Private and Confidential
Ministry of Justice of the Republic of Kazakhstan
Mangilik El avenue, 13 Entrance, House of Ministries, Nur-Sultan,
Herbert Smith Freehills LLP
Neue Mainzer Straße 75
60311 Frankfurt am Main
For the attention of Dr Patricia Nacimiento
21 January 2020
Dear Dr Nacimiento
STATIS Vs THE REPUBLIC OF KAZAKHSTAN
Introduction and overview
1. We understand that Herbert Smith Freehills LLP ("HSF" or "you") represents the Republic of Kazakhstan (represented by the Ministry of Justice of the Republic of Kazakhstan) in a series of legal proceedings related to a dispute between Anatolie Stati ("Mr Stati"), Gabriel Stati, Ascom Group S.A.
and Terra Raf Trans Traiding Ltd. (referred to as the "Stati Parties", together with other companies known to be affiliated to Anatolie and Gabriel Stati); and the Republic of Kazakhstan, under the Energy Charter Treaty (the "ECT Arbitration"). The dispute relates to the Stati Parties' alleged investment in Kazakhstan through Kazakhstan-based companies Tolkynneftegaz LLP ("TNG") and Kazpolmunay LLP ("KPM"). Amongst other things, TNG was involved in the construction of a liquefied petroleum gas plant ("LPG Plant") in Kazakhstan.
2. We understand that on 19 December 2013, the Stati Parties obtained an arbitral award issued by a tribunal of the Arbitration Institute of the Stockholm Chamber of Commerce (the "Tribunal") of around USD 500 million against the Republic of Kazakhstan (the "Award" and the "Awarded Amount"). We understand that the Awarded Amount was based, in respect of the value of the LPG Plant, on an indicative bid which had been submitted for that plant. This indicative bid was based on a combination of TNG's historical costs allegedly spent on the LPG Plant and TNG's reported levels of earnings (referred to as "EBITDA"2), as shown by the TNG interim financial statements for the six months to 30 June 2008.
3. After the date of the Award, the Republic of Kazakhstan initiated annulment proceedings in the Svea Court of Appeals in Stockholm, at the seat of the ECT Arbitration. During the course of the annulment proceedings, a new set of facts was discovered by the Republic of Kazakhstan that allegedly reflected that the Award and the Awarded Amount had been fraudulently obtained. We understand that the Svea Court of Appeals in Stockholm did not decide on the merits of Kazakhstan's fraud arguments and did not annul the Award.
4. In parallel to the annulment proceedings in Sweden, the Stati Parties commenced proceedings for enforcement of the Award in the United Kingdom, where following an exchange of written and oral submissions in a two day hearing, on 6 June 2017 the English High Court decided that "there is a sufficient prima facie case that the Award was obtained by fraud" (the "Prima Facie Fraud Judgement").3 The Prima Facie Fraud Judgement is attached as Exhibit 1.
5. Immediately after the English High Court issued the Prima Facie Fraud Judgement, the Stati Parties initiated new enforcement proceedings in seven jurisdictions and subsequently discontinued the English High Court proceedings. The Republic of Kazakhstan is contesting the enforcement of the Award, claiming that it had been procured by the Stati Parties by fraud. We understand that the Republic of Kazakhstan's challenge reflects further information which has come to light through to late 2019, including (as we explain further below) the withdrawal of previously issued audit and review opinions by KPMG Audit LLC ("KPMG") on the financial statements of various companies owned by the Stati Parties.
6. We have previously prepared a letter (dated 19 August 2019) for HSF in relation to these legal proceedings (the "August 2019 PwC Letter", a copy of which is included in Exhibit 2 to this letter).
In that letter we concluded that, inter alia, based on the information we had reviewed, TNG's financial statements for the years ended 31 December 2006 to 2009, as well as TNG's interim financial statements for the period ended 30 June 2008 were materially misstated. Further, we concluded from the information that we had reviewed that the Stati Parties appeared to have provided false representations to its auditors, KPMG and that to the extent this was the case and these misrepresentations were intentional this would seriously impair the integrity of TNG's management.
7. As explained further below, since the date of the August 2019 PwC Letter, you have provided us with a number of additional documents, including copies of certain correspondence between KPMG and the Stati Parties. For the purpose of this letter, you have asked us to review and comment upon this additional information. For context, we first set out below an overview of our understanding of the Republic of Kazakhstan's case on fraud against the Stati Parties. We then set out an overview of the additional information that has now been provided to us, before commenting on the additional information provided to us.
Overview of our understanding of the Republic of Kazakhstan's case on fraud
8. We set out below our understanding of the Republic of Kazakhstan's case on fraud, to the extent such case pertains to our views expressed herein.