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December 2, 2009 6:23 PM

Report: Shearman & Sterling Wins Round for Yukos Shareholders

Posted by Ed Shanahan

By Luke Eric Peterson

A panel of three arbitrators sitting in The Hague has cleared a path for the world’s largest-ever arbitration claim against a government to proceed to a hearing on the merits, according to The New York Times.

Under the ruling, The Times reports, the panel found that Russia is bound by the terms of an international energy treaty designed to provide security to foreign investors in the (then) newly opened USSR.

Because Russia signed, but never ratified, the 15-year-old Energy Charter Treaty, its lawyers at Cleary Gottlieb Steen & Hamilton argued that foreign shareholders of the bankrupt Yukos oil company should be barred from seeking billions of dollars in compensation for the Russian government's alleged expropriation of the bankrupt company on trumped-up tax charges.

Arbitrators, however, apparently rejected that argument, and instead found that an unusual provision of the energy treaty obliged Russia to respect the property rights of energy investors, even before the Russian Duma gave its formal blessing to the agreement.

While the ruling is good news for the Yukos shareholders in their bid to be compensated, it could still be several years before the arbitration panel rules on whether the Russian government is liable for dismantling and seizing Yukos as part of a political vendetta against former CEO Mikhail Khordorkovsky.

Once the arbitration ends, the real fun starts for the claimants, and their lawyers at Shearman & Sterling. Shearman's Emmanuel Gaillard confirmed via e-mail that the arbitration panel had issued a ruling. He declined to provide a copy of the confidential document.

In theory, a verdict in favor of the majority shareholders could be enforced in numerous jurisdictions, thus relieving the claimants of the thankless task of enforcing an award in Russia.

However, some hint of the epic battle that lies ahead can be seen in the ongoing battle between a German citizen, Franz Sedelmayer, and the Russian government. Sedelmayer is the first foreign investor to try to sue Russia under an international treaty--and his experience gives pause.

In 1998, arbitrators awarded him $2.5 million following the expropriation of his small St. Petersburg-based private security firm. It was Sedelmayer, not Russia, who started writing checks in the aftermath of his apparent victory.

When the Russian government declined to pay him, Sedelmayer was forced to continue hiring lawyers to defend against his adversary's efforts to overturn the award in the Swedish courts.

Following several years of defending the award, Sedelmayer was finally able to start collection proceedings. By then, he was representing himself, and becoming a self-taught expert on the arcane rules of sovereign immunity in various jurisdictions where Russia owned assets. After unsuccessful attempts to seize overflight fees paid to Russia by the German airline, Lufthansa, and similarly thwarted attempts to confiscate Russian military and aeronautic hardware at an industry trade show, Sedelmayer finally struck pay dirt when he located a former KGB outpost in Cologne, Germany.

Seizing and auctioning the building covered part of Russia’s debt. And while Sedelmayer continues to chase Russia for the remainder, he has also found himself a new line of work:  he has opened a consulting firm specializing in tracking and freezing sovereign assets.

If Yukos shareholders succeed in winning their much higher-stakes verdict against Russia, they may find themselves in the market for his services.

Luke Eric Peterson is the editor of InvestmentArbitrationReporter.com and a regular contributor to ALM Media’s Focus Europe. He has been following international arbitration as a consultant and journalist for a decade.

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