OAO Yukos, the Russian oil company wallowing in a chapter 11 case in Houston, had its credit-rating slashed to default status yesterday after it failed to make the interest payments on a $1 billion loan from a syndicate of western banks and a $1.6 billion loan to Menatep, which is also its largest shareholder. Security for the loans was Yukos’ interest in Yuganskneftegaz (“Yugansk”), the oil unit that the Russian government auctioned off earlier this month to defray Yukos’ alleged $27 billion in overdue taxes. Here are the earlier posts on the Yukos chapter 11 case.
Meanwhile, in Houston, Deutsche Bank filed a motion to dismiss the Yukos chapter 11 case with the Houston Bankruptcy Court on Tuesday. Duetsche Bank was was one of a group of Western banks that had committed to finance OAO Gazprom‘s acquisition of Yugansk at the Russian government’s auction before the Houston Bankrutpcy Court’s temporary restraining order enjoined the bank and other Western financial institutions from participating in the auction.
In its motion, Deutsche Bank asserted that Yukos had tried to “artificially manufacture” a presence in the U.S. in order to seek bankruptcy protection. In obtaining the TRO earlier this month, Yukos had preliminarily persuaded the Bankruptcy Court that it had jurisdiction over Yukos based on, among other things, the fact that it had stablished a bank account in Houston, that its chief financial officer had recently moved to Houston and was working there, and that approximately 15% of Yukos is owned by investors from the United States.

OAO Rosneft, the Russian government-controlled oil company that has bought OAO Yukos‘ Yuganskneftegaz (“Yugansk”) huge oil unit, has been put on credit watch by Standard & Poor’s Ratings Services in a quintessentially Western financial assessment of the riskiness of the deal.
S&P observed that were “major uncertainties regarding the financing of the acquisition and the tax and litigation risks.” S&P also continued its credit watch on OAO Gazprom, the Russian government-controlled natural gas company that is scheduled to merge with Rosneft by the end of January.
Gazprom and Rosneft are coordinating the acquisition in defiance of a Bankruptcy Court’s temporary restraining order in Yuko’s pending chapter 11 case in Houston that enjoined firms from participating in the Russian government’s auction of Yugansk to pay for alleged Yukos’ tax debts. Yukos’ attorneys announced in open court last week that Yukos intends to sue whoever was involved in the acquisition of the Yugansk unit. Here are earlier posts on the Yukos case and the Russian government’s auction.
Inasmuch as the deadline for Rosneft’s purchase of Yugansk is January 2, the S&P cautionary assessment reflects the marketplace’s skepticism that Rosneft will be able to raise the billions in financing necessary to close the deal that quickly.

Russian gas giant OAO Gazprom confirmed yesterday what everyone in the international oil and gas business suspected — that it will control Yuganskneftegaz (“Yugansk”), which was formerly the main oil-production unit of OAO Yukos. Here are the earlier posts about the Yukos chapter 11 case in Houston and the Russian government’s auction of Yugansk.
Gazprom’s control of the Yugansk unit — which generated 60% of Yukos’ oil and gas production — is a key development in the Russian government’s plan to transform Gazprom into a major international oil and gas company on the level of Exxon Mobil Corporation and other majors.
When the Russian government announced the auction of Yugansk earlier this fall in order to fund payment of a portion of Yukos’ alleged $28 billion tax debt, Gazprom — which is 60% owned by the Russian government — was generally considered to be the odd’s on favorite to be the winning bidder at the auction. However, Gazprom’s financing for its bid through Western financial institutions was undermined last Thursday by the entry of a TRO in Yukos’ surprise chapter 11 case in Houston. That TRO enjoined Western financial institutions from participating in financing an acquisition of Yugansk.
Nevertheless, Russian officials scurried around last Friday and Saturday to arrange alternative financing, and Baikal Finance Group — a new special purpose entity controlled by Russian individuals with close ties to Gazprom — submitted the winning bid at the auction. On this past Tuesday, Russian oil company OAO Rosneft — a Russian government-controlled company that Gazprom is acquiring in a previously announced merger — announced that it had purchased Baikal Finance. That announcement confirmed Gazprom’s effective control of the Yugansk unit.
By controlling the Yugansk unit, Gazprom adds a prodigious oil production unit to its already formidable gas production unit. Already the world’s largest producer of gas, Gazprom will now become one of the world’s biggest oil and gas companies with combined reserves that are about six times more than Exxon Mobil’s. Russia is second in world oil production after Saudi Arabia.
Nevertheless, the Kremlin’s heavy-handed handling of Yukos and its valuable Yugansk unit may have far reaching implications for Russian business interests in the international business community. The Russian government’s willingness to elevate its control of Russian oil and gas interests over the promotion of Western business interests is a serious deterrent to future Western investment in Russian companies. Yukos is now the poster boy of that policy — once a darling of Western investors, the Russian government’s actions have now rendered Yukos essentially worthless. It’s hard for the Moscow Chamber of Commerce to put a happy spin on that story in attempting to attract Western capital.
Moreover, Gazprom faces huge obstacles in maintaining a presence as a major oil and gas company. Although it is currently pumping huge quantities of natural gas, replacing that gas is not easy. Inasmuch as most of Gazprom’s reserves are in remote regions that require technological expertise that Gazprom does not currently possess, Gazprom will face increasing production costs as it attempts to maintain or increase its production levels. During the first half of this year, Gazprom’s net income fell 13% to $3 billion even though its revenue rose 12% to $15.7 billion. By way of comparison, Exxon Mobil earned $11 billion in the same period on revenue of $138 billion. Consequently, if oil and gas prices dip, Gazprom’s profit margins could be squeezed even further.
Meanwhile, Houston-based ConocoPhillips announced an agreement yesterday with Gazprom to study at development of the potentially lucrative Shtokman gas field in the Barents Sea. The study will evaluate the feasibility of producting and transporting liquefied natural gas from the field to the United States and European markets.
Discovered in 1988, The Shtokman field is estimated to contain more than 100 trillion cubic feet of gas. Inasmuch as it is located approximately 350 miles off the northwest coast of Russia in the South Barents Sea Basin in water depths of 1,000 feet, the Shtokman field will require at least three or four phases for full field development.
Earlier this year, ConocoPhillips became a large equity investor in Lukoil — another Russian oil major — and became a 30 percent partner in another exploration joint venture with Lukoil. ConocoPhillips announced earlier this week that it is increasing its equity stake in Lukoil to 10% by the end of the year.

Russian oil company OAO Rosneft announced today that it has acquired Baikal Finance Group, the purchaser of OAO Yukos‘ main production unit Yuganskneftegaz (“Yugansk”) at a Russian government auction last Sunday. Here are the earlier posts covering the auction and the Yukos chapter 11 case.
The Russian government controls Rosneft, so the company’s acquisition of the Yugansk unit gives the Russian government effective control over a substantial portion of the Russian oil and gas industry. Yukos believes that the Rosneft acquisition is preliminary to the ultimate transfer of the Yugansk unit to Russian government-controlled OAO Gazprom. Gazprom was expected to be the primary bidder at the auction until the U.S. Bankruptcy Court in Houston issued a TRO late last Thursday in Yukos’ chapter 11 case that chilled Western financial institutions that were scheduled to provide financing for Gazprom’s bid. When Gazprom could not finance its anticpated bid for Yugansk, Baikal Finance stepped into the breach and emerged on Sunday as the winning bidder at the auction by posting a $9.37 billion bid.
Gazprom and Rosneft announced a merger this past September, and many analysts of the Russian economy expect that the Russian government will use Gazprom as the vehicle to create Russia’s major oil and gas company. Before Gazprom’s bid was undermined by the TRO, Rosneft was expected to become part of Gazprom’s new oil subsidiary — OOO Gazpromneft — and Yugansk was to be merged into that unit.
Adding to the quickly changing events of the past week, Gazprom earlier this week announced that it had sold the Gazpromneft unit last Friday to an unidentified buyer for an undisclosed sum. Gazpromneft took part in the auction on Sunday, but did not bid.
Meanwhile, Yukos announced in a Bankruptcy Court hearing in Houston on Wednesday that it is preparing a massive lawsuit against all parties that participated in the auction in violation of the Bankruptcy Court’s TRO. In that regard, Yukos accused Gazprom of violating the Bankruptcy Court’s TRO by participating — although not bidding — in the auction of the Yugansk unit.
In rattling this litigation saber, Yukos is clearly signaling that it will attempt to put the assets of Gazprom and any Western financial institution that participated in the auction at risk. In so doing, Yukos is attempting to gain some leverage in its battle with the Russian government by chilling the market for Western financing of the Russian companies’ oil and gas ventures. It is a creative strategy, but it is far too early to predict whether it will have any meaningful impact on the Russian government’s conduct toward Yukos and the rest of the Russian oil and gas industry.

Although overshadowed by the Enron-related criminal cases, the business fraud criminal trial of former Westar Energy, Inc. CEO David Wittig and his right hand man has been making quite a bit of news over the past few months in Kansas. U.S. District Judge Julie Robinson on Monday declared a mistrial in the case when the jury could not render a verdict on most of the 40 count indictment against the defendants. Although the prosecution can (and probably will) re-try a case that ends in a mistrial rather than an acquittal, the result of the trial was a clear victory for the defense.
The mistrial comes a year and a half after another federal jury convicted Mr. Wittig of bank fraud charges in a case not directly related to Westar. Mr. Wittig remains free on bond pending his appeal of that conviction.
Mr. Wittig and former Westar Executive Vice President Douglas T. Lake each faced charges relating to allegations they tried to loot the largest electric utility in Kansas. The pair left Westar late in 2002 amid revelations of misuse of corporate funds. Subsequently, Westar under Mr. Wittig was implicated in the scandal surrounding corporate efforts to curry favor with Houston congressman Tom DeLay, the House majority leader. A Travis County, Texas grand jury continues to investigate Westar’s contributions of funds during 2002 to the political action committee that Mr. DeLay created.
Mr. Wittig, who is a former star deal maker at Salomon Brothers, became CEO of Westar in 1998 and immediately turned the sleepy Midwestern utility into a deal machine. Mr. Wittig hired Mr. Lake, who worked with him at Salomon. Mr. Wittig was paid compensation of more than $25 million in his seven years Westar, and he had no reservations about showing it in normally conservative Topeka, where Westar is based. He bought the largest home in Topeka, which is a 17,000-square-foot mansion that former Kansas governor and one-time presidential candidate Alf Landon built, which he then outfitted in with over $2 million in art and interior decoration. Mr. Wittig also drove around Kansas in a $230,000 Ferrari 550 Maranello.
After some success, Mr. Wittig’s fast deal plan at Westar faltered and the company’s stock price fell from $44 to $9. As a result, Westar came under increasing pressure from shareholders and regulators, including the Travis County grand jury.
The trial has been particularly wild. Judge Robinson, who is a former prosecutor, and Mr. Wittig’s defense attorneys — Adam Hoffinger and Edward Little — butted heads throughout the trial as the defense accused the judge of favoring the prosecution in her rulings. At several points during the trial, Judge Robinson angrily lectured the attorneys for their courtroom demeanor, which included rolling their eyes during witness testimony. Finally, a day before closing statements, the friction between the judge and the defense attorneys boiled over as Judge Robinson took the extraordinary measure of barring one of the attorneys on Mr. Lake’s defense team from the courtroom for the remainder of the trial.
For excellent background on Westar’s involvement with Rep. DeLay, the PAC, and the Travis County investigation, check out Charles Kuffner’s comprehensive posts.

Parties involved in the Yukos chapter 11 case on Monday were attempting to discover information regarding Baikal Finance Group, which was the obscure winner of Sunday’s Russian government auction of the Yukos oil unit Yuganskneftegaz (“Yugansk”). Several news services reported late Monday that at least two representatives of Baikal are employees of Siberian-based oil and gas major, OAO Surgutneftegaz. Although Surgutneftegaz announced after the Sunday auction that it had no ties to Baikal Finance, speculation is increasing that Surgutneftegaz is providing or backing financing in some manner for Baikal Finance.
Here is the Wall Street Journal’s ($) more thorough coverage of the aftermath of the Russian government’s auction of the Yukos oil and gas production unit.
Meanwhile, in this op-ed in today’s Journal, former Russian chess champion Garry Kasparov pulls no purches regarding the implications from Western acceptance of the Russian government’s handling of Yukos:

If the West won’t stand up for basic human rights and democratic principles in Russia, one last hope was that it would come to the aid of free enterprise. But the only voice of protest against this weekend’s auction of Russian oil giant Yukos’s main asset came from Texas, and it wasn’t George W. Bush — it was a bankruptcy court in Houston. Needless to say, the auction of Yuganskneftegaz went forward on Sunday in Moscow despite the court order.
With the Russian state gas company Gazprom in a potential legal tangle over the injunction, the auction was won by a completely unknown entity from the Russian hinterlands that just happened to have $9.3 billion cash on hand. This company will soon prove to be the outer layer of a Russian matryoshka doll. We’ll find a Gazprom doll inside of that one and, like every matrioshka today, at the center will be Vladimir Putin.

Mr. Kasparov concludes with the following insight:

Perhaps Western leaders agree with last week’s New York Times editorial that made the stunning assertion that “a fascist Russia is a much better thing than a Communist Russia.” I hope I am allowed to order something not on that menu. I am not ready to throw up my hands and surrender to the Putin dictatorship. It is still possible to stand up to the dictator and to fight for democracy.
In March, 1991, then-President George H.W. Bush and his European counterparts were still supporting Mikhail Gorbachev’s futile domestic endeavors. I wrote then that if we were left alone we would soon have no Gorbachev and no communism. Now we need to say no to Vladimir Putin and no to fascism. If the United States and the European powers are not willing to help us in this new fight, at the very least they should stay out of the battle and stop giving aid to the forces of fascism.

A special-purpose vehicle representing unknown Russian interests agreed to pay $9.34 billion for a controlling interest in Yuganskneftegaz (“Yugansk”), which formerly was Russian oil giant OAO Yukos‘ largest production asset. The interest purchased includes all of Yugansk’s voting shares.
Here are the earlier posts on the Yukos chapter 11 case and the related TRO.
OOO Baikal Finance Group made the winning bid at an auction that the Russian Federal Property Fund carried out despite a temporary restraining order that a U.S. Bankruptcy Court in Houston approved in Yukos’ chapter 11 case on Thursday. The TRO enjoined several Western financial institutions from participating in the financing of a bid in such auction.
The winning bid was far below what Yukos contends that its interest in Yugansk was worth. Yugansk constituted 60% of Yukos’s producing output at the time of the auction.
Nothing is known about Baikal, which registered for the auction on Friday after entry of the TRO. The initial speculation is that it is a Russian government controlled entity that relies on domestic Russian financing for its bid.

Gazprom, the Russian state-controlled natural gas giant, has appealed and requested a stay of a U.S. Bankruptcy Court’s temporary restraining order that enjoins Western financial institutions from financing Sunday’s scheduled government auction of Yukos‘ main production subsidiary Yuganskneftegaz (“Yugansk”)in Moscow. An extraordinary Saturday afternoon hearing on Gazprom’s motion for stay was scheduled before U.S. District Judge Nancy Atlas in Houston in civil case no. 04-04756. Here are the earlier posts on the fast-breaking Yukos case.
Gazprom, which is the expected to be the winner of Sunday’s auction, may not be able to finance its winning bid after a consortium of Western banks — including Deutsche Bank, ABN Amro, BNP Paribas, and Dresdner Kleinwort Wasserstein — froze a credit line of about $13 billion it had agreed to loan Gazprom for its bid. With huge banking interests in the United States, each of the banks could face legal action if they violated the TRO and went ahead and financed Gazprom’s bid.
Stay turned for late breaking developments in this fast moving case.
Update: Judge Atlas denied Gazprom’s motion for a stay of the TRO.
Meanwhile, the largest shareholder in Yukos is planning a $100 billion lawsuit against various entities involved in the Russian auction of Yukos.

London-based Clifford Chance agreed Friday to pay $5.5 million in a global settlement with the trustee of former tech law firm Brobeck, Phleger & Harrison’s bankruptcy estate and retired partners and longtime employees of Brobeck. Houston’s Lanier Law Firm, who represent the plaintiffs in the lawsuit, and Brobeck’s liquidation committee also signed off on the settlement. Here is an earlier post on the rather interesting bidding for Brobeck’s claims against Clifford Chance.
The settlement was finalized as the parties negotiated for three hours in two jury deliberation rooms next to U.S. Bankruptcy Judge Dennis Montali‘s courtroom Friday morning. The settlement mooted the necessity for an auction of Brobeck’s claims against Clifford Chance, which Judge Montali had previously ordered. The KM Group, a coalition of asbestos plaintiff lawyers, had planned to bid against Clifford Chance.
The settlement resolves the lawsuit that retired Brobeck partners and employees had filed against Clifford Chance and former Brobeck Chairman Tower Snow Jr. that sought at least $100 million in damages. The lawsuit basically claimed that Clifford Chance’s and Mr. Snow’s agreement that Mr. Snow and and 16 other Brobeck partners would bolt to Clifford Chance in 2002 triggered Brobeck’s 2003 collapse into bankruptcy.
The agreement also resolves a dispute between the plaintiffs in that lawsuit and the Brobeck trustee over the ownership of the claims against Clifford Chance. The Brobeck trustee had asserted in court pleadings that the claims primarily related to profits Clifford Chance received from unfinished business Brobeck partners had taken with them to the firm and, thus, the claims were property of Brobeck’s estate.
The settlement resolves negotiations that have been ongoing for the past six months. Clifford Chance had agreed to pay $3.75 million to Brobeck’s estate to settle the trustee’s potential claims in July. However, the KM Group emerged and offered the trustee $4 million for the estate’s claims againt Clifford Chance. The trustee then renegotiated the deal with Clifford Chance, which upped the settlement amount to $4.5 million. The KM Group’s desire to increase its offer over that settlement amount had prompted the Bankruptcy Judge to schedule the auction of the Brobeck estate’s claims.

The Fifth Circuit Court of Appeals in New Orleans issued this decision on Friday in the case of former Dynegy trader Michelle Valencia that upholds a controversial law that the Justice Department has used to charge a group of Houston natural gas traders with reporting false information in an alleged scheme to manipulate prices. Here is an earlier post on this particular prosecution.
The Fifth Circuit decision overturns a previous ruling of U.S. District Judge Nancy Atlas of Houston that the law was vague and that someone could be charged in the trader cases with delivering “false and misleading” information even if the person did not know that the data was incorrect.
In January 2003, Ms. Valencia was charged with three counts of false reporting under the Commodity Exchange Act and four counts of wire fraud. The indictment alleges that Valencia fabricated natural gas trades for submission to the publication Inside FERC’s Gas Market Report from November 2000 to February 2001. She pleaded not guilty to the charges.
This past August, a group of former natural gas traders received letters from the U.S. Attorney’s Office in Houston advising them that are targets of a criminal investigation. Then, a couple of months later, four former El Paso traders pleaded guilty to false reporting charges in connection with the probe. Finally, in late November, three more former El Paso workers and a former Reliant trader were charged with false reporting, and Ms. Valencia was also charged with conspiracy and wire fraud charges.
All of these indictments follow a lengthy investigation into alleged efforts to manipulate the trading indexes, which are used to value billions of dollars in gas contracts and derivatives. Industry publications such as the Inside FERC Gas Market Report use data from traders to calculate the index price of natural gas. Accordingly, movement in index prices often affects the level of profits traders can generate. In these particular cases, it remains unclear whether the publication actually used the false information provided. Nevertheless, the government contends that it needs only to prove that fake trades were reported and not that they were actually published or affected the markets.
These cases — along with the recent Enron-related Nigerian Barge criminal case — are at the forefront of the controversial but increasingly common tactic of federal prosecutors and state prosecutors such as Eliot Spitzer criminalizing merely questionable business practices to regulate politically unpopular business interests. As noted in this earlier post, this tactic is resulting in absurdly unjust results, such as Martin Frankel’s 25% shorter sentence than that of Jamie Olis.
Moreover, the inflexibility of the federal sentencing guidelines combined with the public animus toward business that the government’s press releases often provoke, defendants in these cases are often faced with the untenable choice of copping a plea for a short prison term or defending themselves under politically-charged circumstances against a possible prison term that would amount to a life sentence.
With the Yukos bankruptcy filing in Houston this past week, much has been made in news reports regarding the Russian government’s politically-motivated and unjust criminal prosecution of former Yukos CEO Mikhail B. Khodorkovsky. What is not as widely reported is that the current United States Justice Department policy of pursuing questionable criminal prosecutions of politically unpopular businesspersons is not much different.