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Allen v. Russian Federation

November 26, 2007

RICHARD ALLEN, ET AL., PLAINTIFFS,
v.
RUSSIAN FEDERATION, ET AL., DEFENDANTS.



The opinion of the court was delivered by: Colleen Kollar-kotelly United States District Judge

MEMORANDUM OPINION

Presently before the Court is an action brought by a group of investors who own or used to own an interest in a Russian company called Yukos. The investors claim that the Russian Federation, acting in combination with senior Russian government officials and several Russian energy companies (and several executives of those companies), expropriated Yukos beginning in 2003. The Defendants allegedly levied illegal and confiscatory taxes on Yukos, forced a sham sale of Yukos's most important asset, seized a majority of Yukos shares, intimidated and harassed Yukos executives, and used bankruptcy proceedings to paralyze Yukos's non-Russian-based management team. These and other allegations contained throughout Plaintiffs' 116-page, 424-paragraph Complaint tell a troubling story if proven true.

Notwithstanding the foregoing, this Court is one of limited jurisdiction. Defendants have brought four Motions to Dismiss arguing, inter alia, that this Court lacks jurisdiction to hear Plaintiffs' claims. The Motions decry Plaintiffs' decision to file a Complaint in this Court when the case involves the conduct of the Russian government, senior Russian government officials, Russian companies, and Russian citizens. After a thorough and dedicated review of the Parties' lengthy submissions and the exhibits attached thereto, the record as a whole, applicable case law and statutory authority, the Court finds that it cannot reach the merits of Plaintiffs' claims based on the doctrines of sovereign immunity and personal jurisdiction. Accordingly, the Court shall GRANT Defendants' Motions to Dismiss for the reasons that follow.

I. BACKGROUND

The scope of the Parties' submissions to the Court necessitates a thorough overview of the case.*fn1 The Court shall first provide an overview of the Parties, followed by a brief history of OAO NK Yukos Oil Company ("Yukos"), the company that is alleged to have been expropriated by Defendants. The Court shall then examine the specific allegations made against each of the Defendants, who shall be divided into three "Defendant Groups" based on their factual and legal positions in the case.

A. Parties

The 43 Plaintiffs bringing this action are holders or former holders of Yukos American Depository Receipts ("ADRs") purchased on the over-the-counter ("OTC") market in the United States or the London Stock Exchange (collectively, "Plaintiffs").*fn2 Am. Compl. ¶¶ 12-59.

Plaintiffs are all United States citizens, with three exceptions.*fn3

Defendants fall into three "Defendant Groups." The first Defendant Group consists of the Russian Federation (or "Russia") and OAO Rosneftegaz ("Rosneftegaz"). Plaintiffs concede that Russia is a "foreign state" within the meaning of 28 U.S.C. § 1330 (incorporating the definition of "foreign state" included in the Foreign Sovereign Immunities Act, 28 U.S.C. § 1603(a)). See Am. Compl. ¶ 60. Rosneftegaz is a wholly-owned direct subsidiary of the Russian Federation. Id. ¶ 74.

The second Defendant Group consists of five senior Russian government officials sued in their individual capacities (collectively, "Government Defendants"). Id. ¶¶ 78-83. First, Viktor B. Khristenko ("Minister Khristenko") is the Minister of Industry and Energy of the Russian Federation, a position he had held since March 2004. Id. ¶ 80. Minister Khristenko also served as First Deputy Prime Minister from May 2000 to March 2004. Id. He is also a Member of the Board of Directors of OAO Gazprom ("Gazprom"), a Defendant company described as part of the third Defendant Group below. Id. Second, Alexei Kudrin ("Minister Kudrin") is the Minister of Finance of the Russian Federation. Id. ¶ 78. He is also a former director of Gazprom. Id. Third, Dmitry A. Medvedev ("Minister Medvedev") is the First Deputy Prime Minister of the Russian Federation and was the Head of the Presidential Administration of the Russian Federation from October 2003 to November 2005. Id. ¶ 75. He is also Gazprom's Chairman of the Board. Id. Fourth, Igor Sechin ("Minister Sechin") is the Deputy Head of the Presidential Administration of Russia. Id. ¶ 82. He also serves as Chairman of the Board of Directors of OAO Rosneft Oil Company ("Rosneft"), a Defendant company described as part of the third Defendant Group below. Id. In February 2006, Minister Sechin was also appointed to the Board of Directors of Rosneftegaz. Id. Fifth, Igor K. Yusufov ("Minister Yusufov") is a Special Representative of the President on International Energy Cooperation, a position he has held since July 2004. Id. ¶ 79. Minister Yusufov also previously served as Minister of Industry and Energy of the Russian Federation at times relevant to the instant Complaint. Id. He also is a Member of the Board of Directors of Gazprom, and previously served as Chairman of the Board at Rosneft. Id.

The third and final Defendant Group consists of five members, including two companies that are indirectly owned by the Russian Federation and three executives of those companies (collectively, "Non-Government Defendants"). First, Gazprom (referenced above in relation to several of the Government Defendants) is a publicly traded joint stock company organized under the laws of the Russian Federation with its principal place of business in Moscow. Id. ¶ 61. The Russian Federation directly owns 38.373 percent of Gazprom's shares through its Federal Agency for Management of Federal Property, 10.74 percent of Gazprom's shares through Rosneftegaz, and .889 percent through a non-party company (totaling 100%). Id. Gazprom produces about 90 percent of Russian gas and is responsible for eight percent of Russia's GDP. Id. ¶ 63. Gazprom is also a direct competitor of Yukos. Id. Second, Rosneft (referenced above in relation to several of the Government Defendants) is an oil and gas producing company. Id. ¶ 70. One share of Rosneft's stock is held by the Russian Federal Agency for Management of Federal Property, and the remainder is held by Rosneftegaz. Id. ¶ 70. Third, Alexei B. Miller ("Miller") is the Chairman of the Management Committee of Gazprom, Deputy Chairman of the Board of Directors of Gazprom, and has previously served as Deputy Minister of Energy of the Russian Federation. Id. ¶ 76. Fourth, Sergey Bogdanchikov ("Bogdanchikov") is the President of both Rosneft and Rosneftegaz and is a member of each company's Board of Directors. Id. ¶ 81. Bogdanchikov was appointed as Rosneft's President and to the Rosneftegaz Board of Directors by the Russian Federation. Id. Fifth, Nikolai Borisenko ("Borisenko") is First Vice President of Rosneft and serves on the Board of Directors of Rosneftegaz. Id. ¶ 83.

B. Overview of Yukos

Following the collapse of the Soviet Union in the early 1990s, the Russian Federation's oil and gas industry consisted of hundreds of separate state-owned entities that survived through state support. Id. ¶ 97. In 1993, the Russian Federation sought to restructure the nation's oiland-gas sector, primarily through privatization. Id. ¶ 98. As part of that effort, the Russian government founded Yukos as a separate legal entity on April 15, 1993, and consolidated certain state-owned producing, refining, and distribution entities into its structure. Id. Yukos became a very successful company, in part by implementing policies designed to attract foreign investment, id. ¶¶100-02, and also by implementing various other internal reforms. Id. ¶ 102. By 2003, Yukos's combined production of natural gas and oil rivaled both ChevronTexaco and Total, and the company began to compete with the Russian company Gazprom. Id. ¶ 103.

Yukos sought to expand its operations and become an energy supplier to the United States, id. ¶ 105, completing its first of eight crude oil shipments from Russia to the United States on July 3, 2002. Id. ¶ 105. Yukos announced that the initial shipment "signaled [the] Company's intention to supply the U.S. market," 105, and later announced that the eight shipments were part of its plans to create "a stable source of non-OPEC crude oil for the U.S."

Id. Yukos also had plans to increase its production of oil to the United States by constructing a pipeline that would link Yukos production to an Adriatic Sea terminal. Id. ¶ 107. In 2003, Yukos executives met with United States oil companies to discuss their potential acquisition of large stakes in Yukos. Id. ¶ 108. ExxonMobil apparently considered purchasing a large stake in Yukos following a potential merger with OAO Sibneft, a Russian oil company. Id. ¶¶ 91, 109. According to Plaintiffs, the Sibneft merger did not occur because of Defendants' conduct detailed below. Id. ¶ 92.

By October 2003, Yukos's market capitalization was estimated to exceed $30 billion and it was outperforming its Russian competitors, including Gazprom and Rosneft. Id. ¶ 110. Yukos also was paying significant dividends to its shareholders at this time, including its ADR holders. Id. ¶ 111. Yukos's biggest asset, Yugansknoftegaz ("YNG"), had grown to account for more than one percent of the world's annual oil production. Id. ¶ 90. Yukos's success provides the background to what Plaintiffs allege happened next -- Defendants, individually and collectively, engaged in actions that effectively expropriated Yukos without compensating Plaintiffs who held ADRs in Yukos. Id. ¶ 310.

C. Specific Allegations

The Court shall review Plaintiffs' specific allegations with respect to each of the three Defendant Groups.

1. Russian Federation and Rosneftegaz

Plaintiffs allege that beginning in 2003, the Russian Federation launched an assault on Yukos and the individuals responsible for owning or running Yukos. Id. ¶ 142. Utilizing the significant resources at its disposal,*fn4 Plaintiffs allege that the Russian government expropriated Yukos through the following five means.

First, Plaintiffs allege that the Russian Federation arrested several of Yukos's owners, directors, and counsel. For example, on June 21, 2003, the Russian Federation arrested Alexei Pichugin, Yukos security manager, on charges of committing, or directing the commission of, murders or attempted murders. Id. ¶ 143. Plaintiffs allege that Pichugin's arrest was an attempt to coerce him into implicating one or more of the founders of GML Limited, a company that owns 51% of Yukos's stock. Id. Pichugin was later convicted of the charges. Id. On July 2, 2003, the Russian Federation arrested Platon Lebedev, Director of GML Limited, on charges of theft of state property, tax evasion, and fraud. Id. ¶¶ 144, 146. Lebedev was found guilty of the latter two charges and, after an eleven-month trial, sentenced to a nine-year prison term. Id. ¶ 163. On October 25, 2003, the Russian Federation arrested Mikhail B. Khodorkovsky, the founder of GML Limited, who was also a member of the Yukos Board of Directors and Chairman of the Board of Directors of OOO Yukos-Moscow, the company responsible for managing Yukos. Id. ¶¶ 86, 145. Khodorkovsky was charged with theft of state property, tax evasion, and fraud, and was found guilty of the latter two charges. Id. ¶¶ 146, 163. Khodorkovsky received a nine-year prison sentence. Id. ¶ 163. Both Lebedev and Khodorkovsky appealed their sentences, and in September 2005, their sentences were reduced from nine to eight years, respectively. Id. ¶ 164.

The Russian Federation also filed charges against Leonid Nevzlin (former First Deputy Chairman of Yukos), Mikhail Brudno (former First Vice President of Yukos Refining and Marketing), and Vladimir Dubov (Yukos shareholder and associate of Khodorkovsky), and several of Yukos's in-house or outside counsel. Id. ¶¶ 157, 158. One of Yukos's in-house counsel, Sveltana Bakhmina, was sentenced to seven years in prison for tax evasion and embezzlement. Id. ¶ 158. Plaintiffs allege that these charges, arrests, and convictions ultimately forced Yukos's management team, including Yukos CEO Steven Theede, to relocate to London. Id. ¶ 168. In 2006, "two Moscow-based Yukos executives refused to take future direction from Theede." Id.

Second, Plaintiffs allege that various departments of the Russian Federation Government, "under the color of official right," began investigating Yukos and its affiliates, particularly in the fall and summer of 2003. Id. ¶ 154. Officials from the Tax Ministry, together with "FSB officers and armed militia," searched Yukos's offices, "intimidating personnel and seizing documents and electronic files." Id. The Ministry of Natural Resources also reviewed Yukos's production licenses for compliance violations, and "threatened several important licenses," but did not interfere with them. Id. On October 3, 2003, investigators and police searched a Yukos business center, the home of Platon Lebedev, the offices of Vladimir Dubov, and a Yukos-funded orphanage outside of Moscow. Id. ¶ 171.

The Russian Federation also sought assistance from other countries in the course of its investigation. In 2003, the Russian Federation asked the Attorney General of Liechtenstein "to seize records allegedly located in Liechtenstein and relating to illegal activity on the part of Khodorkovsky and GML Limited." Id. ¶ 162. Liechtenstein's highest court denied the request after finding insufficient supporting evidence. Id. The Russian Federation also submitted "requests for mutual legal assistance to the Attorney General of Switzerland requesting the seizure of business documents related to, inter alia, GML Limited, it subsidiaries and counsel, Khodorkovsky, Lebedev, Yukos, and Yukos-related trading companies." Id. ¶ 159. In March 2004, the Russian Federation sought to freeze bank accounts located in Switzerland held in the names of the same entities and individuals. Id. The Swiss Attorney General froze accounts which held approximately $4.9 billion, but some of those accounts were subsequently released by order of the Swiss Federal Supreme Court. Id.

Third, on October 30, 2003, the Russian Federation seized all of the shares of Yukos common stock owned by Yukos Universal Limited ("YUL") and Hulley Enterprises Limited ("Hulley"), two subsidiaries of GML Limited which own a combined 51% interest in Yukos. Id. ¶ 182. A spokeswoman for the Russian Federation indicated that the stock was seized in connection with the criminal case against Khodorkovsky (a founder of GML Limited and member of the Yukos Board of Directors) to satisfy his liabilities to the Russian Federation, a reason Plaintiffs characterize as pretextual. Id. ¶ 183. According to Plaintiffs, this stock seizure expropriated Yukos in two ways. First, it transferred control of Yukos to the Russian Federation. Id. ¶ 184. Second, it prevented Yukos's principal shareholders from using their shares to facilitate a resolution of the tax claims (described below) against Yukos. Id.

Fourth, Plaintiffs allege that the Russian Tax Ministry violated the Tax Code of the Russian Federation by assessing illegal and confiscatory taxes on Yukos. Id. ¶ 196. In December 2003, the Russian Federation conducted a "special" tax audit of Yukos. Id. ¶ 203. Whereas previous audits in 2003 revealed that Yukos had complied with its tax obligations, id. ¶204, the December 2003 audit resulted in an additional $3.4 billion in taxes, interest, and penalties for the year 2000. Id. ¶ 205. Although Yukos representatives "identified numerous errors in the tax calculations that resulted in an overstatement of the amount owed . . . rather than reducing the tax assessment by these amounts, [the Russian Federation] created new 'violations' that were equivalent to the originally assessed amounts." Id. ¶ 206. The $3.4 billion tax assessment apparently stemmed from Yukos's "use of trading companies in tax havens," which Plaintiffs characterize as a "tax-minimization program" that Yukos "voluntarily disclosed in its public financial statements." Id. ¶¶ 210-12. Yukos objected to the tax assessment. Id. ¶ 213. On April 14, 2004, the Tax Ministry issued a Resolution that adopted the findings of the "field tax audit" and required Yukos to pay the $3.4 billion. Id. ¶ 214. In May 2004, Yukos filed an "Application Seeking to Declare Unlawful the Resolution of the Ministry of Taxes of the Russian Federation and Levies with the Moscow Arbitration Court." Id. ¶ 215. On May 26, 2004, the Court of Arbitration upheld 99 percent of the government's tax claims. Id.

Additional tax assessments and freezing of bank accounts followed. On April 15, 2004, and June 30, 2004, the Russian Federation obtained ex parte injunctions to freeze Yukos assets including, among other assets, Yukos's majority interest in YNG. Id. ¶ 216. On July 1, 2004, the Russian Federation "directed Court officers to freeze all of Yukos's accounts in Russian banks" and "directed the Tax Ministry to file an entirely new $3.4 billion tax claim against Yukos, this time ostensibly for 2001 liabilities." Id. ¶ 218. On August 31, 2004, YNG's bank accounts were frozen. Id. ¶ 219. On September 9, 2004, 13 additional freezing orders were imposed on Yukos's other subsidiary operating accounts. Id. On September 3, 2004, the Ministry of Tax levied a $4.1 billion tax levy on Yukos for the 2002 tax year. Id. ¶ 220. On November 1, 2004, the Russian Federation announced additional tax liabilities for FY 2001 and 2002 adding another $10 billion in claims. Id. ¶ 221. The Russian Federation announced $8 billion in additional levies for 2003, and in December 2005 announced another tax levy of $3.5 billion for 2004. Id. The total amount of taxes levied against Yukos reached approximately $30 billion. Id.

Fifth, on July 20, 2004, the Russian Federation announced that it would auction off YNG, Yukos's biggest asset, to satisfy Yukos's tax assessments. Id. ¶¶ 261, 271. The auction was scheduled for December 19, 2004, id. ¶ 271, with three entities indicating an interest in bidding: (1) OOO Gazpromneft ("Gazpromneft"), a limited liability company created by resolution of Gazprom, Id. ¶ 66, (2) OAO First Venture Company ("First Venture"), and (3) ZAO Intercom ("Intercom").*fn5 Id. ¶ 275. To stave off the auction, Yukos filed for bankruptcy protection in the United States District Court for the Southern District of Texas. Id. ¶ 276; In Re Yukos Oil Co., 320 B.R. 130 (S.D. Tex. 2004). Although the Court issued a temporary restraining order, Plaintiffs allege that Defendants evaded the order by replacing First Venture and Intercom in the auction and with BaikalFinansGroup ("BFG"), a sham company.*fn6 See Am. Compl. ¶ 277. BFG and Gazpromneft were the only two bidders on YNG, and BFG entered the winning bid at $9.3 billion. Id. ¶¶ 277, 278. Plaintiffs allege that BFG bid against itself "to achieve what appeared to be a predetermined auction price." Id. ¶ 279. Several days after the YNG auction, Rosneft (an indirect subsidiary of the Russian Federation) purchased BFG. Id. ¶ 284. The Russian government "has admitted that BFG received its financing for the purchase of YNG from banks controlled by Defendant Russian Federation." Id. ¶ 287.

The allegations concerning the role of Rosneftegaz (a direct subsidiary of the Russian Federation) related to the foregoing conduct are relatively limited. Plaintiffs allege that the Russian Federation created Rosneftegaz as a special purpose vehicle in 2005, Id. ¶ 291, and that Rosneftegaz owns all but one share of Rosneft. Id. ¶ 70. In June 2005, Rosneftegaz entered into a $7.1 billion agreement to purchase a 10.74 percent interest in Gazprom. Id. ¶ 291. Therefore, Plaintiffs allege that the Russian Federation essentially has a controlling stake in both Gazprom and Rosneft, and that Rosneft was the ultimate recipient of YNG, Yukos's biggest asset. Id.

While the Russian Federation was carrying out the five types of activities described above, Plaintiffs also allege that Russia's President, Vladimir Putin, "made several misstatements and omissions of material fact directed at U.S. and global securities markets." Id. ¶ 147. See also id. ¶¶ 187, 190-92, 226, 227, 264, 266, 282, 285, 286. Although President Putin is not named as a Defendant in the instant action, Plaintiffs allege that these statements were made on behalf of the Russian Federation, Rosnefegaz, and Rosneft (a company described in the third Defendant Group below). Id.

According to Plaintiffs, the cumulative effect of the foregoing conduct reduced Russian crude shipments to the United States. By November 2004, such shipments, including those from Yukos, fell to zero. Id. ¶ 273. Plaintiffs allege that the Russian Federation has re-nationalized Yukos by seizing control of a majority of Yukos shares, transferring Yukos's most valuable assets to commercial entities controlled by the Russian Federation, and diverting to state-controlled entities all remaining benefits of owning an interest in Yukos. Id. ¶ 310. Plaintiffs allege their ADRs are "now effectively worthless." Id.

2. Government Defendants

In connection with the events described above, Plaintiffs allege that the Government Defendants used, and "direct[ed] the use of, color of official right to take Yukos from its owners and to obtain control of key Yukos assets, all for the private and commercial benefit of Defendants." Id. ¶¶ 75, 78, 79, 80, 82. In addition, Plaintiffs allege that four of the Government Defendants made misstatements that were directed at the United States and global securities markets that were designed to "deceive investors." Id. ¶¶ 172, 237. The Court shall identify these statements below.

Minister Khristenko:

! Platt's Oilgram News (Nov. 22, 2004): "When the auction of [YNG] is finally held, little competition is expected. Energy Minister Viktor Khristenko sidestepped the issue of the starting price [on] Nov. 19, saying the auction would decide the firm's value."*fn7 Id. ¶272.

! Interfax Energy Daily (Dec. 30, 2004): "The assets of [YNG], the core production unit of Yukos sold at a December 19 auction, will be transferred to a separate, wholly state-owned company, the Russian Industry and Energy Ministry's Public Relations Center said in a statement, quoting Viktor Khristenko, the ministry's head. Khristenko was quoted as saying that up to 20% of the new company may be offered to China National Petroleum Corporation (CNPC)." Kudrin Mot. to Dismiss Ex. H at 1. Plaintiffs allege, based on these statements, that Minister "Khristenko stated that Rosneft did not intend to control YNG."

Am. Compl. ¶ 288.

Minister Kudrin:

! Kommersant (Nov. 3, 2003): "I have heard [President Putin] saying myself that this was no redistribution of property." Kudrin Mot. to Dismiss Ex. C at 1; Am. Compl. ¶ 189. The article identifies Minister Kudrin as the Russian Federation Deputy Prime Minister and Minister of Finance. Id.

! New York Times (Jun. 21, 2004): "'As far as I know, Yukos has offered to cooperate with the tax ministry on settling the claims that have been made,' the finance minister, Aleksei L. Kudrin, told news agencies Monday. 'Cooperation on the possible settlement of the claims is under way. I think Yukos has enough funds to pay its liabilities.'" Kudrin Mot. to Dismiss Ex. F at 1; Am. Compl ¶ 231.

! Platt's Energy Economist (July 1, 2004): "[Minister] Kudrin in fact appeared in a relaxed mood, suggesting that the government would be happy for Yukos to sell assets on the open market, rather than to the state or to 'state-approved' companies, to pay off its debts." Am. Compl. ¶ 234. Plaintiffs' allege that Minister "Kudrin also maintained that the tax claims against Yukos were not political but were part of a 'routine' investigation." Id.

! Financial Times (Sept. 13, 2004): "The state will do everything possible to ensure a deal takes place in accordance with the law and in an absolutely transparent and market-oriented way,' [Minister Kudrin] said, implicitly confirming that asset sales through [the YNG] auction were likely to be part of a resolution to the company's stand-off with authorities." Kudrin Mot. to Dismiss Ex. G at 1; Am. Compl. ¶ 265. The article identifies Minister Kudrin as "Russia's finance minister." Id.

Minister Yusufov:

! Moscow Times (Oct. 13, 2003): "Energy Minister Igor Yusufov said Friday that Russia would welcome [a deal between YukosSibneft and ExxonMobil] as a 'positive step.' 'Of course, it fills us with pride that discussions are under way with the first company in the world, ExxonMobil,' Minister Yusufov said at a news conference for ...


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