#8 - JRL 8169 - JRL Home
From: "Ora Biles" <OBiles@ssd.com>
Subject: SCC RICO article_v4.DOC
Date: Thu, 15 Apr 2004

Sarah Carey asked me to send you the attached for publication. Thank you.

Ora L. Biles
Executive Legal Secretary
SQUIRE, SANDERS & DEMPSEY, l.l.P.
1201 Pennsylvania Avenue, NW
P.O. Box 407
Washington, DC 20044-0407
+1.202.626.6229
+1.202.626.6780 (fax)
obiles@ssd.com

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RICO v. Russia: A Lost Cause
By Sarah Carey

In mid February 2004, the US District Court for the Southern District of New York put another nail in the coffin of the campaign to fight Russian takeover battles via RICO and similar conspiracy claims filed in the US. The case was brought by Norex Petroleum Ltd. of Cyprus (a company with Canadian connections) against Tyumen Oil Company ("TNK") alleging massive racketeering and money laundering schemes carried out by TNK, its managers, owners and affiliates that resulted in plaintiff's loss of ownership of its stake in the Russian oil company, Yugraneft, and its loss of substantial oil revenues.

In granting defendants’ Motion to Dismiss on forum non conveniens grounds, Judge Laura Taylor Swain concluded that the events complained of had largely occurred in Russia, litigation dealing with the same events had already taken place or had been voluntarily foregone in Russia and, in short, "the evidentiary center of gravity of the (this) litigation is located in Russia." Judge Swain commented that "the American connections identified by Plaintiff are merely financial channels allegedly used in the money laundering and tax fraud aspects of the illegal scheme," noting that plaintiff had first to demonstrate that the activities which took place in Russia were illegitimate, a matter best handled by the Russian courts.

The Norex Petroleum Ltd. v. Crown Luxembourg Holdings, SA case is one of several cases brought by or involving the Marks & Sokolov law firm.* The goal of these cases is to use the vague, all-encompassing provisions of the RICO (Racketeer Influenced and Corrupt Organizations Act) law as a handle for bringing into US federal courts disputes involving corporate takeover battles that occurred in Russia over control of Russian assets, companies and revenues. In each of the cases, the connections with the US are tenuous, generally involving the use of US financial institutions, and the complainants have depended heavily on unsubstantiated allegations made in Russian newspaper articles. The plaintiffs in these cases, like the plaintiff in the Norex case, have generally been frustrated by their failure to win takeover battles for major Russian industrial assets and with the results achieved via the Russian judicial system. Key to their attempts to gain access to the US courts are allegations of pervasive corruption in the Russian courts and the inability to get a fair trial because of judicial intimidation.

In support of her conclusion that the center of gravity of the Norex case was in Russia, not the US, Judge Swain described plaintiff's premise as the following: "Defendants have gained control of Russian entities and Russian company assets improperly, through frauds and violence carried out in Russia and involving Russian persons and institutions." This, she concluded, "is clearly a matter that is principally of Russian concern." In deciding that the plaintiff had failed to make a case that the Russian forum was effectively closed because of corruption, the Judge relied on a previous Second Circuit ruling that "it is not the business of our courts to assume the responsibility for supervising the integrity of the judicial system of another sovereign nation,”* and rejected out of hard sweeping generalizations about the Russian legal system, finding that plaintiffs had failed to condemn the system as a whole and, further, had failed to introduce evidence of corruption in the specific cases affecting Norex.

In reaching her decision, Judge Swain relied heavily on the decision of the US District Court for the Southern District of New York in Base Metal Trading S.A. v. Russian Aluminum (March 27, 2003), where the court also granted a motion to dismiss based on forum non conveniens. Plaintiffs in the Base Metal case also made sweeping allegations regarding the inadequacies and corruption of the Russian judicial system; the court noted that plaintiffs were simply forum shopping and had failed to make the case that they could not obtain a fair review at the appellate level or through wholly new claims before the Russian Arbitrazh Court system (Russia's commercial court system). In its analysis, the Base Metal court pointed to the availability of adequate causes of action in Russia and to procedural safeguards provided under Russian law. It also acknowledged, "The avowed commitment to judicial reform by the highest levels of the Russian government."

The Norex decision was followed a month later by a decision of the Colorado Court of Appeals upholding the lower court's dismissal of a case brought by Archangel Diamond Corp. against AGD, a Russian oil, gas and diamond mining business and Lukoil, a Russian energy company that is the majority owner of AGD. Plaintiff alleged that defendants committed fraud, engaged in a conspiracy to defraud plaintiff of its rights, breached their fiduciary duties, etc., with the result that plaintiff lost its alleged rights in a diamond mine in Russia. Again, virtually all of the events complained of had occurred in Russia and the defendants were found to have less than the required minimal contacts with Colorado. The Colorado Court of Appeals upheld the lower court's finding that it lacked personal jurisdiction over the defendants.* It is important to note that the Norex decision was rendered several months after the shocking press stories claiming manipulation of the Russian criminal justice system to achieve political revenge against former Yukos CEO, Mikhail Khodorkovsky, and some of his associates. This suggests a critical distinction between the criminal and the civil justice systems in Russia. The former, although recently the subject of legislative reforms, appear not yet to have fully realized those reforms and may still be manipulated for political purposes. The latter is moving slowly but steadily towards international standards of performance. As standards for selection the of judges, as well as their salaries and training have been upgraded, and as the arbitrazh courts have been better equipped and staffed, corruption and influence peddling have been reduced.

After several years of litigation, accompanied by much fanfare and repeated attacks in the press, US courts are consistently barring RICO and similar routes for litigating in the US corporate takeover and other battles that have been hard fought -- and lost -- in Russia. The Russian privatization process was seriously flawed and, as in most battles over valuable assets, the losers are understandably reluctant to accept closure, but if any further appeals exist, they will have to be played out in Russia. The exception to that rule will be when and if US citizens are centrally involved and the actions complained of took place in the US, a rare occurrence when the property being fought over is located in Russia.