Allen v. Russian Federation

522 F. Supp. 2d 167 (2007)

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Allen v. Russian Federation

United States District Court for the District of Columbia
522 F. Supp. 2d 167 (2007)

Facts

In 1993, the government of the Russian Federation (Russia) (defendant) founded Yukos, a private oil and gas firm, as part of an effort to restructure the oil and gas industry. State-owned entities for the production, refining, and distribution of oil and gas became part of Yukos. Yukos was successful; by 2003, it produced about as much gas and oil as Chevron Texaco and had a market capitalization of more than $30 billion. Yugansknoftegaz (YNG), Yukos’s largest asset, produced about 1 percent of the world’s oil. Yukos planned to supply the United States with crude oil and to give United States investors stakes in Yukos. In 2003, however, Russia initiated a series of hostile actions against Yukos and its managers and officers. Russia arrested and convicted Yukos’s security manager on murder charges and arrested and convicted multiple Yukos officers on tax and fraud charges. Yukos’s chief executive officer took refuge in London. Russia began to investigate Yukos, sending armed militia to search Yukos offices and related premises. Russia asked Switzerland and Liechtenstein to seize documents and freeze accounts related to Yukos and Yukos’s officers. Russia also seized all the shares of Yukos common stock owned by Yukos Universal Ltd and Hulley Enterprises Ltd, subsidiaries of GML Ltd that together owned 51 percent of Yukos’s stock. Russia asserted that it had seized the stock in connection with the criminal proceedings against one of the founders of GML to satisfy the founder’s liability to Russia. The stock seizure gave Russia control of Yukos and stopped Yukos’s other shareholders from using their shares to resolve the tax claims against key officers. Russia also began a tax audit of Yukos, ultimately concluding that Yukos owed an additional $3.4 billion in taxes. Yukos showed that Russia’s tax calculations were full of errors that overstated the amount owed. In response, Russia found new violations. Over Yukos’s objections, the Russian Tax Ministry ordered Yukos to pay the $3.4 billion. The Moscow Arbitration Court upheld 99 percent of Russia’s claims in 2004. Throughout 2004, Russia assessed additional taxes and froze Yukos’s interest in YNG and the bank accounts of Yukos, YNG, and Yukos’s subsidiaries. The taxes levied reached about $30 billion. In July 2004, Russia scheduled an auction of YNG to cover Yukos’s liabilities. Yukos filed for bankruptcy in the United States district court in Texas, which granted Yukos a temporary restraining order. To evade the order, Russia arranged for banks controlled by the Russian government to finance purchase of YNG at auction by BaikalFinansGroup (BFG), allegedly a sham company. BFG and Gazpromneft, a subsidiary of Russian-owned Gazprom. Investors in Yukos (investors) (plaintiffs) alleged that BFG bid against itself to manipulate the auction price. Ultimately, BFG paid about $9 billion for YNG. Days later, Rosneft bought YNG from BFG. Rosneft was a subsidiary of Rosneftegaz, in turn a subsidiary of Russia, the owner of 99 percent of Rosneft, and the owner of Gazprom. By 2004, shipments of oil to the United States had ended. Russia had, in effect, renationalized Yukos. The investors sued in United States district court, alleging that Russia had expropriated their investments by levying confiscatory taxes, seizing Yukos’s shares, harassing Yukos’s management, and conducting a sham sale of YNG.

Rule of Law

Issue

Holding and Reasoning (Kollar-Kotelly, J.)

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