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Colorado Court Cites Russian Lawlessness

A Colorado trial judgment issued in June provides a rare inside look at corruption in Russia and tells a cautionary tale that appeasing the beast of corruption can lead to ruin at the hands of the beast itself. 

The judgment ended ten years of litigation in New York and Colorado in which Creditanstalt Investment Bank tried to hold two international law firms liable for the destruction of its Russian brokerage business. The bank claimed that the business was destroyed as a result of a Tax Police raid and investigation into investments in a derivative product based on Gazprom shares, which were subject to restrictions on ownership by foreigners.

The Colorado judge rejected the bank’s contentions that the law firms inadequately warned that the Gazprom investments could provoke draconian actions by the Russian authorities. The judge’s conclusions were based on evidence that the bank accepted lawlessness as part of the Russian business environment and that the authorities’ actions were part of the same pattern of lawlessness that the bank accepted.

The evidence of corruption and lawlessness cited by the judge included the following:

  • The agreement on acquisition of the bank’s Russia business included a warranty about illegal payments, but with an unusual caveat for bribes and kickbacks in the “ordinary course of business in Russia.”
  • The Russian business was run by traders who refused outside control by the bank while receiving “huge” bonuses (50% of profits), which “encouraged extremely risky behavior and illicit actions.”
  • The bank’s accountants warned that Russian “tax authorities operate with budgets which may cause them to take unreasonable and overly aggressive positions.”
  • The bank’s decision to keep the Gazprom investments was based in part on  Gazprom’s informal “blessing,” subject to a requirement that “no new clients could be added.”
  • The bank’s Gazprom shares were stolen by the bank’s Moscow back office manager, who then orchestrated the Tax Police raid in order to hide the theft.
  • Law enforcement officials offered to call off the Tax Police investigation in return for bribes.
  • The bank paid hundreds of thousands of dollars for unspecified services by “experts” who offered to help solve the bank’s Russian legal problems.
  • The Tax Police investigation never led to a prosecution, but also was never closed.

Daniel Rothstein, pictured above, is a New York lawyer. He was on the defense team in the legal malpractice litigation described in this post and practiced law in Moscow from 1990 to 2000. He can be contacted here.

His Moscow Times op-ed piece tying revelations from the litigation to issues of the rule of law and protection of investments in Russia’s one-party system can be downloaded here.

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