What is happening with PrivatBank court cases and why is this such a big deal

PrivatBank, the largest and the most profitable bank in Ukraine, has been fighting a legal war with its former owners for a couple of years now.

Right after the state took the bank away from its oligarch stakeholders Ihor Kolomoisky and Gennadiy Boholyubov in December 2016, the pair hired an army of lawyers to win the bank back. They filed hundreds of lawsuits across the country against PrivatBank turning the life of its current top management into continuous legal battle.

The PrivatBank crisis can easily shake the life of the entire country if Kolomoisky and Boholyubov manage to wrest the bank back.

Why did the state nationalize PrivatBank in the first place?

In 2014 Ukraine’s National Bank started a two-year clean-up of Ukraine’s banking sector that saw around 90 bogus banks shut down. Many of these were riddled with insider lending schemes to connected enterprises.

Soon the reform reached PrivatBank. A team of forensic auditors with the New York consulting firm Kroll later discovered a $5.5 billion hole in the bank’s ledger. It emerged that Kolomoisky and Boholyubov had embezzled these funds in a fraudulent insider-lending scheme.

To save Ukraine’s top lender from bankruptcy, the state used taxpayer money to inject the missing billions back in. The bank was nationalized under a bail-in, in which insiders’ deposits were converted into shares, which were bought by the state.

Why Kolomoisky and Boholyubov are suing PrivatBank?

There are three possible reasons. The former co-owners want the bank back, they want compensation or both. In either case, the business partners made it clear that they strongly deny all wrongdoing.

Kolomoisky and Boholyubov argue that the nationalization was unfair and unlawful. However, prior to the state’s takeover of the bank, its owners sent a letter to the then-Prime Minister Volodymyr Groysman. In it, Kolomoisky and Boholyubov gave a green light for the state to buy the bank’s shares for 1 hryvnia and asked the government to recapitalize it.

The businessmen changed their minds soon after the bank was taken away.

How big a deal is this?

It is huge.

Ukraine seeks to receive a much-needed new $5.5 billion loan program from the International Monetary Fund (IMF). The most vital precondition is implementing reforms and securing those already in place, including reforms of the banking sector.

IMF made it clear that there will be no assistance for Ukraine if it returns PrivatBank to its former owners. A loss of IMF cooperation is likely to destroy investor confidence in the country.

The PrivatBank issue is seen as an indicator of how well the state resists oligarchs’ influence as Kolomoisky is among the richest and powerful men in Ukraine.

Moreover, Kolomoisky has business ties to President Volodymyr Zelensky, whose TV show “Servant of the People” ran on Kolomoisky’s TV channel, 1+1. In the series, Zelensky played a fictional president of Ukraine, before becoming a real one.

Despite pressure by Kolomoisky, Zelensky said that the bank will remain in state hands.

But Kolomoisky responded that it will not and that Zelensky is just saying what everybody wants to hear.

So, what has been happening in the courts?

Many hearings. More precisely, 550 different cases are proceeding in different courts across the country at the moment.

So far beating Kolomoisky in courts has proven tough for state-owned PrivatBank.

Local courts issued a number of rulings in favor of former owners. The biggest knockout blow so far has been a decision that forces PrivatBank to pay them back 22 million hryvnias.

This is the amount that Kolomoisky’s Nikopol Ferroalloy Plant paid to the National Bank of Ukraine as repayment of PrivatBank’s debt to the state. Now the state-owned PrivatBank has to give it back.

The bank has appealed constantly. However, this strategy cannot last forever and will come to an end as soon as the case reaches its final destination, the Supreme Court. This is what is happening with the life-changing Surkis vs PrivatBank case.

Ihor and Hryhoriy Surkis are business partners of Kolomoisky. During PrivatBank’s nationalization, thee Surkis brothers were recognized as insiders and their deposits, which exceeded $40 million, were confiscated and converted into the bank’s shares or capital. The brothers are trying to get back the money.

On April 16 the Supreme Court will hear the Surkis case. Its decision will determine whether other insiders like the Surkises will be able to reclaim money from PrivatBank.

Wait, does this mean the fight is not just between Kolomoisky/Boholyubov and PrivatBank?

Exactly.

There are at least 45 other claims filed by Kolomoisky associates, including insiders like Surkis brothers. They sued the state-owned PrivatBank seeking to retrieve their deposits totaling 29 billion hryvnias ($1.16 billion).

Under the bail-in procedure, the insiders’ funds became the bank’s money.

The Surkises demand that the Supreme Court void the bail-in procedure. If it does so, all the rest of Kolomoisky’s associates and deposit holders will be able to push forward with a joint claim they have filed in London.

Did it go beyond Ukraine?

Way beyond.

Why London? Before 2016, the Kolomoisky-owned PrivatBank issued Eurobonds or debt securities through UK SPV Credit Finance PLC, a London-based company deliberately created for this purpose. The Surkis brothers and many other Kolomoisky associates invested in it.

In 2017, these investors banded together and created Madison Pacific Trust Limited, a trustee of deposit holders. Together they launched a lawsuit against PrivatBank in the London Court of International Arbitration (LCIA) in a bid to recognize illegitimate the bail-in nationalization and force PrivatBank to return their investments.

The London court is currently waiting for a decision of the Supreme Court in Ukraine to proceed with the claim.

Did PrivatBank strike back?

It has.

The state-owned PrivatBank is suing its former owners abroad in multiple foreign jurisdictions including London, where PrivatBank is trying to retrieve part of the $5.5 billion that Kolomoisky and Boholyubov allegedly embezzled from the bank.

According to PrivatBank, $1.9 billion was misappropriated through six limited companies, three in Britain and three in the British Virgin Islands (BVI).

The bank’s claim stands at around $3 billion as interest accrues at $500,000 per day.

The High Court of England and Wales will start hearing the case in mid-2021, having found that PrivatBank had been the victim of “money laundering on an epic scale.”

Is PrivatBank only suing Kolomoisky and Boholyubov in London?

They wish.

PrivatBank and other state institutions have filed claims in five different foreign jurisdictions so far. One of them is the United States.

In May 2019 the bank filed an extraordinary civil complaint in the U.S. Chancery Court of Delaware, accusing Kolomoisky, Boholyubov and their associates of conducting $470 billion worth of money laundering transactions through Cyprus over the course of a decade through loan recycling schemes and laundering.

Millions of dollars in laundered money was parked assets and enterprises across a dozen U.S. states, including real estate and metallurgical companies.

The U.S. case has reportedly triggered an FBI investigation into Kolomoisky and his alleged accomplices.

The causes of action in the U.S. are almost identical to the Israel case.

In December 2019 PrivatBank filed a lawsuit against Israel’s Discount Bank accusing it of aiding Kolomoisky and Boholyubov in stealing at least $600 million from PrivatBank.

These millions were allegedly transferred into accounts that a shell company called St. John held at Discount Bank, according to Israeli court documents.

The claim was also brought to Cyprus in March 2018. The National Bank of Ukraine (NBU) launched a $3 billion lawsuit against the global auditing firm PricewaterhouseCoopers, or PwC.

According to NBU, the firm helped PrivatBank conceal the fraudulent money laundering scheme. Pwc audited PrivatBank in 2013-2015 and has never reported problems in the bank’s books, despite evidence of massive lending to enterprises linked to Kolomoisky. PwC denied any wrongdoing.

In Switzerland, NBU sues Kolomoisky in an attempt to collect his debt. The central bank turned to the Tribunal de Premiere Instance in Geneva, claiming that Kolomoisky owes $238 million for refinancing loans made to PrivatBank before its nationalization.

Does this mean that Kolomoisky and Bogoliubov will testify in court? Say, in London?

That might happen but not necessarily. It is up to the judges.

In London, the procedure requires the defendants to testify before the court in person, however, Kolomoisky and Bogolyubov can avoid it if they prove they have a very important reason – like a serious threat to their safety – not to come to London. If the court approves it, they could testify via video link.

For Kolomoisky it would make sense trying to avoid leaving the territory of Ukraine as long as the FBI is investigating him to avoid potential extradition.

When will we know who’s winning?

Presumably not earlier than mid-2021, after the trial in London ends. However, that can change if any other jurisdiction starts to hear the case earlier.