Kyrgyz Debt Restructuring agency issues press-release on filing a US $63 million action against former management of AsiaUniversalBank «АзияУниверсалБанка»BISHKEK, KYRGYZSTAN, 29 APRIL 2013. The Agency of the Kyrgyz Republic for Reorganization of Banks and Debt Restructuring ("DEBRA"), which acts as the bankruptcy administrator for Open Joint Stock Company AsiaUniversalBank ("AUB"), announces that on 8 April 2013, DEBRA filed a claim with the October Regional Court of the City of Bishkek against the former management of AUB.
The named defendants in the action are: the former Chairman of AUB's Board of Directors Mikhail NADEL, former member of the Board of Directors and Chairman of the Audit Committee Alexandra KATRIN, and former members of the Board of Directors Irina Bauer, Andrei GALITSKI, Michael MERED, Senator John Bennett JOHNSTON, Senator Donald RIEGLE Jr, Senator Robert DOLE. In addition, former member of the Management Board Nurdin ABDRAZAKOV and former member of the Management Board Tatyana SHEVELEVA, have also been named as defendants.
The claim has been filed for recovery of loss and damage caused to AUB as a result of the former management of AUB of having breached their duties. The claim is based on two episodes in particular.
(1) In December 2009, AUB paid over KGS 2 billion (over US $42 million) to a Kyrzgyz company Ak-Tilek Investment, allegedly for the purchase of promissory note issued by various Russian banks. Ak-Tilek Investment immediately transferred the entire amount to two offshore companies - Aqvenor Limited (UK) and Pintercool Limited (Belize), which were AUB's clients at the time, and which in turn dissipated the funds by transferring them to other offshore companies. The offshore companies split and eventually transferred the funds out of AUB.
In accordance with AUB's documentation, the promissory notes were allegedly kept by the now bankrupt Kyrgyz company Central Asian Stock Exchange ("CASE"). In April 2010, the National Bank of the Kyrgyz Republic (the "National Bank") placed AUB into temporary administration the aim of which, by law, was to verify the financial condition of the bank, for the purpose of which an inventory of assets and liabilities is carried out. As a result of this inventory exercise, the promissory notes could not be located.
AUB's personnel, relying on documentation, insisted that the promissory notes were transferred to the custody of CASE. CASE's management has informed the temporary AUB's administrators that all promissory notes belonging to AUB were handed over to AUB's representative in Moscow and were then kept in a safety deposit box in one of the Moscow-based banks. Neither AUB nor CASE's personnel were able to say where that safety deposit box was located. The alleged representative of CASE (to whose custody the promissory notes worth KGS 2 billion (or US $42 million) were entrusted) turned out to be a Moscow-based driver who insisted that he had no relation to CASE and never received any promissory notes. The Russian banks which allegedly issued the promissory notes and the Russian Central Bank advise that the promissory notes allegedly purchased by AUB had either never been issued, or had been presented for payment and paid, or were listed on the balance sheets of the Russian holders.
(2) Three months later, in early April 2010, AUB paid a further US $20.5 million to three offshore companies Aron Capital Limited (Belize) Aqvenor Limited (UK) and Pintercool Limited (Belize) allegedly for the purchase of further promissory notes. Just as was the case with the payment of KGS 2 billion (over US $42 million) in December 2009, the US $20.5 million was immediately transferred to other offshore companies who were AUB clients, and which in turn dissipated the funds through accounts of other offshore companies. When the National Bank-appointed temporary administrator of AUB demanded the purported sellers of the promissory notes deliver them up, all three sellers advised that they were unable to effect delivery due to "organisational" and "technical" reasons. Several months later, each of the purported sellers was struck off the relevant corporate registers by the UK and Belize authorities on the grounds of failure to file corporate returns and/or non-payment of registration fees.
Based on the evidence submitted to the court, DEBRA assets that the above transactions were, at best, entered in serious breach of the applicable legal requirements relating to the management of banking risks, and, at worst, constituted a theft of AUB's funds.
DEBRA also asserts that if the former management of the bank had discharged their duties as was required by law and by AUB's Charter, with the required decree of care and diligence, and had the former management of the bank taken all measures to comply with their obligations to AUB, the loss caused to AUB could have been averted.
The Statement of Claim criticises not just the local leadership of AUB, but also three former US Senators including Senators DOLE, RIEGLE and JOHNSTON, which were appointed as members of AUB's Board of Directors and compensated annually to the sum of US $175,000 each plus share options. Based on the minutes of the Board of Directors of AUB, during 2009 and 2010 (taken together), each of Senators JOHNSON and DOLE attended board meetings once, and Senator RIEGLE did not appear at all. On this basis, DEBRA asserts that any suggestion that the Defendants could duly perform their duties imposed by the laws of the Kyrgyz Republic and AUB's Charter, is preposterous. (Kyrgyz corporate laws does not envisage a position of "non-executive directors". All members of the Board of Directors have the same duties and bear the same personal liability.) Consequently, DEBRA asserts, it came as no surprise that AUB was dominated by the atmosphere in which there was a complete lack of control, where fraud and money laundering was commonplace, and which gave rise to the above tremendous losses suffered by AUB (and its bona-fide creditors).
DEBRA notes that the events concerning the promissory notes were not the only transactions of concern. By way of example, between 1 July 2008 and 27 January 2010, AUB reported in its accounts 36 incoming SWIFT payments to its correspondent bank accounts with other banks for the aggregate amount of US $374 million. An investigation uncovered that all those transactions were fictitious and that AUB had been reporting false information to the National Bank and to AUB investors, inflating the value of its assets to the tune of hundreds of millions of dollars. As stated in the claim, an investigation into AUB's activities is ongoing and DEBRA is considering filing further claims including claims under the US Racketeer Influenced and Corrupt Organizations Act.
In any event, the claim states that it was the transactions concerning the promissory notes, which resulted in the misappropriation of over KGS 3 billion (US $63 million) of AUB's funds, and the inflation of AUB's balance sheet was to that amount by non-existent assets, were the last straw for AUB and meant that after the creation of relevant loss provisions at the end of May 2010, AUB's liabilities exceeded its assets, AUB's capital became negative, and AUB was declared bankrupt. DEBRA's counsel are Kyrgyz law firm Rule of Law Consulting Ltd (currently being renamed into Satarov, Askarov & Partners), and the US firm Winston & Strawn LLP.
A copy of the Statement of Claim can be downloaded here or can be requested together with evidence attached to the Statement of Claim by emailing to AUBManagementClaim@debra.kg.
About DEBRA: The Agency of the Kyrgyz Republic for Reorganization of Banks and Debt Restructuring ("DEBRA") is a public body which acts primarily as the bankruptcy administrator for bankrupt banks. At present, there are seven banks under DEBRA's administration: AKB "Kyrgyzdyikanbank", AKB "Kutulush-Bank", AKB Adil, AK "Kyrgyzagroprombank, AGB "Bishkek", AKB "Mercury" and OAO "AsiaUniversalBank". DEBRA was founded in 1996 by the National Bank of the Kyrgyz Republic, as a public not-for-profit entity under an Agreement between the Kyrgyz Republic and the International Development Association, within the framework of the funding provided to assist with the structural reform of the Kyrgyz Republic's financial services sector. In 2003, within the further restructuring of Kyrgyzstan's financial services sector, DEBRA became an independent public body which reported to the President and the Government of the Kyrgyz Republic. At present, DEBRA's operations are governed by Kyrgyz "Regulation on DEBRA" approved by the Decree of the President of the Kyrgyz Republic No. 255 dated 12 October 2011. For more information see www.debra.kg
About AUB: ОАО "AsiaUniversalBank" was formerly one of Kyrgyzstan's largest commercial banks, held by the Kyrgyz court to be bankrupt on 27 October 2010. In recent years, according to AUB's Chairman of the Board of Directors Mikhail Nadel, Mr Nadel acquired 59% of the shares in AUB. According to AUB's reports to the National Bank of the Kyrgyz Republic, by many indicators, during 2008-2010, AUB was the largest commercial bank in Kyrgyzstan with over 90 branches across the country and 90,000 clients. As at 6 April 2010, its assets were KGS 24 billion (US $531 million). However, on 7 April 2010, AUB recorded a sudden withdrawal of funds from its correspondent bank accounts within a single day, which reduced AUB's assets by 40% to KGS 14 billion (US $300 million). On 8 April 2010, the National Bank placed AUB in temporary administration and started an inventory exercise in respect of AUB's assets and liabilities. By 31 May 2010, the National Bank concluded that as at that date, AUB's assets amounted to KGS 6.84 billion (US $149 million), and liabilities KGS 7.32 billion (US $159 million). On 7 June 2010, AUB was nationalised and the Government and the National Bank was discussing a bailout plan for AUB by provision of KGS 3 billion (US $63 million) debt and equity funding. However, the bailout plan was eventually abandoned and on 27 October 2010 AUB was held bankrupt. In 2012, an international NGO Global Witness published a detailed report on AUB.