Atlantica Holdings, Inc. v Sovereign Wealth Fund Samruk-Kazyna JSC
| Jurisdiction | England & Wales |
| Judge | Mr Justice Julian Knowles |
| Judgment Date | 21 February 2019 |
| Neutral Citation | [2019] EWHC 319 (QB) |
| Docket Number | Case No: CR/2018/926 |
| Court | Queen's Bench Division |
| Date | 21 February 2019 |
[2019] EWHC 319 (QB)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
Mr Justice Julian Knowles
Case No: CR/2018/926
and
Shaheed Fatima QC (instructed by Brown Rudnick LLP) for the First Applicant
Ruth den Besten (instructed by Bates Wells Braithwaite) for the Second Applicant
Andrew Hunter QC and Shane Sibbel (instructed by Cozen O'Connor) for the Respondents
Caley Wright (instructed by Hogan Lovells LLP) for the Second Defendant
The First Defendant did not appear and was not represented
Hearing dates: 15 and 16 January 2019
Approved Judgment
The Honourable
Introduction
This is an application by Pavel Prosyankin and John Howell (the Applicants) and the Second Defendant (BTA Bank/the Bank) to set aside the order for the Applicants' oral examination under oath made by Morris J on 21 December 2018 (the Order) or, in the alternative, a variation of the Order.
Following a hearing on 15 January 2019, on 16 January 2019 I announced that the applications were refused for reasons to be given later. These are my reasons. The examinations were scheduled to take place on 17 – 18 January 2019.
The Order was made pursuant to s 2 of the Evidence (Proceedings in Other Jurisdictions) Act 1975 (the 1975 Act) following the receipt of two materially identical letters of request (LORs) issued on 6 December 2018 by the Honourable Judge Jesse M. Furman of the United States District Court for the Southern District of New York in civil proceedings in that Court brought by the Plaintiffs against the Defendants (the US Proceedings). The LORs were transmitted to the UK under the provisions of the Hague Convention of 18 March 1970 on the Taking of Evidence Abroad in Civil or Commercial Matters, which the UK ratified following the passing of the 1975 Act: see Rio Tinto Zinc Corp v Westinghouse Electric Corp [1978] AC 547, 632.
The LORs and the Order were made on the application of the Plaintiffs, who consider that each of the Applicants (both of whom reside in the UK) has relevant evidence to give in relation to the issues involved in the US Proceedings. The Applicants' evidence will stand as part of the trial testimony in the US Proceedings, pursuant to the Federal Rules of Civil Procedure, rr 30 and 45.
The Order was made without notice to the Applicants and [16] and [17] of the Order gave the Applicants the right to apply to set it aside, which they have exercised. The applications are made on various grounds which I address below. Before doing that, it is convenient first to describe the US Proceedings.
The US Proceedings in outline
The litigation in New York concerns the purchase by the Plaintiffs of securities in BTA Bank, allegedly in reliance upon false statements and omissions by the Defendants. This occurred, it is alleged, pursuant to a large and complex fraudulent scheme whereby the Defendants diverted assets from BTA Bank over the course of two debt restructurings, at the expense of its international creditors, including the Plaintiffs, whose securities lost all or most of their value because of the Defendants' activities.
The Plaintiffs are corporations formed under the laws of the Republic of Panama, each of which purchased securities from the Bank through their broker-dealer in the State of Florida.
The First Defendant, SK Fund, is a sovereign wealth fund which was formed under the laws of, and is wholly owned by, the Republic of Kazakhstan. SK Fund is, and at all material times was, the majority owner of BTA Bank.
In February 2009 the Republic of Kazakhstan effectively took control of the Bank when significant concerns arose about its ability to continue as a going concern. It was discovered that sums of money running into billions of dollars had been misappropriated by Mukhtar Ablyazov, the Bank's former Chairman, and others, putting the Bank into a precarious financial position. Since 2009 there has been extensive litigation in the UK and elsewhere by the Bank in its attempts to recover the money stolen by Mr Ablyazov and his co-conspirators: see eg JSC BTA Bank v Ablyazov (No 14) [2017] QB 853.
In February 2009 the First Defendant, SK Fund, invested approximately US$1.5 billion in the Bank in exchange for a 75.1% shareholding in the Bank's common stock. In April 2009 BTA Bank announced that it had ceased payment of principal on all of its outstanding financial obligations. Thereafter, it engaged in a restructuring of its corporate debt, which was finalised in or around August 2010 (‘the 2010 Restructuring’).
In connection with the 2010 Restructuring BTA Bank issued an information memorandum running to approximately 780 pages (the Information Memorandum), which described the terms of that restructuring and its intended effect on the Bank's future operations. The terms included that: (a) SK Fund would receive additional equity in the Bank, becoming an 80% owner; and (b) pre-existing holders of BTA Bank's debt (including Atlantica and Baltica) would receive, in exchange for their old securities, new ones, including certain subordinated notes (the Subordinated Notes).
The Information Memorandum incorporated by reference a deed of undertaking issued by SK Fund (the SK Undertaking). Both the Information Memorandum and the SK Undertaking stated that SK Fund had agreed, subject to certain very limited exceptions, to accept no dividends or distributions from BTA Bank until the newly issued securities (including the Subordinated Notes) had been repaid, or until seven years had passed. The Information Memorandum contained various other representations going to the financial position, expenditure and prospects of the Bank. These included details of its interest-based income and expenditure, its expectation that it would continue as a going concern, its expectation that it would achieve the requisite levels of capital ratio, and the objective of SK Fund to manage the Bank so as to maximise its long-term value.
The agreement of the Bank's existing creditors was required for the 2010 Restructuring to become effective. The Plaintiffs' case is that in reliance upon the Information Memorandum and the SK Undertaking, they provided their agreement on 28 May 2010 and thereafter accepted Subordinated Notes in exchange for their pre-existing securities.
In connection with the 2010 Restructuring, various creditors were issued with investments called ‘Recovery Units’. These provided creditors with an interest in BTA Bank's ongoing efforts, at the time, to recover approximately US$10 billion in BTA Bank assets that were alleged unlawfully to have been diverted from the Bank by its former management, including Mr Ablyazov (the Asset Recovery Process). Under the terms of the Recovery Units, the holders would collectively receive 50% of any assets recovered pursuant to that process.
Atlantica and Baltica later acquired additional Subordinated Notes on the secondary market between September 2010 and October 2012. The Third Plaintiff, Blu Funds, Inc (‘Blu Funds’) bought Subordinated Notes in April 2012.
In May 2011, it was revealed that the average interest rate which BTA Bank had been paying to SK Fund on its deposits (which were in the order of US$1.6 billion) was 9.8%. As a result, the value of the Subordinated Notes substantially declined from 70% of their face value in May 2011 to less than 10% of their face value in January 2012.
In order to prop up the price of Subordinated Notes and other BTA Bank securities, SK Fund made a number of public statements between July 2011 and December 2011 to the effect that it intended to provide additional and ongoing financial support to BTA Bank in order to prevent a second debt reorganisation.
BTA Bank defaulted on its debt obligations in January 2012, and thereafter engaged in a second restructuring of its debt (the 2012 Restructuring).
In connection with the 2012 Restructuring, BTA Bank made a series of presentations to investors and others, including in January 2012 and March 2012, identifying (amongst other things) what were said to be its total external liabilities at the relevant time. The Defendants also publicly stated that the bank would be stabilised and capital injections would be made.
The Plaintiffs' claims against the Defendants arising out of these alleged events can be summarised as follows.
Proceedings were commenced in the Federal District Court against SK Fund on 5 December 2012 (‘Case 1:12’) and against BTA Bank on 16 August 2013 (‘Case 1:13’). They have been managed from a very early stage by Judge Furman. The Court's dockets for the two cases demonstrate that Judge Furman has given hundreds of decisions and rulings on the two cases. If I may respectfully say so, he can be taken to be very familiar indeed with the subject matter of the litigation.
The first witness statement of Martin Bloor, one of the Plaintiffs' US attorneys, explains that:
a. Both claims are brought under section 10(b) of the Securities Exchange Act of 1934 (the 1934 Act). That section (and Rule 10b-5 thereunder) provides a right of action for a plaintiff who purchases or sells securities in reliance upon a defendant's materially false statements or omissions.
b. It is necessary to show, as part of such a claim, that the defendant acted with ‘scienter’, which means a fraudulent state of mind (which may be intentional or reckless).
c. Under the 1934 Act, the relevant misstatements may include ‘forward looking’ statements as to a defendant's intention, purpose or future plans, where the statement was material,...
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