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Weapons Available to Litigators in the Fight Against International Fraud - Part II, Contributed by Richard Lewis, Hogan Lovells LLP

Monday, February 27, 2012

Few areas of law develop more quickly during a recession than that relating to high-value fraud claims, where new and more effective weapons are under more or less constant consideration. The first part of this article1 examined some of the ways in which the law has recently developed in the context of the BTA Bank proceedings. The developments considered included making worldwide freezing orders more effective by tightening up their terms, forcing defendants to give disclosure as to their assets orally under cross-examination, and the appointment of receivers to seek to ensure that frozen assets cannot be dealt with. It also considered the possibility of augmenting those assets under the control of the receivers by the addition of further assets that the defendant had not disclosed. 

For those with a claim whose value exceeds that of the assets a defendant has disclosed, the search for undisclosed assets can quickly become one of the most important features of the litigation. Whether the defendant does indeed have assets that he is seeking to conceal, and, if so, whether such assets can be identified, will be important considerations for a claimant in deciding whether and how to pursue his claims. 

So, what methods can be employed to find assets that a defendant seeks to keep concealed? Moreover, how can a defendant be forced to reveal them? Three possibilities that should be considered are: (1) orders for the search of secret document stores; (2) orders for the disclosure from third parties, such as e-mail providers; and (3) as perhaps something of a last resort, orders for the committal of a defendant to prison in an attempt to coerce him to come clean as to exactly what he owns. Part II of this article will examine how recent experience, again, in the context of the BTA Bank proceedings, shows just how effective those tactics can be.

Search Orders

Freezing orders are said to be one of the two "nuclear weapons" available to litigators. The other is the search order. Much rarer than freezing orders, search orders are among the most invasive of all civil remedies and therefore require evidence of an unusually strong character. Where that evidence exists, however, search orders can be extremely powerful tools in identifying assets that a defendant has sought to keep hidden. 

The conditions for the grant of a search order2 require that: (1) the claimant has an extremely strong prima facie case; (2) there is a risk of very serious damage to the claimant, which can be avoided by the grant of a search order; (3) there is clear evidence that the defendant has incriminating materials in his possession; (4) there is a real possibility of the destruction or removal those materials; and (5) the likely harm caused to the defendant by the execution of the search order will not be excessive or disproportionate. If granted, a search order must be executed in the presence of an independent solicitor, known as a "supervising solicitor." 

In JSC BTA Bank v Solodchenko,3 Henderson J granted a search order in respect of a storage unit in North London in the context of proceedings for the recovery of approximately $300 million of AAA-rated investment bonds in respect of which the claimant asserted a proprietary claim. The bonds appeared simply to have been transferred away from the claimant bank to a series of offshore companies without any proper consideration having been given. One of the defendants to those proceedings was an English company, Eastbridge Capital Limited, which administered hundreds of offshore companies, including the companies to which the bonds had been transferred. Eastbridge had already been made subject to a freezing order with the usual ancillary disclosure provisions in relation to its own assets (including those held as nominee for others – see part I of this article) and tracing interrogatories relating to the bonds themselves. 

In purportedly complying with its disclosure obligations, Eastbridge's newly-appointed director claimed to have no knowledge of the companies Eastbridge had administered, nor of the location of any documents or electronic records, save for a few relatively mundane documents held with its accountants. As Henderson J had put it, attempts appeared to have been made to make Eastbridge "disclosure proof." 

The claimant, however, had retained enquiry agents, who had observed a vehicle regularly travelling between the address of Eastbridge's company secretary and a storage unit in North London. One evening, two men were observed removing around 20 boxes of documents from the storage unit into a white van and leaving them at the address of Eastbridge's company secretary, where they were then reviewed late at night by a former Eastbridge director, who had sworn an affidavit that very day denying that he had access to relevant documents. The documents were collected the following morning and taken back to the storage unit. 

This evidence that, contrary to what had to that point been disclosed, Eastbridge did in fact have a large cache of documents, allied to evidence that the claimant had earlier obtained by way of a search order against a corporate services provider in Cyprus, which showed Eastbridge having given instructions to falsify documents in relation to companies under its administration, led Henderson J to conclude that the necessary requirements had been satisfied to justify the grant of a search order. Execution of the order led to the seizure, not only of the 20 boxes of documents, but also of computer equipment containing what turned out to be hundreds of thousands of relevant documents.

Disclosure Orders Against E-mail Providers

The advent of electronic communications is already acknowledged to have changed a litigator's life dramatically, most obviously in the field of disclosure due to the exponential increase in the number of written documents created today, compared with days gone by. Generally, this has increased the amount of evidence available to the parties to litigation. In fraud cases, however, claimants' solicitors may still receive the barest possible disclosure from defendants, who, having taken steps to conceal documents such as those described above, may seek to avoid voluntarily handing over the contents of their e-mail accounts. 

However, claimants do not necessarily need to rely on the defendant to disclose his own e-mail communications. Instead, where the e-mail accounts in question are held by a third party provider, it may be possible to obtain disclosure from that third party. In JSC BTA Bank v Yahoo,4 Peter Smith J ordered Yahoo to disclose to the claimant the contents of 11 e-mail accounts, on the basis that each appeared to have been used to conceal assets of the primary defendant. The Judge also ordered the disclosure of other information relating to the accounts, including the IP addresses from which they had been accessed. Analysis of those IP addresses permitted the claimant to establish that the accounts had, in fact, all been operated by the same individual. 

The jurisdiction invoked by Peter Smith J for the making of the orders against Yahoo was the well-known Norwich Pharmacal jurisdiction,5 which allows for disclosure from a third party where he has become mixed up (whether or not innocently) in wrongdoing committed by another, and is likely to hold information necessary for the wrongdoer to be sued. Although it was previously suggested that the Norwich Pharmacal jurisdiction is limited to the disclosure of information necessary to identify a wrongdoer, it now goes significantly further and can include information needed to enable a claimant to trace assets.6

In appropriate cases, where the respondent to such an application is an e-mail services provider, it may be that the individual whose e-mails are sought to be disclosed is not given notice of the application. This can be expected to give the court pause for thought. However, depriving the account-holder of notice of the application will often be precisely the result that a claimant is seeking – the concern being that if the account holder has notice of the application, he will take steps to delete his e-mails, or even the account itself. Indeed, in circumstances where disclosure is sought in the expectation that assets not disclosed by the defendant can be identified and secured, it will not even be sufficient for a claimant simply to ensure that the e-mails are preserved pending notification of the account-holder. The risk would remain that, as soon as the account-holder is made aware that his e-mails have been the subject of a preservation order, he will seek to rearrange his corporate structures to ensure that valuable assets are held by companies other than those named in the e-mails that are to be disclosed to the claimant. 

The court's understandable concerns can be allayed by the making of an order that disclosure is, in the first instance, given not to the claimant or its lawyers, but to an independent solicitor retained specifically for the role and owing a duty to the court, not unlike the role of the supervising solicitor in the search order context. The independent solicitor can then filter out e-mails that should not be disclosed to the claimant because they are personal, irrelevant, or privileged (the removal of privileged documents also serves to protect the claimant's solicitors themselves, who might otherwise be at risk of having to cease acting if they inadvertently have sight of critical privileged materials) before handing them over to the claimant. Such an approach was approved by Peter Smith J in the BTA Bank v Yahoo case. 

It will not always be possible to obtain disclosure from e-mail providers in this way; in part it depends on the jurisdiction of the entity holding the relevant e-mail accounts. Where the entity in question falls under the jurisdiction of the English courts, obtaining such an order should usually be possible in the right case; where it falls under the jurisdiction of, for example, the U.S. courts, the position may be more difficult.

Committal Orders

The ultimate sanction against a recalcitrant defendant is an order for his committal to prison for breaching the court's orders. This will often be seen as something of a last resort by a claimant, not just because of the drastic nature of the remedy sought, but also because of the high burden of proof that lies with the claimant. It is one of the rare occasions where a civil litigant will be require to prove his allegations to the criminal standard of "beyond reasonable doubt."

— Proving Contempt

Following a three-week trial in the Commercial Court at the end of 2011, the principal defendant in the BTA litigation, Mukhtar Ablyazov, was found guilty of contempt of court.7 The Court handed out three concurrent 22-month prison sentences and issued a bench warrant for the defendant's arrest as he failed to appear in Court when the judgment was handed down. 

In its application, which was largely based on the documents obtained by way of the search and disclosure orders described above, the claimant made 35 separate allegations of contempt. Given the burden that a trial of all 35 allegations would have placed on the parties and the Court, and the disruption it would have caused to the substantive fraud proceedings, however, the claimant was ordered to select just three allegations to bring to trial immediately,8 the remainder being left on the file, with liberty to apply to have them determined after the conclusion of the main proceedings.9

The claimant opted to have determined its allegations that the defendant had: (1) lied on oath as to his ownership of valuable assets, including a nine-bedroom mansion on The Bishop's Avenue in North London (otherwise known as Billionaires' Row) and a 100-acre country estate in Surrey; (2) failed to disclose his interest in a British Virgin Islands company, which had received some of the AAA-rated investment bonds described above from the claimant bank shortly before the defendant's departure from his position as chairman of its board of directors; and (3) dealt in assets with a value of almost $100 million in breach of a freezing order made against him. 

During the course of the trial, the defendant argued that there was no direct evidence of his ownership of the assets he was alleged to own, the claimant's case being entirely based on inference, and that the dealings in frozen assets had been pursuant to agreements that pre-dated the grant of the freezing order and took matters out of his hands. In order to assist his defence, he called as witnesses two of his wife's brothers, Syrym and Salim Shalabayev, who, he said, were, at the relevant times, the true owners of the properties that were the subject of the claimant's allegations. 

Syrym Shalabayev had already been found in contempt of court in related proceedings10 and had been described as a "fugitive from British justice."11 However, in circumstances where he was said to be a crucial witness for the defendant, he was nevertheless permitted to give evidence by video link from a location disclosed only to the Court (but not to the claimant). Syrym Shalabayev, who, unlike Ablyazov, had no public profile as a wealthy man, claimed to have acquired the means to buy the Bishop's Avenue mansion and the Surrey country estate by virtue of starting a uranium business in Kazakhstan in 2003 and selling it in 2005 for $350 million. 

Mr Justice Teare, having heard evidence from both Shalabayev brothers (one of whom, Salim, admitted to lying on oath while giving his evidence as to his knowledge of his brother's whereabouts), concluded that the Court could not accept the testimony of either unless it was supported by reliable documentary evidence and, in respect of the uranium business, held that Syrym Shalabayev’s evidence "has been shown to be untrue."12 Although Ablyazov, who also gave oral evidence, had supported the evidence given by his brothers-in-law, Mr Justice Teare concluded that: "I could place little weight on his denials and could only accept what he said if it was supported by reliable contemporaneous evidence."13

The Judge acknowledged that the claimant's case depended primarily upon inference and noted that findings to the criminal standard of proof could only be made on the basis of inference if the inferences the Court was invited to draw were the only ones that could reasonably be drawn from the facts.14 Here, the Judge concluded that "the only reasonable inference to be drawn from the circumstantial evidence is that Ablyazov was the beneficial owner" of the assets in question.15 © 2012 Hogan Lovells LLP Richard Lewis is a senior associate in the litigation team at Hogan Lovells LLP. Richard has acted for BTA Bank in a series of major fraud cases against Mukhtar Ablyazov for a total of approximately U.S. $5 billion. Telephone: +44 (0) 20 7296 2000; E-mail: richard.i.lewis@hoganlovells.com.

Disclaimer
This document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. The Bureau of National Affairs, Inc. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy.

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