Tuesday, March 21, 2006

Uncertain Terrain

It’s not every day you have a Russian company as a Defendant in a U.S. securities class action, is it? But today is the day, and the spotlight is on Open Joint Stock Company Vimpel-Communications, which has nearly 11,000 employees trying to provide “wireless communications services to customers in Russia and Kazakhstan.” And you think your job is hard. Anyway, Defendants moved to dismiss Plaintiffs allegations that Vimpel “failed to disclose the existence of a tax audit,” and that it “owed back taxes,” and it was up to Judge Naomi Reice Buchwald (S.D.N.Y.) to settle things, and she has.

You see, in evaluating the consolidated amended complaint (“CAC” for short), Judge Buchwald concluded that “based on the facts set forth in the CAC, Russian tax laws present an uncertain terrain for individuals and companies doing business there. None of the facts set forth in the CAC support the conclusion that VimpelCom officers knew (or should have known) that the August 2004 tax inspection would result in adverse consequences to VimpelCom or that the company's interpretation of tax laws related to VAT was ‘highly unreasonable.’”

“Plaintiffs' allegations also do not demonstrate how VimpelCom's public statements during the class period were inconsistent with the existence of the August 2004 tax inspection,” and “the fact that VimpelCom promptly disclosed tax authorities' preliminary conclusions concerning the company's tax liability further undermines the allegation that defendants acted recklessly.” As a result, “plaintiffs' allegations completely fail to support a conclusion that defendants acted with an intent to deceive or defraud the public.”

Result? Dismissed with prejudice.

Want more? For a quick viewpoint on the Russian tax system compared to the U.S., go here.

You can read In re Vimpel, issued March 14, 2006, at 2006 U.S. Dist. LEXIS 10256.

Nugget: “This seems a quintessential case of impermissibly pleading ‘fraud by hindsight.’ Plaintiffs' allegations do not suggest how VimpelCom could have known that it would owe ‘back taxes’ related to VAT offsets before it received the preliminary act from Russian tax officials. Moreover, the allegations do not suggest why the company should have suspected that its method of handling VAT offsets was improper.”

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