Manganese plot a la Milanese

Mineweb ^ | 17-APR-06 | John Helmer

[Tailgunner Joe]

MOSCOW (Mineweb.com) -- The plot to steal a billion-dollar manganese plant in Ukraine, allegations of which surfaced in a US court filing late last month, now threatens a billion-dollar Italian bank takover, according to letters of warning issued by Italian lawyers in Milan.

On March 30, a group of shareholders associated with Ukrainian steelmaker and financier, Igor Kolomoisky, filed suit under the US racketeering statute, accusing a group of Ukrainian and Russian defendants of corruptly gaining control of the Nikopol Ferro-Alloy Plant of the Ukraine. Nikopol is one of the world’s largest producers of the steel-hardening manganese alloy. The lawsuit accuses 13 individual and corporate defendants of looting the proceeds of the plant’s operations and exports, through a network of international trading companies and money-laundering fronts.

Two notable Russians, steelmaker Alexander Abramov, owner of the Evraz group, and Victor Vekselberg, owner of the Renova multi-metals group, were also named as part of the alleged racket. The mastermind, according to the 40-page court claim, was Victor Pinchuk, the son-in-law of former Ukrainian president, Leonid Kuchma.

With treble damages claimed for racketeering, the Boston suit is seeking a court award of three billion dollars.

The bank listed on March 31 as one of the defendants is the Ukrainian Bank for Social Development (Ukrsotsbank), one of the five largest financial institutions in the Ukraine. The US court documents claim Pinchuk is the "beneficial owner of the majority of shares in Ukrsotsbank". The documents also charge that he used "tens of millions of dollars of proceeds diverted from Nikopol to purchase his controlling interest in this bank in 2004, and, further, to make a capital contribution of $60 million in return for additional shares in the bank in 2005."

Pinchuk bought his stake in the bank from Valery Khoroshovsky, a young Ukrainian who says publicly that he was Abramov's longtime friend and partner in buying control of the bank between 2002 and 2004, when Khoroshkovsky was also Economics Minister in the Ukrainian government under Kuchma. During the same period, he also reports receiving a PhD in economics from Shevchenko Kiev State University. Running the Ukrainian economy and studying economics must have been lucrative, because Khoroshovsky managed to move from being someone's placeman as chairman of the supervisory board of Ukrsotsbank in 2000 to owning it outright.

According to Khoroshkovsky's remarks in a recent interview with a Moscow newspaper, "his company Merks joined forces with an Abramov-affiliated company called Ferrotrade to start snapping up shares in Ukrsotsbank, a top-five Ukrainian lender. "In about a year, a year and a half, we brought our stake to a controlling one," Khoroshkovsky said. "Later, I bought [Ferrotrade's] shares and continued on my own. You could say it was my biggest project in business before Evraz," he said. Khoroshkovsky then sold to Pinchuk in a deal valued by investment banks at about $200 million. How much real money had exchanged hands between Abramov, Khoroshovsky and Pinchuk remains to be revealed if the Boston case goes to trial. The proceeding may also clarify what relationship, if any, exists between the similarly named Ferro-Trade International of the Ukraine, a Pinchuk company, and Ferrotrade of Gibraltar, an Abramov company.

When Khoroshovsky left his ministerial office in January 2004, he declared "business is more honest [than government] and has greater freedom." He joined Evraz soon after, becoming chief operating officer, according to a statement in an Evraz prospectus. As part of that deal, Khoroshkovsky was given an option to buy Evraz shares, acquiring a 2.08% stake; this was diluted to 1.88%, following Evraz's share listing in London last June. At this week's market price, Khoroshovsky's stake is worth $179 million. In January of this year, Abramov appointed his protege as chief executive in his place, while he moved to become chairman of the corporate group.

Ukrsotsbank did not remain Pinchuk's trophy for long.

Six weeks before the Boston court filing, the bank told a press conference in Kiev that Pinchuk had decided to sell out. According to a report of the Ukrainian Times, "Banca Intesa SpA of Italy has signed an agreement with the UkrSotsBank on the purchase of 85.4% of its shares. In the near future Banca Intesa SpA plans to hold 88% of UkrSotsBank shares. As per agreement, the Italians will pay $1.16 billion, $60 million being invested in UkrSotsBank's capital in particular. The purchase will be made in two stages: the first stage is to be completed in May when Intesa obtains a permit from regulatory bodies, and the second will be finished in September when the above $60 million are pumped into the Ukrainian bank. Intesa is the second-largest bank in Italy."

The Kolomoisky group has told the US court it has been a shareholder in Nikopol since 2000, and through the Cyprus companies it controls “more than 10% of the issued and outstanding shares of Nikopol.” Before Pinchuk’s takeover, PrivatBank, a Kolomoisky institution, managed “approximately 23%” of the Nikopol shares on behalf of its clients.

Three flow-charts attached to the court claim illustrate the alleged Pinchuk scheme. A Swiss company controlled by this group bought manganese ore from South Africa, Gabon, and other sources, requiring Nikopol to pay over-market prices for the feedstock. Other contracts, known in the trade as tolling schemes, arranged ore inputs for the plant, paying a processing fee to the plant, and then taking the alloys for export, without incurring domestic taxes. Tolling contracts, according to the court documents, were “commercially unreasonable, and operated as a fraud on Nikopol and its other shareholders.”

Sales contracts for Nikopol’s products diverted large sums from the plant to the Pinchuk group through commissions and other sell-low arrangements. Some of the proceeds of the transactions were banked at Ukrsotsbank and Credit Dnepr. Transfers of the proceeds were in US dollars, and were wired through US banks. In all, the court documents claim that up to $381 million in plant profits “were siphoned from Nikopol, and perhaps more if the commission contracts were amended when market prices changed.” Other contracts allegedly generated another $265 million in diverted profits to the benefit of the Pinchuk group.

On April 3, six weeks after the Ukrsotsbank sale announcement, Bacciardi & Partners, an Italian lawfirm, despatched a letter to the Intesa board chairman and chief executive, warning that their proposed buyout of Pinchuk's stake in Ukrsotsbank potentially exposed the Italian bank to substantial financial liability for the Nikopol racket.

Representing a Kolomoisky shareholder in Intesa, called Flink Investment SA, the letter reports that Flink "has recently learnt that Banca Intesa is in the process of acquiring shares in Ferro Trade International (or related companies), a Ukrainian company controlled by Mr. Victor Pinchuk, which has controlling holdings in Ukrsotsbank, a Ukrainian banking institution. Our Client Flink Investment SA believes that the acquisition which Banca Intesa would like to perform raises numerous ethical concerns and may bear substantial liability."

The letter warned Intesa of the legal and regulatory problems if it proceeded to buy Ukrsotsbank, knowing or wilfully ignoring the latter's involvement in the alleged manganese racket. According to the letter, repeating the allegations of the Boston lawsuit, "Ukrsotsbank conspired, in conjunction with the other defendants, to violate the provisions of the Racketeer Influenced and Corrupt Organizations Act (“RICO”) in force in the United States; Ukrsotsbank violated the provisions of the Wire Fraud Statute (18 U.S.C. § 1343) in force in the United States; Ukrsotsbank violated the provisions of the Anti–Money Laundering Statute (18 U.S.C. § 1956) and ..Ukrsotsbank was involved in illegal transactions in monetary instruments in violation of the provisions of 18 U.S.C. § 1957 in force in the United States."

To date, there have been no public responses by Abramov, the Evraz group, or Pinchuk to the Boston court claim. Last October, however, Pinchuk filed suit in a US federal district court in New York, claiming on behalf of Addox, a local company controlled by him and others, that the reprivatization sale of Ukrainian steelmill, Krivorozhstal -- which Pinchuk and an ally had also taken during the Kuchma period -- was unlawful. After the Ukrainian courts invalidated Pinchuk's privatization award, and the Kiev government reclaimed the steelmill stake, it was resold to the Mittal group for more than five times the price Pinchuk had paid.

Ukrsotsbank promised to respond to Mineweb's request for response, but had not done so at print time.

According to Bruce Marks, attorney for the Boston claimants, the possible sanctions for Intesa in the US are serious. "The plaintiffs in the Massachusetts case seek up to $1 billion in damages, which would be trebled under RICO to $3 billion," he said. RICO is the acronym for the 1962 US statute outlawing racketeer-influenced and corrupt organizations. "Under RICO, all defendants are jointly and severally liable for damages. Thus, Ukrsotsbank could be exposed to a claim of $3 billion, In addition, if a federal court concluded that Ukrsotsbank violated RICO, this would impose a risk of regulatory sanction, including the risk of losing clearing privileges with U.S. banks."