BTA affair versus Alliance Bank case: discrepancies under the hammer

England’s Royal Court’s judge Teare may well be among the world’s most famous judges. But whereas so far he has scored significantly in the case of Kazakhstan’s embattled bank BTA against its former controlling shareholder and president Mukhtar Ablyazov, with the latter on the run, condemned in Britain to 22 months behind bars for contempt of court (perjury) and his assets frozen (at least to known extents), another, similar-looking case undertaken by Kazakhstan’s Alliance Bank against former executives and major shareholders, originally also on Teare’s desk, seems to have stranded. Attempts to get in the order of 1.1 billion US dollar in diverted cash and collateral, similar to the “Ablyazov trick” of strings in loan beneficiary and collateral ownership structures through chains of offshore mailbox firms controlled by proxy, appear to have got stuck on jurisdiction problems – even though the latest verdict in appeal leaves room for further proceedings. As for Alliance Bank, now like BTA majority-owned by Kazakhstan’s state fund Samruk-Kazyna, its present management has vowed to undertake such proceedings, while reiterating its intention to pursue criminal proceedings against its former executives – even though their commitments to “cooperate” with the course of justice have pointed at leniency in recent years.

CHARLES VAN DER LEEUW, KZW SENIOR CONTRIBUTOR

BTA affair versus Alliance Bank case: discrepancies under the hammer“Alliance Bank will continue to seek recovery of the damages caused as a result of the defendants’ actions both on the territory of Kazakhstan and abroad regardless where their assets are located,” Bloomberg http://www.bloomberg.com/news/2012-12-21/alliance-bank-to-continue-asset-hunt-after-case-dropped.html reported on December 21 last year quoting a statement by the bank – following a dismissal in appeal by an English court of law. The Alliance bank, which is listed on the London Stock Exchange, defaulted in April 2009 after government-appointed managers found $1.1 billion of liabilities “missing” on the balance sheet in a way that looked pretty much like the case with BTA following Mukhtar Ablyazov’s departure. Kazakhstan has accused the key shareholders of local lender Alliance of stealing $112 million from the bank which is in talks to restructure its $4.2 billion debt, Kazakh financial police said on Wednesday. Margulan Seisembayev and Yerlan Seisembayev, who own a majority stake in Alliance through a holding company, have been charged in absentia, it said. “A court has sanctioned their arrest and an international warrant has been issued,” financial police spokesman Marat Zhumanbai told a briefing. None of the accused could be reached for comments. Earlier this year, the financial police arrested Zhomart Yertayev, the former chief executive of Alliance, charging him with a $1.1 billion theft. Yertayev has denied any wrongdoing. Seisembayevs’ company offered to hand most of its stake in Alliance to the government for free in February, saying it could no longer support the bank.”

As we reported at the time, now in his forties, Margulan Seisembayev graduated in 1991, on the eve of the break-up of the Soviet Union followed by Kazakhstan’s independence, at the law faculty of the Kirov State University of Kazakhstan. The same year, he founded the Seimar holding with a number of young associates, with the aim to create an industrial mini-empire consisting of manufacturers and traders in industrial and consumer goods. On top of its industrial assets, Seimar Holding also took the opportunity to established its own financial service facilities. It started in the northeast of Kazakhstan with the Pavlodar-based IrtyshBusinessBank, followed by the Semipalatinsk City Bank which was merged into it in June 1999. In summer 2001, the IrtyshBusinessBank was bought out by a number of business corporations including meat products company Almaty Kus, Astyk Astana 2030 and Byte Corporation.

Behind it all was the Seimar Holding and its shareholders who had been bargain-hunting in the mid-1990s when most of the obsolete industrial assets formerly belonging to the Soviet public sector were put on sale. Together with Sultankulov, a one-time study companion of Margulan Seisembayev, the Kazakh oligarch-in-the-making also consolidated his interest in Omsk-based Starbank, privatized through the notorious stock-for-loans deals under Boris Yeltsin. Starbank is the successor of the Soviet-time Stroybank, whichi in 1990 merged with the all-Union Promstroybank, meant to finance public-private joint ventures in the civil construction sector under Gorbachov’s perestroika regime. Back in Kazakhstan, in the course of 2002 Seimar’s bank attracted more partners including Rakhat Confectionary and the ANT Group. Looking back, some questions could well be raised on the formula through which the expansion process took place, the answers to which could well be eye-openers for investigators today. It looks very much indeed as though the “shareholders’, mainly consisting of manufacturers and distributors, were in fact buying into the bank to ensure their own credit facilities – thereby circumventing credit control and other tools to keep lending and borrowing fool-proof.

In December 2006, the capital structure of Alliance Bank was reshaped and ownership consolidated in a direct subsidiary of the Seimar Holding, Seimar Alliance Financial Corporation. It has probably been this loophole in shareholder-executive relations that enabled the Seisembayev brothers and their associates to carry out what now looks like a rather vulgar asset stripping scheme but what at the time must have looked (or almost) like the perfect white collar crime. It came down to a system in which all liabilities under Alliance Bank remained with the bank while assets fell under the title of the SAFC – even though the Seimar Holding only owned 72.8 per cent in Alliance Bank. The money thus funneled from the bank to the Corporation through asset sales.

Worse: under the letter of the law, both Kazakh and abroad, the entire plot looked perfectly legal. Meanwhile, liabilities were kept piling up. It had started in November 20004, with the first modest-looking $23.5 million syndicated loan obtained from an international consortium managed by a tendem consisting of one London- and one Vienna-based bank. It was followed the next year by another $80 million loan from a syndicate led by Dutch ING and Citibank of the USA. In July 2005, Alliance Bank issued its first Eurobonds with a face value of $160 million. Demand for cash was skyrocketing under the illusion that the income on oil exports in years to come would increase turning each member of the Kazakh business elite into an Asian oil sheikh. New stock was issued not only in Almaty, but also in Moscow and finally, on July 7 2007, on the London Stock Exchange where 17.4 per cent of Alliance Bank’s ordinary shares were set afloat, which added another 4 billion US dollar to its market capital.

And then, it all went wrong – or rather what had been going wrong for years was finally exposed to the public – and the authorities. “Kazakhstan has accused the key shareholders of local lender Alliance of stealing $112 million from the bank which is in talks to restructure its $4.2 billion debt,” Reuters reported on October 28 2009 http://asia.news.yahoo.com/rtrs/20091028/tbs-kazakhstan-bankers-7318940.html

, quoting police. “Margulan Seisembayev and Yerlan Seisembayev, who own a majority stake in Alliance through a holding company, have been charged in absentia, it said. ‘A court has sanctioned their arrest and an international warrant has been issued,’ financial police spokesman Marat Zhumanbai told a briefing. None of the accused could be reached for comments. Earlier this year, the financial police arrested Zhomart Yertayev, the former chief executive of Alliance, charging him with a $1.1 billion theft. Yertayev has denied any wrongdoing. Seisembayevs’ company offered to hand most of its stake in Alliance to the government for free in February, saying it could no longer support the bank. Their holdings in the bank are due to be diluted into a minority stake as part of Alliance’s planned debt restructuring deal. State welfare fund Samruk-Kazyna will then own a majority stake.”

Looking back in time, initially few details have been disclosed when the Alliance Bank’s management and leading owners threw the towel in the ring. Had the new owner, Kazakhstan’s state fund Samruk-Kazyna, opened vital information on the allegations to the public domain, attempts to recuperate the 1.1 billion US dollar “missing” to all possible extents might have been more successful. Even though such attempts undertaken in English courts of law have seen deadlock after deadlock, the schemes undertaken by the defendants have finally come to light in considerable detail. According to Justice Burton’s verdicts, the defendants in the court cases consist of a number of offshore firms used in the scheme and individuals involved in them: (1) Aquanta Corporation, (2) Bazora Corporation, (3) Serbina Limited, (4) Xilliana Limited, (5) Terpia Limited (formerly Audina Management Services Limited), (6) Mr Margulan Kaliyevich Seisembayev, (7) Mr Erlan Kaliyevich Seisembayev, (8) Mr Askar Kaliyevich Galin, (9) Seimar Alliance Financial Corporation JSC, (10) Mr Aleksei Ageyev, (11) Mr Zhomart Zhadygeruly Ertayev, (12) Mr Dauren Kereibayev, (13) Ms Irina Viktorovna Ivanova, (14) Mr Erik Sultankulov, (15) Mr Anuar Beisebayev.

“This has been the hearing of a series of applications, arising out of the grant ex parte by Teare J on 5 April 2011, in favour of the Claimant, Alliance Bank JSC, a large Kazakhstan bank, against a number of Defendants, primarily three brothers, the Sixth, Seventh and Eighth Defendants (collectively referred to as “the Brothers”), of permission to serve proceedings out of the jurisdiction and of a worldwide freezing order,” Burton’s verdict of December 11 2011 reads. The ex parte order has been continued over this hearing, and a number of Defendants have appeared to set it aside. The Fifth Defendant originally so applied, but has not pursued its application, which must fall away, while the Tenth, Eleventh, Thirteenth and Fifteenth Defendants (“the Inactive Defendants”) have not entered an appearance and taken no part in this challenge, and the Twelve and Fourteenth Defendants have not been served. Accordingly, the parties in the hearing, which lasted ten days, have been: i) the Claimant (Alliance Bank), ii) the Sixth Defendant, a Kazakh who was previously Chairman of the Board of Directors of the Claimant, iii) his brothers, the Seventh and Eight Defendants, also Kazakhs, but now resident in Dubai in circumstances to which I will refer, iv) the Ninth Defendant (“SAFC”), a Kazakh company, previously owned as to one third by each of the Brothers (although the Sixth Defendant has, prior to these proceedings, in unexplained circumstances, sold his holding to two Sharjah-based companies), apparently originally a public company called Seimar Investment Group (“SIG”), which was “transformed” (the Ninth Defendant’s description) into SAFC in December 2006, which was, at the material time, on the Claimant’s case not simply owned but controlled by the Brothers, v) the First and Second Defendants, both BVI companies (incorporated in Autumn 2006), and the Third and Fourth Defendants, respectively a Samoan and BVI company, each incorporated in 2004-5, collectively the “Offshore Companies”, of each of which the Fifth Defendant, a Liechtenstein-based company, was the nominee corporate director, and all of which are admitted to be beneficially owned by the Sixth Defendant, but asserted by the Claimant to be so owned by all the Brothers.”

According to the court document, the applications have been as follows: “i) The Sixth, Seventh, Eighth and Ninth Defendants all seek to set aside the order and, by challenge to the jurisdiction of the Court, to set aside the proceedings against them and service upon them. ii) The First, Second, Third and Fourth Defendants do so also, but have an application for a stay pending arbitration, by virtue of an arbitration clause upon which they rely in the Loan Agreements into which they entered, insofar as the Claimant, by subrogation, seeks to enforce such agreements against them. iii) The Claimant has applications which are subsidiary to their main aim of resisting the Defendants’ applications. First, the Claimant seeks to amend the Particulars of Claim, so as to plead, in the alternative, that its claims against the Defendants, made in English law by way of conspiracy, dishonest assistance, knowing receipt and unjust enrichment, are sustainable in the alternative at Kazakh law, as unlawful acts in breach of Article 917 of the Civil Code of the Republic of Kazakhstan, together with the joint and several liability imported by Article 932, and as unjust enrichment, pursuant to Articles 953, 955 and 956; and it seeks permission to serve such amended pleading out of the jurisdiction, inter partes, by reference to the same evidence and on the same basis as the original pleading. Secondly, having served the Third Defendant at the address provided for by the Loan Agreement in London, the Claimant now seeks additionally permission to serve the Third Defendant in Samoa, again on the same basis and evidence as relied upon against all the Defendants, but inter partes. I propose to treat the two inter partes applications in the same way as the ex parte orders now challenged before me, save only as to the possible incidence of costs.”

The latest outline of the scheme used to divert the $1.1 billion now sought for by the Alliance Bank as defined by the London court of appeal in its verdict referred to in the Bloomberg report quoted above reads as follows: “At all relevant times the brothers owned D9 (and its predecessor Seimar Investment Group / Investment Group Seimar (“SIG”)), which operated as a holding company for their interests. D9 owned the majority of the shares in Alliance. D6 was both Chairman of D9 and also Chairman of the Board of Alliance. D7 and D8 also sat on the Board of D9. D8 was Co-Chairman of D9. In order to facilitate their alleged fraud the brothers set up in the British Virgin Islands Ds 1, 2 and 4 and in Samoa D3 as offshore special purpose vehicles. Those vehicles were mere facades, alter egos or nominees used by the brothers Ds 6-8. Their common corporate director at all material times was D5, which took its instructions from the brothers. Between November 2005 and April 2008 Alliance was caused by the brothers, with the assistance of Ds 10-15, senior employees of Alliance, to acquire US Treasury Notes called “STRIPS”, an acronym for “Separate Trading of Registered Interest and Principal Securities”, in a total value of US$1.1 billion. I shall from time to time call Ds 6-8 and Ds 10-15 “the conspirators”.

The STRIPS were then, without the knowledge of anyone at Alliance other than the conspirators, charged or pledged to two Cypriot banks as security for loans made by those banks to the offshore SPVs, Ds 1-4. The Cypriot lenders were Reachcom Public Limited, “Reachcom”, a subsidiary of a Russian bank, Renaissance Capital and Metropol Cyprus, “Metropol”, again a subsidiary of a Russian Bank, Metropol. Reachcom was the lender to Ds 3 and 4. Metropol was the lender to Ds 1 and 2. […] In this manner, approximately US$1.1 billion was lent by Reachcom and Metropol to Ds 1-4. STRIPS to an equivalent value were acquired by Alliance, held in custody accounts in Cyprus operated by associates of Reachcom and Metropol, and charged to Reachcom and Metropol as security for the loans.”

Even though the court of appeal made its reservations in terms of proof on the table, its condierations look pretty clear – and point at large similarities to the BTA case. “There was never any intention that Ds 1-4 should repay the loans,” the court document reads. “The money lent was laundered back through a network of offshore companies principally to D9 or its predecessor, Seimar Investment Group. More than US$600M was used by the brothers/D9 to purchase more shares in Alliance, some or all of which were then sold at a large profit in an Initial Public Offering on the London Stock Exchange in 2007. US$440M was transferred indirectly by D1 to finance the acquisition of a shareholding in D9. Other large sums were extracted from the offshore SPVs by the brothers and their family members. By these means Ds 1-4 were divested of any ability to repay the loans. […] It is said that in early 2009 Ds 1-4 defaulted on the loans. There is as yet no evidence of this, although Ds 1-4 do not deny it, and Alliance assumes that the offshore SPVs did default on the loans. On 10 and 15 April 2009 Alliance received Notice of Enforcement of Security from the operators of the custody accounts informing them (i) of the default of Ds 3 and 4 and (ii) that Reachcom was exercising its rights pursuant to Clause 9 of the Guarantees between Alliance and Reachcom to transfer the collateral securities from Alliance’s custody account to Renaissance Securities Trading Limited in Bermuda. On 20 May 2009 Metropol informed Alliance that all the STRIPS in Alliance’s custody account had been debited by Metropol on 2 February 2009. In this manner, despite protest from Alliance, STRIPs to the value of US$1,118,905,408.55 were transferred out of the relevant custody accounts.”

But not just the structure of the scheme concerning Alliance Bank shows striking similarities with the BTA case, which makes the former’s case’s dismissal look all the more peculiar for it. “Seisembayev, whose whereabouts are unknown, couldn’t be reached for comment. He has said the money he and other executives are accused of stealing was invested to support Alliance,” the Bloomberg report quoted earlier reads further. “Yertayev declined to comment today, saying by phone that he considers his court involvement with the bank to be “completed.” The defendants ‘consider the decision an important step in establishing the truth in the case around Alliance Bank and believe the court put a full stop in the proceedings,’ Interfax quoted Seisembayev as saying in a Dec. 19 statement. Courts in countries including Switzerland, Lichtenstein and the United Arab Emirates have dismissed accusations and halted proceedings against the bank’s former management, the Russian news service reported, citing the statement. In March, a Kazakh court overturned a ruling that awarded Alliance 177.5 billion tenge ($1.2 billion) in damages from its former management. While the court in the financial capital of Almaty struck down the damages ruling, it upheld a conditional prison sentence of two years and a 378,000 tenge fine for both Seisembayev and Yertayev.”

The damage done to the Alliance Bank, in spite of its bail-out and subsequent debt restructuring, has continued to hurt the enterprise in the course of last year. Through the third quarter, its equity capital dwindled and stock value of both common and preferred shares turned into negative (see table). The list of payment failures remains long. BTA remains in similar conditions, though to much larger amounts. Both banks pin their hopes on recovery of cash and assets embezzled by their former managements. Further steps are expected to get Alliance Bank in the same, relatively hopeful, position as BTA in this regard. Their proceedings will be long and laborious – which should fill the hearts of Kazakh taxpayers with care and those of London’s lawyers with joy…

Alliance Bank’s financial performance in the first 3 quarters of 2012

Indicator As of 10/01/12 As of 07/01/12
Authorized capital 273,090 mln. KZT 273,090 mln. KZT
Equity capital 2,173 mln. KZT 7,881 mln. KZT
Total assets 565,319 mln. KZT 552,655 mln. KZT
Net income 597 mln. KZT 5,306 mln. KZT
Book value of common share -64.31 KZT 486.96 KZT
Book value of preferred share -779.50 KZT 779.50 KZT

Source: KASE

BTA’s financial performance in the first 3 quarters of 2012

Indicator As of 10/01/11 As of 07/01/11
Authorized capital 1,178,779 mln. KZT 1,178,771 mln. KZT
Equity capital -318,613 mln. KZT -216,681 mln. KZT
Total assets 1,701,575 mln. KZT 1,786,641 mln. KZT
Net income -203,824 mln. KZT -102,562 mln. KZT
Book value of common share -7.29 KZT -4.96 KZT

Source: KASE

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