Well then, my friends. I invite you to watch—and maybe even take part in—our latest innovation in the hunt for the scalps of the crooks from VTB Bank. The full background is available under the VTB tag. The Effective Management of this lending institution generously supplies treasury notes to just about any law enforcement agency in the Russian Federation, which makes our work much harder. So we decided to move part of our holy war to a place Effective Managers like to visit so they can feel not like ordinary post-Soviet crooks, but like Civilized People. To the United Kingdom of Great Britain and Northern Ireland. Meet:
Matthias Warnig. Former Stasi officer, personal friend of V. V. Putin, managing director of Nord Stream. And, at the same time, chairman of the Audit Committee of the Supervisory Board of VTB Bank. "Hahahahaha," you laughed from the other end of the internet. "What’s the point of complaining about crooks to an audit committee that the crooks created for themselves?" But don’t laugh too soon. Every post-Soviet crook dreams of becoming a European. And so VTB Bank shares are traded not only on Russian exchanges, but also, in the form of global depositary receipts, on the London Stock Exchange. Which opens up certain opportunities for us. There are Effective Managers in England too, of course, but fortunately they do not control every aspect of the country’s and society’s life. That is why in the United Kingdom there are such things as “duties of care to the interests of the company, proper professional skill, and diligence in work.” In other words, if you’re being paid a salary, do your job properly. And the management of any company whose GDRs are traded in London is supposed to operate by that principle. In our case, that did not happen. Matthias Warnig, who is paid for his work on VTB Bank’s audit committee, showed no concern for the company’s interests. He ignored all our messages (and media publications) about the fact that the bank’s management stole $150 million from shareholders. Apparently in much the same way as, back in his Stasi days, he ignored intelligence reports that the director of the USSR–GDR Friendship House was selling stolen roofing felt, state-owned furniture, and fur ushanka hats at a Dresden flea market. So last week, the following letter arrived at Matthias Warnig’s office in the Swiss canton of Zug. (It was written in English, then translated into Russian, so don’t be surprised by the slightly odd style.) Nord Stream AG Managing Director Mr. Matthias Warnig Chairman of the Audit Committee, Independent member of the Supervisory Council of JSC VTB Bank 6304 Zug Grafenauweg 2 Switzerland 06/05/2010 Dear Mr. Warnig, I am writing to you as a shareholder of OJSC VTB Bank (the “Bank”). In this letter, I would like to draw your attention to a situation that concerns you in your capacity as Chairman of the Bank’s Audit Committee. It relates to the circumstances surrounding the acquisition of drilling equipment (the “Equipment”) by the Bank’s subsidiary, VTB-Leasing. I note that this transaction has been widely discussed in the Russian media. The facts of the matter appear to be as follows. In July 2007, VTB-Leasing purchased 30 units of drilling equipment at a price of approximately US$15 million each. The total value of the contract, including transportation and customs duties, amounted to approximately US$650 million. The circumstances of the acquisition appear highly unusual: • Although the Equipment was manufactured by a Chinese producer, it was purchased not directly, but through a Cypriot intermediary company. • The purchase price per unit of Equipment was US$15 million, whereas the manufacturer’s list price in China is approximately US$10 million per unit. Despite the substantial size of the order, no discounts were obtained. • Apparently, in this transaction VTB-Leasing had no financial guarantees from any company with a sound financial position, which resulted in the Equipment not functioning and currently being stored in a warehouse in Russia, while there are no realistic prospects of recovering losses from the lessee or its shareholders. Moreover, according to my information, the Bank did not obtain full ownership of the Equipment after the lessee’s default. The Bank’s direct losses on this transaction exceed US$160 million and may reach as much as US$650 million if the unused Equipment is fully written off in the future. The Bank’s management and President have brushed aside all suspicions of corruption within the Bank. They have chosen to act as if nothing happened and have provided no public information whatsoever about this situation. If I am correct, then the Bank’s management bears responsibility for the following: • Failure to develop and follow procurement and internal control procedures, which resulted in the purchase of Equipment at inflated prices. • Complicity in fraud, since no financial guarantees were provided in respect of future lease payments for such highly specific and illiquid Equipment, which I believe violates the Bank’s standard procedures. The lessee, a company specially created for this transaction by its owner, Severnaya Ekspeditsiya, is currently undergoing bankruptcy proceedings. • Failure to take action aimed at recovering funds and initiating legal proceedings against the fraudsters, whether inside or outside the company. • Refusal to publicly disclose information about this event, which has a material impact (US$650 million) on the Bank. • Failure to take any measures to investigate the transaction and improve asset acquisition procedures in order to prevent similar cases of fraud in the future. Taken together, these events should undoubtedly attract the attention of the Bank’s Supervisory Board, which should ensure a thorough investigation, proper disclosure, and improvement of control procedures. The Regulations on the Audit Committee, which you chair, state that “... the Committee oversees the functioning of internal control systems and ... identifies, discusses, and resolves issues related to their functioning; ... promotes the establishment of an appropriate ‘control environment’ and ‘control culture’ within the Bank ...” To date, there is no evidence that these duties have been fulfilled in relation to this case. There is another curious aspect to this situation. Severnaya Ekspeditsiya, the lessee that failed to meet its obligations to the Bank and caused significant losses to the Bank, is partially controlled by Gleb Fetisov, a well-known Russian businessman. I was surprised to learn that Mr. Fetisov was appointed a member of the Bank’s minority shareholders committee, which is supposed to assist the Bank’s management in improving corporate governance. It is entirely possible that the real facts of this leasing fiasco could have been uncovered with one or several phone calls. Russian corporate law regarding the duties and liability of members of companies’ supervisory boards is evolving and will ultimately conform to international standards. As the international litigation concerning Yukos demonstrates, Russia cannot exist as a separate legal island in the sphere of international law. We are obliged to observe certain principles of commercial and corporate conduct consistent with international practice and legislation. By deciding to list its securities on the UK market, the Bank undertook direct and unconditional obligations to adhere to these principles. The Bank must comply with the corporate governance standards established by British regulators; otherwise, it will face adverse consequences. The same applies to its management and members of the Supervisory Board. It can be argued that, by ignoring this situation, the members of the Supervisory Board, collectively and individually, have breached the duties of care, skill, and diligence required of company directors under English law. I am confident that my deep concern is shared by many shareholders and holders of the Bank’s depositary receipts. I also believe that representatives of the London Stock Exchange and the UK Listing Authority, who are responsible for protecting the rights of holders of securities listed in the United Kingdom, as well as representatives of regulators in other countries, will be unpleasantly surprised by the attitude of the Bank’s Supervisory Board toward this situation. As a result, the potential damage from shareholder lawsuits and fines imposed by financial regulators on the Bank and its Supervisory Board, as well as negative investor sentiment, will most likely adversely affect the Bank’s share price in the near term. However, if this leads to measures being taken to strengthen internal controls and eradicate corruption within the Bank, then in the long run we will all benefit. Better late than never. I would like to propose the following steps, which should be taken by the Audit Committee and the Supervisory Board: • Initiate an investigation into the transaction. The investigation must be fully independent of the Bank’s management and led by you in your capacity as Chairman of the Audit Committee. • Publicly disclose information about these transactions, the possible losses, the measures taken by the Supervisory Board to investigate them, and the strengthening of internal control systems. Provide periodic updates on the progress of the investigation. • Cooperate with Russian law enforcement authorities in order to initiate a criminal investigation into the fraudsters. • In order to detect such situations more quickly in the future, establish whistleblower procedures so that insiders have the opportunity to contact the leadership of the internal control department and the Audit Committee directly, bypassing the Bank’s management, while ensuring adequate protection of their personal data and the possibility of an independent fraud investigation. In addition to being a shareholder of the Bank, I am also a citizen of Russia and an indirect beneficiary of the state’s stake in the Bank, which makes the actions and inaction of the Bank’s management even more painful to me. I am sure that my indignation is shared by your colleagues, the representatives of the Russian Government on the Bank’s Supervisory Board, and that they will take all necessary measures to correct the situation in the spirit of the uncompromising fight against corruption and the unflagging drive for modernization championed by President Medvedev. Yours sincerely, Alexei Navalny Beautiful, isn’t it? As you can tell from the text of the letter, if Mr. Warnig does not do what he is supposed to do under his duties, then we will do everything possible to initiate proceedings with the FSA and other British regulators, and then launch litigation involving foreign holders of VTB Bank’s GDRs. The latter will of course require considerable effort, but as Belka said to Strelka (the famous Soviet space dogs): if you really want it, you can fly into space. At that point, the claims will be brought not just against the bank, but against Warnig personally. Can you help us? Yes, you can. And you should. The main task right now is to spread information about our plan in the foreign media. We need to inform international public opinion about, um... certain aspects of Herr Warnig’s work. So if you have any contacts with foreign journalists, businesspeople, or public figures, VTB shareholders would be very grateful if you shared these materials. We have prepared a press kit. It contains the information needed to get acquainted with the case: the release, the letter, who I am, who Warnig is. Press kit in Russian. Press kit in English. Press kit in German. We also finally made English subtitles for the blockbuster “Starie Wori,” so we very much ask everyone to send the video link to every foreigner they can reach and post the video on English-language resources.
Direct link: http://www.youtube.com/watch?v=xMYLnETH_mk Many thanks in advance to everyone who takes part. And enormous special thanks to my Kind Monsters. They helped tremendously with this campaign—from assistance with the letter to translation into all languages. I think they’ll take part in the further beatdown as well. Kind Monsters—mwah to you.