Ablyazov’s diversion schemes: the tale of the AAA-bonds’ long journey/I

What in fact has been a sideline case in the form of an attempt by Kazakhstan’s troubled BTA bank to get a fourth defendant behind bars in the United Kingdom connected with the multi-billion fund and asset diversion schemes of its former president Mukhtar Ablyazov, has turned into a fresh eye-opener concerning one of the cases in which the latter has been convicted to 22 months in a British jail for perjury. The case, known as the AAA-files, concerns a clandestine transaction of high-brow bonds in prestigious investment institutions such as the International Finance Corporation and the European Bank for Reconstruction and Development. One astonishing aspect is that the issuers of the bonds at stake seem to have done nothing to prevent the income from the paper being entitled to their new holders to which they have been transferred – behind which as always sticks no one else than Mr. Ablyazov – either directly or by proxy. One of those is his former henchman Anatoly Ereshchenko, like Ablyazov currently hiding out on an unknown location.

CHARLES VAN DER LEEUW, KZW SENIOR CONTRIBUTOR

Ablyazov’s diversion schemes: the tale of the AAA-bonds’ long journey/IThe list of defendants in the (dismissed) case was long. Apart from Ereshchenko, Ablyazov himself as well as a number of his proxies having been colourfully portrayed in media around the globe by now such as Roman Solodchenko and Alexander Udovenko, the runaway banker’s brother-in-law Syrim Shalabayev and his two Cyprus-based associates Paul Kythreotis and Jason Hercules have reappeared on the scene once more. The companies that have been instrumental in selling the controversial bonds and passing on the revenues to “safe” (in the eyes of Ablyazov, that is) beneficiaries have been defined as the BVI defendants since all of them are registered on the British Virgin Islands. Two of them remain known under their original names of Nafazko Investment Ltd and Olofu Investment Ltd. The other three have changed their original names of Bubris Investment Ltd, Granta Investment Holdings Ltd and Kyma Investment Holdings Ltd into Celina-, Shoreline- and Mymana Investment Holdings Ltd respectively. Firms among the defendants to which revenue on bond sales has been transferred bear the names of Mabco Incorporated, Calermen Finance Incorporated, Astrogold Corporation and Grundberg Incorporated. It appears in the court document that Ereshchenko has been a key figure in the entire process – wittingly or not. The first claim has been denied by the defendant, leaving him with the benefit of doubt concerning the second one – for the moment, that is.

“The motion was filed in the bank’s litigation to recover assets, and to compensate for losses that were allegedly inflicted on the company by its former executives, including Ablyazov,” Russia’s legal news agency RAPSI reported on July 11. “In the latest motion, the plaintiff alleged that Yereshchenko, a former employee of Eastbridge Capital Ltd., UK, intentionally lied to the court, which asked him to present several documents on major transactions that supposedly resulted in hundreds of millions of dollars in losses for the bank.” The case surrounding Yereshchenko (also spelt Ereshchenko) is concentrated around one of the files that brought Mukhtar Ablyazov a 22-months prison term in the UK for perjury in February this year, which is dubbed the AAA File. “In essence, the Bank says that Mr Ereshchenko deliberately lied when he responded to an order for disclosure made against him on 3rd November 2010,” the court ruling referred to reads. “The lies that Mr Ereshchenko is alleged to have told were effectively twofold: first, that so far as he could recall he knew nothing about the transactions in question (the so-called “AAA Transactions”), and secondly that he did not have access to any documents that might assist.”

Ereschenko’s declarations in court were made in December last year, but the court now judges that they have not been proven beyond reasonable doubt to have been deliberately untrue, distorted and/or misleading. “On the present evidence, the Bank has failed to prove beyond reasonable doubt that Mr Ereshchenko lied in any of the 8 specific respects that it particularized,” Judge Clarke writes in his conclusion. “Put shortly, I cannot now be sure that Mr Ereshchenko knew more about the AAA Transactions than he was saying in his December statement, nor that he had not answered any of the 199 specific questions in the Disclosure Order as far as he was able at the time. Nor can I now be sure that he knew he had access to documents that might have helped him respond.” But he also leaves the door open for further proceedings against the defendant, by stating: “Nothing that I have said in this judgment should be taken as determining anything finally in the action. If the Bank had left this committal application over until after the trial, things might, as I have repeatedly said, have looked different. I know not.”

“The background to the AAA Transactions is inevitably complicated,” Judge Vos notes in the court document.. “But I shall seek to set out the Bank’s basic claims and the chronology as succinctly as possible. Before doing so, it is important to understand a little of Mr Ereshchenko’s alleged role. He is a Russian national, who was one of three directors of an English corporate services company called Eastbridge Capital Limited. Whilst he was always based in London, he travelled extensively during the relevant periods. Moreover, Eastbridge had offices in Moscow, and later in Cyprus. Mr Ereshchenko’s case is that another of Eastbridge’s directors, a Mr Aleksander Udovenko, the 15th Defendant (“Mr Udovenko”), was primarily involved in the corporate services activities of Eastbridge, and that his own role was peripheral and limited and took up only a minimal amount of his time. In answering the extensive questions posed by the Disclosure Order, Mr Ereshchenko says now that he genuinely could not remember the entities involved or what might have occurred in relation to them. Later disclosures of documentation by the Bank have, says Mr Ereshchenko, to some extent jogged his recollection, and he has been increasingly forthcoming as matters have progressed. But ultimately, he still says that he was mostly only copied in to emails, was never in charge of Eastbridge’s activities in relation to the AAA Transactions, and was generally only involved when a proponent of the AAA Transactions, one Mr Timur Surapbergenov (“Mr Surapbergenov”) of JSC TuranAlem Securities (“TAS”) a subsidiary of the Bank, wanted to chase some specific action that Eastbridge was supposed to be undertaking. The Bank, for its part, submits that Mr Ereshchenko’s position is wholly implausible. It points to numerous documents that were sent to or by Mr Ereshchenko, and says that he cannot possibly have forgotten the names of the BVI Defendants and the Further Recipients, nor the fact that he had been involved in numerous dealings in relation to them. It points to the fact that he, amongst others, held a Power of Attorney, to act for them (which Mr Ereshchenko denies he knew about). More importantly, perhaps, the Bank points to the events that were known to Mr Ereshchenko between the nationalisation of the Bank in February 2009 and the grant of the Disclosure Order in November 2010, and submits that it is inconceivable that he cannot have known when he was served with that order that it concerned the AAA Transactions in which he had been involved. The Bank contends that Mr Ereshchenko decided deliberately to lie about the extent of his knowledge because he feared the consequences if he told the truth.”

The most important aspect of the court document is, rather than the cautious dismissal of the case against Ereshchenko, a concise chronology of how the AAA scheme has been carried out for the first time in the public domain. “At some time in 2003, Mr Mukhtar Kabulovich Ablyazov (“Mr Ablyazov”) was apparently released from prison in Kazakhstan and came to London,” the chronology relates. On 8th September 2003, Eastbridge was incorporated. On 9th September 2003, Mr Ereshchenko and Mr Udovenko became directors of Eastbridge. In May 2005, Mr Ablyazov returned to Kazakhstan to take up his position as Chairman of the Bank’s board of directors. […] Between 28th December 2007 and 2nd January 2008, the BVI Defendants were incorporated in the BVI. […] On 21st and 22nd May 2008, the Bank acquired the AAA Investments. Between 22nd and 23rd May 2008, both the Bank and the BVI Defendants entered into brokerage agreements with and opened accounts at Alfa Equity. On 4th June 2008, Mr Alexander Chekalin, “Head of Legal” at Eastbridge Moscow (“Mr Chekalin”) emailed Mr Paul Kythreotis, the 2nd Defendant (“Mr Kythreotis”), copied to Mr Udovenko, but not to Mr Ereshchenko, attaching 5 draft securities’ sale and purchase agreements to sign for the 5 BVI Defendants. The agreements in question may have related to sales of the AAA Investments from the Bank to the BVI Defendants. On 9th June 2008, Mr Ereshchenko’s expense report shows that he incurred ?234.84 in respect of accommodation at a hotel in Riga.”

So what had been, or still was, going on? “It was suggested (though he could not recall) that Mr Ereshchenko went there to sort out the problems that had arisen in relation to the transfers of funds at TKB in relation to the AAA Transactions,” the court’s paper explains. “Also on 9th June 2008, the BVI Defendants entered into loan agreements with the Further Recipients in the sum of US$250.1 million. These loans are said by the Bank to be shams. On 10th June 2008, the Bank transferred the AAA Investments to its account at Alfa Equity. On 10th and 17th June 2008, the BVI Defendants entered into the short sales of AAA Investments to Alfa Equity. The consideration of US$294.1 million was received by the BVI Defendants from Alfa Equity on 11th and 18th June 2008. Between the 12th and 20th June 2008, the BVI Defendants transferred monies (purportedly under the allegedly sham loan agreements) to the Further Recipients. On 13th June 2008, Mr Anton Rybalkin, a lawyer at Eastbridge Moscow (‘Mr Rybalkin’), emailed Mr Udovenko and others saying that he was sending documents to be signed by Mr Solodchenko, and concluding: ‘the transaction with Alfa Bank is under the control of [Mr Ablyazov]. If necessary the explanation can be given by [Mr Udovenko], [Mr Ereshchenko] and me’.”

The bank’s version of the events that were to follow has been summarised in the court ruling and involves mainly Russia’s Alfa Bank and its offshore subsidiary Alfa Equity, as well as the Latvian bank Trasta Komercbanka. “Between 21st and 22nd May 2008, the Bank acquired a portfolio of AAA rated investment bonds with a value of some US$300 million,” the summary reads. “On or about 22nd May 2008, the AAA Investments were transferred to an account in the Bank’s name at OJSC Alfa-Bank’s affiliate in Kazakhstan, Alfa Russia. Between 23rd May and 10th June 2008, Mr Roman Solodchenko, the 1st Defendant, who was then a director of the Bank and Chairman of its Management Board (“Mr Solodchenko”), transferred the AAA Investments from the Bank’s account at Alfa Russia to an account in the name of the Bank at Alfa Equity Investments Limited, a BVI company. Between 10th and 17th June 2008, 5 BVI companies (the 4th to 8th Defendants – referred to hereafter as the “BVI Defendants”) sold securities of the same descriptions and amounts as the AAA Investments to Alfa Equity. It appears that these were short sales, in that the BVI Defendants did not at that time own securities of the descriptions and amounts of the AAA Investments. In June 2008, the sums payable by Alfa Equity to the BVI Defendants in respect of the short sales were paid into accounts held by the BVI Defendants at Alfa Equity and were then transferred to accounts held by the BVI Defendants at Trasta Komercbanka in Riga in Latvia. The Bank suggests that what lies behind these arrangements in June 2008 must have been the grant by the Bank of security over the AAA Investments to Alfa Equity to secure the obligations owed by BVI Defendants to Alfa Equity under the short sales. Some US$250 million of the proceeds of the transfers to the BVI Defendants’ accounts at TKB were then paid in mid-June 2008 to further accounts at TKB in the names of the 9th to 12th Defendants (known as the “Further Recipients”). The Bank says that these payments were made pursuant to sham unsecured loan agreements dated 9th June 2008.”

Attached to the ruling is an overview explaining who paid what and when to whom and which paper was involved. It appears that on June 10 2008 in the order of $175 million in A-bonds was sold to Alfa Equity and paid the following day, assumedly to BTA accounts though those are not mentioned as such. Sellers in all cases were the so-called BVI defendants Bubris/Celina, Kyma/Mymana, Olofu and Nafazko. This first round of sales was followed, a week later, by a second one for the total amount of approximately $120 million. The first round included bonds issued by such prestigious institutions like the European Bank for Reconstruction and Development, the European Investment Bank as well as the German KfW Bankengrupp and the Landwirtschaftliche Rentenbank. The latter’s paper was also sold in the second round on June 17, along with that of Eurofima and the Nordic Investment Bank. Sellers were Nafazko, Bubris/Celina and Grant/Shoreline. Overnight, all the amounts were transferred from to accounts belonging to the recipients at Trasta Komercbanka and from there to other destinations. Thus, a firm called Grundberg between June 12 and 19 received clost to $58 million from Nazafko, another beneficiary called Calernen $69 million and $49 from Granta/Shoreline and a third one called Mabco close to another $49 from Kyma/Mymana. In all, more than half a billion greenbacks have been embezzled in this way within hardly more than a single week’s time.

But this was not the end of the journey the revenues were to make. “On 1st August 2008, Mr Udovenko emailed numerous people including Mr Ereshchenko thanking them for their comments on the algorithm procedure relating to documents that referred to Eastbridge’s archive of documents and the electronic register of documents,” the court’s report continues. “On 15th September 2008, Mr Udovenko emailed a Bank employee, copied to Mr Ereshchenko and others regarding the transfer of offshore companies on to Moscow. Mr Ereshchenko said that he did not think he knew about these events. A chain of emails on 8th October 2008 concerning a bond transaction by Bubris included an email from Mr Ereshchenko to Mr Chekalin saying that he (Mr Ereshchenko) “[a]greed” the execution of certain documents. On 10th October 2008, Mr Ereshchenko was sent 4 statements for 4 of the 5 BVI Defendants’ accounts at TKB. On 15th October 2008, Mr Manokhin sent Mr Ereshchenko and Mr Udovenko an email about the pooling of cash held in TKB. On 23rd October 2008, Mr Ereshchenko was sent by email a supplement to the brokerage agreement between Alfa Equity and each of the 5 BVI Defendants. On 31st October 2008, Mr Surapbergenov emailed Mr Sadykov, Mr Ereshchenko, Mr Rybalkin and Mr Udovenko concerning the repayment of coupons (presumably interest on the AAA Investments that had been short sold by the BVI Defendants) on 15th November 2008 saying that Mr Ereshchenko would need to prepare the respective orders of the BVI Defendants for transfer of the money to the Bank. On 11th November 2008, Mr Ereshchenko sent Mr Surapbergenov an email saying that money “will clear on the companies’ brokerage accounts tomorrow” and that the originals of the supplemental agreements were already with Alfa Equity. Ms Elena Lapteva of Eastbridge responded asking Mr Surapbergenov to take the bank’s fees into account on future payments.”

Towards the end of the year, the main players in the hide-and-seek game must have felt that soon things might be going extremely badly for them and all others involved. The court in its ruling refers to what it dubs a “challenged corrupted email” forwarded on 24th November 2008 by the bank to Ereshchenko, “…asking whether London could be recorded as the “archive location” for Eastbridge. Also on 24th November 2008, Mr Surapbergenov emailed Mr Ereshchenko concerning payment for coupons saying that the ‘authorisation must be signed urgently’. On 8th December 2008, an administrative director of Eastbridge Moscow emailed Mr Manokhin, copied to Mr Ereshchenko, Mr Udovenko and others indicating that archives had been taken to London. On 18th December 2008, Mr Chekalin emailed Mr Kythreotis saying that Mr Ereshchenko had confirmed by telephone transfers from 2 of the BVI Defendants to Alfa Equity. The email also asked Mr Udovenko to approve the transfers. The 5th January 2009 is the apparent date of the 5 draft SPAs purporting to document the sale of the AAA Investments from the Bank to the BVI Defendants. On 22nd January 2009, the AAA Investments were transferred on Mr Solodchenko’s instructions from the Bank’s account at Alfa Equity to the BVI Defendants’ Alfa Equity accounts.” It was then that the end was drawing nigh, and both the bonds and the cash had to be diverted further. It is obvious that by that time Ablyazov and his associates knew that the twisted accounts of BTA with the multi-billion hole in them were bound to be exposed soon. The fact, as shall be seen, that the diversion scheme was to go on virtually unhindered from Ablyazov’s place of exile at least strongly suggests this. (to be continued)

Share