London judge rules auction-rigging case can go to full trial

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Mar 06 2018 Nick Kochan

A London commercial court judge has given a provisional ruling that a case alleging VTB Capital, a Financial Conduct Authority-regulated institution, rigged an auction to sell Bulgaria’s largest telecommunications company, should go to full trial.

The judge rejected the claim that the entire auction should be voided on the grounds of fraud. The decision means Empreno, the company bringing the case, could have a claim against VTB Capital for damages, depending on the outcome of the full trial. VTB Capital is the Russian VTB’s corporate investment business and is based in London.

Provisional ruling

The court report on the provisional hearing said Empreno claimed it was excluded from an auction of a 43.3 percent block of shares which they themselves owned, in a company associated with Bulgarian telecoms company Vivacom, as a result of the actions of VTB Capital (VTBC).

The judge’s conclusion to this provisional hearing was Empreno should be able to “claim damages or monetary compensation, in respect of their alleged loss of a valuable chance or opportunity to participate in the EY sale process”.

VTBC hired EY as “special adviser”, to “enforce the sale of the shares”, the provision ruling said.

The complainants’ contention that the sale of the block of shares should be set aside on the grounds that “fraud vitiates everything” was dismissed.

The court’s provisional ruling reported Empreno’s claim that the auction “was a dishonest sham, intended to give the false appearance of being a genuine sale at arm’s length for a fair value while in fact delivering the shares at an undervalue to the purchasing consortium”. The company whose shares were auctioned is Vivacom.

The complainants are LIC Telecommunications and Empreno Ventures, two companies owned by Dmitri Kosarev, a Russian businessman. VTB Capital and a number of other companies and individuals who were part of a consortium that participated in the auction are defending the claim.

“All allegations of wrongdoing are denied; in particular the sale was not in any way rigged or improper,” Said a court document describing VTBC’s defence.

Claimants allege conspiracy

The judge’s ruling, however, disclosed the claimants’ contention that, “the sale was rigged and was the product of a conspiracy between VTBC and some of the other defendants to remove control of the Bulgarian telecommunications industry, or at least a substantial part of it” from the claimants.

The events at issue began in early 2015, when VTBC appointed EY as its special adviser to assist it in “enforcing the shares held by VTBC as security”. This move was taken during a “standstill period” when VTBC (and a related company Delta Capital International, another defendant) agreed not to exercise certain rights under a loan agreement to “enforce the transaction security”.

A series of events culminating in the auction are outlined in the court documents. First, Empreno wrote to VTBC requesting an explanation of VTBC’s intentions in appointing EY in October 2015. It did not receive a reply. Empreno then offered to refinance the loan for three months and VTB responded by saying that it would consider any serious offer.

“The reality was that VTBC made no real effort to engage with Empreno on this,” the claimants contended. Empreno signed a non-disclosure agreement with VTBC, with the expectation that it would be brought in on the negotiation for the sale of the shares. This did not happen and Empreno was told the agreement was non-negotiable.

The auction

The next critical step was the holding of an auction. This took place on November 19, 2015 and the court document reported that on November 20, 2015 VTBC announced it had sold the shares at auction for 330 million euros. The claimants contend (according to the judge in his ruling) the price obtained at the auction undervalued the shares by at least 143 million euros.

A report of the hearing from One Essex Court, which acted for one of the defendants, stated: “The defendants are alleged to have procured the sale of shares in the operating subsidiaries of the Vivacom group, held by an intermediate holding company, known as V2, at an undervalue. The shares were pledged to VTBC as a security for a loan granted to the group by VTBC.”

The Luxembourg company InterV owned 100 percent of the shares in Viva Telecom Bulgaria EOOD, a Bulgarian telecoms company, which “lay at the head of the Vivacom Group”, according to court documents.

Winning consortium

Members of the winning consortium included Milen Veltchev, a former Bulgarian finance minister and the current CEO of the Bulgarian affiliate of VTB Capital, and Spas Roussev, a businessman and associate of Veltchev.

“We are pleased that the judge has said to VTB that it must now explain at trial what happened during the rigged auction, why it shut us out the way it did, why they strung us along, and why they allowed it to be sold to themselves at a fraction of its true value,” Kosarev was quoted as saying after the judgment.

A spokesman for VTB welcomed the court ruling, which it said confirmed the absence of legal grounds for the claims of Empreno regarding the results of the Vivacom auction.

“VTB will continue to defend its position in the future as we believe that the claims made by Empreno in court regarding the validity of the auction are unfounded,” the spokesman said.

• Nick Kochan is a contributing editor to Thomson Reuters Regulatory Intelligence. He is the author of ‘The Washing Machine’, a book about money laundering and ‘Corruption: The New Corporate Challenge’. Kochan writes widely about compliance and economic crime.