Nikolay Lagoon
Creditprombank depositors filed a lawsuit with ICSID to have their funds repaid by the state.
Ukrainian taxpayers will be held liable for the debts of a private bank if American investors who held UAH 211 million in Kreditprombank win an international arbitration case. American citizens simply have no other options left to recover the funds they invested in Kreditprombank through Praktika Asset Management Company. After all, the bank's owner, Mykola Lagun, is only willing to pay them 20% of their deposit. If Ukraine loses this case, the plaintiff could receive approximately UAH 500 million from the state budget.
The familiar problem of bank defaults on deposits for Ukrainian clients has gained international attention. For the first time in Ukraine's history, a lawsuit has been filed against it at the International Centre for Settlement of Investment Disputes (ICSID). It was determined that the state has no mechanisms in place to compel a Ukrainian bank to fulfill its obligations to its clients.
On April 24, ICSID Secretary-General Meg Kinnear registered the application to initiate arbitration proceedings. The claim was filed by the London-based company Volterra Fietta, with the Ukrainian Ministry of Justice acting as the defendant. The status of the proceedings is "pending."
Volterra Fietta, representing the plaintiff, said the lawsuit was initiated by a Kreditprombank depositor, Praktika Management Company LLC. This was stated in the ICSID letter dated April 11, sent to the Cabinet of Ministers, the Ministry of Justice, the Antimonopoly Committee, the National Bank, and the Deposit Guarantee Fund.
The lawsuit stemmed from a conflict between Kreditprombank owner Mykola Lagun and Praktika Asset Management Company, which represents the interests of a group of American citizens. The banker acquired Kreditprombank in March 2013. The bank immediately stopped accruing interest on the Asset Management Company's UAH 211 million deposit, which was placed on July 5, 2010, and expired on July 9, 2013. The new owner offered to return only 20% of the deposits to non-resident clients. "All non-residents received 20% of their debt, and Praktika was offered the same. I'm willing to negotiate with them, but I won't be able to get as much as they want. I'll pay what this product is really worth," explained Mykola Lagun.
Buyout of Kreditprombank
When the financial crisis began in Ukraine in the fall of 2008, a conflict between the main shareholders of Kreditprombank was heating up – Victor Nusenkis (owner of the Energo concern) and former Prosecutor General Gennady Vasiliev. This standoff was of concern to 28 foreign banks, which had invested over $400 million in Kreditprombank debt instruments. Investors included the European Bank for Reconstruction and Development, the American Cargill Financial Inc., France's BNP Paribas (Suisse) SA, the Netherlands' ING Belgium SA/NV, Cyprus's Pireus Bank SA, and Austria's Erste Bank Internationale Beteiligung GmbH. As a result of negotiations, the investors reached a restructuring agreement with the bank. A portion of the debt, amounting to $100 million, was exchanged for Kreditprombank shares in the fall and winter of 2011. International banking groups became owners of 47,78% of the bank through Cyprus's Kalouma Holdings Ltd.
The addition of foreigners to Kreditprombank's supervisory board failed to resolve the bank's problems, as asset quality continued to deteriorate. In the fall of 2012, the bank's chairman, Viktor Leonidov, approached the National Bank for refinancing. However, he was refused and advised to seek funding from Delta Bank, controlled by Mykola Lagun. Financing was obtained, but at a commercial price, not the preferential price (from the NBU) as Leonidov had hoped. After this, Kreditprombank's shareholders began searching for a buyer.
Russia's Alfa-Bank emerged as the leading bidder for the bank. However, after several months of evaluation, the potential investor sent Viktor Leonidov a letter of refusal, citing the NBU's "instructions not to acquire Kreditprombank." Thus, the NBU, then headed by Sergei Arbuzov (now a fugitive from Ukrainian justice), facilitated the acquisition of Mykola Lagun by its actions. Due to the lack of competition, Kreditprombank was purchased for $1 in March 2013.
Meanwhile, Kalouma Holdings Ltd., which held $96,6 million in Kreditprombank debt, sold it to Nikolai Lagun's Clever Management at an 80% discount. Kalouma Holdings also sold $37,5 million of the bank's subordinated debt to Clever Management for just $1, a source at the bank reported. According to the source, the Kreditprombank debt transactions were carried out with the active participation of the Moscow office of Cargill Financial, a co-owner of Delta Bank (30%). Kalouma Holdings also became the property of Nikolai Lagun. Thus, the Western banks received only $19,3 million for Kreditprombank.
Within two weeks of the completion of the Kreditprombank acquisition on March 7, 2013, Clever Management assigned the debt of Nikolai Lagun's Cypriot company, Rabiturna Ltd. The transaction was conducted through Latvia's Baltic International Bank and Bank 3/4. Rabiturna Ltd. then presented Kreditprombank with the full amount of $96,6 million. Kreditprombank paid it at par, as evidenced by its quarterly financial statements. On March 22, 2013, the same amount, $96,6 million (UAH 773,133 million), appeared in Delta Bank's account as subordinated debt from Kalouma Holdings, which Nikolai Lagun had purchased on March 7. The $37,5 million subordinated debt also disappeared from Kreditprombank's debt. Nikolai Lagun declined to comment on last year's transactions.
When FinMaidan asked NBU officials whether they considered such transactions during the Kreditprombank acquisition to be tax evasion or contrary to business ethics, they denied any knowledge of them. Mykola Lagun maintains that all actions were legal. "We (Delta Bank – Ed.) have undergone four NBU inspections during this time, and no violations were found," he stated.
Dispute over deposit
Following the deal, in which Mykola Lagun effectively acquired the bank for free, all of its liquid assets began to be transferred to Delta Bank. Meanwhile, Kreditprombank refused to recognize the deposit agreement with Praktika Asset Management Company as valid, so the non-residents attempted to recover the funds through the courts. On July 1, 2013, the Kyiv Commercial Court, as a security measure for the claim, seized Kreditprombank's assets and prohibited the "alienation of its real estate and movable property, including Kreditprombank's property rights under any agreements and other transactions in which Kreditprombank participates," totaling UAH 217,46 million.
Kreditprombank lost its appeal but immediately appealed to the same court, which ruled in its favor on September 27. The transfer of assets from Kreditprombank to Delta Bank continued. Meanwhile, the investors—US citizens—appealed for external assistance. In June 2013, US Ambassador to Ukraine John Tefft appealed to NBU Governor Igor Sorkin and First Deputy Prime Minister Serhiy Arbuzov to intervene. John Tefft was concerned that after Mykola Lagun purchased Kreditprombank, the American investor was required to offer an 80% discount on the deposit amount, and threatened to withhold all funds if he refused.
In June, Morgan Williams, president of the U.S.-Ukraine Business Council (a group representing over 200 of the largest U.S. corporations, including all of the largest U.S. investors in Ukraine), sent letters to President Viktor Yanukovych, Prime Minister Mykola Azarov, and Foreign Minister Leonid Kozhara. "The presence of such unfortunate cases of fraud in Ukraine's banking sector will negatively impact my ability to convince corporate council members of the wisdom, safety, and effectiveness of investing in the Ukrainian economy," Mr. Williams noted.
As a result, one of the investors was invited to the First Deputy Prime Minister's office, where it was explained that the co-owner of Delta Bank "enjoys the significant support of Serhiy Arbuzov" and that investors would be better off negotiating with Mykola Lagun. "Now, after the Maidan, the situation hasn't changed; rampant corruption in Ukrainian courts continues," Yuriy Kaplun, one of Praktika's investors, told FinMaidan. "The National Bank, the Cabinet of Ministers, the Ministry of Justice, and the Ministry of Economy are aware of the problem with our deposit. It seems that the new officials are continuing to cover for their thieving predecessors. Clearly, they prefer to pay off Kreditprombank's debts from the state budget."
Now investors intend to turn to the new NBU governor, Valeria Gontareva, who is "well acquainted with this matter." Kreditprombank hired the Paris office of Rothschild in 2010 to restructure the debts of foreign investors, including the opening of a deposit account with Praktika Asset Management Company. FinPoint and ICU (owned by Valeria Gontareva) also provided consulting services. However, Ms. Gontareva's position on depositors may be biased, as she also advised Mykola Lagun on the acquisition of Kreditprombank. "The fact that Valeria Gontareva was directly involved in consultations on the restructuring of Kreditprombank's debt will help her understand this matter and avoid arbitration proceedings at the World Bank," says Yuriy Kaplun.
The National Bank has so far shown no intention of intervening in the conflict or convincing the banker to return the funds. "We are aware of this matter, but this is a relationship between the bank and its client. The NBU, according to the law, has no right to influence the commercial relations of the parties. I can invite Mykola Lagun for a cup of tea and ask him for something, but I cannot order him," Volodymyr Krotyuk, First Deputy Governor of the National Bank, told FinMaidan in June. Praktika's year-old deposit accounts for approximately 20% of Kreditprombank's total liabilities, but the NBU has still not complied with the direct application of Article 75 of the Law "On Banks and Banking Activities" and has not classified the institution as problematic, Rostislav Kravets, Senior Partner at the law firm Kravets & Partners, is surprised.
Americans continue to actively support depositors. On June 22, Morgan Williams, President of the U.S.-Ukraine Business Council, sent a letter to President Petro Poroshenko and Prime Minister Arseniy Yatsenyuk, citing the "outrageous fact" of non-return of investments and the bank's artificial bankruptcy. Morgan Williams is perplexed: how can he recommend investing in Ukraine under such circumstances? The U.S. Embassy in Ukraine raised this issue during official contacts with Ukrainian government officials, requesting their personal intervention.
Judicial quagmire
As of June 11, 2014, Praktika Asset Management Company was already involved in 12 lawsuits in courts of various levels. The lawsuits were filed against Kreditprombank, the Antimonopoly Committee, the National Bank, Delta Bank co-owner Nikolai Lagun, and Kreditprombank Chairman of the Management Board Vitaly Masyura, who is also the First Deputy Chairman of Delta Bank's Board of Directors. Third parties involved in these cases included Delta Bank, Astra Bank, Omega Bank, and Kalouma Holdings.
The parties have been litigating for over a year, but some courts are unable to even hold hearings, citing formalities. For example, the Kyiv Court of Appeal accepted Praktika's appeal on the second attempt, but then, on March 18, postponed its consideration for six months "due to the need to notify the third party involved in the case, Kalouma Holdings Ltd, at least six months in advance." The Supreme Commercial Court of Ukraine has already rejected the cassation appeal three times, the third time "due to the absence of a case number on the receipt." There are also cases where a recess was declared "to provide the court with additional time to review the case materials." In March 2014, the judges sent the matter back for expert review. "The court went on a six-month recess to clarify the definition of 'capital,'" said Rostislav Kravets, who represents Praktika Management Company in court. He also calls it strange that in four different cases in the commercial court the computer “randomly” selected the same judge – Polyakova K. M.
Kreditprombank is challenging the legality of its acceptance of Praktika deposits in 2010 on the grounds that their amount exceeded 25% of the bank's capital, and that Chairman of the Board Viktor Leonidov exceeded his authority by signing the agreements. The bank even successfully initiated a criminal investigation against the former chairman. At issue at the time were four Praktika deposits totaling UAH 337,5 million (some of which were later returned), which were UAH 265 less than 25% of the bank's capital. But Ukrainian courts are unable to resolve such an arithmetic problem.
Moreover, the legality of the transaction to convert Kreditprombank bonds into deposits (which is how Praktika Asset Management Company's deposits came to be held at Kreditprombank) was approved by Deloitte, Ernst & Young (now EY), Rothschild, and Salans. The investors intend to involve them in ICSID arbitration. Mr. Leonidov reported on this restructuring to the Supervisory Board, and the Board approved it, as confirmed by a letter from Douglas Dryden, Deputy Chairman of the Management Board and representative of the EBRD. Furthermore, Kreditprombank underwent annual audits by the NBU, and these reports did not indicate any violations in the execution of this transaction.
ICSID to help them
Having failed to achieve any success in Ukraine, Praktika appealed to the ICSID. A case review by this center takes at least a year. However, a decision can take longer. "Sometimes it takes 9-12 months from the filing of a claim to the first hearing," says Dmitry Grishchenko, managing partner of the law firm Grishchenko & Partners. The case of the Lithuanian investor, Tokios Tokeles (which owned the Taki Spravi publishing and printing center in Ukraine), took four years to resolve.
ICSID was established in 1966 based on the Convention on the Settlement of Investment Disputes between States and Nationals of Other States, which has been ratified by 150 countries. Ukraine acceded to the Convention in 2000. According to research by Kluwer Arbitration, by early 2013, only seven countries had participated in ICSID cases more than 10 times, including Ukraine. Approximately 100 claims were filed against our country, some of which were dismissed because the arbitration did not find them to be in violation of investment interests. Of the ten cases concluded, Ukraine won five, lost three, and settled two with settlements. One of the claims against Ukraine was fully satisfied: in 2011, ICSID ordered the payment of $9 million to US citizen Joseph Lemire, owner of the radio station Gala-Radio, while several other claims were partially satisfied (for example, the country paid $2-5 million out of a claim of $20-30 million).
After ICSID registers Praktika's claim, each party (Ukraine and Praktika) must select a tribunal to represent their interests. The parties also agree on a third member—the tribunal president.
In a letter dated April 15, the Ministry of Justice addressed the law firm Volterra Fietta, acting on behalf of Praktika, announced that the Ministry of Justice would represent Ukraine's interests. On June 25, by Order No. 595, the Cabinet of Ministers authorized the Ministry of Justice to procure legal services related to protecting the country's rights and interests during the consideration of certain cases in foreign jurisdictions involving foreign entities and Ukraine. Among the cases in question is a lawsuit filed by Praktika Asset Management Company against the state of Ukraine. It is not yet known who will act as Ukraine's foreign defense counsel.
The selected tribunal is expected to schedule hearings for this case this fall, after which a written exchange of claims will begin. This process could take six months. The next stage is oral hearings and witness examinations. The tribunal will have several weeks to several months to render a verdict. The losing party has 120 days to appeal it.
Price issue
The asset management company's deposit amounted to UAH 211 million, but ICSID could oblige Ukraine to pay significantly more. "The plaintiff has the right to demand compensation for lost profits and direct damages. The total claim amount could be one and a half to two times the deposit amount," estimates Dmytro Grishchenko. Lost profits include interest accrued since 2013, penalties, and the exchange rate difference resulting from the hryvnia's devaluation by more than 40% since the beginning of 2014. Taking these and future potential accruals into account, the lawyer estimates that the compensation amount could reach UAH 500 million.
Additionally, Ukraine will have to cover the costs of the case. "In each case, the tribunal decides individually which costs and in what amounts the losing party will cover," explains Dmitry Grishchenko. According to Kluwer Arbitration, the typical cost per party is approximately $4-6 million. For example, Ukraine spent $4,37 million on Joseph Lemire's case, including $3 million on international consultants and $1,33 million on Ukrainian ones.
Lawyers note that if Ukraine loses, it may demand compensation for its losses from the party at fault in the conflict. "This could be Kreditprombank or Delta Bank, or even Nikolai Lagun personally. It all depends on how the claim filed with ICSID is formulated," said a partner at a law firm specializing in international arbitration.
The Cabinet of Ministers did not respond to FinMaidan's request, and the Ministry of Justice does not rule out the possibility of attempting to recover the amount from Kreditprombank. "The issue of recovering from Kreditprombank or other entities the amounts paid from the state budget of Ukraine during the enforcement of an arbitration award can only be resolved after the relevant arbitration award is issued and depends on its content. The functions of filing claims and representing the state's interests in court in cases of compensation for damages to the state budget are vested in the prosecutor's office," noted Olga Kostyshina, Acting Head of the Department for Representing the State's Interests in International and Foreign Courts. Complicating the forecast is the fact that by the time the ICSID ruling is issued, Kreditprombank, which is 100% owned by Mykola Lagun, may already be in the process of liquidation, which the owner had previously promised to initiate. All of the institution's liquid assets have already been transferred to Delta Bank, branches have been sold or closed, and the bank is only accumulating losses.
Ruslan Cherny, Victoria Rudenko, Finmaidan
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