Litigation: Russian standoff

In the legal battle between Alex Shnaider and Michael Shtaif, neither side is giving an inch.

Alex Shnaider, flamboyant Russian-born tycoon and Canada’s sixth-wealthiest man, doesn’t like lawsuits. Last year, his lawyers repeatedly characterized a high-profile US$750-million action against the steel magnate as purely frivolous and malicious. They also accused its chief complainant, Michael Shtaif, a 43-year-old Calgary- and Toronto-based professional accountant and Canadian citizen, of being nothing more than a fugitive from Russian justice. Shnaider’s representatives claimed that Shtaif conspired to steal millions of dollars’ worth of Treasury bills from the billionaire while buying Russian oil assets for him. End of story.

But an amended statement of defence entered in the Ontario Superior Court of Justice this past December in response to a countersuit by Shnaider, Eduard Shyfrin and their Midland Resources Holding Ltd. — along with more than a half-dozen recent resolutions from Russian courts — squarely questions that version of events. For starters, an April 1 decision by a judge of the Tagansky District Court of Moscow stated that putting Shtaif on the wanted list in that country was “illegal and unfounded.” Moreover, a March 12 ruling by a deputy prosecutor found that there was insufficient evidence to prove that Shtaif ever conspired to steal funds from Shnaider — and that a subsequent police investigation in Russia was “unfounded” and contravened “the requirements of law.” In other words, Shtaif, now executive vice-president of corporate development and finance for a major Canadian real estate construction firm, appears to be neither a criminal nor a fugitive. Nor will his amended statement of defence go away anytime soon.

Shtaif alleges that Shnaider, Shyfrin and Midland Resources repeatedly broke Russian law in an attempt to silence him and derail his Canadian-based lawsuit. It accuses Shnaider and Midland partner Shyfrin of conspiring “to have Shtaif wrongfully convicted and incarcerated in Russia through spurious criminal charges, bribes and other fraudulent acts, as a means” to end Shtaif’s litigation.

Ron Fine, a spokesman for Midland Group, maintains, as he did a year ago, that Shtaif’s allegations are “wholly without merit.”

But the messy legal tussle involving the 40-year-old Shnaider may well become a prime-time story this year. Both Shnaider and Shtaif, proud Russian-born Jews, are clearly vexed by the public allegations that have sprung from their failed multimillion-dollar Russian oil partnership. Last March, Shnaider formally sued Shtaif and several other former business associates for more than US$200 million. Shnaider accused his former business partner of “fraudulent misrepresentation, conspiracy to injure, breach of fiduciary duty and fraud,” as well as violating Ontario securities laws.

Each man sees his respective case as an affair of honour. Shnaider, who enjoys the trappings of great wealth, including a Global Express jet and an Israeli soccer team (Maccabi Tel Aviv FC), told Toronto Life magazine last year that he couldn’t “compare this situation to anything else I’ve encountered. I’ve been lied to and cheated in the past — it’s unavoidable in business — but the difference here is that these people also attempted to damage my reputation by using the media to spread lies.”

Shtaif, a former vice-president of operations for the Russian oil giant TNK-BP, where he was responsible for 50,000 employees, offers an equally compelling argument. “My reputation is 10 times more important to me, because I’m not a billionaire,” the oilpatch veteran says. “I will defend myself and expose Shnaider for who he is, not with allegations but with facts. The biggest mistake I made in my life was trusting a billionaire.”

The origins of much of Shnaider’s wealth (as well as the controversial lawsuit) remain Russia’s floundering cowboy capitalism. Like many of the country’s 32 billionaires or oligarchs, Shnaider made his money by being in the right place at the right time, when Russia and its neighbouring former Soviet republics privatized a host of public companies at bargain-basement prices in the 1990s. Together with Eduard Shyfrin (now a London-based billionaire), Shnaider parlayed keen investments in several steel enterprises (Ukraine’s Zaporizhstal steel mill, the Zaporizhye iron mine, as well as the Volgograd steelworks) into a global concern: the Midland Group.

Since 1994, the private company has grown to employ thousands of people in 35 countries. In 2008, a combination of high steel prices, Moscow’s real-estate boom (now in the throes of a financial correction) and favourable exchange rates helped catapult Shnaider from No. 18 to No. 6 on the annual Canadian Business ranking of Canada’s richest people. But the subsequent global financial meltdown has hammered Russia’s oligarchs, and that nation’s wealthiest individuals had lost more than $350 billion at the close of 2008. According to Midland spokesman Fine, Shnaider and Shyfrin recently “divided some assets as part of an internal restructuring plan.”

The remarkable lawsuits agree on a few basic facts. In 2005, Shtaif met Shnaider in Toronto, where the two men immediately hit it off. They quickly agreed to invest in undervalued Russian oilfields, with the eventual goal of creating a public company listed on the Toronto Stock Exchange. While Shtaif scouted promising oil properties, Shnaider and Shyfrin put up US$50 million in cash. With the help of several investors, including Toronto lawyer Greg Roberts, the partnership initially tried to use what appeared to be a publicly listed U.S. shell company, Magellan Energy Ltd., and later a new stand-alone entity, Koll Resources Ltd., to get the venture off the ground. After completing one oil property purchase worth at least US$156 million (Reef Energy LLC), management tension about share ownership — Shnaider’s and Shyfrin’s share of Koll eventually rose to 67% from 32% — came to a head. Finally, in May 2007, Shtaif, Roberts and other investors launched the first of several lawsuits charging that their rights as minority shareholders had been violated.

In March 2008, Shnaider issued a 34-page statement of claim. It accused Shtaif and Roberts of orchestrating “an elaborate and fraudulent scheme” that included the theft of Treasury bills. It also accused Shtaif and Roberts, the former CEO of Ontario high-tech firm IPICO Ltd. and a Bay Street deal maker, as well as Stanton DeFreitas, another Toronto investor purportedly interested in Russian oil, of conspiring to get Shnaider to park his oil investments in Magellan Energy Ltd. — “a sham corporate vehicle.” (In 2007 and 2008, the Ontario Securities Commission, in a case largely unrelated to Magellan, issued several temporary enforcement orders that suspended DeFreitas from trading due to “potentially manipulative and fraudulent trading activity.”)

Shtaif’s amended claim admits that there were serious irregularities with Magellan’s incorporation, but says that Roberts and Shtaif quickly discovered that the private company had wrongfully secured public company status. According to Shtaif’s claim, which has not been tested in court, neither Shnaider nor Shyfrin alleged they were victims of any wrongdoing at the time, because Shnaider “confided to Shtaif that he was ‘involved’” in the illegal sale of Magellan securities, too. In a May 19, 2009, defence statement, Shnaider “denies that he knowingly received any illegal shares of Magellan.”

In 2005 and 2006, Magellan was listed on the Pink Sheets in the United States, a loosely regulated over-the-counter market that requires no audited financial statements. After Roberts reviewed the Magellan minutes book, he promptly hired Toronto lawyer Allan Beach to check out the company’s origins. According to the amended statement of defence, Beach found many irregularities. Within hours of receiving the information, Roberts allegedly sent an e-mail to Shnaider on May 26, 2006, warning him that Magellan was “a sham”; he then suggested forming a proper company. After DeFreitas resigned from Magellan’s board, Shnaider and Shtaif agreed to create Koll Resources Ltd. for their oil purchases. Shtaif later began a securities fraud action against several Magellan investors, but he says that, “on Shnaider’s request,” he discontinued it.

Another key issue highlighted in the lawsuits concerns the alleged disappearance of US$12-million worth of Treasury bills. The debacle reads like a scene from a Dostoyevsky novel. In 2006, Shtaif arranged to purchase the shares of SibinTEK, a Siberian firm that owned a potentially valuable oil property in Tyumen, Russia. The purchase agreement involved the signing and placement of Treasury bills or promissory notes in a safety deposit box at a Sberbank branch in Moscow to be collected on the closure of the transaction, a normal practice in Russia.

Due to an alleged clerical error, Arthur Poltoranin, a partial owner of SibinTEK, became entitled to all of the notes without satisfying the conditions of sale. But according to Shnaider’s lawsuit, Poltoranin — “a convicted murderer” and an “individual of ill repute” — conspired with Shtaif to steal the promissory notes. Shnaider’s claim accuses Shtaif of keeping “two of the Promissory Notes with a value of more than US$2 million,” and that Midland had to retain “private forensic investigative consultants” to recover half of the Treasury bills.

Shnaider’s legal representatives also informed Canadian Business in February 2008 that two White & Case LLP lawyers, who helped oversee the transaction, pointedly cautioned Shtaif about the safety deposit box mishap on May 29, 2006, but that he negligently ignored their warnings. Last year, general counsel for White & Case, Philip Schaeffer, wrote two brief letters to Greg Roberts about the bungled transaction. The letters state that the “version of the facts” given by Shnaider’s legal representatives was “incorrect,” and that “the warning allegedly made to Mr. Shtaif on May 29, 2006, was not given.”

In his amended statement of defence, Shtaif notes that US$12 million came from his own company, Eurogas Consulting LLC, and that he met Poltoranin only once. (The statement also says that Shtaif later learned that Poltoranin had been found guilty in Russia of killing two men who murdered his wife.) White & Case, one of the world’s largest and most prestigious law firms, advised all parties that a court injunction could fix the error and eventually retrieve the funds. However, Shtaif alleges that Shnaider and Shyfrin rejected this course and abruptly ordered him to terminate the transaction and pay a US$1-million bribe to a Moscow police officer to “illegally recover the promissory notes.” Shtaif also claims that he was ordered to sign a false statement that accused Poltoranin of fraud. In addition, while attending a Moscow police station on the matter, Shtaif alleges that he was also forced to sign a new loan agreement that converted Shnaider and Shyfrin’s investments in Koll Resources into a loan or “not leave the police station a free man.” Fearing for his security and having invested US$4 million of his own money to that point, Shtaif signed the agreement, but wrote a letter to Shnaider and Shyfrin claiming extortion.

Shtaif’s defence also alleges that Shnaider, through a subsidiary of Midland Resources, “secretly entered into an agreement” to purchase SibinTEK from Poltoranin in 2008. Symon Zuker, counsel to Shnaider, says “Midland at no time completed any transaction relative to SibinTEK.”

According to Shtaif, the Treasury notes are all accounted for: four were eventually retrieved by Poltoranin, one by Midland Group; another was destroyed, and six were obtained by officials at the Basmanny police station and returned to Midland for an alleged bribe eventually worth US$525,000. Although Shnaider’s spokesmen referred to the note retrievers as “former policemen” in interviews with Canadian Business last year, Midland’s Moscow lawyer, Valentin Vinogradov, actually described them as “law enforcement agencies” in a formal July 13, 2007, petition to the police. According to Shtaif, “Midland never retained, on behalf of Koll, private forensic investigative consultants to assist it.” Shtaif alleges that Shnaider ordered him to pay the bribe or forfeit Midland’s investments in oil properties.

After the SibinTEK fiasco, both sides contend that the management of Koll Resources became increasingly “dysfunctional.” While Shnaider’s claim says that Shtaif and Roberts tried to dispute Shnaider’s and Shyfrin’s “entitlement to 67% of the shares of Koll,” Shtaif alleges they “maintained control of 100% of Koll’s shares” and “usurped the function of the Board of Directors.”

In March 2007, Shtaif’s lawyer announced that he would take legal action against Shnaider. Shortly afterward, Shtaif found himself the subject of a criminal complaint lodged by Midland Resources in Moscow. According to Shtaif’s claim, Shnaider “took the position that Shtaif should be jailed in Russia as a co-conspirator in the loss of the four missing promissory notes.” Shnaider’s allegation surfaced eight months after Midland lawyers had allegedly advised Moscow police that Shtaif was a victim and not a perpetrator of fraud. Shtaif’s statement of defence says that a Moscow police officer told him “that as soon as Shtaif was accused of being an accomplice, the entire claim in Canada would ‘go away.’”

On Sept. 18, 2007, the vice-consul of the Embassy of Canada in Russia, Emese Kovacs, asked Russia’s ministry of foreign affairs “to ensure the protection and physical safety of Mr. Shtaif and his family” because “business opponents in Canada wish to apply pressure on him using the Russian police.” Shtaif, his wife and their three-year-old son left Russia in November 2007.

After news of the Shtaif lawsuit broke in early 2008, legal representatives of Shnaider told Canadian Business that Russian courts had charged Shtaif with fraud in connection to the promissory notes in December 2007 and implied that Shtaif was a fugitive. Yet according to Russian court documents, Shtaif wasn’t put on a wanted list until late May 2008. In fact, repeated resolutions from Russian courts have held that Shtaif’s legal and constitutional rights have been trampled through unlawful means. For example, E. A. Ivanova, a judge of Tagansky District Court of Moscow, agreed on July 17, 2008, that a police petition to imprison Shtaif and put him on an international most-wanted list “was unfounded, lacked sufficient evidence and violated” Russian law. Shtaif has also taken his case to the RCMP.

To date, attempts at a financial settlement have failed. In a November letter to Canadian Business, Shnaider’s lawyer Symon Zucker declined to comment on Russian rulings. He simply stated that “this matter is in the hands of the Court and will be resolved judicially.”