million received from Mr Urumov. The total value of the assets at the disposal of Mr Pinaev was therefore US$55 million but the defendants’ disclosure only purports to account for assets worth US$45 million. Accordingly, as Mr Cohen for the defendants frankly accepted, the claimants have an arguable case that the defendants are in breach of the disclosure orders by failing to disclose what has become of US$10 million worth of assets.

The claimants further contend that the defendants’ disclosure as to assets worth a further $10 million deriving from the US$36.5 million received via Pleator is woefully deficient.

On the evidence before the court Mr Pinaev would have become aware that the claimants had commenced proceedings on about 8th or 9th October 2011 when he was visited in Geneva by Mr. Urumov. Very shortly after that, he (Mr. Pinaev) transferred around US$6 million from his Pleator account with Bordier & Cie as follows: (i) CHF 3.3million was paid to Chatila, a luxury jeweller in Geneva; (ii) CHF 500,000 was withdrawn in cash; and (iii) a CHF 2 million banker’s draft was drawn on Pleator and subsequently credited to a new account with Hottinger Bank. One of the purchases from Chatila was a 10.06ct diamond ring purchased on 11th October 2011, a few days before Ms. Kovarska’s birthday, for just over CHF1.5million. Mr. Pinaev’s explanation for these transactions is that he purchased diamonds – including the 10.06 ct diamond ring – between 11th-13th October 2011 as a hedge against currency fluctuations and because of concern about the collapse of the Eurozone. Further, Gemini had asked for cash urgently to make an investment and, on 13th or 14th October 2011, the diamonds he had purchased, plus cash, were handed to Mr Kondratyuk to be passed on to the hedge fund.

An officer at Bordier & Cie has given evidence in proceedings in Switzerland that the jewellery was purchased for Ms. Kovarska and there is evidence that an employee of the bank noticed that Ms. Kovarska was wearing a very large diamond ring soon after the purchase was made.

I agree with Mr. Pillow’s submission that this account given by Mr. Pinaev is worryingly improbable and raises many questions.

As to the other US$10 million, the defendants now say that this was used to make various loans to different borrowers. I say “now” because when disclosure was first made under the disclosure order, Mr Pinaev made no mention of any loans being made out of the sums received into the Pleator account. Following his initial disclosure, the question of loans was raised by the claimants’ solicitors in correspondence with the defendants’ solicitors and the explanation given on behalf of the defendants for the failure to disclose the loans was that Mr Pinaev did not appreciate that loans might be “assets”. I cannot make any final determination as to the honesty of that explanation, but I am bound to say that, having regard to: (i) the terms of the order; (ii) the fact that Mr Pinaev would have had legal advice in respect of the order; (iii) the fact that Mr Pinaev is obviously highly experienced in financial matters, this explanation is highly questionable.

On 13th October 2011, €1.45million was transferred from Pleator to Haymoks’ accounts at Snoras Bank and Norvik Bank. Haymoks is a Northern Irish LLP. The claimants say its ownership is opaque: its partners are a Belize company and a Panamanian company. Responding to a question about the purpose of the payments, Mr Pinaev’s solicitors stated on his behalf that he was “checking the position”. Later, they stated that Pinaev had no interest in Haymoks. However, there is an internal Bordier Bank document consisting of a note made by an employee of the bank, Mr. Sebastien Giovanni, of a conversation with Mr. Pinaev when he was giving the instruction for the transfer to Haymoks. That note records that Mr. Pinaev said that he was the beneficial owner of Haymoks and that the transfers were for his personal use. Mr. Pinaev says that this note is erroneous.

Mr Pillow for the claimants points out that the transfer was made in two payments and the recipient banks were both banks involved in the Argentinian Warrants Fraud. Further, Norvik Bank is a Latvian bank and Ms. Kovarska is a national and former resident of Latvia.

Mr Pinaev initially refused to provide a copy of the loan agreement, citing confidentiality concerns. However, following an order for disclosure made by Walker J, a document expressed to be a loan agreement was produced. This document evidences a loan of €3million at 3% interest per annum. It makes no provision for any security. No other documents relating to the making of this loan have been produced, save for a payment instruction to Bordier & Cie from Ms. Kovarska. Mr. Pinaev has not provided any explanation of the commercial purpose of the loan or of the identity of those who are behind Haymoks.

On 13th September 2011, €1.25 million was paid from Pleator to Mauchline. The recipient bank was Raiffeisenbank in Prague. Mauchline is an English company indirectly owned by an offshore fiduciary company. Accounts to a date in 2010 show that it was a dormant company. It was incorporated in 2006. Mr Pinaev has produced no loan agreement, although Mr. Pinaev has said that one exists. He also says that the loan was personally guaranteed by a Mr. Slobins, who is a friend of Ms. Kovarska and who has become a friend of his. No documents at all pursuant to Walker J’s order have been produced in respect of this loan, notwithstanding that the defendants have suggested that due diligence was carried out in the form of internet searches and the obtaining of financial information.

The defendants’ solicitors stated on 28th March 2012 that Mauchline was not owned by anyone associated with Mr. Pinaev. However, there is an internal Bordier & Cie note recording that Mr. Pinaev had told the bank that the loan was being made to Mr. Slobins, a friend of his. It is said that the loan is due for repayment and is expected to be repaid with interest at 10%. As I have said, the loan documentation has not been produced. It is not suggested that any security was sought or given for the loan.

Shortly after Mr Pinaev must have learned that proceedings had been commenced involving the two frauds, CHF 2 million was transferred from the Pleator account at Bordier & Cie and deposited in a new account at Hottinger Bank in Mr Pinaev’s name. Shortly thereafter, on 3rd February 2012, US$528,861 was transferred to Calorna. Mr Pinaev has stated that this was a business development loan. Calorna is a Belize company. The recipient bank was Tallinn Business Bank in Estonia. Mr Pinaev’s first account as to what had happened to the money in the Hottinger account was that, to the best of his recollection, the monies were spent on: (i) refurbishment of a villa in Conches in Switzerland which was purchased in the name of his wife; (ii) professional fees; and (iii) a loan to Miss Yulia Balk. As Mr. Pillow submitted, it is surprising that Mr. Pinaev had forgotten a recent loan or investment with a value of over $500,000.

A loan agreement has been disclosed. This evidences a 5 year interest free loan made without any security. Mr. Pinaev says that the purpose of the loan was to facilitate, through Mr. Petrovs, introductions to the privatisation programmes in the municipality of Riga. This stands to be contrasted with the earlier statement that the loan was for the purposes of business development.

Payments were made to Dalberg from the Pleator account in the sum of US$400,000 on 7th January 2011 and from Ms. Kovarska’s account at Julius Bear in the sum of CHF 800,000 on 9th October 2011. Dalberg is a BVI company. The recipient bank was another Latvian bank, Rietumu Bank, and Mr. Slobins was said to have been involved in arranging both of the loans.

As to the Pleator-Dalberg loan, there is a document that describes the loan as a “shareholder loan agreement”. Mr. Pillow contends that this suggests that Mr. Pinaev has an undisclosed interest in Dalberg. Mr. Pinaev says that what is stated in this document is an error. No other documents have been disclosed in respect of this loan. Mr. Pinaev now says that the final US$200,000 outstanding was repaid at some stage prior to 2nd March 2012 by Dalberg paying to a company called Luxurex Limited (“Luxurex”) certain losses that he had incurred on margin calls for foreign exchange transactions.

As to the Kovarska-Dalberg loan, Ms. Kovarska has previously stated that she provided this loan to Dalberg for business development purposes. It has subsequently been said that Dalberg is owned by Mr. Slobins and that the loan was made for “cash flow reasons”. The loan was not to be repaid for two years and the interest thereon was payable only at the end of the term. It is difficult to see, therefore, how the loan could have been made for the reasons stated by Ms. Kovarska.

Payments of US$110,000 and US$350,000 were made to Luxurex from or via Pleator. One payment was given a reference “Invoice DD May 2010 Building Materials”; the other payment was given the reference “Margin Deposit Contract N17B 19.05.2011”. Mr. Pillow submits that it would be strange if Luxurex carried on business both in respect of building materials and in respect of transactions where margin deposits would be required. Luxurex is a Belize company. The recipient bank was Norvik Bank in Latvia. Mr. Pinaev has now revealed that he believes that Dalberg paid another US200,000 to Luxurex on his behalf. The claimants do not know who stands behind Luxurex or how it can be contacted.

Mr. Pillow also made submissions in respect of vintage and sports cars purchased by one or both of the defendants, safety deposit boxes and a watch. Mr. Pinaev has disclosed that a number of high value vehicles were purchased out of the funds transferred to Pleator, including a very expensive Ferrari and an E-Type Jaguar. Amongst the documents available to the claimants is an e-mail from a Spanish company, Worldwide Classic Cars Network, to Mr. Pinaev. Sent with this e-mail was a statement of the payments on account which the Spanish company needed for certain cars. It is plain that the Spanish company was carrying out work on a number of cars. The cars are listed as follows: Lamborghini, Mercedes, a Jaguar E-Type, a Jaguar XK140 and an Aston Martin DB6. Of those cars, only the purchase of the Jaguar E-Type has been disclosed by Mr. Pinaev. The claimants wish to cross-examine him as to how and when he purchased the other cars that are listed in the attachment to the e-mail.

Moving on to safety deposit boxes, there was evidence that there were two safety deposit boxes; one such box was said in an e-mail to be for paintings (in the plural). The defendants have said that there was stored in that box only one modern picture worth £5,000-odd.

As to the watch, it has emerged that US$128,000 was paid to a Latvian jeweller by one or other of the defendants for a watch. The defendants say that the watch was given to Mr. Petrovs.

The leading authorities in which there is discussion as to when it might be appropriate to make such an order were recently reviewed by Vos J in Jenington International Inc & Ors v. Assaubayev & 6 Ors [2010] EWHC 2351 (Ch). They included House of Spring Gardens Ltd v Waite & Ors (Mareva practice) (1985) FSR 173; CBS United Kingdom Ltd v Perry (1985) FSR 421; Yukong Line Ltd of Korea v Rendsburg Investments Corp of Liberia & Ors (Court of Appeal, 17 October 1996; and Motorola Credit Corporation v Uzan & Ors (No.2) [2004] 1 WLR 113. On the basis of these authorities, Mr. Justice Vos identified five requirements for the ordering of cross-examination which I respectfully adopt:

Mr. Cohen submits that the defendants ought not to be cross-examined on their disclosure. He contends that such cross-examination would be inappropriate for a number of reasons:

Mr. Pillow submitted that if ever there was a case for cross-examination being ordered, this was it. For a start, it had been accepted by Mr. Cohen, as he was constrained to do, that the claimants have an arguable case that the defendants have failed to account for US$10million of the assets derived from the money paid into the Pleator account. He further contends that it is plain that the disclosure provided is grossly inadequate and wholly unconvincing.

Mr. Pillow made it clear that the cross-examination he is seeking would last no more than half a day in respect of Mr. Pinaev and a full day for Ms Kovarska because she would need a translator. If she had been fluent in English, it would have been half a day for her too.

Mr. Pillow produced a helpful document, at the court’s request, setting out the topics that would be covered in cross-examination of the defendants. This document is not intended to be an exhaustive document; nor is it an agreed document. However, it is clear from this document that the great majority of the matters which the claimants wish to pursue in cross-examination are designed to obtain information as to what has happened to the funds which are the subject of the proprietary order and thereby to make the disclosure order effective.

In my judgment, it is just and convenient to order that each of these defendants is cross-examined in respect of the topics identified by Mr. Pillow. (The document setting out the topics will be annexed to my approved Judgment). I am satisfied that the claimants have made very considerable efforts to obtain information from third parties and that those efforts have continually run into the sand when they are told simply that money has been received by an offshore entity whose ownership is extremely opaque. The time has come in my judgement, for the defendants to be closely questioned, rather than for letters to continue to pass between the solicitors with explanations which give rise to yet further questions raised in yet further correspondence. I say this because, in my judgment, there are serious question marks over the accuracy and credibility of the defendants’ disclosure and the related explanations that have been provided. The value of the unexplained transactions, together with the loans, is considerable - US$20million. This represents a material part of the overall proceeds. The defendants have not been at all forthcoming in the information that they have provided. For example, they have named Mr. Slobins, but they have given no other information about his address, his business or anything beyond his name that would assist the claimants in pursuing enquiries of him. The explanations for the purpose of the loans also give rise to many questions as to the genuineness of the alleged loans and, if they are genuine, as to who, in reality, are the beneficiaries of these loans and what may have become of the money.

For these reasons I conclude that the claimants should be allowed to cross-examine the defendants at a hearing of no more than 1 ½ days on the topics set out in Mr. Pillow’s document which relate to the missing $10million, the sports cars, why safety deposit boxes were rented, the art antiques and paintings which have been purchased, the jewellery (including the watch said to have been given to Mr. Petrovs), the alleged loans and what has become of the jewellery that was purchased in October 2011. The cross-examination will be supervised by a judge of the commercial court and the defendants will be entitled to be represented. I am accordingly confident that the cross-examination will serve the purpose of endeavouring to give effect to the disclosure orders and will not become a roving, one-sided and unfair exercise.

THE MISSING US$10m

General

Questions about the Pinaevs’ current and recent spending, lifestyle, funding, banks/bank accounts (other than those disclosed), including in particular:

Questions about particular transactions shown on banking documentation, seeking an explanation for sources of income and/or reasons for debits.

Specific types of missing asset

Sports cars etc.

What has happened to the Lamborghini, Jaguar XK and Aston Martin? See [1/5/364-7] If sold, what has happened to the proceeds?

Safety deposit boxes

Why did Mr Pinaev rent safety deposit boxes at Bordier and Hottinger [Dooley 13 para. 124]?

What was he intending to store in the Hottinger box (which he says has never been used)?

Was anything ever stored in the Bordier box – if so, what was stored in it; when did he cease to use it; and what happened to the assets that were in it?

Art, Antiques, Paintings

What art/furniture/antiques were purchased for the Conches property, including the €90,000 from the Cuban antiques dealer? Where are they now?

What were the “paintings” being referred to by Ms Kovarska in [1/3/254]?

Watches / other jewellery

What has happened to the watch bought for US$125,000 from a Latvian jeweller? If given as a gift to Mr Petrovs:

What other items of jewellery do/did the Pinaevs own? When were they purchased, how, and what has happened to them?

‘LOANS’ etc.

Generally, in relation to each:

Who is the beneficial owner of the company? How can they be contacted/where?

Who negotiated the contract? How can they be contacted/where?

What was the commercial purpose of the contract? What assets might there be to show for the ‘loan’ (i.e. the returns on the ‘investments’; the interest in the business being ‘developed’ or in the ‘opportunity’ the loan opened up; assets purchased with the moneys)?

Where/when were the loans re-paid or are they to be re-paid?

Haymoks

Who is Ms Julia Bodriya, the signatory for Haymoks on the loan agreement? How can she be contacted/where?

Who is Vitaly Shavlov, who introduced Ms Bodriya to Mr Pinaev? How can he be contacted/where?

What were the final terms of the loan, if not as recorded (interest rate, repayment date)?

Why was the payment made to two different banks?

Who sent the email providing the payment instructions to Ms Kovarska at [1/4/200]? What was Ms Kovarska’s role?

Mauchline

Who is Mr Slobins. How can he be contacted/where? What business is he in?

What is the connection with the Riga commercial port? [Pinaev 2, para. 87(iv)] Were any shares actually acquired? If so by whom and where are they? If not, has the money been involved elsewhere?

Where are the loan and guarantee documents?

What (if any) arrangements have been made for repayment (loan is said to be “due for repayment” – Pinaev 2, para. 87(iv))? To what account will repayment be made?

Calorna

Who is Mr Petrovs, and what was his role (he signed the contract but is not said to be the beneficial owner)?

How was this loan intended to “facilitate… introductions to privatisation programmes”? [Pinaev 2, para. 99-100(i)] What is meant by the loan being for “business development of investee company”?

How did Mr Pinaev expect to make a profit given that loan was interest free?

When is the loan expected to be repaid?

Why was Mr Petrovs given a US$125,000 watch by Ms Kovarska at this time?

Dalberg (two loans: one from Pleator, one from Ms Kovarska)

What were the “business development purposes” of this loan?

Who are Richly Pacific International, Foxside International and Megaterra (referred to in related documents); and what was their role/relevance in this transaction?

Have those entities received moneys from or the fruits of the loans?

Luxurex

Who is the unidentified “business associate” who owns Luxurex? [Pinaev 2, para. 135-6(i)] Contact details, etc.

What “foreign exchange transactions” were performed with Luxurex? [Pinaev 2, para. 135-6(ii)] What were the payments for – e.g. services / assets? Where did the funds come from?

US$4M OF CASH AND JEWELLERY: OCTOBER 2011

What exactly was purchased from Chatila in October 2011 for a total of CHF3m?

What has happened to each item?

If not taken to Israel, how have their expenses and lifestyle been funded since then (see above).