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Rusoro Mining Limited v. Bolivarian Republic of Venezuela

United States District Court, District of Columbia

March 2, 2018


          MEMORANDUM OPINION March 1st 2018 [Dkt. ## 1, 16]

          RICHARD J. LEON United States District Judge.

         For the third time in as many years, Respondent Bolivarian Republic of Venezuela ("Venezuela") finds itself before the U.S. District Court for the District of Columbia opposing the confirmation of an arbitral award flowing from its expropriation of foreign gold-mining assets.[1] In this case, Venezuela seeks to persuade the Court that the arbitral tribunal, constituted pursuant to provisions of the bilateral investment treaty between Canada and Venezuela, exceeded the scope of its authority in awarding damages to Rusoro Mining Limited ("Rusoro") for the expropriation of that entity's assets. In the alternative, Venezuela seeks a stay of enforcement of the arbitral award in light of a pending appeal of the award in Paris. Unfortunately for Venezuela, its third time is not a charm and for the reasons that follow, this Court will DENY Venezuela's Motion to Dismiss Petition and to Deny Confirmation of the Arbitral Award or, in the Alternative, to Stay ("Mot. to Dismiss") [Dkt. # 16], and GRANT Rusoro's Petition to confirm the Award ("Petition") [Dkt. #1].


         Rusoro Mining Limited ("Rusoro") is a Canadian corporation listed on the Toronto Stock Exchange. See Rusoro Mining Ltd. v. Bolivarian Rep. of Venez., ICSID Case No. ARB(AF)/12/5, Award ¶ 11 (Aug. 22, 2016), Friedman Decl, Ex. 2 [Dkt. # 1-2] ("Award"). Its principal business is the exploration and production of gold. Id. ¶ 12. Between 2006 and 2008, Rusoro acquired controlling interests in twenty-four Venezuelan companies, which held a total of 58 mining concessions and contracts. See Id. ¶¶ 12, 77-78. All of Rusoro's assets were in Venezuela. Id. ¶ 652.

         On July 1, 1996, Canada and Venezuela entered into the Agreement between the Government of Canada and the Government of the Republic of Venezuela for the Promotion and Protection of Investments ("BIT" or "Treaty"). See Mot. to Dismiss, Ex. 2 [Dkt. #16-3]. The Treaty governs investments between the contracting parties, providing protections against expropriation and establishing a mechanism for dispute resolution. See id.

         As relevant here, the Treaty provides for the resolution of disputes between an investor (i.e., Rusoro) and a host contracting party (i.e., Venezuela). Article XII. 1 provides:

Any dispute between one Contracting Party and an investor of the other Contracting Party, relating to a claim by the investor that a measure taken or not taken by the former Contracting Party is in breach of this Agreement, and that the investor or an enterprise owned or controlled directly or indirectly by the investor has incurred loss or damage by reason of, or arising out of, that breach, shall, to the extent possible, be settled amicably between them.

Id. Failing amicable resolution, an investor may submit the dispute to the Additional Facility Rules of the International Centre for the Settlement of Investment Disputes ("ICSID"), [2] "provided that either the disputing Contracting Party or the Contracting Party of the investor, but not both, is a party to the ICSID Convention." Id. art. XII.4(b).[3] The Treaty provides that expropriation must be made "against prompt, adequate and effective compensation." Id. art. VII. "Such compensation, " the Treaty goes on to say, "shall be based on the genuine value of the investment or returns expropriated immediately before the expropriation or at the time the proposed expropriation became public knowledge, whichever is the earlier." Id. This amount "shall be paid without delay . . . ." Id.

         At the time of Rusoro's acquisitions, Resolution No. 96-12-02, issued by the Central Bank of Venezuela, regulated gold exports. See Award ¶¶ 138-39. The Resolution's "overarching principle" was the "liberty of export, " id. ¶ 138, with only limited conditions imposed on companies seeking to export gold from the country. Namely, gold producers were required to (i) register with the Central Bank of Venezuela, (ii) obtain non-discretionary export authorization from the Central Bank of Venezuela, and (iii) sell at least 15% of their total annual gold production on the private domestic market. See id.

         Resolution No. 96-12-02 remained in place until Venezuela enacted the April 2009 BCV Resolution, which "significantly altered the legal regime for the export of gold." Id. ¶ 145. As such, Venezuela now mandated (i) that 60% of each gold producer's quarterly gold production be sold to the Central Bank of Venezuela; and (ii) that gold producers export no more than 30% of their gold production. Id. ¶¶ 144, 145, 147, 501. Subsequent measures, undertaken the same year, imposed further restrictions on foreign gold mining entities, while loosening restrictions on domestic ones. Id. ¶¶ 148-152. Under these measures, the Central Bank paid for the gold in local currency, tied to the Official Exchange Rate, which was consistently lower than the market rate. Id. ¶¶ 145, 501. The Central Bank was also charged with approving all proposed exports. Id. ¶ 147.

         The following year, Venezuela went one step further. It banned the use of the secondary currency exchange, known as the Swap Market, placing all foreign exchange transactions under the jurisdiction of the Central Bank. See Id. ¶ 154. Shortly thereafter, Venezuela announced that Rusoro would be required to sell 50% of its gold production, and 50% of its foreign currency income, to the Central Bank. Id. ¶¶ 156-59.[4]

         These measures finally came to a head with the government's complete expropriation of Rusoro's Venezuelan assets. On August 11, 2011, President Hugo Chavez declared the "immediate nationalization" of the Venezuelan gold mining sector. Id. ¶ 160. Within one month, Venezuela adopted Supreme Decree No. 8.413 ("Nationalization Decree"), in which the State asserted control over the property and mining rights of all gold-producing companies in the country. Id. ¶¶ 160-62. On March 31, 2012, Rusoro "formally withdrew from [its] mining areas." Id. ¶ 173. Rusoro's "[m]ining [r]ights and other assets" were taken by the Venezuelan Government shortly thereafter. Id. ¶ 174.

         On July 17, 2012, Rusoro submitted a Request for Arbitration to the International Centre for Settlement of Investment Disputes ("ICSID"). Id. ¶ l.[5] In its request, Rusoro alleged multiple breaches of the Treaty by Venezuela, and sought an award of compensation plus interest, legal fees and costs, as well as any other relief the Tribunal considered appropriate. See Id. ¶ 1. Rusoro claimed that Venezuela had expropriated its investment without payment of compensation. Id. ¶ 179. Rusoro sought compensation in the amount of approximately $ 2.3 billion. Id. ¶ 180.[6] Venezuela raised jurisdictional and merits defenses. See Id. ¶¶ 181-85, 187.

         The Tribunal was constituted on January 4, 2013. Id. ¶¶ 8, 16. The parties, represented by counsel (many of whom appear on the briefs before this Court), id. ¶ 19, participated in multiple hearings before the Tribunal, id. ¶¶ 62, 66, producing witnesses, experts, and documents, id. The Tribunal declared the proceeding closed on June 29, 2016. See Id. ¶ 76. The panel unanimously ruled on August 22, 2016 that Venezuela "breached Art. VII of the BIT by expropriating Rusoro's investment in Venezuela without payment of compensation, " and ordered that Venezuela pay Rusoro $ 966.5 million "as compensation for the expropriation of its investment." Id. ¶ 904.[7]

         The Tribunal explained its reasoning at length, devoting considerable discussion in the Award to the calculation of damages. The Tribunal acknowledged that the parties agreed that (i) the proper valuation date was September 16, 2011, the day when the Nationalization Decree was issued, and (2) that the term "genuine value, " as used in Article VII of the Treaty, "equates with the traditional concept of 'fair market value.'" Id. ¶ 647. It noted two distinct features of the damages assessment in this particular case: (i) that Rusoro, as a publicly-traded corporation, was subject to accounting and disclosure requirements, id. ¶ 651, thereby enhancing the reliability of their balance sheet and trading price, and (ii) that Rusoro's enterprise was confined to a single industry, gold exploitation, in a single country, Venezuela, id. ¶ 652. The Tribunal went on to discuss the nature of the international gold market and its correlation to the value of gold-producing companies, id. ¶¶ 654-58; Rusoro's investment in Venezuela, id. ¶¶ 659-82; the book value of that investment, id. ¶¶ 683-707; Rusoro's market capitalization, id. ¶¶ 708-714; and Rusoro's valuation of its investments, id. ¶¶ 715-50.

         With this background established, the Tribunal acknowledged that the damages calculation was "a hypothetical exercise" because "in real life, in September 2011 no buyer having good information about the gold sector in Venezuela would have been prepared to buy a gold producing enterprise in that country for a fair price." Id. ¶ 752. It explained that "the value of gold companies is affected by the intensity of the regulatory measures adopted by host states, " and it acknowledged that Venezuela's regulatory measures would have created a "chilling effect" sufficient to deter any prospective investor. Id. ¶¶ 753- 54. As such, in analyzing the Treaty's instruction to value an expropriated asset at the time "immediately before the expropriation or at the time the proposed expropriation became public knowledge, " id. ¶ 756 (internal quotations omitted), the Tribunal reasoned that "[t]he fair market value which the State must pay is that which an innocent, uninformed third party would pay, having no knowledge of the State's pre-expropriation (but post-investment) policy toward the expropriated company and its sector, " id.[8]

         There were six valuations proffered on the record. First, the "Investment Valuation" assessed the value of Rusoro's acquisitions and investments in Venezuela. This number came to $ 774.3 million. Id. ¶ 763. Second, the "Adjusted Investment Valuation" revised the "Investment Valuation" amount to account for the increase in the value of gold internationally between the time of investment and the time of expropriation. Id. ¶ 764. This inflated the $ 744.3 million number to $ 1.128 billion. Id. Third, the "Book Valuation" reflected the net book value of Rusoro's assets, totaling $ 908 million. Id. ¶ 766. Fourth, the "Maximum Market Valuation" reflected Rusoro's peak stock market valuation, $ 700.6 million, taken February 28, 2008. Id. ¶ 768. Fifth, the "Final Market Valuation" reflected the decline in market capitalization following Rusoro's initial investment in Venezuela. Id. ¶ 769. By this measure, Rusoro's investment was $ 125.6 million. Id. Sixth, Rusoro's expert, Brent Kaczmarek, calculated the value of Rusoro's expropriated assets to be $ 2.23 billion. See Id. ¶ 770.

         Ultimately, the Tribunal relied on only three of the six methods: the Maximum Market Valuation, the Book Valuation, and the Adjusted Investment Valuation.[9] In reaching the "genuine value" of the expropriated investment, the Tribunal assigned a weight to each method. It accorded 25% to the Maximum Market Valuation, 25% to the Book Valuation, and 50% to the Adjusted Investment Valuation. Id. ¶ 789. The weight assigned to each method reflected that method's "strengths and shortcomings." Id. For example, the Maximum Market Valuation had the advantage of reflecting "no subjectivity in its calculation, " based, as it was, on the stock market's independent assessment. Id. The Maximum Market Valuation had a shortcoming, however: Rusoro achieved this marker for only "a very short period, in mid[-]2008, three years before the date of the expropriation." Id. Similarly, the Book Valuation represented "a conservative criterion, " as it was taken directly from Rusoro's audited balance sheet, but did not account for increases in the price of gold during the relevant time period or the "development of the mining properties" under Rusoro's control. Id. The Adjusted Investment Valuation received the most weight, 50%, because it "reflect[ed] the value the investment would have reached on the date of expropriation, simply as a direct consequence of the increase in the price of gold and of gold producing companies." Id. When averaged and weighted, the Quantum for the expropriated assets totaled approximately $ 966.5 million. Id. ¶ 790.

         On October 10, 2016, Rusoro asked this Court to confirm the arbitral award. [Dkt.-#1].

         LEGAL ...

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