Oligarch's Unique Defense Won't Fly

What do a Siberian prison, a brutal knife attack, and the richest oligarch in Russia all have in common? Why, the Yukos Oil Company securities class action, of course. You see, “in October 2003, the Russian Federation arrested Yukos' President, Mikhail Khodorkovsky ("Khodorkovsky"), and seized his equity holdings in the Company. Soon thereafter, the Russian Ministry of Taxation charged Yukos with underpaying the previous years' taxes by approximately $ 27.5 billion” (did he say billion, with a B?) “and the Russian Federation confiscated Yukos' primary assets, sending the Company into an economic tailspin.”

Judge William H. Pauley III ‘s (SDNY) opinion on the motion to dismiss is long and reaches various results, but is notable for its analysis of the “state doctrine” defense. The what you ask? Don’t feel bad, the Nugget never heard of it either, but apparently it “prevents the courts of the United States from questioning the validity of public acts (acts jure imperii) performed by other sovereigns within their own borders.” See where this is going? Basically, Defendants argued that “the adjudication of this dispute inevitably will require this Court to inquire into the actions and motives of the Russian Government.”

Well, Judge Pauley, in rejecting the argument, first noted that “Defendants have not cited any precedent invoking the act of state doctrine to abstain from adjudicating a securities fraud action.” Of course, even if they had, their new argument seemed destined for failure, as Judge Pauley pointed out that “under the arguments advanced by Defendants, the doctrine would mandate abstention from any action in which a foreign corporation is alleged to have concealed conduct deemed illegal by its home country upon a defendant's mere assertion that the sovereign's determination was in error. Such an application of the act of state doctrine would effectively insulate foreign corporations from a large swath of securities fraud claims by United States investors.”

So whatever happened to that Khodorkovsky fellow that fifteen Russian FSB agents arrested as he stepped off his private jet? Well, it looks like he’s pulling a nine year stint in Prison Camp 13 (yes, in Siberia), where he was recently slashed and disfigured by knife wielding attackers (his attorneys say it was orchestrated by the guards). It’s true, really, see here and here. Good thing for Scrushy he didn't live in Russia, huh?

You can read In re Yukos, issued March 30, 2006, at 2006 U.S. Dist. LEXIS 13794.

Nugget: “Moreover, Plaintiffs' scienter allegations stem from the Russian Federation's arrest of two other oligarchs, Boris Berezovsky and Vladimir Gusinsky, who openly criticized Putin.”