What is known about the case of an American investor arrested in Russia

In mid-February, the founder of the Baring Vostok fund, US citizen Michael Calvey, was detained in Moscow. According to investigators, Calvey convinced the shareholder of Vostochny Bank to accept shares of the International Financial Technology Group company as payment for the debt from the First Collection Bureau. According to the investigative committee, Calvey inflated the cost of the papers by five times.

February 25 RBC published information that in fact the Cyprus offshore company paid for shares from the Calvi case in 430 times the valuation of the UK. For the IFTG shares that caused arrest of Michael Calvey, the initial investor paid $ 4,4 million. The investigation estimated them at 600 thousand rubles. (9130 dollars). One of the methods gives such a figure, but startups do not appreciate it, experts say.

A block of shares in the Luxembourg International Financial Technology Group SCA (IFTG), in exchange for which Vostochny Bank forgave a loan to the First Collection Bureau (PKB) in the amount of 2,5 billion rubles. ($38), the original investor bought for $041 million. This is 962 times more than the estimate of 4,4 thousand rubles, which appears in the criminal case of Baring Vostok founder Michael Calvey and his partners, but also 430 times less than the estimate, on the basis of which the shares were transferred to the balance sheet of Vostochny Bank.

According to investigators, in February 2017, Calvey convinced the board of directors of Vostochny, where Baring funds have a 51,6% stake, to vote for a compensation agreement providing for the forgiveness of a loan from PKB (also controlled by Baring funds) in exchange for a stake in IFTG. The investigation proceeds from the fact that for this transaction the shares were valued at 3 billion rubles. ($45), while their real value did not exceed 650 thousand rubles. Calvey denies the fraud allegations.

We are talking about the actions of classes C and D Luxembourg IFTG, follows from the decision to initiate criminal proceedings. These papers were issued two months before the deal involved in the criminal case (December 15 2016) in favor of the Cyprus Balakus Company Limited, which paid $ 4,4 million for the package (RUB 256 million at the official rate of the Central Bank as of this date), follows from company reporting.

For Balakus, an additional issue of IFTG class C (566 thousand) and class D (6,2 million) investor shares was held. Almost the entire amount went to the payment of Class C securities, with Class D shares having only $ 621. As a result, IFTG turned out to be $ 4 400 621, it follows from the disclosure. PKB does not disclose how these shares were later at its disposal.

According to the latest version of the IFTG charter, the funds invested in Class C and D shares are invested in ITI Group Ltd, ITI Asset Management Holding Ltd, ITI Technologies Ltd, Freedom Tower Assets Limited and Jemmott Investments Limited. These are investments in startups of the ITI group of companies, specializing in investment activities, brokerage and financial services, as well as in a startup 2can & ibox, which offers mobile acquiring by bank cards.

Da Vinci Capital is invested in all these companies by Oleg Zhelezko, who is also the IFTG investment manager and PKB portfolio investor. At the end of 2016, investments in startups amounted to $ 12 million. This suggests that funds from other classes of IFTG shares were also invested in them.

What is known about Balakus Company Limited

The Cyprus company Balakus Company was established on October 2 2014 of the year, three years later - on November 22 of the year 2017 - was liquidated. As follows from the data of the Cyprus registry, it was established by Peter Yurasov, but then it came under the control of the Cyprus trust WCN Worldwide Corporate Nominees, which in turn is owned by WCS Worldwide Corporate Services.

WCS has a website that states that the company has been operating since 1997 and is engaged in advising in trust management, banking, finance, corporate matters and real estate. WCS operates in Cyprus and in a number of offshore jurisdictions from Jersey to the UAE.

The WCN trust has previously appeared in cases in Russian jurisdiction. In 2013, minority shareholders of Kamkabel tried to have the pledge agreements concluded by the company with the Uraltechnokabel company invalidated. The plaintiffs failed to prove the connection between the Cypriot company Syngroves Holding Limited, which owned more than 20% of Kamkabel, and the WCN-controlled Cypriot company Darnex Limited, which owned 100% of the shares of Uraltechnokabel.

WCN Worldwide Corporate Nominees also briefly held 2010% of Loko Bank shares in 6,46 for the benefit of Leonid Strunin and Leonid Fridland, the founders of the luxury merchant company Mercury (owner of TSUM).

Where did the estimate in 600 thousand rubles come from

A criminal case against Calvi was opened by the FSB at the request of Sherzod Yusupov, a minority shareholder of Vostochny (4,8% of shares). He, along with the owner of 32% Artem Avetisyan and another minority shareholder Yuri Danilov (3,2%), is part of the group of Vostochny shareholders, which is in conflict with Baring Vostok, whose funds own a controlling stake in the bank.

At a meeting of the Basmanny Court, when the investigation’s request to select a preventive measure for Calvey was considered, the investigator said that the valuation of the shares of the Luxembourg IFTG, taken by Vostochny in exchange for forgiveness of PKB’s debt of 600 thousand rubles, was carried out by PwC (they did not comment on this information). In the future, the name of the appraiser was not mentioned, it was only said that the appraisal was ordered by the Cypriot Finvision (through which Avetisyan owned a stake in Vostochny).

The assessment document was made available to the BBC Russian service, which did not disclose the name of the appraiser, calling it a report from a Luxembourg law firm. Lawyers, having studied the company's charter, considered that the valuation of these papers should be made in terms of the amount of dividends that can be obtained from them. At the same time, to calculate dividends, the nominal value of securities was used, which is spelled out in the IFTG charter. According to its latest version from September 20, their face value is $ 2831 and $ 621, respectively. The amount of the nominal value of the shares was multiplied by two, as it was about paying dividends for two years - it turned out $ 6905. The trial sounded the ruble equivalent of this amount - 600 thousand rubles. (the investigator did not say at what ruble exchange rate the valuation of the shares was calculated, today it is more than 9 thousand dollars).

It is possible, but not always applicable, to assess the value of a company from the point of view of dividend flow, notes Mikhail Alexandrov, partner at A2 Law Office. “This is a standard question: what is called, how was it calculated. If you look at a stock from a dividend flow perspective, the classic approach, you have to stand up and say, “Look, Uber is worth zero. Why is it worth zero? Because she never paid dividends and she has a loss. And in the USA they are going to launch it for an IPO for $120 billion,” he gave an example. Investors don’t go to venture funds for dividends—they expect a rapid increase in the company’s value, the lawyer notes.

Yusupov explained to Vedomosti that the low valuation of IFTG shares is due to the fact that Vostochny received securities on its balance sheet that were subject to restrictions. “They relate to the payment of dividends, as well as any payments upon liquidation of the company,” he said. These restrictions, according to him, were mentioned in the company’s charter, which became known only in the spring of 2018. ​Calvey admitted in court that there were restrictions, but at the time of the transaction no one noticed this mistake; later the restrictions on the papers were lifted.

What restrictions were imposed on IFTG papers

Simultaneously with the purchase of Balakus class C and D papers, the rights to these papers were recorded in the IFTG charter (15 December 2016). In accordance with the articles of association, the profit from investments exceeding the costs necessary for the company's operating activities may be transferred to the accounts of its shareholders. A certain priority was established for such payments: payments to holders of classes C and D were to be made after payments to holders of securities of classes A and B.

Upon liquidation of the company after all payments to creditors, 10% of the company’s remaining funds were sent to class A holders of shares, and 90% to class B holders. Holders of C and D classes could qualify for payment as a last resort in amounts comparable to their initial contribution to capital. At the same time, the charter did not spell out the possibility for holders of shares of classes C and D to present the right to buy back their securities. There are similar limitations in the charter of 27 April 2017.

Changes to the document were made only on 27 August 2018 of the year: the owner of shares of classes C and D had the opportunity to make a request to buy out his papers or exchange them for papers of Fintech startups in which IFTG had invested. Restrictions on the sale of shares to a third-party company have not been established in any version of the charter.

How to evaluate the IFTG for transfer to the "East"

Two months after the purchase of shares C and D by a Cypriot company with unknown beneficiaries for $4,4 million, they were transferred through PKB to the balance sheet of Vostochny Bank at a multiple higher price. The asset was valued by independent appraisers in the range from 2 billion to 3 billion rubles, Michael Calvey said in court. This assessment raised questions from the Bank of Russia, which in 2018 conducted an inspection of Vostochny. The Central Bank report indicated that this asset is subject to additional reserves. As Sherzod Yusupov reported to RBC, the IFTG bank was ordered to form a 100 percent reserve.

“For a bank, the mere receipt of shares in a company that invests in startups or technology projects should not necessarily result in additional pressure on capital if the price of the shares at the time of their acquisition already reflected a fair assessment of the risks inherent in such investments,” says the analyst Moody's Olga Ulyanova. But based on public data alone, it is impossible to accurately assess what risk an investment such as an investment in IFTG poses for a bank, adds Fitch senior analyst Alexander Danilov​.

“We need to understand whether the assessment carried out is adequate and by whom it was carried out. You also need to know how the company is managed, who makes decisions on the alienation and purchase of assets, and so on. Due to such uncertainty, we usually classify such investments as high-risk,” he explains, adding that with a loan it is easier to assess risks, since “there is a repayment schedule, there is a borrower with some credit quality.”

Baring Vostok declined to comment on discrepancies. But, according to a source from RBC close to an investment company, when evaluating the value of IFTG shares, an independent appraiser at the time of the transaction took into account the “synergy related to access to the multimillion-dollar base of the bank’s clients - individuals and small enterprises”, since the activities of IFTG portfolio companies (mobile acquiring, brokerage services and other fintech areas) are a logical continuation of the bank’s line of services. According to the interlocutor of RBC, similar projects in Vostochny could have been launched in 2017 – 2018, if this had not been disturbed by a corporate conflict within the bank.

The assessment of a company’s value must be integral, says Gleb Davidyuk, managing partner of the investment company iTechCapital. “Any qualified appraiser will confirm that shares or shares in a business can and should be assessed using a whole set of tools traditional for the financial industry, starting from the valuation method based on the book value of assets, method of valuing comparatives, ending with a whole set of more scientific approaches in the method of estimating future discounted cash flows,” he described the variety of approaches to asset valuation.

How the IFTG works

The International Financial Technology Group was created in 2012 and was originally called the Russian Exchange Holding SCA (created for investments in the shares of Mosbirzh, as of the end of 2016, owned shares of $ 13,8 million). The name change took place in December 2016. The company is registered in Luxembourg as a limited liability partnership. To create it you need two partners - a general and a partner with limited liability. The general partner is liable for the company's obligations, while the responsibility of the second partner applies only to the funds invested by him.

The SCA structure allows issuing additional shares of the company without diluting the share of the general partner, which is another Luxembourg company - Russian Exchange Holding GP S.à rl, established by Da Vinci Capital (ultimate beneficiary - Oleg Zhelezko).

The company has managerial and investor shares (according to the last charter, these are class B, C, D, E shares). All of them have different nominal values ​​on which voting rights depend on Luxembourg law. Management shares (4,5 million class A1 + 1 share class A2) are held by the general partner - Russian Exchange Holding GP S.à rl, they account for the main managing rights. Under the funds of various investors, additional issues of investor shares are held.

According to the latest published IFTG reporting for 2016, its assets amounted to $ 82 million (4,8 billion rubles at the Central Bank exchange rate at the date of approval of the transaction), and its net profit was $ 22,7 million (1,3 billion rubles). As a private company IFTG is not obligated to publish reports, its report on the 2016 year was published at the end of the 2018 year.

US Embassy announces visit to Calvi

A representative of the US Embassy in Russia visited the founder of the Baring Vostok investment fund Michael Calvey, who was arrested in a fraud case. This was reported in the diplomatic mission Twitter. As diplomats emphasize, the embassy received permission to visit Calvi on the 12 day since his arrest, writes RBC.

The diplomatic mission added that it takes seriously the right to visit detained US citizens and “ensure that they are treated humanely and provided with access to medical care.” On February 21, the embassy complained that the Russian Foreign Ministry had not granted permission to visit Calvi, despite numerous requests.

Putin commented on the arrest of Michael Calvey

Officials from Foreign Minister Sergei Lavrov to Economic Development Minister Maxim Oreshkin were forced to answer questions about this case and its impact on the business climate. Several major Russian businessmen spoke out in support of Calvey, writes BBC.

But President Vladimir Putin has not yet publicly commented on the arrest of the investor. February 25 Baring Vostok sent an open letter to Putin with the request to take the case under his personal control. A Kremlin spokesman, Dmitry Peskov, said the president would be informed about this letter because it was a high-profile matter.

Фото: Depositphotos

According to Bloomberg, last week Putin expressed his point of view on this matter at a closed meeting. Bloomberg, citing three sources, writes that the meeting participants asked Putin to express his opinion on the arrest of Calvi and the possible damage to the Russian investment climate.

Putin replied that the investigation could not ignore the suspicions of Calvi and others arrested in the theft of 2,5 billion rubles. In addition, Bloomberg writes, Putin said he did not give permission in advance for an arrest, but according to him, in some cases, the arrest may be justified. In addition, restricting the actions of law enforcement and regulators with respect to business can lead to a risk to the safety and health of society, the president added.

Other versions

As the BBC Russian Service found out, Putin spoke out about the February Baring Vostok 20 case after the message to the Federal Assembly. This happened on the same day during the conversation of the president with the chief editors of the Russian media, two participants of the meeting told Bi-bi-si. The interlocutors asked for anonymity, since under the terms of the meeting they are not authorized to disclose its content.

The BBC Russian Service has reached out to Presidential Press Secretary Dmitry Peskov for comment and is awaiting a response. Peskov told Interfax that Putin did not speak out to justify the initiation of a criminal case and the detention of Calvey. “Definitely not. The President stated the facts. “I didn’t express any preferences,” the agency quotes Peskov.

The question about Calvey was asked by Vedomosti editor-in-chief Ilya Bulavinov, BBC sources clarified. According to one of the interlocutors, Bulavinov asked Putin how his statements that those accused of economic crimes should not be sent to pre-trial detention center correlated with the arrest of an American businessman.

We are talking about Putin's statement during the address. The president said that conscientious businesses “should not constantly […] feel the risk of criminal or even administrative punishment” and that when investigating economic criminal cases, “we need to strictly limit the reasons for extending detention periods over and over again.”

Putin’s answer to Bulavinov’s question at a closed meeting with the editors-in-chief of Russian media “was standard, like all his statements when asked about arrests and investigations,” says another BBC source. “[Putin said:] the investigation will figure it out, we need to watch - not in the sense that the Kremlin needs to watch, but in general, watch. There was nothing about his personal attitude or agreement. A very standard bureaucratic answer in the spirit of the Kremlin,” the BBC interlocutor recounts.

Putin also said that he is aware of the situation with the arrest, but the fact that Calvey is a US citizen and an investor does not exempt him from responsibility if a crime is committed, the meeting participant retells the essence of Putin’s comment. The President, according to him, also drew attention to the fact that those gathered had not familiarized themselves with the materials of the case, which means they could not objectively evaluate it.

Earlier on February 25, Dmitry Peskov called the Baring Vostok case “very resonant.”

“Of course, it is under special control in those services that carry out investigative actions. As for the president, of course, some details related to investigative actions are reported to him,” Peskov said.

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