6.  The applicant was born in 1957 and lives in Magadan. 7.  The applicant was the president of a non-governmental organisation known as Investory Kolymy (Investors of Kolyma). In 2001 he wrote an article entitled “Shares for the Moor of Moscow” (“Акции для московского мавра”). The article was about the acquisition of shares in Kolymaenergo Plc (a local energy‑producing company which was at the time a part of the State holding Edinye Energeticheskiye Systemy Rossii) by a group of Moscow-based firms. In the article the applicant described the purchase as a crooked deal and alleged that a high-level official from Moscow, one of the leaders of the pro‑government political party, was behind the transaction. The article reads as follows:
“Shares for the Moor of Moscow
Where are the 1,300,000,000 roubles [obtained from] the placement of shares in Kolymaenergo Plc?
We meant well ...
Everything started with an advertisement in [the official daily] Rossiyskaya Gazeta of 1 July 2000, in which Kolymaenergo Plc informed us about the next step in its exploration of market in the country – namely, about the official registration of the issue of 3,231,000,000 simple non-documentary nominal shares. [In that advertisement Kolymaenergo] described in great detail the conditions and procedure for the issue of the shares, including the distribution of the shares amongst prospective buyers in the first priority group and the second priority group, explained how to formulate a request for acquisition of shares, and, naturally, indicated the bank account into which payments for the shares should be made. The payments were supposed to go through a commercial bank situated in Krasnodar [a city in southern Russia]. In other words, a reputable firm got involved, and, as a consequence, the business was put on a solid footing. At least, that was the appearance that the sponsors of the project wanted to create for those who they hoped would “swallow the bait” and, under the influence of the very promising advert – published, by the way, in all the mass media of the Magadan Region – would be prepared to play for high stakes.
At the local level the preparations had started long before the publication of the advert. First of all, the issuer (the corporation issuing the securities) took care to develop convincing arguments which would help to get support for their project from public officials. On 29 April 1999 a consultation meeting took place in the office of the head of the Yagodninskiy District [of Magadan Region], where the question of payment of the local taxes due by Kolymaenergo Plc was discussed. It was no accident that that question was on the agenda of the meeting: by that time the outstanding fiscal debt of the energy industry [vis-a-vis the local authorities], including the carryovers from previous years, amounted to 228,700,000 roubles – a very significant amount for the District [budget]. As a result of the discussion an agreement was reached which provided, in particular, that (direct quote) “the administration of the Yagodninskiy District discharges Kolymaenergo Plc from the payment of 228,700,000 roubles in local taxes. In return, Kolymaenergo Plc transfers [to the administration] its shares worth 228,700,000 roubles, at the market rate applicable at the moment of the transfer”. Both parties signed the minutes of the meeting containing that clause. Naturally, among the signatures were those of Mr F.I.T., the head of the local administration, and Mr G.I.S., the managing director of Kolymaenergo. Some time later Mr. G.I.S. made a similar proposal – “shares in exchange for taxes” – to the financial department of the administration of the Magadan Region and to the mayor's office of Magadan.
The plot thickens. At the beginning of November 1999 the Duma of the Magadan Region adopted the Law on investment in the construction of the Ust-Srednekanskaya HydroElectric Power Plant (HEPP). Almost certainly, everyone has heard about the problems with the financing of that “never-ending construction project”, so the desire of the lawmakers to use every opportunity to get the extra funding is quite understandable. As a result, in the new law, driven by the best aspirations, they stipulated that “... in order to complete the construction of the Ust-Srednekanskaya HEPP plant, which is one of the most important elements in the fuel and energy system of the Magadan Region ... Kolymaenergo Plc may dispose of the fees as a registered member of the special economic zone, due for the period until 31 December 2002, which were earmarked for the special-purpose extra-budgetary fund for social development in the Magadan Region.
Those fees should be considered as a capital investment in the main capital of Kolymaenergo Plc, in particular to pay for the construction costs of the Ust‑Srednekanskaya HEPP, on condition that a corresponding part of the shares is registered as the property of the Magadan Administration” (end of quote). That law was enacted on 3 November 1999.
... But it ended up the same as always
As the saying goes, “everything looked smooth on paper, but they forgot that in reality it was full of cracks”. The fourth additional issue of shares was registered on 16 June 2000, and distribution was supposed to start in two weeks. On different dates, all within the period of open distribution of the shares, a number of potential investors concluded standard acquisition agreements with Kolymaenergo Plc. Edinye Energeticheskiye Systemy Rossii [the biggest State-controlled energy company at that time], for good reason, bought shares for almost 1,680,000,000 roubles, thus investing in the construction of the Ust-Srednekanskaya HEPP. However, the situation has since changed, for the worse as regards most of the investors. One of the local companies, Regiondragmet Ltd, expressed an interest in purchasing shares for 1,200,000,000 roubles. When the director of Kolymaenergo Plc. Mr G.I.S., learned about that offer, he requested that all previous offers and the book where they were registered be destroyed, and decided that henceforth he would take care of the distribution of the shares.
Very soon, instead of the bank account in Krasnodar indicated in the original issue plan, a new bank account was opened, this time with the Korvet bank (Moscow), and, following that, the implementation of the whole scheme, as designed from the very beginning, started. In a very short time, three commercial firms were incorporated in Moscow: Bakkar Ltd, Promstroy TEK Ltd and ONEKS-Consulting Ltd. Bakkar transferred 140,000,000 roubles to Kolymaenergo's account with the Korvet bank; with that money the recipient [Kolymaenergo] paid for the promissory notes issued by ONEKS-Consulting. For those not familiar with of all the subtle details, I should explain that promissory notes, unlike shares, do not need to be secured by any property or financial resources of the company that issued them. That is why any limited company with a charter capital of eight or ten thousand roubles and nothing besides, not a bean, can issue promissory notes for one billion roubles, provided that a buyer comes forward.
In our case the buyer was Kolymaenergo, which at that time had an outstanding debt of more than a billion roubles owed to its employees, the pension fund and the State budget at different levels. The value of the promissory notes was no less than 1,300,000,000 roubles; it's no coincidence that the head of Bakkar earlier transferred 140,000,000 roubles to the account with the Korvet bank (see above). And then that amount was passed ten times through the corresponding bank accounts, with the use of the same photocopied bank payment order. As a result, Bakkar purchased, almost for free, a huge number of shares which amount to 15 per cent of the overall charter capital of Kolymaenergo.
It is easy to guess what the reaction of the would-be investors, who suffered both pecuniary and non-pecuniary damage, was. Numerous legal suits, petitions and complaints were addressed to the Magadan Town Court, the Commercial Court of the Magadan Region, Edinye Energeticheskiye Systemy Rossii and other senior authorities. On 14 May 2001 an NGO called Investory Kolymy was created by a group of persons, and it immediately joined in the process of uncovering the truth. The main goal of that NGO consisted in promoting the interests of the investors, shareholders and other interested persons, and protecting their investment in the energy industry of the Magadan Region before the courts, social policy institutions or any organisations competent to address their concerns in whatever manner. But they received silence in reply [to their petitions]. In particular, the board of directors of Kolymaenergo kept ignoring them, although it had been Mr V.A.P., the head of the board, who had approved the [share] issue plan.
As we can read in a letter from one of the shareholders of Kolymaenergo to the head of the management board of Kolymaenergo, Mr A.S. (with a copy to the head of the management board of Edinye Energeticheskiye Systemy Rossii, Mr A.B.Ch.): “In the internal audit report, under the heading of “Profits and losses” there is no information about any money received from the shares sold. 1,300,000,000 roubles were supposed to be transferred to the bank account of Kolymaenergo Plc. That money was sufficient to pay the outstanding debts of the company, to relaunch normal operations through the bank account of the company and not through [non-monetary] “clearances” in which the company was losing half of what was due to it.
“Furthermore, it became known that some of the shareholders, namely Bakkar and Probstroy TEK, had paid only one tenth of the price [of the shares they had purchased], whereas according to the audit report on the issue of the shares Bakkar had paid [Kolymaenergo] the full price. Why has this been done?” [end of quote]
The arguments of the claimant were considered unpersuasive
That letter was sent as early as May 2001; in June a meeting of shareholders took place, but the author of the letter did not get a reply until now. The question formulated at the end of the quote is, most likely, a rhetorical one, because we are all grown-ups and we all understand why it has been done. We also understand that after that scam with the shares came to an end, all our hopes inspired by the promises of the sponsors of the [share issue] plan, the hope of getting salary arrears paid, of getting tax paid, of investing in the construction of the Ust-Srednekanskaya HEPP, etc., all those hopes have vanished.
A striking example is provided by the situation with the company Metalloeksportnaya, which brought proceedings before the Commercial Court of the Magadan Region, seeking damages from Kolymaenergo Plc for false advertising. That company [Metalloeksportnaya] was prepared to buy 400,000 shares. Last year, on 25 December, it made the first payment, but on the next day the money was returned [to Metalloeksportnaya] since the account indicated in the agreement did not exist and the recipient of the money was not [amongst the clients of the bank] (now we know why – the account with the Krasnodar bank was never opened). The Metalloeksportnaya company immediately sent Kolymaenergo all signed documents and asked them to provide new banking details for the bank transfer. However, there was no reply. A new request in similar terms was made on 2 February 2001, but, again, to no avail. As a result, on 21 May 2001 a tort claim was introduced before the Commercial Court of the Magadan Region, for an amount of 90,000 roubles.
The claimant's arguments were very convincing. Let us take the manipulation with the bank accounts described above. Whereas most of the potential buyers of the shares of the fourth additional issue tried (in vain) to use the account indicated in the issue plan, i.e.. the account that in reality did not exist, those investors for whom Kolymaenergo created a most-favoured regime were able to pay for the shares through a secret account in the Moscow-based Korvet bank. The decision of the court mentioned that fact; however, it was interpreted in a peculiar way. Indeed, as the decision established, “... owing to the absence of the bank account and of a recipient in the bank the money in the amount of 2,000 roubles was returned”. To all appearances, that fact is established. However, on the same page, a few paragraphs below, one can read one of the arguments which the defendant put forward: “... in breach of the agreement on the acquisition of shares the claimant had made the payment before the conclusion of the agreement.” On the next page we see the court's conclusion, which was the central reason for dismissing the tort action: “... at the moment of conclusion of the agreement the claimant had been required to transfer to the defendant no less than 200,000 roubles. The defendant, in accordance with section 3.3 of the agreement, was to forward to the claimant the documents confirming the payment together with a signed copy of the agreement. However, in breach of the agreement, the claimant only transferred 2,000 roubles for the shares”.
Too many inconsistencies, are there not? In fact, contrary to what the court established, the payment had been made on 25 December, i.e., after the conclusion of the agreement, which had been signed on 9 December. What does this mean? First of all, it means that the materials in the case file were not duly studied by the court. Furthermore, what difference would it make if the claimant transferred 200,000 roubles and not 2,000? Would the correct bank account appear in the issue plan? Would it allow the company to become the lawful owner of the shares? Unfortunately, miracles are impossible, especially when nobody wants to produce a miracle. And please pay attention to the phrases which are underlined [in the quote above]. It is hard to reconcile the argument of the defendant (that the payment should have been made after conclusion of the agreement) and the argument of the court (that the buyer was under an obligation to send a signed copy of the agreement together with a document confirming payment). I will further note that the acquisition agreement required [the buyer] to pay 50 per cent of the overall sum of the transaction, but did not specify whether such payment had to be made in instalments or in one go.
And that is not the end. In the section “Distribution of the shares amongst buyers in the second priority group” of the issue plan one can read: “Offers from prospective buyers in the second priority group will be accepted [by Kolymaenergo Plc] in chronological order of their receipt”. That means that the dates of receipt of every offer should be registered in a special logbook. However, the requests by the claimant and by the court to produce such a logbook were to no avail. It was only possible to see the record of existing shareholders, in which, under no. 1, we can see the name of the very same Moscow-based firm which obtained, for unclear reasons, preference in buying the shares. Still, it was impossible to get a clear answer to the question whether an offer from Metalloeksportnaya to buy shares was registered, and, if so, on what date.
Ready or not, here I (don't) come?
Very shortly [I will tell] you about those who stood to gain in this whole obscure story. When the prosecution officials involved in the inquiry into the situation with the shares came to Moscow, they were unable to find Bakkar Ltd, Promstroy TEK Ltd or ONEKS-Consulting at the official addresses given, or those people who were mentioned in the documents of Kolymaenergo Plc. The Moor has done his work, and the Moor has left, without leaving an address or even saying “Goodbye”.
This is the true situation; however, criminal investigation no. 14158 into the abuse of official position by the managers of Kolymaenergo Plc was finally closed for lack of the constitutive elements of a crime.
The decision of the Commercial Court of the Magadan Region was appealed against by the NGO Investory Kolymy; in its grounds of appeal all the breaches of the law in the sphere of the advertisement, selling and buying of shares were described in detail. However, the Court of Appeal again just ignored the arguments of the claimant. None of the facts mentioned above, which clearly spoke against the defendant, were taken into account. As a result, the claimant, together with Investory Kolymy, lodged an appeal on points of law with the Court of Cassation in Khabarovsk. As to the discontinuation of the criminal investigation, we will challenge the decision of the prosecution in this respect by all legitimate and civilised means.
When that dispute started, we informed Mr A.B.Ch., the head of the management board of Edinye Energeticheskiye Systemy Rossii, and the Federal Commission on Securities, of the situation. However, a principle of esprit de corps came into play, and they decided not to wash their own dirty linen in public. As it appears, they want to cover up the affair at all levels.
If we do not succeed, we will still continue fighting. On 15 August 2001 our organisation sent to the Magadan Town Court a statement of claim against Kolymaenergo and the Federal Commission of Securities and the then head of the Board of Directors of Kolymaenergo, the leader of the “United Russia” fraction in the State Duma, Mr P., the General Director of Kolymaenergo Mr. S., and the chief accountant Ms K. What is our organisation asking for before the court? First of all, that it declare the advertisement of the fourth issue of shares abusive, and the issue itself invalid. We think that Kolymaenergo Plc breached the provisions of the federal legislation, in particular, the Standards for the Issue of Shares, the Act on Defence of the Rights of Investors and the Public Limited Companies Act. The legal provisions on which we base our claims are indicated in the statement of claim.
So far the date of the hearing in this case has not been set; it will take place in October or November, after the judge returns from her leave. By the way, the judge took annual leave twenty days after the case had been assigned to her. A similar handling of cases concerning machinations with shares has become almost systemic.
All this squabbling cannot but be detrimental to the investment climate in the region, because Kolymaenergo is a public limited company and its shares can be purchased by foreign investors as well. And now, when Russia is seeking recognition as a country with a market economy, events of this kind will not help it to acquire weight.
In the current situation the NGO Investory Kolymy will insist on an objective examination of its civil claims and of the criminal case, in order to protect the rights of investors. 8.  On 10 October 2001 the applicant submitted the article to a municipally owned newspaper, Vecherniy Magadan, for publication. He produced documents in support of the facts described in the article. Mr Svistunov, the editor-in-chief of the newspaper, agreed to publish the article. It was included in issue no. 44 of 2 November 2001. That issue, with the applicant's article in it, had a print run of 5,184 copies. 9.  On the morning of 2 November 2001, 2,394 copies of the issue containing the applicant's article were sent to subscribers and to State libraries. Two thousand copies were given to the distributing company Rospechat to be sold at street distribution points, kiosks and newsstands. However, shortly afterwards those copies were withdrawn from the newsstands and they were later destroyed. According to the Government, the withdrawal was requested by Mr Svistunov (the editor-in-chief). They submitted a letter from the editor-in-chief to the head of Rospechat asking the latter to withdraw the copies. The letter is dated 2 November 2001; however, according to the applicant it was backdated. Only the copies that had been sent to libraries and subscribers remained. The Government submitted that a part of the print run had already been sold, with the result that only 120 copies had been withdrawn and destroyed. 10.  On 5 November 2001 the editor-in-chief wrote a letter to the mayor of Magadan asking the latter to release him from the position of editor‑in‑chief because he “was unable to perform his duties in a fully professional manner”. 11.  On 10 November 2001 the head of the trade union at the Kolymaenergo hydroelectric power plant wrote a letter to the editor-in-chief of Vecherniy Magadan asking him to explain why issue no. 44 had been withdrawn from the newsstands. 12.  On 11 November 2001 the editor-in-chief replied to that letter explaining that he had not given the relevant order. He claimed that the decision had been taken by the head of the distributing company Rospechat. He, the editor-in-chief, had had to sign a backdated order for withdrawal of the copies, and from a private conversation he had understood that the copies had been withdrawn because of the applicant's article, which had mentioned the names of certain politicians whom the editor-in-chief described as “untouchable”. After that incident he “[had taken] the difficult decision to resign from the position of editor-in-chief of Vecherniy Magadan”, because, in his words, “the newspaper was unable to enjoy freedom of speech and of the press,” and he “did not want to deceive readers”. It appears that soon afterwards the editor-in-chief left Vecherniy Magadan and started working as a journalist on a private newspaper. 13.  In the following months the applicant tried to publish the article in several regional and central newspapers, but to no avail. 14.  On an unspecified date in 2002 the applicant lodged a formal complaint with the regional prosecutor's office concerning the withdrawal of the copies. In his submission, the withdrawal amounted to unlawful interference with freedom of the press, a criminal offence under Article 144 of the Criminal Code. 15.  On 22 January 2003 that complaint was transmitted to the Magadan town prosecutor's office. The case was assigned to an investigator, who questioned the head of Rospechat and the former editor-in-chief. 16.  On 30 January 2003 the head of Rospechat testified before the investigator that the decision to withdraw the copies had been taken by the former editor-in-chief. On the following day the investigator questioned Mr Svistunov, the former editor-in-chief of the newspaper. Mr Svistunov confirmed that he had asked Rospechat to withdraw the copies of the newspaper. He explained that he had agreed to publish the article because it concerned an interesting subject and because the applicant had shown him documents which supported the facts described in the article. The editor‑in‑chief had thought that the article would arouse public interest and had decided to publish it. However, after fresh consideration, when the newspaper had already been printed and sent out for distribution, he had decided to withdraw it. He had realised that the editorial staff “would have problems” if the article was published. As to his letter of 11 November 2001, it had not been accurate, because at the time he had been upset over his own decision to resign from the post. 17.  On 31 January 2003, after a preliminary inquiry, the investigator decided not to open a criminal investigation. The investigator found that the decision to withdraw the copies had been taken by the editor-in-chief himself without any coercion. The investigator noted, however, that the decision of the editor-in-chief to withdraw the copies had been motivated by the need to avoid lawsuits and litigation which might have followed the publication of the article, and to protect the editorial staff. The investigator concluded that no interference with freedom of the press had occurred. 18.  The applicant challenged that decision before the court. On 7 April 2003 the Magadan Town Court examined the materials in the case file and heard evidence from the applicant and the former editor-in-chief; the latter testified that he had signed the order to withdraw the copies after they had already been withdrawn from sale. After examining the applicant's complaint, the Town Court decided to quash the decision of 31 January 2003. The court noted that by law the withdrawal of a print run could be ordered only by the judicial authorities. The Town Court also ordered certain additional investigative measures to be carried out by the investigating authorities. 19.  On 23 April 2003 the Magadan town prosecutor ordered an additional inquiry. The case was assigned to another investigator, who questioned the applicant, the former editor-in-chief, the head of Rospechat and a staff member of Rospechat. The applicant testified that when he had learned about the withdrawal of the copies he had called the editor-in-chief, who explained that they had been withdrawn by a decision of Rospechat, and that the head of Rospechat had persuaded him to sign a backdated order for withdrawal. 20.  The head of Rospechat testified that the copies had been withdrawn by order of the then editor-in-chief. He also denied putting any pressure on the editor-in-chief. 21.  The former editor-in-chief confirmed his previous testimony given to the investigator of the town prosecutor's office. As to his testimony before the Town Court, it was his view that the copies had been withdrawn before the order had been signed. Indeed, he had discovered at one of the street kiosks that all copies of issue no. 44 had disappeared. However, he had no proof that they had disappeared because they had been withdrawn. 22.  Finally, the staff member of Rospechat confirmed that on an unspecified date she had helped the then editor-in-chief of Vecherniy Magadan to withdraw the copies from the street kiosks. Altogether, they had managed to withdraw between 100 and 200 copies. 23.  On 3 May 2003 the investigator concluded that there was no case to investigate. His reasoning was similar to the reasoning of the previous investigator of 31 January 2003. 24.  The applicant challenged that decision before the courts. On 20 May 2003 the Magadan Town Court upheld the decision of 3 May 2003. The court concluded that the prosecution inquiry had been carried out with due diligence and that the findings of the inquiry had been properly reasoned. The applicant appealed, but on 25 June 2003 the Magadan Regional Court upheld the judgment of 20 May 2003. 25.  The applicant brought court proceedings seeking to have 2,000 copies of issue no. 44 containing his article reprinted and sold at street kiosks. 26.  On 1 July 2003 the Magadan Town Court dismissed his action. The court stated that the newspaper, as the owner of the copies, could dispose of them of its own free will. The court also found that there had been no contract between the applicant and the newspaper obliging the latter to distribute the issue containing the article. 27.  The applicant appealed. On 5 August 2003 the Magadan Regional Court upheld the lower court's decision, repeating the latter's reasoning. 28.  According to the charter of the newspaper, Vecherniy Magadan was founded by the municipal property committee of the municipality of Magadan (“the municipality”) in the form of a “municipal institution” (муниципальное учреждение), with a view to informing the population of Magadan about social, political and cultural life in the town. The municipality retains the ownership rights in respect of the assets of the newspaper, while the newspaper exercises a right of “operational management” (право оперативного управления) in respect of those assets. The municipality approves the budget of the newspaper and payroll expenses. The newspaper receives its funding from the municipal budget; it can also receive income from other sources such as advertising, subscription fees, and so on. In 2007, according to the Government, all the newspaper's expenses (6,980,000 roubles) had been paid from the municipal budget. 29.  The municipality can “define targets” for the development of the newspaper. The newspaper has an “editorial council” (редакционный совет), a “coordinating and advisory body” composed of the editor-in-chief and several representatives of the municipality. 30.  The editorial policy of the newspaper is defined by the “editorial board” (редакционная коллегия), composed of the editor-in-chief, his deputy, the secretary, and the heads of departments. The editorial board can propose materials for publication or recommend not publishing “controversial material”. 31.  The editor-in-chief of the newspaper is appointed by the municipality. The editor-in-chief appoints the other staff members of the newspaper and acts on behalf of the newspaper vis-à-vis third parties. The municipality cannot compel the newspaper to publish material if it has been rejected by the editorial board, unless the law provides otherwise or the material is of an official nature. The charter of the newspaper does not stipulate, however, who can decide to withdraw or destroy copies of the newspaper or the grounds for doing so.