Over the past weeks, I’ve been looking at the fraud case against American investor Michael Calvey as it unfolds in Moscow. According to prosecutors, Calvey induced the board of directors at Vostochny Bank to accept shares of a company in payment of a 2.5 billion-ruble debt that were worth four thousand times less than their stated value. (For earlier coverage of the case see: Why was Michael Calvey Arrested? and Four Important Factors in the Michael Calvey Affair.)
400,000 percent is a major discretion in price, so the case should come down to which valuation is more objective. Ahead of the stock purchase, in 2017, KPMG conducted an independent valuation of a 59.9% share in the Luxembourgish company International Financial Technology Group. They valued the stock at between two and three billion rubles ($35-50 million). In 2019, the unspecialized Cypriot financial company Finvision Holdings Limited conducted a second valuation, determining a value of 600 thousand rubles ($10,000) for the shares.
Which auditor had it right? That’s a question for professionals. Stock prices might change from one minute to the next. Over the course of two years, a stock price might go up or down by thousands of percentage points. It would be reasonable for investigators to accept that a 2019 valuation might come to a very different result than one held in 2017.
The auditor’s reputation also plays an important role. KPMG is one of the big four international auditors whose valuations are considered the gold standard. Its objectivity and thoroughness are beyond question. Comparing KPMG to an unknown offshore holding company is absurd. All the more so because Finvision is not a neutral party, but a shareholder in Vostocny Bank owned by Artyom Avetisyan, a man who has sued Michael Calvey for ownership of the bank in British arbitration court. Lacking expertise in financial matters, however, the prosecutors regard the second valuation as more in accordance with accounting practices established in Russian law.
So, How Do You Double-Check Stock Prices?
One obvious solution is for the court to order another valuation of the stocks in question. The more authoritative the auditor, the more fair the valuation. If not KPMG, Deloitte, Ernst & Young or PricewaterhouseCoopers are on the same level. All of them have offices in Moscow for exactly this purpose.
Mike Calvey himself brought up a simple and reliable alternative for valuing the shares: Put them up for sale. The market will clear up everything with regard to stock prices. If they sell for under a hundred grand, Calvey will stand guilty as charged. If someone buys them for tens of millions of dollars, obviously it was Finvision that committed the fraud.
Who’s the Victim?
According to the charges, evidence of fraud was discovered by an FSB agent. The agent then began investigating the stock purchase due to his own supposition that a fraud had been committed. The original “tip” almost certainly came from Avetisyan, but that isn’t mentioned in the charges.
Only after the investigation had begun did the FSB receive a report from Vostochny Bank shareholder Sherzod Yusupov that the IFTG stock value did not correspond to debts incurred by PKB, a company owned by Calvey’s private equity firm.
These details of the charges show that the investigation was illegal under Russian law.
First, according to the Russian Code of Criminal Procedure, arrest and detainment should not occur in cases relating to the category of entrepreneurial law except as a last resort.
Second, criminal cases under the category of entrepreneurial law (and most other categories) can only be initiated by a plaintiff. Only after receiving a complaint by an injured party can law enforcement open the case. No plaintiff – no case.
The case levied against French citizen Philippe Delpal, a and fellow partner of Calvey’s at Baring Vostok and another member of the board of directors at Vostochny Bank, is even more shocking in its groundlessness. During Delpal’s hearing in Moscow Municipal Court on March 1st, it came out that the accused had not taken part in the February 15, 2017 meeting of the Vostochny Bank board of directors when the decision to accept IFTG stock in lieu of payment was made. Six of the nine members of the board voted to accept the stock, including Sherzod Yusupov, the accuser.
Philippe Delpal’s lawyers noted that the Frenchman not only took no part in the meeting, he never signed any documents relating to the deal. Nor did he talk about the issue with Yusupov, whom prosecutors claim Delpal misled regarding the deal.
Delpal made the following statement during the hearing: “I never misled Yusupov into voting for the deal. That was his decision, not mine. I’m astounded that I’ve been arrested and taken into custody on the basis of false and totally unproven accusations.”
Moscow Municipal Court rejected this defense and sent Delpal back to custody in jail.
So, Why Is This Happening?
There are several versions to explain all of this, and I can’t get into all of them here. What’s becoming painfully obvious is that prosecutors pursued the case not as a typical shakedown or because Avetisyan asked for it. This has nothing to do with Calvey personally. People higher up the food chain wanted to arrest a prominent American businessman, and Mike happened to be available. Mike Calvey is a hostage. That is all. Putin wants to gain leverage against US sanctions, and he’s grabbing onto whatever he can.
Did the ongoing business dispute with Avetisyan over Vostochny Bank influence the decision? Yeah, sure it did. Avetisyan wanted to pressure Calvey and was trying to use his FSB connections to do it. But that was only the beginning. Once the FSB heard Calvey’s name, they put him into their plans for entirely different reasons.
Could Avetisyan stop the prosecution? No, not now. Nothing depends on him. He reached into issues beyond his control and influence. Avetisyan’s move to put pressure on Calvey has become a move by the Russian government to put pressure on the US. The worse US-Russia relations get, the more likely Calvey is to be convicted, no matter how absurd and illegal the proceedings are.
The worse Russian-American relations grow, the worse it is for any American or any other foreigner taken hostage by the FSB. How many victims will there be? Nobody knows. As many as Putin wants. If Russian history is any guide, he might want a lot of them.
Editor’s Note: This article has been corrected to show that six of the nine members of Vostochny Bank’s board of directors voted in favor of accepting IFTG stock. An earlier version stated incorrectly that the vote was unanimous.