Court File No. 08-CL-7446
DATE: 20140219
ONTARIO
SUPERIOR COURT OF JUSTICE
(Commercial List)
B E T W E E N:
MIDLAND RESOURCES HOLDING LIMITED, ALEX SHNAIDER and EDUARD SHYFRIN
Plaintiffs
Kenneth Prehogan, Kim Mullin, Symon Zucker for the Plaintiffs
- and -
MICHAEL SHTAIF, THE ESTATE OF ANTHONY GROAG, GREGORY ROBERTS, EUGENE BOKSERMAN, ILYA ENTIN, IRWIN BOOCK a.k.a. IRWIN KRAKOWSKY and STANTON DE FREITAS
Defendants
Colin P. Stevenson, J. Daniel McConville for the Defendants Michael Shtaif, Patricia Groag, as the Executrix of the Estate of Anthony Groag, Ilya Entin and Eugene Bokserman
Kevin Richard for the Defendant Stanton De Freitas
Greg Roberts, self-represented
A N D B E T W E E N:
MICHAEL SHTAIF, GREG ROBERTS, EUGENE BOKSERMAN and ILYA ENTIN
Colin P. Stevenson, J. Daniel McConville for the Plaintiffs by Counterclaim Michael Shtaif, Eugene Bokserman and Ilya Entin
Greg Roberts, self-represented
Plaintiffs by Counterclaim
And
MIDLAND RESOURCES HOLDING LIMITED, ALEX SHNAIDER, EDUARD SHYFRIN and KOLL RESOURCES LIMITED
Kenneth Prehogan, Kim Mullin, Symon Zucker for the Defendants by Counterclaim
Defendants to the Counterclaim
HEARD: February 2013 to June 2013
M.A. SANDERSON J.
REASONS FOR DECISION
TABLE OF CONTENTS
TABLE OF CONTENTS. 2
INTRODUCTION.. 6
About the Presentation of Evidence in these Reasons. 6
THE PARTIES. 7
The Plaintiffs. 7
The Defendants. 7
CHRONOLOGY.. 8
Genesis of the Magellan Joint Venture. 8
The Pre-Contractual Period. 8
October 2005. 8
November 2005. 9
December 2005. 10
January 2006. 13
February 2006. 16
March 2006. 19
April 2006. 21
April 4, 2006: Midland Wires $50 million to Magellan. 21
April 5-30, 2006. 22
May 2006. 27
May 15-17, 2006. 30
May 18-23,2006. 35
May 24-31, 2006. 38
June 2006. 45
June 1-13, 2006. 45
June 14-19, 2006. 48
June 20, 2006. 51
Events Post June 20. 54
June 21, 2006. 54
June 22-30, 2006. 57
July 2006. 59
July 1-6, 2006. 59
July 7-13, 2006. 61
July 14-21, 2006. 69
July 22-26, 2006. 70
July 27- 31, 2006. 71
August 2006. 72
September 2006. 74
September 1-12, 2006. 74
September 13, 2006. 74
September 19-30, 2006. 76
October 2006. 78
November 2006. 79
November 11,2006 – Koll Meeting. 82
November 12-30, 2006. 83
December 2006. 84
- 85
January 2007. 85
February 2007. 86
February 25-26, 2007. 89
February 28, 2007. 91
March 2007. 91
April 2007. 97
May 2007. 98
June 2007. 99
July 2007. 99
August 2007. 101
September 2007. 102
October 2007. 103
November 2007. 105
December 2007. 107
2008 to 2013. 107
107
112
2010-2012. 114
CREDIBILITY OF THE WITNESSES. 115
ANALYSIS. 117
General Observations. 117
The Main Action. 117
The Law - Primary Cause of Action 1: The torts of Deceit, Fraudulent Misrepresentation. 117
Primary Cause of Action 2: Breach of Fiduciary Duty. 119
Primary Cause of Action 3: Conspiracy. 120
The Main Action: Specific Allegations. 121
Nov. 2005 Boock and De Freitas: Unlawful Conspiracy- The Creation of Magellan and the Plan to Use it Unlawfully. 121
Dec. 2005 Breach of Fiduciary Duty First Meeting. 123
Dec. 2005 Shtaif + Bokserman - Deceit/False Representations. 123
Dec. 20, 2005 - Shtaif and Groag – Misrepresentation re Transfer of $8 million. 124
Jan. 2006: Boock, De Freitas, Shtaif, Roberts - Unlawful Conspiracy. 125
Jan. 2006 Shtaif: Breach of Fiduciary Duty to Magellan. 127
Feb. 19, 2006 De Freitas: Breach of Fiduciary Duty to Magellan. 128
Feb. 19 2006 Roberts: Breach of Fiduciary Duty to Magellan. 128
Shtaif Breach of Fiduciary Duty to Magellan. 129
Mar. 28-Apr. 4 Boock, De Freitas, Shtaif, Roberts, Groag – Unlawful Conspiracy. 129
Mar. 31-Apr. 4, 2006 Boock, Shtaif and Groag - Deceit in misrepresenting BDW had met obligation to fund 130
Mar. 28, 2006 Boock: Deceit: BDW's higher offer for Magellan shares. 130
Mar. 31, 2006 Shtaif & Groag - Deceit: BDW's higher offer for Magellan shares. 131
April 1, 2006 Roberts - Deceit – Other Investors Ready to Invest $200-300 million in Magellan 131
April 5, 2006 Shtaif - Deceit - BDW's funds have arrived. 131
Apr. 6-May 16, 2006 Shtaif: Deceit/Continuing Misrepresentation that BDW had paid. 132
April 28 De Freitas – Deceit and Breach of Fiduciary Duty. 133
May 16, 2006. Roberts & Shtaif – Deceit 133
May 17-June 20, 2006. Shtaif: Deceit/Continuing Misrepresentation. 135
May 23, 2006 Shtaif - Conspiracy with Poltoranin. 136
June 20, 2006 – Shtaif Deceit to Shnaider and Shyfrin & Breach of Fiduciary Duty to Magellan Board 137
Breach of Fiduciary Duty. 137
June 21-July 2006. Roberts, Shtaif – Conspiracy re Magellan June 23 Notes. 137
Shtaif and Roberts – Ongoing Deceit Post July 13, 2006. 138
Unlawful Conduct Conspiracy: Roberts & Shtaif re Koll and Koll's Assets. 140
November 2006 Conspiracy. 141
Conspiracy to Use Bad Faith Litigation/Extortion. 141
Punitive Damages. 142
Counterclaim.. 142
Breach of Contract and Inducing Breach of Contract 142
Summary Of My Factual Findings Relevant To The Breach of Contract 144
Inducing Breach of Contract 148
The Elements of an Action for Inducing Breach of Contract. 148
The Law.. 149
Malicious Criminal Prosecution Against Shtaif. 150
Additional Cause Of Action Pleaded In The Counterclaim: Conversion. 150
DAMAGES. 151
The Main Action. 151
Damages Assessment General Observations. 151
Entin. 151
Bokserman. 151
Boock. 151
Damages Payable To Plaintiffs By De Freitas. 152
Midland's Damages Against Roberts. 152
Midland's Damages Against Shtaif. 153
The Plaintiffs' Failure To Mitigate. 154
Damages re the Counterclaim.. 154
Damages for Breach of Contract 154
Contract—Loss Of An Opportunity. 155
Non-Expert Evidence of Value of Reef and Invenskoye as at March 2007. 156
The Expert Evidence. 156
Lazar's Evidence. 157
Rosen's Evidence. 159
Findings re Rosen's Evidence. 161
Soriano's Evidence. 161
Schaeffer's Evidence re Value of Reef. 162
Cline's Evidence re Value of Reef. 162
Final Conclusions on Koll Share Value. 163
Employment Losses of Shtaif and Roberts. 163
Lazar's Calculations of Shtaif's and Roberts' Employment Losses. 163
The Evidence of Soriano re Employment Losses. 164
Losses on Options. 164
The Evidence of Soriano re Options. 164
Finding re Options. 165
Conclusions Re Roberts' and Shtaif's Employment Losses. 165
Mitigation Re Employment Losses. 165
Punitive Damages. 165
Counterclaim Mitigation Generally. 165
DISPOSITION.. 166
REASONS FOR DECISION
INTRODUCTION
[1] This litigation is about a joint venture to acquire and develop Russian oil fields, involving two companies, Magellan Energy Limited ("Magellan") and then its successor, Koll Resources Limited ("Koll.")
[2] The parties blame each other for the failure of the venture.
[3] In their pleadings, the Plaintiffs alleged, among other things, that the Defendants individually and in concert, caused them damages by forming and illegally using sham public companies, deceitfully inducing them to join and continue in the joint venture, breaching their contract and fiduciary duties, obstructing justice, and suppressing evidence. The Plaintiffs claimed that the Defendants are personally liable for their loss.
[4] The Defendants counterclaimed, alleging that in addition to breaching and inducing breaches of their contracts, the Plaintiffs engaged in extortion, bribery of the Russian police, coercion/duress, attempted kidnapping, violent seizure of corporate assets, groundless and malicious criminal prosecution of Shtaif. One obtains a flavour of the litigation from the Amended Statement of Defense and Counterclaim of the Defendants Shtaif, the Groag Estate, Entin and Bokserman, which contained the following at paragraphs 7-10:
7 The theory of the plaintiffs … that they were induced to make a substantial investment in the joint venture based on an elaborate conspiracy to defraud them … [was] concocted, reckless and irresponsible. This claim is an abuse of process.
8 The Plaintiffs are the fraudsters. Through fraudulent and illegal means, the plaintiffs have taken control of 100 % of the Joint Venture Properties with the result that these defendants have lost their entire interest, even though it was these defendants who created the joint venture in the first place.
9 When these defendants and Anthony Groag (who died on July 19, 2007) gave notice that they intended to commence proceedings in March 2007 against Alex Shnaider ("Shnaider") and Midland Resources Holding Limited ("Midland"), the plaintiffs conspired to have Shtaif wrongfully convicted and incarcerated in Russia through spurious criminal charges, bribes and other fraudulent acts, as a means to end the litigation.
10 These defendants and Anthony Groag's estate are the real plaintiffs and their claim is set out below by way of counterclaim.
About the Presentation of Evidence in these Reasons
[5] Transcript References. With the exception of Shyfrin's evidence in January 2013, all of the arguments and viva voce evidence was recorded on consecutively numbered pages from the beginning to the end of the trial. Page number references are shown in one of two ways: as part of the sentence (e.g. "Shnaider gave evidence 130 that..." or "Roberts said 7904…") or at the end of the sentence (e.g. "Shtaif 5056.")
[6] Exhibit References. In the text of the Reasons, exhibit references contain two referents, e.g., "Ex. 51/Tab 283." The tab numbers refer to the document's location in the Joint Book of Documents. Once an Exhibit is mentioned with both numbers, generally only the Exhibit number will be given thereafter.
[7] Emails andText (SMS) Messages. Many of the Exhibits referenced in these Reasons are emails and text messages. Some are not explicitly identified as either emails or text messages; others that are said to be emails may actually be text messages. As nothing turns on the point, no effort has been made to ensure that each one is correctly identified as to whether it is an email or a text message.
THE PARTIES
The Plaintiffs
[8] Shnaider. At all material times, the Plaintiff, Alex Shnaider ("Shnaider"), a Canadian citizen and resident of Toronto, indirectly owned 50% of the Plaintiff Midland Resources Holdings Limited ("Midland"). He continues to own 33.6% of the shares of Koll Resources Limited ("Koll").
[9] Shyfrin. Eduard Shyfrin ("Shyfrin"), a resident of the United Kingdom and citizen of the Russian Federation, indirectly owned 50% of Midland. He continues to own 33.6% of the shares of Koll.
[10] Midland. In 1994, Shnaider and Shyfin incorporated Midland, a Guernsey/Channel Islands corporation, to purchase and resell Ukrainian steel worldwide. As time passed, it purchased Russian, Ukrainian and Macedonian steel mills; the electrical grid of Armenia; meat, rubber and copper processing plants, real estate businesses, shipping companies and numerous other enterprises. Today it has business interests throughout the world.
The Defendants
[11] The Defendant and Plaintiff by Counterclaim Michael Shtaif ("Shtaif"), a Canadian citizen, a resident of Calgary, was the initiator of the subject of this litigation, a Russian oil and gas venture. He continues to own 29.3% of the shares of Koll.
[12] The Defendant and Plaintiff by Counterclaim, Anthony Groag ("Groag") died on July 19, 2007. His Estate continues to beneficially own 1.6% of Koll.
[13] The Defendant and Plaintiff by Counterclaim Eugene Bokserman ("Bokserman"), a Canadian citizen and resident of Toronto, continues to own 0.5% of the shares of Koll.
[14] The Defendant and Plaintiff by Counterclaim Ilya Entin ("Entin"), a Canadian citizen, resident of Calgary, continues to own 0.05% of the shares of Koll.
[15] The Defendant and Plaintiff by Counterclaim Gregory Roberts ("Roberts"), a lawyer and businessman, continues to own 1% of the shares of Koll.
[16] The Defendant Irwin Boock ("Boock"), also known as Irwin Krakowsky, presented himself to the parties at all material times as John Howard. Boock has been noted in default.
[17] The Defendant Stanton De Freitas ("De Freitas") was a director of Magellan until his resignation from the Magellan Board on May 25, 2006.
[18] Hereafter in these Reasons I refer to the Defendants/Plaintiffs by Counterclaim as the Defendants.
CHRONOLOGY
Genesis of the Magellan Joint Venture
The Pre-Contractual Period
[19] Shtaif gave evidence 3111 that by 2005 he had worked in Russia for about 15 years in senior executive positions in the oil and gas industry. Early in 2005, he decided to start his own oil production company. His CV is Ex. 289/Tab 1.
[20] Shtaif's plan was to acquire undervalued Russian oil and gas companies, consolidate them in one company and take it public. He began raising funds and reviewing potential acquisitions, Ex. 292/Tab 15.
[21] Shtaif and Bokserman 5704 had known each other for many years. In early 2005, they entered into a Commission Agreement, Ex. 484/Tab 672, in which Bokserman 5760 agreed to assist Shtaif in finding investors for Shtaif's new business.
[22] Shtaif had met Groag in Russia. In August 2005, Shtaif hired Groag, who had worked as General Auditor for BP for 35 years and CEO for Standard Chartered Bank for five years. Shtaif 3897, 3900, 3908, 3920; Shnaider 1109. Groag's CV is Ex. 302/Tab 2.
[23] By the fall of 2005, Shtaif had identified and targeted several investors, including a Mr. Poju Zabludowicz of Tamares Energy, who had expressed interest in investing in the venture.
[24] I note Ex. 292/Tab 15, Shtaif's Ruscan business plan dated October 9, 2005, specified he was trying to raise $10 million in phase 1, $20 million in phase 2.
October 2005
[25] Shtaif Meets Howard/Watson (Boock). Shtaif gave evidence 4480 that in October 2005, he was introduced to "John Howard" [in T.O.] by Alik Iskender, a friend of a friend. Counsel for the Plaintiffs submitted there were obvious red flags from the time of their first contact that should have caused Shtaif to refuse to deal with "Howard."
[26] On October 26, 2005, within days of their online introduction and even before they met in person, Howard sent Ex. 445/Tab 16 to Shtaif, proposing that Shtaif 3126-3129 become the President or Executive Vice-President of BDW Holdings Ltd. ("BDW"), "simply run the show," and receive 6 million free trading shares, 6 million restricted shares and 6 million options in BDW at a penny.
[27] In chief, Shtaif gave evidence 4327-4334, 4365 that he did not find "Howard's" offer suspicious. He was cross-examined effectively on discovery answers that he had found it suspicious. Howard usually emailed Shtaif using a David Watson's email address. After "David Watson" sent him an email dated October 27, 2005, Shtaif replied, "Dear John," and suggested they meet face to face. On the same day, Shtaif emailed Ex. 297/Tab 19 to Howard: "I have a deal on the table in the magnitude of US$40-50 million. It has huge reserves…" Watson replied: "We would… like to do business." After David Watson responded to Shtaif's email, Shtaif again replied to Howard: "Dear John…I wanted to call you to discuss business opportunity on the phone, but I do not have any numbers to contact you…" On October 28, 2005, Watson replied: "Dear Michael … I will call you … Also how do you want the stock to be issued?" [Emphasis added.]
[28] Shtaif and Howard discussed an investment by BDW in Shtaif's venture. On October 29, 2005, Shtaif wrote: "… Can you please provide me with details of the company we are discussing … just a short summary will do." Howard/Watson/Boock replied: "BDW is a public corporation with about 50 million shares issued …"
November 2005
[29] In Ex. 298/Tab 20, Howard offered to provide a corporate vehicle for the oil and gas venture, Magellan Energy Ltd. ("Magellan") that he represented to be a Delaware public company trading on the Pink Sheets, a U.S. based, over the counter stock exchange.
[30] We now know that neither Magellan nor BDW were legitimate public companies.
[31] On November 4, 2005, in Ex. 298/Tab 20 Shtaif wrote, "Hopefully, shortly we can talk in person … Does BDW have enough resources to start due diligence and possible acquisition … or do you have to raise the funds?... Is it possible to send me some info regarding the company?"
[32] On November 8, 2005, Howard emailed Ex. 299/Tab 22 to Shtaif: "BDW Holdings is a publicly traded company in the U.S. that is pursuing oil and gas projects that can be developed and in some cases see increased production. How much do we need to say? Send a list of questions. That might be easier."
[33] On November 9, 2005, Ex. 447/Tab 23, Shtaif emailed Howard: "… the only thing I would need is your latest financial report…"
[34] On November 11, 2005, Howard sent Shtaif Ex. 300/Tab 25, an unaudited balance sheet for BDW showing it had cash and marketable securities of $8,051,123.25. Howard wrote: "The balance sheet reads as is because we revived a dead shell, i.e., a public entity that was not trading and had no assets or liabilities." In examination in chief, Shtaif said when he received the balance sheet, he had no reason to be suspicious. During cross-examination, when confronted with answers given on his discovery to the effect that he had been skeptical about whether BDW had the $8 million, Shtaif said 4349 he was "inquisitive." He wanted to know who he was dealing with, whether the company was "legit" and whether it had the financial wherewithal to complete the transaction:
Q. Your testimony here today that the fact that you asked for this -- for evidence of $8 million being in this company, you're saying the fact that you didn't receive that information, that even though you didn't receive the information, you were not at all suspicious.
A. Suspicious is a word that I wouldn't use. I was inquisitive. I wanted to know who I'm dealing with, whether the company is legit, whether they have the financial wherewithal to complete the transaction. …
[35] Shtaif said 4342 he understood that BDW was "just a start-up company." On November 13, 2005, he asked Howard to provide information about the source of BDW's $8 million. On November 16, 2005, Howard advised Shtaif that the $8 million had been raised "by private placement. …Alik should be forwarding the document you need." [Shtaif said 4353 he never received the information requested.] Ex. 301/Tab 27.
[36] At about that time, Shtaif decided to use Magellan as his corporate vehicle. On November 24, 2005, BDW issued 12 million shares to Shtaif.
December 2005
[37] Shtaif Meets Shnaider. Sometime in late November or early December of 2005, Bokserman contacted Shnaider, seeking to introduce him to Shtaif. As already noted, in early 2005, Bokserman and Shtaif's company Euro Gas had entered into Ex. 484, a commission agreement. Bokserman thought Midland might be interested in getting into the Russian oil and gas business.
[38] Bokserman 5765-5767 knew that the Pink Sheet OTC exchange where Magellan traded had been associated with fraudulent activity. His own employer, Octagon Capital, refused to accept share certificates from Pink Sheet companies [such as Magellan and BDW] because of concerns about fraud Ex. 522/Tab 29. He said 5767-5768 on December 2, 2005 he warned Shtaif, emailing him Ex. 522, a copy of Octagon's policy that it will not accept share certificates from Pink Sheet companies. Bokserman claimed that while he did not email Shnaider, he did have a personal conversation with him.
[39] I reject Bokserman's evidence. Bokserman knew Magellan was a Pink Sheet company. Had he warned Shnaider in a personal conversation that Pink Sheet companies were often associated with fraud, the Plaintiffs would have been wary about investing in Magellan.
[40] On December 6, 2005, at a meeting where De Freitas met Shtaif for the first time, Boock was introduced to De Freitas as "John Howard." De Freitas, who also lived in Toronto at the time, had known Boock for many years and knew that Howard's real name was Irwin Boock. De Freitas admitted in cross examination that he suspected at the time that Boock was calling himself Howard to keep quiet his past infractions with the United States Securities and Exchange Commission ("SEC") and the trading ban it had imposed on him. At the December 6 meeting, they were discussing an investment by BDW of $70 million in Magellan.
[41] On the same day, Shtaif emailed Ex. 304/Tab 30 to Groag:
I am currently in Toronto finalizing discussions with Canadian investors. Things are progressing well and I should have an operational account open shortly. Today I am meeting with all the representatives of the public entity, corporate lawyer, principals, market makers, off-shore advisors, auditors, representatives of financial institutions, etc. They have committed to fully participate... Has David contacted you? I'm getting frustrated with his silence... If David cannot deliver, the Canadians offered to finance everything themselves, but I did not agree.
[Emphasis added.]
[42] I reject Shtaif's evidence that the Canadians to whom he was referring in Ex. 304 included Shnaider. On December 6, 2005, Shtaif met with Howard and De Freitas, the representatives of the public entity [BDW]. I find that "the Canadians who offered to finance everything" were Howard and De Freitas, not Shnaider. [Shtaif knew he could not "finalize" discussions with Midland until he had met with Shyfrin and Shnaider together. That did not happen until December 11 and December 13, 2005.]
[43] On December 8, 2005, Howard forwarded a draft BDW/Magellan Letter of Intent. Paragraph 5 provided that BDW would pay Magellan $8 million on closing.
[44] Bokserman had known Shnaider since Shnaider was a teenager. They had become close friends in 2000 or 2001 Shnaider 13 had flown Bokserman to Moscow several times on his private jet, and had taken him as his guest to the Formula One Grand Prix in Istanbul. Shnaider had made some relatively small investments based on Bokserman's investment advice. Shnaider 16, 30; Bokserman 5760-5762.
[45] Shnaider gave evidence that Bokserman told him that Shtaif, a Canadian accountant, formerly a Vice President of Operations for BP-TNK, was proposing to set up an oiI and gas venture in Russia that would buy and consolidate undervalued oil and gas fields in Magellan, a public company that Shtaif had already secured. Shtaif had already identified a number of undervalued oil and gas properties. Shtaif told Shnaider 16 he was looking to raise a minimum of $120 million and that he had already spoken to a number of potential investors. He referred to one in particular: BDW, a sophisticated Bay Street investor that had already committed to fund US$70 million.
[46] Shnaider said 16-20, 30, 518-519 Bokserman confirmed everything that Shtaif had said. The fact that BDW was committed to investing US$70 million in Magellan demonstrated that someone else believed in Shtaif. He felt BDW's involvement would help ensure a successful IPO. Bokserman denied 5694 confirming that BDW was a sophisticated Bay Street investor. I accept Shnaider's evidence that Bokserman confirmed everything Shtaif had said.
[47] Shtaif gave evidence that at their first meeting, he and Shnaider had a "serious" discussion that lasted about two hours. Shnaider told him Midland was interested in getting into the oil and gas business. Within about half an hour, Shnaider had offered to invest $200 million, take an 80% interest and give Shtaif and his team a 20% carried interest. Shtaif said he told Shnaider he did not want another stakeholder to control his company. They negotiated back and forth, stopping at a $50 million investment by Midland.
[48] Shnaider denied offering to invest $200 million. He said 18-19 Midland was never prepared to invest more than $50 million in Magellan. Before he could commit Midland to invest even $50 million, he needed the approval of the other Midland shareholder, Shyfrin.
[49] On Sunday, December 11, 2005 in Moscow, Shtaif met with Shnaider and Shyfrin for the first time. Shyfrin gave evidence January 29, 2013, p. 12-13 that on December 11, Shtaif represented that BDW was definitely willing to invest $70 million in the joint venture. It was a reputable international investor represented by John Howard, a financier. Shtaif told Shnaider and Shyfrin they must invest quickly. A number of others, including Tamares and Rothschild Bank, were lined up to invest. (Shyfrin, January 29, 2013, pp. 12-14; Shnaider 503-504; Shtaif. 3168-3169). Shyfrin said he knew the owner of Tamares, Poju Zabludowicz, was a very wealthy man (Shyfrin 164). He said Shtaif's references lent legitimacy to his claims.
[50] On Monday, December 12, 2005, Shtaif emailed Ex. 306/Tab 32 to Bokserman, advising he had met with Shnaider and Shyfrin in Moscow the day before, and was going to meet again with them on (Tuesday) December 13, 2005.
[51] Shyfrin said Jan. 29, 2013 p. 158 Shtaif told them he knew of a number of oil fields that his company could purchase at less than market value. After they were consolidated and his company taken public, the profits would be enormous. Shyfrin was reluctant to invest in Magellan because he did not want to be distracted from Midland's core businesses. However, he went along with Shnaider (Shyfrin January 29, 13-14; Shnaider 18-20.)
[52] Both Shnaider and Shyfrin were of the view that $50 million was insufficient to fund the proposed venture or to create even a medium sized oil company (Shyfrin Jan. 29, 2013 at 166-167). Without BDW's $70 million, a $50 million investment by Midland would not have made sense. Both Shyfrin and Shnaider gave evidence that if there had been no other committed investor, they would not have agreed to proceed Shyfrin Jan. 29, 2013 at 17; Shnaider 26-27. With a total investment of $120 million, Magellan would be better able to raise additional funds from commercial banks and leverage equity to buy additional assets.
[53] Shtaif told Shyfrin and Shnaider that BDW was transferring $8 million to Magellan. Shtaif gave evidence that although Shnaider and Shyfrin tried to "squeeze him" for 40% of the equity in Magellan, Midland was to receive only 32% of the Magellan shares.
[54] Shnaider gave evidence 21, 33-34 the Plaintiffs proposed that Shtaif and his team would receive 20% of the Magellan shares, BDW about 40%, Midland about 40% [inclusive of options]; Midland would buy 25 million shares in Magellan at $2 per share. They agreed Shtaif would transfer 7 million options to Shnaider and Shyfrin, leaving Shnaider and Shyfrin with approximately 40% of Magellan. They also agreed that Magellan would own the operating company.
[55] Magellan Engagement Letter. On December 19, 2005, Shnaider emailed Ex. 307/Tab 34 to Shtaif asking for an update. In response, on December 20, Shtaif circulated Ex. 4/Tab 36, an "engagement letter" on Magellan letterhead, mentioning that Shtaif had set up Magellan on the over-the-counter exchange, BDW had already transferred $8 million to Magellan and would be investing $70 million; and that the operating company, Euro Gas, would be transferred to Magellan to "protect the interest of all the shareholders."
[56] At trial, Shtaif agreed the statement in Ex. 4 that the $8 million had already been transferred to Magellan was "incorrect." Shtaif acknowledged 4406-4407 that before he circulated Ex. 4, he had not received confirmation from Howard that the $8 million transfer had been made.
[57] I accept Shnaider's evidence 26 that in considering whether to commit Midland to invest in Magellan, he relied on the representation in Ex. 4 that BDW had already transferred $8 million to Magellan, and had committed to invest a further $70 million in Magellan, that Magellan was a public company and that the operating company, Euro Gas, would be transferred to Magellan to protect the interest of all the shareholders. I accept Shnaider's evidence that Shtaif's promise to transfer Euro Gas to Magellan was a matter of priority for the Plaintiffs.
[58] In late December 2005, Shnaider asked Mr. Avi Greenspoon ("Greenspoon") a lawyer at the Goodman's firm in Toronto, to coordinate the Plaintiffs' proposed subscription agreement re Magellan. Ex. 280/Tab 37 is a Greenspoon email dated December 23, 2005.
[59] On December 27, 2005 Watson emailed Ex. 453/Tab 38 addressed "To Whom it May Concern" to Shtaif, advising that BDW was prepared to transfer the "first portion" of its funding to Magellan totalling $2 million; Shtaif agreed 4428 he understood from it that BDW had not transferred any money to Magellan as of December 27, 2005. Shtaif agreed 4428 that [contrary to his representation in Ex. 4], he certainly knew by December 27, 2005 and before January 4, 2006 [when the Plaintiffs made a firm decision to invest in Magellan] that BDW had not transferred $8 million to Magellan.
[60] Shnaider gave evidence 37 that Shtaif never advised him or Shyfrin that BDW had not transferred $8 million to Magellan.
January 2006
[61] On January 4, 2006, Shnaider emailed Ex. 5/Tab 41 to Shtaif, confirming that Midland would invest $50 million in Magellan provided it received 40% of the Magellan shares and $120 million in total had been raised. Shtaif gave evidence 3174, 4438 that Ex. 5 was inconsistent with his understanding of what had been agreed – Midland was not to receive 40% of the shares. There was no condition that $120 million would be raised.
[62] As of January 6, 2006, Shtaif clearly knew that Magellan had no Canadian bank account and that BDW had still not transferred any funds to Magellan – no $8 million as represented in Ex. 4, and no $2 million as promised in Ex. 453.
[63] On January 9, 2006, before the Magellan Board met for the first time on January 20, 8 million Magellan shares had been transferred to Howard and 12 million Magellan shares had been transferred to Shtaif.
[64] Ex. 310/Tab 42 is an email from Shtaif 3186 to Groag dated January 11, 2006 enclosing a presentation for Magellan. Shtaif 4448 wrote: "It needs revisions and obviously has mistakes … I cannot devote too much time in preparation of a 'perfect' presentation..."
[65] The Magellan Board is Appointed. Shtaif said he and Groag decided around January 2006 to limit Magellan's investors to BDW and Midland, and its Board to Shtaif, Groag and two appointees to be made by each of BDW and Midland. [BDW appointed Roberts and De Freitas; Midland appointed Shnaider and Shyfrin.]
[66] BDW Appointments to Magellan Board: Roberts. Roberts said in January 2006 Howard called to ask him to become a director of Magellan and offered him US$80,000 a year and 2 million restricted Magellan shares to do so. Roberts said 6059 in 2005 he had purchased IPICO, a South African high-tech company and at the time of Howard's call was in the process of taking it public on the TSX Venture Exchange. He said he agreed only to attend Board meetings until after IPICO had been taken public.
[67] Roberts said he thought David Watson and his wife were the owners of BDW and that Watson was BDW's president and CEO. He understood that Howard was a successful stock promoter. He lived extremely well. He had been to his home once and had stayed at his villa in St. Maarten.
[68] Roberts conceded 7326 he knew Boock's birth name was Irwin Krakowsky, he had been convicted of fraud in relation to a mortgage on his own parents' home [Ex. 672/Tab 780 is Lexis printout of R. v. Krakowsky]. While incarcerated he had met and married Birte Boock and taken her name. He had been released from prison in 1997.
[69] Roberts, a lawyer, had represented Boock in the past but said he had never done any corporate or securities work for him or represented him on any criminal, corporate or securities matter [except as a trustee or escrow agent.] He had done civil litigation for him. Before this litigation started, Roberts said he was not aware of any of Boock's other criminal or OSC charges.
[70] By January 12, 2006, out of his 8 million Magellan shares, Boock had allocated 2 million to Roberts; Ex. 565/Tab 43 is the share certificate.
[71] BDW Appointments to Magellan Board: De Freitas. Boock asked De Freitas, a provider of offshore services based in St. Vincent and the Grenadines, to become the other BDW nominee on the Board of Magellan. De Freitas said he received 1.5 million shares from Howard. Other records reflect and I find that out of Boock's 8 million Magellan shares, he allocated 3 million to De Freitas.
[72] Magellan January Stock Price Increases. On January 12, 2006, Howard emailed Ex. 311/Tab 44 to Shtaif: "… The stock should start moving up so you should start thinking about raising money with this stock at $5 plus … "[Emphasis added.] Shtaif gave evidence that at that time, he had "no idea what Howard was saying. On January 19, 2006, Shtaif emailed Ex. 312/Tab 47 to Howard: "As per our discussion, you can issue the shares [in] … BDW to my company …"
[73] First Magellan Board Meeting. On January 20, 2006, Shtaif, Groag, Shyfrin and Shnaider attended Magellan's first Board meeting in Moscow. Roberts and De Freitas did not attend. The minutes of the January 20, 2006 meeting are Ex. 6/Tab 49.
[74] Appointment of Officers and Directors. Shnaider gave evidence 33-34 that the Board appointed Groag Chairman and non-executive director; Shtaif CEO and Executive Director; Shnaider and Shyfrin non-executive directors.
[75] Shareholdings. The Magellan shareholding was discussed. The minutes reflect that the Board approved issuance of 25,454,545 shares to BDW, 25 million to Midland, 18 million to Shtaif, 8 million to Howard for a total of 76,454,545 [with options, a total of about 94 million].
[76] Shtaif insisted that the Board grant him broad authority to negotiate and consummate acquisitions of oil and gas properties in Russia
[77] Euro Gas. Further to the promise that Euro Gas would be transferred to Magellan in order that the company operating Magellan could be made accountable (to "protect the interest of all shareholders"), the Magellan Board approved either Magellan's immediate unconditional purchase of Euro Gas BVI or the unconditional surrender of Euro Gas' shares to Magellan.
[78] Disclosures and Alleged Non-Disclosures at the First Magellan Board Meeting. Shnaider 36-37 and Shyfrin 19 gave evidence that Shtaif did not disclose before or at the January 20, 2006 meeting that he held 12 million shares of BDW, or that Howard had asked him to become its president.
[79] Shtaif said 3195 they did discuss his shareholding and options in BDW at the meeting. Shnaider did not care about them. At any rate, he thought his shareholding in BDW was "irrelevant." At that time, BDW shares were trading at less than a cent a share. 4669, 4470.
[80] I reject Shtaif's evidence that he disclosed that he owned 12 million shares in BDW. The January 20, 2006 minutes reflect no such discussion. Mention was made in the minutes of 8 million shares to be issued to Howard. No mention was made that of those 8 million shares, Howard had already received 3 million, Roberts 2 million and De Freitas 3 million.
[81] There is nothing in the January 20, 2006 Magellan minutes recording that BDW had failed to pay the $8 million. I accept Shnaider's evidence 37 that at the January 20, 2006 meeting, Shtaif did not disclose that BDW had not in fact transferred the $8 million that he had earlier represented had been paid to Magellan. I reject Shtaif's evidence on that point 4471-4472.
[82] On January 24, 2006, Shtaif emailed Ex. 7/Tab 51 to Shnaider including the following: "As agreed 25 million shares … options I will issue to you once I receive them, since they are in my name. As agreed, 7 million options at $.20 for consideration of one dollar US." Ex. 7 corroborates Shnaider's evidence that Shtaif promised to transfer 7 million options in Magellan to Midland, leaving it with roughly 40% of the Magellan shares.
[83] Free Trading Shares/Manipulation of Magellan Stock Price. On January 28, 2006, Howard emailed Ex. 455/Tab 52 to Shtaif, setting out his strategy. He suggested 4 million Magellan free trading shares should be created. He emphasized that Shtaif should not discuss his proposal with any Board member but De Freitas:
I think there should be a series of PRs as it helps meld things from a psychological perspective in the market. There should be four, (1) your appointment [as CEO of Magellan], (2) Tony, (3) the agreement with BDW and appointment of Stanton and Greg, (4) agreement with and appointment of Alex. This will move the stock to at least an eight dollar bid… Second we should complete a 504D offering and create 4 million free trading shares. … I have the two names you sent me. I think we split it up 1 million apiece including Alik who will be putting it under my auspices so that the market moves orderly…. I think this should only be discussed between us, not even off the record with directors. Stanton will be part but will not discuss it unless we say it is okay.
[Emphasis added.]
[84] Shtaif conceded in cross-examination that he knew that Howard was proposing to create 4 million free trading shares.
[85] Based on the content of Ex. 455, I find that on January 28, 2006, Shtaif was aware that Howard was intending to take steps to increase the Magellan stock price to eight dollars. He knew the agreement with Midland would help to move up the stock. He was also proposing that 4 million free trading shares be issued and that information about them be withheld from the Magellan directors other than De Freitas.
[86] Shtaif gave evidence he did not agree with Howard's proposal to issue 4 million shares without the approval of the Magellan Board. Ex. 456/Tab 52 contains a set of emails sent on Sunday, January 29, 2006. Shtaif emailed Howard: "With regards to issuing 4 million shares … We need a unanimous board approval … What is your proposal for the public float? Who will receive the shares?? … Tony has clearly stated that we will not dilute the company anymore unless the board approves new issue … [Emphasis added.]" Howard replied the same day: "I had the old Board put into place what is known as a 504D… Just need the lawyer to send it in and we can create free trading certificates. Who gets them? Just us..." [Emphasis added.]
[87] On the same day Howard emailed Ex. 457/Tab 52 to Shtaif: "… send me a copy of your signature with your name typed underneath and I will make sure that new certificates are ordered." Shtaif responded: "As discussed please find attached signature page to issue shares certificate.
[88] I find that as early as January 29, 2006, after Howard advised him that only he and Howard would benefit from the 4 million shares and that no approval of the current Board would be needed, Shtaif agreed to the issuance of the 4 million Magellan free trading shares. On January 29, 2006, Shtaif sent Howard a signed signature page so the 4 million shares could be issued. He did not intend to discuss or share the benefits of the 4 million shares with Groag and Roberts.
[89] On January 30, 2006 at 9:26, Shtaif emailed Howard, Ex. 457/Tab 52: "… I just wanted to clarify issue of 4 million shares. Are these shares issued to us, and are we selling them to the public?" [Emphasis added.] Howard responded:
Hi Michael, The shares are issued under what is called the Texas 504D to four Texas corporations and then transferred accordingly. … the decision to sell and how many … is … a call that we make, dependent on market conditions … We do not want the stock to jump to $100 overnight because the Securities and Exchange Commission would suspend trading … because the move was too high too fast.
[Emphasis added.]
[90] Shtaif told this Court that he had no knowledge of the 4 million free trading share issuance until after he retained Nusbaum in May of 2006 and Beach confirmed that Magellan was a sham.
[91] On January 30, 10:01 a.m. Watson emailed Shtaif: "We got the shares."
[92] I reject Shtaif's evidence that he did not know 4 million free trading shares had been issued. I find that by January 30, 2006, Shtaif knew they could not sell too many of them at any one time or the SEC would suspend trading, and that the shares should not be discussed with Groag or Roberts. He offered 1.4 million of them to Shnaider to induce Midland to invest.
[93] Midland Subscription Agreement. On or around January 31, 2006, Midland signed Ex. 8/Tab 54, a subscription agreement promising to pay Magellan $50 million for 25 million shares. The January 31, 2006 Midland/Magellan subscription agreement did not contain a provision making it conditional on BDW paying $70 million to Magellan. However, Midland did not remit $50 million or any payment with Ex. 8. Shnaider said he had made it clear in Ex. 5 that Midland would only invest in Magellan if $120 million in total would be raised.
February 2006
[94] Purchase/Sale of Free Trading Shares. By February 2006, Shtaif was actively seeking buyers of the 4 million illegally issued free trading shares. In February 2006, Shtaif introduced his friend and business partner Vlad Voskoboinikov ("Voskoboinikov") to De Freitas. De Freitas admitted he facilitated the private sale of Magellan free trading shares through his online brokerage Aberdeen Online. Voskoboinikov filled out the forms necessary to open a trading account with Aberdeen and to purchase 50,000 Magellan shares at $5 per share. On these forms the name of the seller was left blank.
[95] Both Shnaider 46 and Shyfrin Jan. 29, 2013 at 20 gave evidence that in February [and March] 2006, Midland was continuing to withhold payment of its $50 million, waiting until BDW had paid its $70 million to Magellan.
[96] SibinTek First Contact. In February 2006, Shtaif said he met Irina Bekker (Bekker) to discuss an oil field in Tyumen owned by a closed Russian joint stock company called SibinTek. Shtaif thought it was underdeveloped and undervalued.
[97] The Second Magellan Board meeting. February 19, 2006 was the day of the Second Magellan Board Meeting in Moscow. Ex. 9/Tab 58 is the Minutes of that meeting.
[98] Shnaider, Shyfrin, Shtaif, Groag, Roberts and De Freitas were present. Roberts met Shtaif, Groag, Shnaider and Shyfrin for the first time. De Freitas had already met Shtaif and Roberts, but was meeting Shnaider and Shyfrin for the first time.
[99] Roberts gave evidence that at the beginning of the meeting, after some introductory comments, Shnaider asked him how he knew Howard and De Freitas. He responded 6106 he had known them in his law practice. Shtaif said that Roberts did disclose he was a retired lawyer and that he had earlier acted for Howard and De Freitas. Ex. 9 does not reflect such a disclosure. Roberts submitted 7364 he did not need to disclose that information because it was not material. He believed that Howard was the promoter, not the owner, of Magellan.
[100] Alleged Non-Disclosure of Howard's Identity at February 19 Meeting. Shnaider said 49-50 Roberts did not disclose that he had previously acted for Howard/Boock, that Howard's real name was Boock or Krakowsky or that he had been convicted of fraud. Had Roberts disclosed this information, Shnaider said 53 he would have realized that this was a "pump and dump" scheme, and would have declined to further participate in Magellan.
[101] Shyfrin gave evidence 21-22 that Roberts did not advise the Board that Howard was an alias for Irwin Boock or that he had been convicted of fraud. Had they known, they "would have stopped this business immediately."
[102] Shtaif gave evidence 4480-4486 that Roberts did not disclose that Howard's real name was Boock or details about his past. That would have been important information for the CEO and directors of Magellan to have known. He said had he known, he would not have continued to deal with Howard.
[103] Shnaider gave evidence 51 that Roberts did not disclose to the Board that before the Board meeting, he had already received 2 million shares from Howard: Ex. 565/Tab 43.
[104] I have accepted Shnaider's and Shyfrin's evidence that Roberts did not disclose he had acted as a lawyer for Howard and De Freitas in the past.
[105] I find neither Roberts nor De Freitas disclosed Howard's true identity to the Magellan Board.
[106] Payments to Magellan/Re $8 million Non-Payment. At the February 19 Board meeting, Shtaif did not disclose to the other members of the Board that the $8 million he had earlier represented that BDW had already transferred to Magellan, had not been paid. Shtaif gave evidence that by the February 19, 2006 Board meeting, neither Midland nor BDW had made any payments to Magellan.
[107] Acquisitions. De Freitas said Shtaif presented his business plan, including his planned acquisitions. The Magellan Board authorized the purchase of the SibinTek and Reef oil fields through two subsidiaries, Trovalion and Koaploma.
[108] Free Trading Shares. Shtaif first gave evidence that there was no discussion about free trading shares at the February 19, 2006 Board meeting. Later, he modified his earlier answers and said 6128 that De Freitas advised the Board that a previous Board of Magellan had authorized the issuance of 4 million free trading shares under the exemption from the registration requirements in Rule 504D of Regulation D of the Securities Act 1933 (US).
[109] I reject the evidence of Roberts about disclosure of his past dealings with Boock. Roberts attempted to rationalize his non-disclosure as being privileged. If Roberts believed the information could not be disclosed because it was privileged, given its materiality, he should not have agreed to join the Board. I find Roberts did not disclose other material information, including Howard's real name Boock or Boock's prior conviction for fraud.
[110] I accept Shtaif's, Shnaider's and Shyfrin's evidence that they would have considered Howard's alias and criminal past to be material to their decision to pursue the joint venture.
[111] Roberts and De Freitas did not disclose Howard had already transferred to them 2 million and 3 million Magellan shares respectively.
[112] Roberts pleaded at paragraph 41 of his Statement of Defense and Counterclaim that "Canadian institutions would not invest in the equity of a U.S. company listed on the Pink Sheets," advice that he claimed to have given to the Magellan Board during the February Board meeting.
[113] On February 19, 2006, just after the First Board Meeting Roberts attended, he expressed some doubt about whether BDW would be able to obtain an equity line. He emailed Ex. 554/Tab 59 to Irwin Boock at equiant@rogers.com:
Love this deal... I do not know how close you are to obtaining an equity line. If you are in doubt, we could likely sell BDW's interest to Eduard for at least $3 per share right now, maybe as high as $12. … We can hold onto our interest and let it run…
[Emphasis added.]
[114] I find none of Roberts, Shtaif or De Freitas disclosed at the February 19, 2006 meeting that it would be necessary for BDW to raise the $70 million, let alone that they had any doubts about its ability to do so.
[115] Euro Gas. Shnaider gave evidence that despite Shtaif's promise to transfer Euro Gas to Magellan at the outset of the venture, he had failed to do so. Shtaif gave evidence 3198, 3254-3258 he had received an opinion from PWC or KPMG that the doctrine of mind and management would have applied had Euro Gas become a subsidiary of Magellan. Since Shtaif was the General Director of Euro Gas and the CEO of Magellan, Magellan would have been taxed in Russia.
[116] Shnaider said 48 that shortly after the February 19, 2006 meeting, the Board decided that Magellan Russia would be incorporated as Magellan's operating company.
[117] Magellan. On February 20, 2006, De Freitas opened a bank account for Magellan at TD Canada Trust in Toronto.
[118] On February 27, 2006, Groag emailed Ex. 323 to Howard, copied to Shtaif: "Only after all the subscription payments have been received in full by Magellan can the float be issued." After receiving Groag's email, Howard wrote Shtaif:
Michael, I thought we had an agreed upon procedure in place …. I'm very confused. We have previously spoken, including when you were here, that we would proceed with the issuance of the 504D shares structured under previous management. Shares less those required for market maker would be sent to Stanton, and you and Alex would open the appropriate accounts….
[119] As of February 27, 2006, I have found that Groag was unaware that Shtaif had already agreed to the issuance of 4 million free trading shares. When he received Groag's February 27 email, I find Howard was upset and complained to Shtaif. I find Howard's February 27, 2006 email to Shtaif accurately summarized Howard's agreement with Shtaif regarding the free trading shares. I reject Shtaif's evidence he thought Howard was referring to options [not free trading shares]. I find Shtaif understood that Howard was referring to the 4 million free trading shares he knew had already been issued. Shtaif knew that some of those shares were being sent to De Freitas' company, to be sold as Shtaif and Howard directed. Shtaif knew the proceeds were being allocated to himself and Howard. Shtaif's were to be forwarded to his personal account. Since Shtaif had promised Midland part of his own allocation, he also knew that De Freitas was opening an account to receive those proceeds. Shnaider gave evidence that he was not aware there was anything illegal about the additional 1.4 million shares Shtaif had promised to allocate to Midland.
[120] BDW Subscription Agreement. After promising to do so for months, on February 28, 2006, Watson finally emailed Ex. 324/Tab 61 to Shtaif, enclosing BDW's Subscription Agreement for $70 million of the Magellan shares. [Watson's signature was in electronic form.] Immediately after Magellan received Ex. 324, Groag wrote Howard asking him to provide a schedule of dates on which Magellan could expect to receive BDW's subscription payments.
March 2006
[121] Roberts gave evidence 7373 that from February 19, 2006 until April 28, 2006, he was not involved in the business of Magellan because he was "really busy as the CEO of IPICO, a pretty hot technology company." He said he was not copied on any emails. He estimated his total time spent on Magellan matters up until April 28 was about 10 hours. Although he knew that BDW had agreed to invest $70 million in Magellan, he said he did not stay in touch with Boock about his fundraising efforts.
[122] IPICO went public the first week of March 2006.
[123] On March 2, 2006, De Freitas wrote Ex. 12/Tab 62 to Shnaider:
Since our meeting and subsequent telephone conversation we have found a St. Vincent and the Grenadines (SVG) International Business Company named TH Capital Corporation that is available and ready for use immediately. In addition we have reserved the IBC name JK Fogherty Investment Corporation that will be registered and utilized for separate business activities.
[124] De Freitas gave evidence 5969 his initial transaction with Shnaider had "nothing to do with Magellan," although the two company accounts might eventually have held Magellan shares. However, he did not recall any transfers/deposits of Magellan shares into those companies/accounts.
[125] BDW Payment Schedule. On March 5, 2006, Howard emailed Ex. 325/Tab 63 to Groag, enclosing BDW's proposed payment schedule: $10 million by March 31, $30 million by April 30, $30 million by the end of May.
[126] Neither Groag nor Shtaif copied Shyfrin and Shnaider with Groag's request for a BDW payment schedule, or with Howard's March 5, 2006 response. Shtaif said Groag shared that payment schedule with Shyfrin and Shnaider. Shtaif said on discovery he was "doubtful" that BDW would meet the payment schedule. However, he did not advise the Plaintiffs at any time before May 16, 2006 about the schedule or his doubts. I accept Shnaider's evidence that he was unaware that BDW would be paying its $70 million subscription in tranches.
[127] Shtaif's Insistence on Unhampered Management of Magellan. Shyfrin and Shnaider gave evidence that Shtaif viewed any assistance from Midland as unnecessary interference.
[128] On March 16, 2006 Groag emailed Shyfrin:
… At our last board meeting we empowered Shtaif to purchase six targets and we must let him carry this out on our behalf unencumbered…. Eduard [we] must have your assurance that Shtaif can … carry out the orders of the Board and commit to purchase the first three acquisitions without any further delays. … [Emphasis added.]
[129] Ex. 330/Tab 67 is a letter from Watson to Shtaif dated March 28, 2006, purporting to offer $2.75 per share for the Magellan shares for which Midland had subscribed. Midland had agreed to pay $2 per share, but as of late March 2006, had still not paid any of its $50 million to Magellan. Shnaider gave evidence that he and Shyfin had continued to make it clear to Shtaif they would only pay Midland's $50 million when BDW had paid its $70 million.
[130] On March 31, Shtaif emailed Ex. 331/Tab 70 to Howard: "I am going to hammer Eduard to deposit full amount …" [Emphasis added.]
[131] Howard emailed Ex. 331/Tab 70 to Shtaif: "Funds should hit yesterday or worse today from ILGY." [By March 31, 2006, BDW's name had been changed to International/ILGY.]
[132] On March 31, 2006, Groag emailed Ex. 10/Tab 71 to Shnaider and Shyfrin:
It falls to me to remind you that unless these funds are credited to [the] Magellan TD bank account as of close of business today, I will have no alternative but to call an extraordinary meeting of the Magellan Board for Monday, April 3, 2006 … given the sharp increase in the share price over the last few days… Magellan has received a written offer for shares at a price higher than the Midland subscription price.
[Emphasis added.]
[133] Shnaider gave evidence 56, 58 he had not seen the "written offer for shares at a price higher than the Midland subscription price." Shyfrin gave evidence January 29, 2013 at 23-24 he spoke to Groag by telephone and asked for the name of the offeror at a higher price. Groag refused to provide the name, saying it was a "commercial secret." Shtaif gave evidence 3272 that he showed Shyfrin the BDW offer, Ex. 330. They had a long discussion about it.
[134] Later that day, Groag emailed Ex. 10/Tab 71 to Shnaider to advise that BDW had met its obligation to fund by March 31, 2006. I have inferred that Shtaif asked Groag to send that email.
[135] Shtaif conceded 4614 that Groag's representation to Shnaider and Shyfrin in Ex. 10 that BDW had met its obligation to fund was "inaccurate." He blamed Groag, saying 3277 Groag had told him on March 31 that he had spoken to Howard and De Freitas who both had confirmed that funds had been deposited. De Freitas gave evidence 6001-6002 that he did not recall having had such a conversation with Groag. Groag later wrote on April 6 Ex. 337/Tab 86 that when he made the statement that BDW had met its obligation to fund, he had been relying on what Shtaif had told him.
[136] Ex. 332/Tab 72 is an email from Shtaif to Watson dated March 31, 2006: "Just wanted to get confirmation that the funds were transferred and what amount." Shtaif said that on March 31 he also left a message for Mr. D'Alessandro, Manager at the TD Bank, seeking information on amounts the Bank had received. D'Alessandro had not responded.
[137] I accept Shnaider's and Shyfrin's evidence that BDW's commitment to subscribe $70 million, and Shtaif's and Groag's representation that as of March 31, BDW had met its obligation to fund, were crucial to their decision to advance $50 million on April 4, 2006.
[138] I reject Shtaif's evidence that Groag told him he had spoken to both Howard and De Freitas and they had both advised him that the funds had been deposited. I find on March 31, when he represented that BDW had met its obligation to fund, Groag was relying [see Ex. 337] on information Shtaif had provided, and that Shtaif had told him that BDW had paid, without first confirming with De Freitas or the TD Bank that BDW had in fact met its obligation to fund.
[139] Shtaif knew that International was the offeror for shares at a price higher than the Midland subscription price. Shtaif "doubted" that BDW would be able to meet its own commitment to invest $70 million "let alone pay an additional $68.5 million."
[140] I find Ex. 330, "Watson's" March 28 letter, was bogus, prepared to induce Midland to immediately pay its $50 million. Ex. 10/Tab 71 was sent for the same reason. Shtaif noted in Ex. 352/Tab 72, a letter to Howard, it had had the desired effect: "Tony's email expedited things somewhat." I find De Freitas caused "the sharp increase in the [Magellan] share price over the last few days" mentioned in Ex. 10 for the same reason.
[141] I find BDW's offer to purchase Midland's shares at a higher price, the sharp increase in the share price over the few days preceding March 31, the calling of an extraordinary meeting and the vague statement that BDW had met its obligation to fund, were all part of a shared plan and that Howard, Shtaif and De Freitas were all acting in concert to induce Midland to immediately pay its $50 million.
April 2006
[142] Roberts' April 1, 2006 Letter to the Plaintiffs. On April 1, 2006, Roberts emailed Ex. 673/Tab 783 Shyfrin, Shnaider, De Freitas and Groag:
… John has asked me to determine the interest of my group of investment bankers in financing Magellan in the sum of between $200 million and $300 million. I have canvassed 3 investment banks [GMP Securities Inc., MGI Securities Inc. and Wellington West] and all are interested… We will need to get our business plan to them for consideration.
[143] Roberts gave contradictory evidence about his involvement as a Magellan Board member prior to mid-May. On the one hand, as I have already mentioned, he said he did not even receive emails in February, March or April of 2006, and he had spent fewer than ten hours on Magellan issues. On the other hand, when he was commenting on Ex. 673, he gave evidence he had been doing his job and by April 1, the investment bankers were already "excited" about Magellan's prospects.
[144] Roberts wrote "John" had asked him to determine the interest of investment bankers. I find Howard/Boock had asked him to send Ex. 673 to Shyfrin and Shnaider on April 1, 2006. I find in Ex. 673, Roberts made the statement that three investment banks were interested before he had formally approached any of them. I reach this conclusion in part based on his earlier evidence about his involvement in Magellan before April, and subsequent correspondence in May 2006 with the investment bankers.
[145] SibinTek. Shtaif gave evidence he discussed the purchase of the SibinTek oil field with White & Case, the Russian international law firm that handled the transaction, for the first time around the end of March or the beginning of April 2006.
April 4, 2006: Midland Wires $50 million to Magellan
[146] On April 4, 2006, Midland wired $50 million to Magellan. Shnaider 62; Shyfrin, January 29, 2013 at 25.
[147] I accept Shnaider's evidence 61 that had they known BDW had not made any payments, he and Shyfrin would not have ordered the transfer of Midland's funds when they did. I accept Shnaider's evidence that he initially understood "BDW has met its obligations to fund" to mean that BDW had paid the whole $70 million. When later he was told it had paid only $10 million he was unhappy, but he thought that by making a $10 million payment, BDW had shown its commitment to Magellan.
[148] On April 4, 2006, Shtaif emailed Ex. 333/Tab 80 to De Freitas and Watson inquiring if the funds from International and Midland had been credited to Magellan's account. The TD bank manager D'Alessandro emailed Shtaif directly: "We have received an incoming wire in the amount of $50 million."
[149] I find that on April 4, 2006 when he received D'Allessandro's message, Shtaif knew that BDW had not paid any of its subscription to Magellan. He knew that four days earlier, he had told Groag and Groag had told Shnaider and Shyfrin that BDW had met its funding commitment. Shtaif said 4625 he did advise Shnaider and Shyfrin.
[150] In his capacity as President and Chief Executive Officer, Shtaif had insisted on being given and had been given unlimited access to the US$50 million in the Magellan bank account. I find Shtaif did not advise Shyfrin or Shnaider on April 4 or April 5, 2006 that BDW had not paid anything. Had he done so, the Plaintiffs would have been unhappy they had been falsely induced to pay Midland's $50 million and at the very least, just as they later did, would have insisted on limiting Shtaif's discretion, including tighter financial controls over the disbursement of Magellan's funds.
[151] I have found that as early as January, De Freitas had been artificially manipulating the Magellan share price.
[152] On April 4, 2006, Shtaif emailed Ex. 333/Tab 80 to De Freitas: "… I hear you are having fun at the sea … since you have gone, the market slowed to a standstill. So it is time to stop having fun and come back to reality …"
[153] Shtaif Gains Access to the $50 Million in Magellan's TD Bank Account. On April 4, 2006, Shtaif emailed De Freitas: "I need … details on how to access account electronically."
[154] Free Trading Shares. On April 4, 2006, Shnaider emailed Ex. 13/Tab 77 to De Freitas: "I just want to verify that 1.4 million shares of Magellan have been deposited in the account that you have set up. Have some of the shares been sold? I ask because I spoke to Mike … and he told me that those shares have been distributed and some have been sold. Can you please keep me up to date?" De Freitas responded: "The process for getting the 1.4 million shares is underway and should be in the account by next week for sure. The delay is the transfer agent of the company. No shares have been sold to date."
[155] Euro Gas. On January 30, 2006 in connection with Magellan, Shtaif had emailed Ex. 457/Tab 52 to Howard, as follows: "I will need original documents or notarized copies … so I can start registering the company to conduct business in Russia. Russian authorities are very strict. Fax[ed] notarized copies are not accepted." [Emphasis added.] Yet on April 4, 2006, knowing Marechal would need originals or notarized copies to incorporate Magellan Russia, the company that was to replace Euro Gas as the operating company for Magellan, Shtaif sent photocopies.
[156] I find Shtaif knew that sending photocopies would delay the incorporation of Magellan Russia, and in turn delay the transfer of management functions from Euro Gas to Magellan Russia.
April 5-30, 2006
[157] BDW Promises of Payment. On April 5, 2006, Shnaider emailed Shtaif seeking confirmation that Midland's funds had been deposited into Magellan's bank account. Shtaif responded to Shnaider Ex. 11/Tab 80: "I just wanted to inform you that the funds have arrived at the bank. We currently have over $60 million in the bank..." Shtaif admitted 4637-4638 that statement was "inaccurate." He knew Shnaider would understand from Ex. 11 that BDW had paid $10 million [in addition to Midland's $50 million wired April 4, 2006].
[158] Shtaif said 4610 he did not receive Ex. 334/Tab 81 until De Freitas forwarded it to him on April 5, 2006. By April 5 at the latest, both De Freitas and Shtaif knew the only money in Magellan's account had come from Midland. De Freitas 6002-6003.
[159] After receipt of Midland's $50 million was confirmed, De Freitas emailed Shtaif and Boock/Watson: "We're in business!" Shtaif replied: "Good job. Thank you for the information. I will call you later on."
[160] Free Trading Shares. On April 5, Shnaider wrote Shtaif: "… I checked with Stanton and he told me that … no shares have been sold." [Emphasis added.] Shtaif replied: "… I was under the impression that it was already done. There have been sales of shares recently between $10 and $13 per share. … Meanwhile, we have requests for large blocks of shares to buy from authorized float re 4 mil." [Emphasis added.]
[161] Shtaif gave evidence 3303 that on April 7, 2006, he informed Shyfrin that BDW had not deposited $10,000,000 in the TD account and showed him a printout of Magellan's TD Bank account.
[162] I reject that evidence. Shtaif said at one point he could not access the Magellan account at all until April 8, 2006 and could not make printouts until after he had signed banking forms in Toronto on April 10, 2006. I accept Shyfrin's evidence that on April 7, 2006, Shtaif did not give him a printout of Magellan's account or inform him that BDW had not paid anything.
[163] Euro Gas. Ganus, a Midland lawyer in Russia, gave evidence that on April 7, 2006, he emailed Shtaif telling him what I have found Shtaif already knew: the documents Shtaif had forwarded for the incorporation of Magellan Russia were insufficient. He needed originals. Shtaif denied receiving Ganus' April 7 email.
[164] Access to Magellan TD Bank Account. Shtaif said that on April 8, De Freitas provided the password to access the Magellan account.
[165] BDW Non-Payment. On April 8, 2006, Shtaif emailed Ex. 338/Tab 88 to Howard: "There are no funds in the account from ILGY. When should I expect them? …"
[166] Shtaif's Access to Magellan Bank Account. Having travelled from Russia to Toronto, on April 10, 2006, Shtaif personally introduced himself to the TD Bank Manager, D'Allessandro, and signed banking cards to obtain full access to the Magellan account, including the ability to print account information thereafter.
[167] Shtaif gave evidence he "chased" Howard for payment of ILGY's subscription between April 13 and 28, 2006. On April 13, 2006, Shtaif emailed Ex. 339/Tab 89 to Howard: "… The initial funds are still not deposited by David…." Shtaif said on April 13 after he returned to Moscow from Toronto, he printed a bank statement, gave it to Shyfrin and told him there were still only $50 million in Magellan's account. I accept Shyfrin's evidence that Shtaif did not do so. I find that Shtaif did not want Shyfrin and Shnaider to know that Magellan had received nothing from BDW.
[168] Reef/Euro Gas. On April 13, 2006 Euro Gas and Yuri Samsanov and Asia Energy entered into a Letter of Intent with repect to the purchase of Reef Energy, a company that owned an oil field in Perm, Russia.
[169] Shtaif Access To TD Account. On April 14, 2006, Shtaif emailed D'Allessandro: "… I need to have an active not a dormant account..."
[170] BDW Non payment. On April 15, Shtaif emailed Ex. 340/Tab 90 to De Freitas: "…. Eduard asked me at least 10 times if ILGY deposited funds. … I am very determined not to give them any ammunition to use against ILGY. Remember, I am a shareholder in ILGY as well, so I need to protect the company…" [Emphasis added.]
[171] Free Trading Shares. On April 17, 2006, Bokserman emailed Ex. 14A/Tab 93 to Shnaider: "Alex, did you give any thought to the offer I mentioned last Thursday to sell some Magellan shares at $6-$7?" Shnaider responded: "You have to ask Shtaif as I have no shares for sale right now." Later the same day, Shnaider wrote to Shtaif again, Ex. 14B: "What do you think? I am not in a hurry but I don't understand much in this."
[172] I reject Shtaif's evidence 4547 that when Shnaider asked him about the free trading shares, he replied, "What are you talking about? Nobody should have any shares."
[173] Shtaif Fundraising for BDW. Shtaif was not doing anything to raise funds for BDW. Roberts gave evidence that Howard had been complaining about that. Shtaif sent Howard Ex. 327/Tab 91 dated December 12, 2005, for distribution to investment bankers. In cross-examination, Shtaif agreed it was a stale document.
[174] Access to Magellan Bank Account. Ex. 550/Tab 94 is a fax De Freitas sent the TD Bank on April 18, 2006 at Shtaif's request, giving instructions to wire $1.5 million out of the Magellan account to Boddington Holdings/Bokserman.
[175] The earlier commission agreement, Ex. 484, between Euro Gas Consulting Inc. and BPL Corp. (Bokserman) entitling Bokserman to a 7% commission, had been restructured. Magellan had agreed to pay 3% commission and Shtaif had agreed to give Bokserman some of his Magellan shares to make up the difference between the 3% and the 7%. Shtaif 3152, 3329-3330; Bokserman 5707.
[176] SibinTek. There is an issue in this lawsuit as to whether Reagent, the purported owner of 40% of the SibinTek shares, had title to them and could sell them to Trovalion, then a subsidiary of Magellan. Shtaif gave evidence that around April 20, 2006, White & Case provided him with Ex. 371/Tab 95, a SibinTek transaction overview. He said he understood from it that White & Case had confirmed Reagent's ownership of 40% of the SibinTek shares. In that document White & Case noted that it had not yet received the documents necessary for it to confirm Reagent's title.
[177] Shtaif referred to Ex. 372/Tab 581, an agreement allegedly between Magellan and Trovalion dated April 21, 2006 regarding the purchase of the Treasury Notes, as evidence that Trovalion approved their purchase. Counsel for the Plaintiffs contested the authenticity of Ex. 372.
[178] Shtaif gave evidence 3543 that White & Case prepared Ex. 372. He said 3540-3541 he had asked Vinogradov, a Midland in-house lawyer, to translate it from Russian to French because Marechal, the signing office for Trovalion, could not speak or read Russian. After Vinogradov translated it and forwarded it to Marechal for signature, Marechal signed it and returned it to the Midland offices. Shtaif said he received it about a week later. Vinogradov denied 1905-1914 translating and forwarding Ex. 372 to Marechal.
[179] The authenticity of Ex. 372 is questionable at best. I have placed no weight on its contents. I find White & Case did not prepare Ex. 372. Ex. 372 does not contain a White & Case document footer [similar to those on Tabs 119 and 581]. Marechal was not a signing officer for Trovalion as of April 21, 2006. Had Ex. 372 been sent to Marechal for signature, Marechal, a lawyer, would have known he was not authorized to sign it and would have refused to do so. Shtaif produced what he said was the original of Ex. 372. It had not been folded. The envelope that had contained Ex. 372 had been folded.
[180] On April 22, 2006, White & Case delivered a list of due diligence needed to be done with respect to the SibinTek transaction.
[181] Reef. White & Case prepared a Share Purchase Agreement/Tab 99 for Reef dated April 24, 2006.
[182] On April 27, 2006, Shtaif emailed Ex. 343/Tab 101 to Howard: "I will call you as soon as I arrive in London tomorrow. Just for your information – funds did not arrive. I will check later on today. Please let me know what the status of payment is?"
[183] On Friday, April 28, 2006, Shtaif emailed Howard: "Hi John, I just checked the account and the funds did not arrive yet." Howard responded, blaming "the idiots at the bank" for non-payment. In Ex. 343/Tab 101 he wrote: "Watson will take care of it Monday."
[184] BDW Non-payment. Just before the third Magellan Board meeting scheduled for April 28, 2006, Groag wrote to Howard Ex. 337/Tab 86: "Shtaif has advised … that International's promised 10 million is in Magellan's TD account. Please see if International can expedite the balance… before the next Board meeting." [Emphasis added.]
[185] I have drawn two conclusions from Ex. 337: (1) Groag did not know that Magellan had not received any funds from BDW/ILGY. (2) Shtaif was not being honest with Groag.
[186] It is clear that just before the Friday April 28 Board meeting commenced, Shtaif knew no funds had arrived from BDW/International. They would not arrive before the following Monday.
[187] Third Magellan Board Meeting in London. Ex. 15/Tab 102 includes the Minutes of the April 28, 2006 Board meeting. Shnaider, Shyfrin, Shtaif, Groag, Roberts and De Freitas attended.
[188] Roberts said 6126 Shyfrin asked De Freitas if ILGY had made a deposit into Magellan's bank account. De Freitas confirmed that International had just done so. Roberts said all of the directors believed De Freitas' representation. [De Freitas said he advised that funds were on the way. He did not mention a specific amount.]
[189] Shtaif gave evidence 5966 that Shyfrin and Shnaider came into the meeting and immediately were "yelling about the $10 million." They asked De Freitas whether or not the $10 million had been paid. De Freitas said it had just been transferred. Shtaif said: "It was sort of a light conversation with respect to … what steps will be undertaken for BDW to produce full $70 million into account by the end of May 2006."
[190] Having received Ex. 343/Tab 101, Howard's email, I find that on April 28, 2006, Shtaif knew that no money had been paid by International. When De Freitas represented that International's payment had just been made, Shtaif did not advise Shyfrin, Shnaider, Groag or Roberts that BDW had not paid anything. I find Shnaider and Shyfrin believed Magellan had received funds from BDW/International.
[191] I find on April 28, 2006, De Freitas told the Board that BDW had paid. He did not mention a specific amount. Groag understood $10 million had been paid. Initially Shnaider understood $70 million had been paid. After the meeting, Roberts, Groag, Shtaif and De Freitas discussed the need for ILGY to pay the balance. Shtaif and De Freitas both knew ILGY had paid nothing. Groag did not know.
[192] Reef and SibinTek. Shtaif said the focus at the April 28 meeting was on the ongoing business of Magellan. He made a presentation and advised that the Board Agreements had been signed for Reef and SibinTek.
[193] Free Trading Shares. Roberts gave evidence 7514 that at the April 28 Board meeting, De Freitas mentioned 4 million shares that could be sold and traded freely pursuant to 504D. Members of the Board understood that only 4700 free trading shares had been issued and that Magellan's previous Board had approved the issuance of the 4 million shares. The current Board had agreed that the 4 million shares could be issued to create a free float but it had not passed a resolution to issue the 4 million shares.
[194] Groag's memo, Ex. 570/Tab 138, noted that nobody mentioned free trading shares at the April 28, 2006 Board meeting.
[195] I do not accept Roberts' evidence on the discussion about free trading shares at the April meeting. I accept Groag's version of events contained in Ex. 570, his May 20 email, mentioning there was no discussion of free trading shares at the April 28 Board meeting.
[196] I find Roberts did not mention Magellan's Pink Sheet status on April 28.
[197] Shtaif said 447 on April 28 Howard had arranged to meet with all the Board members at dinner that evening. However, neither Shyfrin nor Shnaider attended. John Howard and Mrs Howard had dinner with Shtaif, De Freitas, Groag, Greg Roberts and Mrs Roberts.
[198] Shtaif said Groag told Howard at dinner he was going to put him on notice that BDW must pay the full $70 million within 30 days pursuant to the Subscription Agreement.
[199] Roberts said 7415 at dinner, he and his wife sat with Mrs. Howard and talked about London. [Howard was at the other end of the table.] Roberts did not want to argue with Howard when his own wife was present. Later that night he telephoned Howard and told him ILGY's subscription would be terminated unless it paid the balance owing within 30 days. Howard told Roberts ILGY was still doing due diligence and was trying to float an issue on the Stockholm exchange. Roberts said he thought that was B.S.
[200] On April 29, 2006, Groag gave notice, Ex. 16/Tab 104, to International that in the event it had not transferred the final outstanding balance of US$60 million by June 2, 2006, the Board would hold a meeting to cancel any of International's shares that had not been paid in full. I have found that Shtaif knew that BDW had paid nothing as of April 28. Shtaif was present when Groag copied Shnaider, Shyfrin and the other Board members with Ex. 16, the April 29 notice to International. Roberts 6140-6141 prepared Ex. 16. Again, Shtaif was not being honest with Groag and was using him to give the impression that $10 million had been paid and he expected BDW to pay the full $70 million.
[201] Shtaif conceded that the notice incorrectly specified that the outstanding balance owed by BDW/International was $60 million. [Since BDW had paid nothing, the outstanding balance owing to Magellan as of April 24, 2006 was $70 million.]
[202] I do not accept Shtaif's evidence 3344-3352, 4684 he was unable to check Magellan's bank balance on April 29, 2006 because he had no computer, smart phone or Internet access in London and the electronic key that De Freitas had brought him on April 28, 2006 did not work. Shtaif was with Groag on April 29, 2006 when Groag emailed Ex. 16 to International. He could have accessed the Internet on April 29. I find he did not check the Magellan bank on the weekend because he already knew from Ex. 343 that no money had been paid.
[203] On April 30, 2006, Groag emailed Ex. 120/Tab 107 to De Freitas and Howard, copying Shnaider, Shyfrin, Shtaif and Roberts, in which he forwarded the following email he had received from De Freitas:
… I wish to advise the MEL Board that Stanton De Freitas and/or Gregory Roberts are independent directors appointed to the Board on the recommendation of John Howard, an individual responsible for introducing International Energy Ltd. (CEO David Watson) to MEL Management.
Both Stanton De Freitas and Greg Roberts are not directors, shareholders or management of International Energy and cannot speak to with any specificity the terms or conditions of the pending fulfilment of the subscription of International Energy to Magellan's shares.
May 2006
[204] Shtaif gave evidence 4672 he was pursuing the Magellan business plan, not helping BDW raise funds. He said he "could not take time to fly to Toronto to help BDW raise money." Shtaif gave evidence 3349 that Howard had asked him to give a presentation to investment bankers from Knight Securities ("Knight"), New York. He and Roberts did so in mid-May in Toronto. He said in cross-examination BDW asked to bring Knight to listen to Shtaif's presentation.
[205] Shtaif gave evidence he did not dedicate serious efforts to fundraising for BDW. [Had Shtaif believed International might be able to raise its $70 million subscription, he would have had good reason to assist it since he owned 6 million BDW free trading shares, 6 million BDW restricted shares and had 6 million BDW options. If Magellan and BDW were what he was representing them to be, Shtaif's interest in BDW would have been valuable.]
[206] I find in April and May of 2006, Shtaif's lack of effort to fundraise for International is one more indicator that he did not believe it would pay the $70 million to Magellan. Shtaif did not advise Midland about this.
[207] Free Trading Shares. On May 1, 2006, Shtaif emailed Ex. 314/Tab 108 to De Freitas:
We have agreed to sell 50,000 shares at five dollars per share. Vlad [Voskoboinikov] is the general director of Euro Gas Russia and director of Euro Gas BVI…"
I sent information regarding Vlad. He is the person that I talked to you that is doing all the things for us. His signature is incredibly important to us. Without it, we cannot purchase properties. Hence, this is the reason for the volume and the price. John is fully aware and supportive of this decision. So go ahead and issue the shares for him….
[Emphasis added.]
[208] Shtaif gave evidence that he expected the proceeds from the sale of shares to Voskoboinikov to be paid to Magellan, but unfortunately, the money was never deposited to Magellan's bank account.
[209] Free Trading Shares. On May 2, 2006, De Freitas sent documents to Voskoboinikov for the sale of 50,000 Magellan free trading shares at $5 per share, Ex. 504/Tab 714. On them, the name of the seller was left blank.
[210] On May 2, 2006, in response to the formal notice Magellan had given to International on April 29, Howard wrote Ex. 344/Tab 110 to Groag: "…I am perplexed as to why this email was sent and am also somewhat dismayed."
[211] Groag wrote Shtaif: "How do you want me to reply? John did not manage to meet with me last night even though we had arranged it. He said he and Greg had a theatre booking?" Shtaif's reply to Groag, Ex. 345/Tab 111, included the following: "… Just make him feel that there is no pressure and that there is no immediate danger that their shares would be sold to anyone else…"
[212] Euro Gas. On May 2, 2006, Shtaif emailed Ex. 346/Tab 112 to Howard:
I just remembered that you did not pass on to me original and Corporation documentation that was sent to you by the Secretary of State of Delaware. How can I get it? I need the originals to start incorporation of Magellan Russia. Can you have it for me when I arrive in Toronto, or can you courier it to me? I promised this Information to BNP but I have run out of excuses…
[Emphasis added.]
[213] Despite his knowledge that original Magellan documents would be necessary for the incorporation of Magellan Russia, and Ganus' April 7 request, Shtaif did not ask Howard to forward original documents until May 2, 2006.
[214] Groag's Email to Howard re Magellan Board Meeting. On May 3 Groag wrote to Howard:
… On April 7, I wrote an email to John, and again on April 24, 2006, advising that I had expectations that Midland would ask at 28 April Board meeting if all subscriptions had been paid in full…
My expectations manifested themselves on 28 April when Midland asked this question very early on in the proceedings. I differed [deferred] answering until post Shtaif's presentation and as this went on far longer than expected, I was never obliged to answer.
However I was fully expecting that the question would be fired at me and at the close of the Board meeting, the directors other than Midland who had rushed off to another meeting, discussed over beer the need for ILGY to render the balance of their outstanding share subscription payments.
[Emphasis added.]
[215] Euro Gas. On May 5, 2006, three days after he had written Ex. 346 to Howard, Shtaif emailed Ex. 363/Tab 662 to Shnaider, blaming Midland's lawyers for the delays and complaining: "I still did not receive anything from Valentin Vinogradov incorporating Magellan Russia. It has been one and a half months and I'm starting to get concerned. It should not take this long. I asked him two weeks ago and he told me that he would get back to me, but so far nothing."
[216] After receiving Shtaif's complaint, Shnaider emailed Ex. 229 to Vinogradov on May 5: "You promised Michael Shtaif that you will incorporate Magellan Energy Russia, but he has not heard anything from you and we are all getting very concerned about it." Vinogradov responded to Shnaider: "
Yes, indeed, I promised to register. But I also requested the documents which we needed to incorporate the company. Last time I saw Michael I reminded him that we still needed … the originals duly made and apostiled… The request for documents was set out on 7 April. So the company will be urgently incorporated upon receiving the requested documents…" [Emphasis added.]
[217] SibinTek. On May 6, 2006, Euro Gas signed Ex. 373/Tab 116, an MOU re the purchase of SibinTek.
[218] BDW Non Payment. On May 9, 2006, Shtaif emailed Ex. 348/Tab 585 to Howard, noting there had been no movement in the Magellan bank account. Shtaif did not copy Shnaider and Shyfrin.
[219] Euro Gas. On May 10, 2006, Ganus wrote Ex. 233/Tab 645 to Shtaif: "We will register the managing company as soon as we get … documents. There is one question left to be answered, who will be the director of the company? …" Shtaif replied: "... I am expecting originals to come from the Secretary of State of Delaware early this week…." Shtaif 3457-3461. [We know on May 2, 2006 Shtaif had emailed Howard asking for original "that was sent to you by Secretary of State of Delaware" – yet he told Ganus he was waiting for originals from the Secretary of State of Delaware.]
[220] Although Ganus had requested Shtaif to provide original documents in early April, Shtaif waited until May 2, 2006 to request originals from Howard and advised Ganus he was waiting to receive them from Delaware. Having only asked Howard for them on May 2, 2006, Shtaif unfairly complained to Shnaider that the Midland lawyers were the cause of the delay. I have concluded that he deliberately dragged his feet in effecting the transfer of control from Euro Gas to Magellan Russia in April and May 2006 to keep control over the joint venture.
[221] BDW Non Payment/Relationship Shtaif/Howard. As of May 11, 2006, Shtaif knew International had still not paid anything on its $70 million subscription. However, on May 11, Shtaif emailed Ex. 350/Tab 587 to Howard: "If … Eduard will get confirmation that only they funded the account, he will have all the ammunition that he needs to call an extraordinary meeting of the Board … Then everything that we have worked for will be for nothing… We are on the same side." [Emphasis added]
[222] As noted earlier, Shtaif had almost total control over the funds in the Magellan bank account. De Freitas was co-signer of Magellan cheques. On May 11, 2006, Shtaif 4711 directed the TD Bank to transfer $1 million from Magellan's bank account to Euro Gas, Ex. 459/Tab 118. He emailed to D'Allessandro: "Please find attached wiring instructions to Euro Gas Consulting Inc. This transfer is associated with our initial payment for the acquisition of an oil and gas property in Russia."
[223] Shtaif gave evidence this May 11, 2006 transfer was to pay a commission to Novik on the sale of Reef. He did not proffer any commission agreement to support his statement. Although Shtaif also gave evidence 4714 that he had a specific document in his productions proving that Shnaider approved this transfer, he did not produce it.
[224] I find that when Shtaif attempted to transfer $1 million to Euro Gas on May 11, 2006, it was not to pay a commission to Novik. He told D'Allessandro it was for an initial payment for an acquisition. No payments were then due on Reef or SibinTek. Any commission that might have been payable to Novik would not have been due and payable as of May 11 2006, as the Reef transaction did not close until July 13, 2006.
[225] In part based on Ex. 350 to Howard, where Shtaif noted that if Shyfrin learned only Midland had funded, "everything we have worked for will be for nothing, we are on the same side," and Ex. 340 to De Freitas: "Remember I am a shareholder of ILGY… so I need to protect the company," and because he feared the Plaintiffs would withdraw their $50 million if they knew. I have found Shtaif was scheming with Howard and De Freitas and deliberately withholding information from the Plaintiffs that BDW had not paid anything. Shtaif's primary target was Midland's $50 million. Shtaif knew that the Plaintiffs had relied on his false representations that BDW/International had invested $8 million in Magellan and would pay $70 million more, in deciding to invest and in paying their $50 million. He knew they were relying on his statement that there were $60 million in the Magellan account, i.e., BDW had already paid at least $10 million and was about to pay the balance. I infer Shtaif knew there was a real risk that had he revealed the truth, Midland would have pulled out of the venture based on his earlier false representations. Shtaif was not relying on BDW's $70 million commitment. Midland's $50 million was sufficient to cover the commitments he was making on behalf of Magellan.
[226] SibinTek. Shtaif gave evidence 3606 that on May 13, 2006, he signed a Share Purchase Agreement Ex. 180/Tab 119, whereby Trovalion, then a Magellan subsidiary, would acquire the shares of SibinTek.
[227] The purported sellers of the SibinTek shares were three companies (OAO SP Geros, Carimex Transport und Handels GMBH and Road Expo OHG) (collectively, "Geros ") represented by Bekker. Through a series of transactions, Trovalion was to acquire 100% of the SibinTek shares for a total purchase price of US$21 million, subject to adjustment. As part of the purchase transaction, Geros was to subscribe for 25% of the equity of Trovalion. The Share Purchase Agreement did not call for any deposit [see recitals, ss.3.1, 5.1-5.6 and Schedule 3]. Upon completion, Magellan would indirectly hold 75% of SibinTek; on closing, Trovalion would pay US$12 million by transferring Treasury Notes in that amount to it on behalf of Geros to OOO "Reagent-M" ("Reagent") [a company that purported to own 40% of the SibinTek Shares]. The purchase price was to be paid 5 business days after the conditions of closing in favour of the buyer had been satisfied or waived. One such condition was that Trovalion had completed all legal, financial, and other due diligence.
[228] Shyfrin gave evidence that Shtaif told him SibinTek was worth at least US$250 million.
May 15-17, 2006
[229] Meetings with Investment Bankers May 15-17, 2006. In anticipation of an eventual IPO or pre-IPO raise of funds for Magellan, Shtaif and Roberts attended meetings with investment bankers in Toronto on May 15, 16 and 17, 2006.
[230] Magellan provided Ex. 493/Tab 707 dated May 16, 2006 to the investment bankers.
At page 4:
Magellan Energy Ltd. (MGGL.PK) intends to become a company specializing in the extraction and production of oil and gas…Oil and gas-related activities will include acquiring additional properties with potential for increased production in addition to further development and drilling. …
At page 8:
Magellan Energy Limited … is an American company … listed on NASDAQ OTC Bulletin Board and later intends to move to AMEX or AIM.
Magellan Energy has been set up under the stewardship of Michael Shtaif….
[Bold in original]
At page 11:
39,73% of MGGL is held by individuals who are the founders: Michael Shtaif, Anthony Groag and Management team.
43,84% of MGGL is held by Midland Resources Holding Ltd the energy holding of a Russian/Canadian Magnate of Steel Alexander Shnaider and his partner Eduard Shifrin [sic].
6,85% of MGGL are held by various independent directors of the company.
5,84% of MGGL are shares issued for public float.
[Bold in original]
On page 15, a private placement in May 2006 that would bring investment by private placement to $120 million was mentioned. BDW/International was not named:
Continuous program for acquisition of fields that will increase recoverable reserves by 120 million BOE of 2 P reserves in less than two years.
[Emphasis added.]
At page 18:
The first acquisition program … has been secured during an exclusive due diligence period that will end with the acquisition of the last field at October 31, 2005 …
… will be under our own assets and balance sheet no later than 22 June 06.
The two other fields … will be under our own assets no later than 31 June 2006.
All the fields are productive except Om. Current daily production of all the fields is 1 411 BOPD Net / 42 239 BOPM.
2006 – Total company estimated reserves 2P and Other
Proved Producing C1: 54,35 MBOE,
Proved non-Producing C2: 313,80 MBOE
Proved Probable C3D1: 113 + 91 MBOE
Total of 2P Reserves: 573 MBOE
The total Oil in Place is 2.416 MBOE.
[Bold in original]
[231] At page 29: "June 2006 TEV [Total Enterprise Value] Current Value is shown as $862 MUS.
[232] On May 16, 2006, Roberts in an email to Groag copied to Shyfrin and Shnaider, described the meetings (Ex. 18/Tab 120, Ex. 493/Tab 707) as follows:
We have finished day two of our mini road show … Yesterday Mike and I met with Brad Griffiths [GMP] and Derek Webb at MGI Securities. … [Brad] arranged a meeting with Sandy Reddin (Managing Director) of Knight Capital Group Inc., the largest market maker stock trader in the US … Sandy and Marcus … clearly indicated that they would participate in a $300-$500 million raise…
MGI introduced us to … Canaccord Capital Corporation … They … want to participate…
Brad Griffiths [GMP] then introduced us to two very large institutional buyers (Salida Capital Corp.) and First Street Capital Markets. … I can easily say that both of these funds will invest large amounts ($10 million plus each and possibly up to $20 million each) in our company.
Tomorrow we are meeting Blackmont Capital Corporation and Wellington West Capital Markets. … We are also going to meet a senior securities lawyer, Alan Beach at Fasken Martineau… Unfortunately, Mike is leaving tomorrow... Based on the foregoing I am of the view that we will be able to raise a substantial amount of money $300-$500 million using tier 1 and tier 2 investment banks in Canada - but only if we form an international syndicate of investment bankers.
[Emphasis added]
[233] Roberts gave evidence 6163 that investment bankers (the Street) value oil companies based on "blue sky," meaning they would commit to invest based on Shtaif's perceived ability to execute on his business plan (which involved not only Reef but the purchase and development of several properties with the money to be raised]. The Street didn't need Magellan to own six oil fields. At one point Roberts said 6165 the investment bankers thought they could do a quick $70 million raise, then come back in September 2007 for an IPO. At another point, Roberts said he thought they would probably be able to raise $100-$150 million in the first round and more as the company achieved bulk.
[234] Knight Securities. I have already mentioned Shtaif's evidence that Howard had asked him to meet with Knight Securities to raise funds for BDW's $70 million subscription and his evidence 3364 that Knight Securities was interested in investing between $200-500 million in Magellan [not International]. In Ex. 18, Roberts wrote that "Griffiths … [had] arranged a meeting with Knight." Roberts gave evidence he thought Knight could have raised the $70 million for International. However, the bankers would have required at least six weeks to do their due diligence. Since Magellen had given notice on April 29, 2006 that International must pay its subscription by June 2, 2006, International did not have the needed 6 weeks.
[235] MGI, Salida Capital Corp., First Street Capital Markets. Roberts gave evidence 6145-6155 that on May 15, 2006, he and Shtaif met with Brad Griffiths ("Griffiths"), a senior investment banker with MGI Securities with extensive oil and gas experience. They discussed Shtaif's business plan and the investment opportunity. Shtaif said 3824, 5836 Griffiths said he would be prepared to invest $10 million personally and would take him to see Salida Capital Corp., First Street Capital Markets and Amarath Capital. Salida and First Street were each willing to invest $10-$20 million in Magellan.
[236] Canaccord Evidence. Mr. Mark Maybank ("Maybank") [who after August 2006 was President and Chief Operating Officer of Canaccord] was called to give evidence by counsel for Shtaif. While he bolstered Shtaif's evidence in some respects, on balance, in my view, his evidence was not helpful to the Defendants.
[237] Maybank said in May 2006, he and Derek Webb attended an initial preliminary meeting. He could not remember details or specifics. He could not remember who gave the presentation. For the first time Canaccord heard Magellan's "rollup story" (a story where companies seek capital injections to buy properties to add scale and mass).
[238] After he was referred to Ex. 493, he said they liked the story and the people involved and were keen to become lead underwriter on a Magellan IPO. He could not recall discussions in May 2006 about valuation of Magellan. He said at that time, Magellan had not provided Canaccord with any audited financial statements or historical cash flow statements; it may have provided some cash flow projections. Had Canaccord proceeded as underwriter, they would have wanted to know more.
[239] At the Knight Securities meeting, Roberts said he was asked about Magellan's and International's audit status/whether they were or could be "reporting issuers" with up-to-date filings and audited financial statements, so they could be elevated from the Pink Sheets to a more senior exchange. Roberts said 7454 on the evening of May 15, he called Howard to seek an answer to those questions. Howard advised it was unlikely that either Magellan or International could be audited. Roberts considered that to be a significant problem. Roberts gave evidence 6148-6151 it was clear that the Canadian investment community would have supported Magellan in a substantial raise if it could have been listed on an exchange higher than the Pink Sheets. However, the investment bankers had all advised that a Pink Sheet company would not be acceptable. 6173; Ex. 542/Tab 736.
[240] [I note that Roberts pleaded he had advised the Board at the February and April meetings that Canadian institutions would not invest in the equity of a U.S. company listed on the Pink Sheets.]
[241] Roberts said 6182 he had not been paying much attention to the price of the Magellan stock. In May, after the investment bankers asked him how it had been performing, 7475, he noted it had been climbing steeply for no apparent reason. [I have already noted that on January 28, 2006, Howard had emailed Shtaif setting out his strategy for moving the stock to at least an $8 bid. On March 31, 2006, there had been a sharp increase in the share price over the few preceding days. On April 4, 2006, while De Freitas was on holiday, Shtaif wrote: "Since you have gone, the market slowed to a standstill..." On April 5, 2006, Shtaif wrote to Shnaider: "There have been sales of shares recently between $10 and $13 per share." On April 24, 2006, Howard mentioned a $10 quote.] Roberts said he suspected in May that "something was wrong," 6129 that someone had been manipulating the Magellan share price. Because he thought that only 4700 free trading shares had been issued, he could not understand how the share price could be so high.
[242] Extension for BDW. In his evidence, Roberts emphasized that on May 16, 2006, in Ex. 18/Tab 120 he advised the Board that International would not be able to raise the funds needed to complete its subscription by the June 2, 2006 deadline. Roberts wrote in Ex. 18:
International Energy will probably not be able to raise their full subscription amount in the time we have given them, as they could not raise the funds until the bankers met with Mike. The issue is that the investment bankers probably cannot perform their due diligence (trip to Russia etc.) and raise the funds before the end of the month … by June 15 if nothing went wrong with the due diligence - or June 30th for sure. To be fair …do we want to extend the deadline to accommodate the due diligence and allow them to raise their commitment?"
[Emphasis added.]
[243] Despite suspecting that the Magellan share price was being manipulated, having known from the outset that Magellan was a Pink Sheet company and that Canadian institutions would not invest in a Pink Sheet company, and knowing by the time he wrote the letter that Magellan could not be taken to a higher exchange, in Ex. 18, his letter copied to Shyfrin and Shnaider, Roberts reported that in his view, Magellan would be able to raise $300 million-$500 million. He did not report what he already knew: Magellan could not meet the bankers' condition that it be listed on an exchange higher than the Pink Sheets.
[244] Shnaider Learns BDW has invested nothing. On the evening of May 16, 2006, Shtaif finally disclosed to Shnaider that International had not paid anything. When Shnaider questioned how this was possible, given what De Freitas had said at the April 28, 2006 Board meeting, Shtaif said De Freitas had misled him. Although Magellan needed to get rid of International and find other investors, Shtaif 3372 told Shnaider 82-84 that that would not be a problem. Other investors were lined up to replace International.
[245] Free Trading Shares. Shtaif gave evidence that on May 16, 2006, he told Shnaider he was investigating how 4 million free trading shares had ended up being issued without Board knowledge or approval. Shnaider told him he may have "inadvertently" signed some documents and opened some accounts with De Freitas' company Aberdeen Online Trading.
[246] Shtaif's evidence about the discussion he said he had with Shnaider on May 16 about the free trading shares is supportive of my earlier finding that before May 19, 2006, Shtaif did know that 4 million free trading shares had been issued in January of 2006. His evidence about his discussion with Shnaider on May 16 contradicted his evidence that he did not learn about the issuance of the 4 million free trading shares until May 19, 2006, when Roberts explained to him that free trading shares might have been improperly issued.
[247] Shtaif and Roberts retained Beach on May 17, 2006. Shtaif's evidence that he told Shnaider on May 16 that they needed to get rid of Magellan indicates he knew it before Beach first said that would be advisable.
[248] Roberts and Shtaif did not approach Beach about moving Magellan to a higher exchange until after Roberts said he already knew that was not possible. Although I make no finding on this point, I note the suggestion made by counsel for the Plaintiffs: Shtaif and Roberts hired Beach to discover what they already knew, and to disguise that fact.
[249] I find in Ex. 18 and in his evidence, Roberts exaggerated both Magellan's prospects and the investment bankers' acceptance of Shtaif's expertise and business plan.
[250] Shyfrin & Shnaider Consider Pulling Out of the Joint Venture. Immediately after May 16, 2006, Shyfrin and Shnaider considered pulling out of the joint venture. Shyfrin said he wanted Midland to withdraw. Shnaider convinced him to stay (Shnaider 86-88). By May 16, Euro Gas on behalf of Magellan had contracted to purchase Reef and SibinTek. They relied on Shtaif's representation to Shyfrin that Reef was worth $250 million and on the value of SibinTek, on Shtaif's and Roberts' representations that other investors were lined up willing to step into BDW's shoes, and that Magellan would be able to raise hundreds of millions of dollars to acquire more oil fields, Roberts' assurance that in his view Magellan could raise $300-500 million using tier 1 and tier 2 investment banks. I have found Roberts and Shtaif knew those representations were false and made them to induce the Plaintiffs to continue in the joint venture. I have accepted their evidence they did induce them to do so. Shnaider said he thought they had a rough start but going forward he thought everything would be better.
[251] I reject Shtaif's evidence that Shnaider offered to invest $70 million in International's place. I have already found Shyfrin was reluctant to stay invested at all.
[252] I do not accept the submission of counsel for the Defendants that because Shnaider and Shyfrin knew on May 16, 2006 that BDW/International would not be funding any part of the $70 million and nevertheless agreed to continue 246-257, all of Shtaif's earlier misrepresentations were "inconsequential." Magellan had already paid Bokserman $1.5 million. I have rejected the submission of counsel for the Defendants that Shnaider didn't care about the $8 million, based on a passage from Shnaider's evidence [relating to the $60 million that the Defendants had advised was in the TD account on April 5, 2006]. I do not read Shnaider's evidence to indicate that when the Plaintiffs initially decided to invest $50 million in Magellan in December 2005 and early January 2006, they did not rely on the representation in Ex. 4 that BDW had already paid $8 million into Magellan. Shnaider's evidence was to the effect that initially BDW's payment of the $8 million was material to the Plaintiffs' decision because it indicated that BDW was "committed to the company [Magellan]." His later comment "...On the fifth [of April] I'm told there's $60 million in the account... $8 million I totally forgot about it already. I thought it was spent long time ago…on due diligence seismic reports…It's nothing to do with what we are planning to do now. I was concentrating on the $70 million that they were supposed to be funding now [in April]," taken in context did not indicate Shnaider thought that the earlier representation that the $8 million had been paid was immaterial. In deciding to invest initially in December 2005/January 2006, the Plaintiffs did rely on that representation. I have found the Plaintiffs decided to invest in part based on the $8 million misrepresentation and that they relied on it.
[253] I find all of the misrepresentations about BDW including that the $8 million had already been paid and that a further $70 million would be invested, were important in inducing the Plaintiffs to invest. Without those assurances about BDW, initially they would not have advanced $50 million.
[254] Once he had Midland's $50 million on April 4, 2006, Shtaif made commitments to buy Reef and SibinTek. [By May 16, 2006, Euro Gas on behalf of Magellan was already contractually committed by Share Purchase Agreement dated April 24, 2006 to buy Reef, and by agreement dated May 13, 2006 to buy SibinTek.] Shtaif and Roberts made further misrepresentations to the Plaintiffs that Reef and SibinTek were worth far more than Magellan had agreed to pay for them, further inducing the Plaintiffs to continue in the venture.
[255] Move away from Magellan. On May 17, 2006, Beach 7460 sent a voicemail Ex. 542/Tab 736 to Roberts: "We need to find a way to ditch Magellan and to start with a clean company." Late on May 17, Beach wrote Ex. 19/ Tab 122 to Roberts, confirming that recommendation.
[256] Roberts gave evidence that on May 17, 2006, Shtaif advised Howard he was cancelling Howard's 8 million Magellan shares [of which Howard had transferred 2 million to Roberts and 3 million to De Freitas].
[257] On May 17, 2006, Howard emailed Ex. 351/Tab 121 to Shtaif:
What a mistake I made with you. Both Greg and Stanton have called me and voiced their concerns about comments you have made. You seem to forget that both Stanton and Greg are part of Magellan because I brought them there… You are fully aware of the fact that when shares were issued of Magellan, I took care of all the parties involved from my end first, and that includes Greg, Stanton,Alic and whoever else had to be looked after. … This has nothing to do with any financings or International Energy. If you think you will cancel one share of that issuance, you will find that Magellan and all its officers and directors are involved in lawsuits and that every regulatory body will be looking into Magellan and its officers and directors and that one word is associated with Magellan and its actions--- FRAUD…
[Emphasis added.]
[258] Shtaif left Toronto on the evening of May 17, 2006. It is unclear where he was between May 17 and May 24, 2006, although the times and sequences of the emails and text messages between Shtaif and others sent and received on those days are suggestive that Shtaif was in Calgary.
May 18-23,2006
[259] Roberts' participation in the joint venture to that date had been tied to BDW. He had received 2 million Magellan shares at the time he had agreed to sit on the Magellan Board as a representative of BDW. BDW's continuing involvement was threatened. By May 18, 2006, Roberts had already started to try to convince Shtaif, Groag, Shyfrin and Shnaider that he should be appointed to the Board of whatever company replaced Magellan. He continued to represent that with his assistance, the joint venture would have no trouble raising funds to replace International's promised $70 million.
[260] As problems with Magellan were coming to light in Toronto, events were unfolding with respect to SibinTek in Moscow.
[261] SibinTek. It is unclear why on May 17, 2006, Shtaif directed the TD Bank [Ex. 489/Tab 70] to transfer $15 million from Magellan's TD account to Euro Gas BVI 5353 [not the company that operated Magellan, Euro Gas Russia]. Shtaif said $3 million was for "operating expenses," $12 million to purchase the Treasury Notes. I query why he would transfer $3 million for operating expenses and to purchase SibinTek Treasury Notes to Euro Gas BVI.
[262] I do not accept Shtaif's evidence 4914-4915 that on May 18 or 19, 2006, White & Case, the law firm handling the SibinTek transaction for Euro Gas in Russia, advised it to purchase Treasury Notes to secure the SibinTek purchase. The SibinTek Share Purchase Agreement did not require payment until 5 days after due diligence had been completed. None of the White & Case memos in evidence reflect such advice and I find White & Case gave Shtaif/Euro Gas no such advice. Shtaif had no legitimate reason at that time to transfer $15 million to Euro Gas BVI or later to transfer $12 million from Magellan to Euro Gas Russia to purchase the notes.
[263] SibinTek. De Freitas had been designated the co-signer on the Magellan accounts. On May 18, 2006, the day after Shtaif purported to cancel De Freitas' 3 million shares in Magellan, De Freitas refused to authorize the $15 million transfer. De Freitas wrote to Shtaif in Ex. 490/Tab 127: "As a director and signing authority under Magellan accounts at TD Canada Trust, it is important that I have documentation to support every outgoing wire including … the most recent one for $15 million US for Euro Gas." [De Freitas gave evidence he was concerned that Shtaif was sending the funds to an account solely under his control.]
[264] After De Freitas thwarted the $15 million transfer from Magellan to Euro Gas BVI, Shtaif then attempted to initiate Ex. 490/Tab 127, a wire transfer of $12 million from Magellan to Euro Gas Russia Ex. 466/Tab 128. Shtaif falsely advised the TD Bank Manager: "Funds must leave the bank today or Magellan will be in default on its initial payment for the property we are acquiring in Russia."
[265] I find that following his meeting with Shnaider on May 16, when Shnaider learned of Shtaif's earlier false representations, Shtaif was afraid Midland would take steps [to rescind the deal and] remove its $50 million from Magellan. He decided to divert funds from Magellan to Euro Gas BVI before that happened. After De Freitas thwarted that attempt, he transferred $12 million to Euro Gas Russia. He did not advise Shnaider/Shyfrin/Midland what he was doing until after the $12 million had been transferred. He lied to the TD bank representative about the urgency of the transfer.
[266] Free Trading Shares. The day after Shtaif purported to cancel Howard's, De Freitas' and Roberts' Magellan shares, De Freitas revealed to Roberts the existence of the free trading scheme, including that some of the 4 million free trading shares had been allocated to Shnaider. Ex. 316/Tab 135 is an email from Groag to Shtaif: "Greg is on my phone. Stanton told Greg that AS [Alex Shnaider] is selling the free float to friends etc. Greg is hopping. Can I call you when I'm finished with Greg?"
[267] Shtaif said 7354 after he spoke to Roberts, he instructed De Freitas to stop the sales of free trading shares. Ex. 353/Tab 129.
[268] After he received Shtaif's instructions, De Freitas emailed Ex. 354/Tab 130 to Shtaif, c.c. to Roberts:
Michael Shtaif and others appointed by him… have gone out and sold shares in Magellan to third-parties. … my firm is facilitating the transactions that Michael and his friends… have instructed us to do after the private sale of shares has been negotiated …"
… It is true that stock was issued months ago to various parties related to John including myself and Greg who hold 144 restricted stock... John has claimed that obtaining shares in the deal up front was agreed to by you and him when structuring Magellan. Structuring Magellan was important to you so that you could attract financing from sources like Midland … prior to any discussion that involved any investment to be made by International Energy Limited … In terms of subscriptions to free trading shares, my firm Aberdeen Online Trading has been charged with that responsibility …
[Emphasis added.]
[269] On May 19, Groag emailed Ex. 316/Tab 135 to Shtaif: "What free shares? …"
[270] I find before May 19, 2006 that Roberts and Groag were unaware 4 million free trading shares had been issued in January 2006. Shtaif told Roberts and this Court he had had nothing to do with the scheme to issue and sell Magellan free trading shares privately. On May 19, 2006, and ensuing days it appears Shtaif was trying to use Roberts and Groag to help him cover his own tracks. Roberts gave evidence that he had concluded that Shtaif had not been involved. However, Roberts conceded 7524 he had not seen Ex. 456/Tab 52, Howard's and Shtaif's emails discussing who would get the shares, advising "just us" and then "We got the shares!"
[271] On May 20, 2006 Groag emailed Ex. 570/Tab 138 to Roberts:
For your eyes only. … Let me give you my analysis.
I received an email from Stanton dated May 19 at 1604 hrs, which was addressed to Mike and copied to you and me. In this email he advises that his company is NOT selling the free float - that is being done by Mike and others (any idea who these might be?) Stanton then states that the other directors have no reason to comment. Is he correct …
I wrote to Stanton this morning to tell him that Mike called me early this morning to tell me that he and John are back in love and to ask him to tell me at what prices these…shares are being sold…
So Greg, if what I have written above is also consistent with your memory, I believe we have a serious situation on our hands because [A.] The free flow was NOT approved for sale by the Board and no price was set by the Board. (I believe that the board must approve the issue of any shares and must determine the price range.) … [B.] The sale of the shares has been done on an insider trading basis-…
[Emphasis added.]
[272] BDW Non Payment. By May 21, 2006, Groag had finally learned what Shtaif had known since early April: BDW/International had failed to make any subscription payments for Magellan shares. Groag sent Ex. 572/Tab 140 to International:
Therefore, I can only assume that despite what I heard at the last board meeting that $10 million had been transferred by International prior to April 28, 2006 into Magellan TD bank account, International appears to have failed to make any subscription payments for Magellan founders' shares. …
[273] Move from Magellan. By May 22, 2006, Shtaif said Shyfrin had already agreed they would abandon Magellan completely and start fresh without International.
[274] Free Trading Shares. On May 22 in Ex. 577/Tab 152, Roberts replied to Groag's May 20 email:
In my view what John, Stanton and Alex did was not appropriate and if all of the facts were known [it] would be considered "insider trading"… They have apparently traded shares to friends and family and Mike has stopped the practice. I do not know where the funds are but Stanton tells me that they have sold about $250,000 of stock They are all insiders… I do not know how these shares got issued (but were likely issued before we got involved) by John when he was dealing with Mike alone (i.e. before you, Stanton, Alex and Eduard got involved …
[Emphasis added.]
[275] Euro Gas. On May 23, 2006, the date Euro Gas Russia received the $12 million from Magellan for the purchase of the SibinTek shares, Shtaif had still not sent the original Magellan Minute Book to Vinogradov or Ganus so Magellan Energy Russia, which was to replace Euro Gas as manager, could be incorporated. Shtaif said it was necessary for Magellan to wire the funds to Euro Gas because the Midland lawyers had not completed the incorporation of Magellan Energy Russia. I have found that Shtaif had deliberately postponed taking the steps needed to implement the transfer of operating control from Euro Gas to Magellan Russia. Had Magellan Russia been the owner of the notes, Magellan Russia would have had to authorize the purchase of the Treasury Notes, the place and manner of their deposit, endorsement and transfer to the sellers.
[276] SibinTek. On May 23, 2006, after Euro Gas had received the funds, Shtaif emailed Ex. 33/Tab 144 to Shnaider: "We have instructed our bank in Toronto to wire the funds to Russia to acquire SberBank negotiable Treasury Notes to be ready for settlement once we receive a final go-ahead from White & Case for our Tyumen deal. I will keep you posted."
[277] On May 23, 2006, as part of its due diligence on SibinTek, White & Case sent Irina Bekker a list of documents it needed to review.
May 24-31, 2006
[278] On May 24, 2006, Keloglu, Shtaif's deputy at Euro Gas, attended at SberBank [a Moscow bank], purchased $12 million in Treasury Notes and deposited them in a safety deposit box in the name of Keloglu and Tsygankov [the lawyer for Poltoranin, the principal of Reagent] for a period of seven days. Keloglu could have deposited the $12 million or the notes in a safety deposit box in Euro Gas' name alone. Instead, he entered into a Safety Deposit Box Agreement, Ex. 375/Tab 149, that identified two clients. Client 1 Keloglu [the client with the right to access the deposit box at the end of the lease term, unless all of the enumerated conditions of access in the lease agreement had been satisfied by Client 2] and Client 2, purported owner of 40% of the SibinTek shares. I have rejected Shtaif's evidence that Keloglu was acting on his own and have found he was acting on Shtaif's instructions. This action put the $12 million out of the sole control of Euro Gas/Magellan even before due diligence on the the SibinTek deal had been done.
[279] Move from Magellan. On May 24, 2006, a week after Beach had first recommended that Magellan be ditched, Roberts wrote Ex. 575/Tab 148 to Shtaif, Groag, Shnaider, Shyfrin and De Freitas:
Am enclosing a letter from Alan Beach regarding the transfer of the current US Pink Sheet shell to a Canadian CPC shell that will trade initially on the TSX Venture Board of the Toronto Stock Exchange… Our goal is to … move the listing to the TSE … The Pink Sheet shell (that we now have) is a nonstarter for all funds and investment banks in Canada and in the US… Although we have not had an opportunity to formally discuss this move at a board meeting, it is critical that we put the process in place immediately, as the start of the process is a precondition to raising further funds...
[Emphasis added.]
[280] I note that Roberts did not refer to the fact that he had learned from Howard that Magellan was unauditable or could not be moved to a higher exchange. He referred to a fact that he had known from the time he agreed to serve on the Magellan Board that Magellan was a Pink Sheet shell, and Pink Sheet shells were non-starters for all funds and investment banks.
[281] Late on May 24, 2006, Roberts said he reviewed the Magellan Minute Book he had just requested to see and that Shtaif had just brought him and learned for the first time 6191 that there were two Magellans, a private company and a defunct public company that had had its charter revoked and had never been revived. He concluded that Magellan, a private company, was holding itself out to be a public company and was illegally trading on the Pink Sheets. Roberts said he called Shtaif to say he suspected Magellan was a sham corporation, then he called Howard and De Freitas to arrange a meeting the following morning.
[282] By May 25, 2006, Roberts and Groag were regularly sending allegedly "privileged" communications to each other. Roberts 7533 wrote Ex. 577/Tab 152 to Groag: "Privilege Assured … Mike and Alex should transfer the free trading stock they control (of the 4 million shares) to people who are going to drive long term value … Mike has got plenty already … I think Mike understands he can't get where he wants to go without us …"
[283] Roberts continued:
Mike spoke to Alex about me coming full time… I think we should get paid an additional $200,000 net of taxes plus say 500,000 shares… the market will only back [Mike ]… as an unknown commodity if they know someone they know and trust is involved… Really, what we are looking at is you and I fulfilling the CEO role and Mike fulfilling the COO role …
[284] The Move from Magellan. On May 25, 2006, Shnaider emailed Ex. 21/Tab 151 to the other Board members, advising that he and Shyfrin agreed with Roberts the May 24 proposal to move off the Pink Sheets and onto the TSX Venture Exchange. I reject Shtaif's evidence Shyfrin had already agreed to abandon Magellan on May 22, 2006.
[285] Meeting with De Freitas and Howard. On May 25 and May 26, 2006, Shtaif was in Toronto. Roberts gave evidence that he and Shtaif met Howard and De Freitas at 8 a.m. on May 25. Roberts said he accused Howard and De Freitas of creating a fraudulent shell. Later on May 25, De Freitas tendered Ex. 551/Tab 154, his resignation from the Magellan Board.
[286] Meeting with Beach. After leaving the meeting with Howard and De Freitas, Shtaif and Roberts 6192 asked Beach to review the Magellan minute book and 6121 to conduct corporate searches of Magellan.
[287] On May 26, 2006, Beach set out his findings in Ex. 579/Tab 159, characterizing the Magellan minute book as a "rat's breakfast." In Ex. 356/Tab 162, he commented that the Magellan corporate records were substantially incomplete, a "disaster."
[288] On May 26, Roberts forwarded Beach's email as follows to Shnaider and Shyfrin:
Greg – here are my preliminary comments on the minute book review and my Delaware searches today:
There was a Delaware company "The Eastwind Group, Inc." incorporated August 3, 1993. It appears that this was an active investment company with OTC NASDAQ and pinksheet listings. NASDAQ delisted it in 1998. Its charter was voided by Delaware in March 2003 for failure to pay taxes. It filed for Chapter 11 Bankruptcy in late 2000 and a trustee was appointed in January 2001. The trail dies there.
The minute book Mike provided to me contains a resolution signed by "John Sparrow, Secretary" certifying that a "special extraordinary meeting was held by the shareholders to revive the company and elect a new board" at 10:00 a.m. on November 8, 2005. The same resolution changes the name to Magellan Energy Ltd. … rolls back the issued capital for 1,000, indicates that all officers and directors resigned at that meeting, and appoints Michael Shtail (sic) as President and sole director.
Six hours later, at 4:06 p.m. on November 8, 2005, a new "Eastwind Group, Inc." with a new Delaware ID number was incorporated. We are told by our Delaware agents that this was not a revival of the old entity. The sole director of this new company is a "Shaun Adams." The company has 100 million shares authorized at $0.01 par value.
Six days later on November 14, 2005, the articles of new Eastwind were amended to change the name to "Magellan Energy Ltd." and the issued shares were consolidated on a one for 1,000 basis. Shaun Adams certified as "President" that the amendment was duly adopted by the shareholders in accordance with section 242 of the General Corporation Law.
There is nothing further in the minute books or public file to reflect who John Sparrow might be, or the resignation of Shaun Adams, or any new board, or evidencing the issuance by the board, whoever that might be, of any shares.
There is a print-out from "First American Stock Transfer" dated April 24, 2006 reflecting a total of 286 "qualified" holders holding a total of 55,004,390 shares. Among those holders are Mike, with 18,000,000 and Midland Resources, with 25,000,000, various Aberdeens totalling 6,000,000 and the GR Trust at 2,000,000. There are not 286 entries, closer to perhaps 50 at most. Many of these remaining qualified holders hold only one share.
In summary, the corporate records are substantially incomplete, and what there is, a disaster. There is no possible way the TSXV or any other recognized exchange would accept a transaction involving the shares of this company without a complete and consistent share history, with credible legal opinions. I suspect that will be impossible, given the history to date. Our urgent advice would be to immediately cease any further business activities using this entity and investigate the most effective means of withdrawing any financing that has been advanced or subscribed to the safety of a clean entity. The deeper the activities get with this entity, the more difficult any withdrawal, and the more serious the repercussions.
I await your instructions.
[Emphasis added.]
[289] Although Shnaider could not recall receiving Ex. 579, he conceded he must have done.
[290] Ex. 114/Tab 161 is an email from Roberts to Groag May 26, 10:36 p.m., copied to Shnaider and Shyfrin:
We had a good day yesterday … We met … the Chairman of GMP … the Marketing Director at Haywood Securities and presented to Aramanth … then Wellington West and Blackmont Capital. … Nothing has changed my views that if we reposition our marketing … and get onto the TSX, we will be very successful.
[291] Free Trading Shares. De Freitas wrote that Aberdeen had been involved in artificially bolstering the value of the Magellan shares. On May 26, 2006, the day after De Freitas resigned, Shtaif and De Freitas exchanged Ex. 555/Tab 155, including an email from De Freitas to Shtaif containing the following:
… your letter insinuated that I or Aberdeen acted recklessly with Magellan Energy Limited shares without Board approval, when in fact a verbal informal agreement was made for Aberdeen to facilitate the private sales transactions that you and/or your friends and Associates generated… What provokes me even more is that Aberdeen clients have expended in excess of US$40,000 of their own funds to preserve the artificial value of shares in Magellan to assist in your discussions with investment bankers and private investors.
[Emphasis added.]
[292] De Freitas confirmed at trial in his oral evidence that he had been involved in manipulating the Magellan share price.
[293] Move from Magellan. On May 28, 2006, Groag emailed Ex. 359/Tab 167 to Shtaif and Roberts, suggesting that Nusbaum, a U.S. securities lawyer and his firm make recommendations about rescission of Midland's subscription.
[294] SibinTek. Shtaif said he returned to Moscow on May 28, 2006.
[295] The Plaintiffs alleged that Shtaif conspired with Poltoranin, the principal of Reagent, the seller of 40% of the SibinTek shares, to illegally benefit from the transaction. They pointed to a number of events in Russia they alleged were suggestive that Shtaif had conspired unlawfully with Poltoranin to receive proceeds from $6.6 million in Treasury Notes Euro Gas purchased on May 23 that disappeared sometime between May 29, 2006 and July 2006, when $5.4 million in Treasury Notes were recovered. Poltoranin was subsequently charged with theft of the notes.
[296] Ex. 216/Tab 210, a Resolution in Criminal Case 74305, prepared in July 2006, mentioned a meeting attended by Shtaif in Russia on May 28: "Lt. Col. Kusakin ascertained that Poltoranin managed on May 28, 2006 at a meeting with Shtaif to get Shtaif to sign a guarantee to effect the transaction for buying those shares and to repay the forfeit the amount of $6 million in case Mr. M. Shtaif would refuse to execute this transaction..." [Emphasis added.]
[297] Shtaif denied meeting with Poltoranin on May 28, 2006.
[298] On May 28, Shtaif emailed Ex. 376/Tab 165 to White & Case lawyers Tarabrin, Marechal, Polanski and Amy Jones:
I would like to meet tomorrow 9:30-10:30 to discuss final review of our SibinTek acquisition. I did not receive the final review in the mail while I was away. Tomorrow we are scheduled to meet at SberBank to exchange shares and Treasury Notes. I cannot complete the transaction until I have the same report that I received prior to signing Reef Energy contract. Can you please advise me if it's okay to meet tomorrow and proceed with the acquisition of the shares.
[299] Shtaif said 4941 the SibinTek closing date had been set for May 29, 2006. Regional Alliance had informed him and Keloglu that Poltoranin was flying to Moscow on the morning of the 29th. Shtaif conceded that when he sent this email, White & Case had not confirmed that it had completed its due diligence.
[300] Tarabrin was the most senior lawyer at White & Case working on the SibinTek transaction. He reported to Polonsky, a senior partner of the firm. In response to Shtaif's May 28 email, Ex. 376, Shtaif received an Out of Office Auto Reply from both Tarabrin and Amy Jones, another lawyer working on the file. Neither would be at work on May 29, 2006.
[301] It appears from a White & Case memo to Shtaif dated June 22, Ex. 178/Tab 243, that Shtaif told someone at White & Case he had met with Reagent (Poltoranin) on about May 28. Ex. 178 contains the following:
On May 29, upon your return from a business trip you called a meeting in our office. We understood from you that you wished to accelerate the acquisition, due to concerns (arising from your meetings with Irina Bekker and Reagent that Reagent would sell its claims to third parties, thus complicating the procedure for discharging those claims. You instructed us to prepare for completion (and that FAS consent should not be a condition precedent).
[Emphasis added.]
[302] I reject Shtaif's evidence and I find that White & Case was surprised by his request to close on May 29, 2006.
[303] Shtaif gave evidence 3571 that on the morning of Monday, May 29, he met with Polonsky, Tokovinin, Kuznetsova, Jones and Peter Kotelevtsev. I find from the White & Case memos that neither Tarabrin nor Jones was present. In chief, Shtaif gave evidence 4910-4920 that before he went to the bank, White & Case provided a written completion report, saying in effect the deal was ready to close before he went to the bank. In cross-examination he conceded 4959 White & Case did not give him any written confirmation they had completed their due diligence before he went to the bank. He said he understood that everything was ready for closing to proceed that day. They just had to "dot some I's and cross some T's." He said he based his understanding that the deal would close that day on the fact that two White & Case lawyers [Kuznetsova and Tokovinin] went with him to SberBank, he assumed, to attempt to close the transaction.
[304] Meeting at Bank. Kuznetsova and Tokovinin accompanied Shtaif to SberBank 4966. Bekker, Tsygankov and Poltoranin attended for the sellers. Shtaif said it was the first time he had met Poltoranin and Bekker. [This evidence contradicted the information in Ex. 182, a White & Case memo recording Shtaif's expression of concern arising from (earlier) meetings with Bekker and Reagent and in Ex. 216, Lt. Col. Kusakin's information that at a meeting on May 28 with Poltoranin, Shtaif had signed a $6 million guarantee.]
[305] Shtaif gave evidence Kuznetsova told him at the bank there was no problem with the title. She said Poltoranin was the registered owner of the Reagent shares. At Kuznetsova's request, he endorsed the Treasury Notes and they applied the Euro Gas corporate seal. They agreed Tsygankov and Poltoranin would take copies of the endorsed notes to demonstrate to Reagent's creditors that Reagent would be in funds to pay debts owing to them so they would remove their liens against Reagent's shares. Kuznetsova told Shtaif they were adjourning the closing for two weeks so further documents could be prepared.
[306] Shtaif gave evidence 4974 that Kuznetsova instructed him and Keloglu to extend the Safety Deposit Box Agreement for a further 14 days. Since Keloglu had been the client on the May 24 Safety Deposit Box Agreement, and since the May 29 document was an extension of that Agreement, Kutsnetsova advised him that Keloglu [not Shtaif] had to be the client again.
[307] I find the May 29 Safety Deposit Box Agreement was not an extension of the May 24 Safety Deposit Box Agreement. On the May 24 Agreement, Tsygankov had signed as the client on behalf of Reagent. On May 29 Poltoranin was named as the client. There was no reason why Shtaif could not have signed for Euro Gas.
[308] Shtaif said 3582:
On May 29 Mr. Tsysankov was requesting to be client number one. There was a discussion between Tsysankov and Kuznetsova as to the reversal of the client order. … her position was … she demanded that the key always stays with her client … which is me. … Tsyankov was requesting that the key should stay with them. That was not acceptable. And at the end they agreed that the change could be made, client one and two would be switched, but that the key would stay with Shtaif.
[309] Keloglu and Poltoranin went into the SberBank vault, deposited the Treasury Notes, and entered into a Safety Deposit Box Agreement Ex. 469/Tab 173 for 15 days. Poltoranin became Client 1, Keloglu Client 2.
[310] Vinogradov gave evidence at trial that once Client 1 and 2 were switched on May 29, all Poltoranin needed to do was wait until the Deposit Box Agreement expired on June 14 and he could access the notes in the safety deposit box [which Shtaif had endorsed on May 29], whether or not the conditions set out in the SibinTek Share Purchase Agreement had been fulfilled.
[311] Shtaif gave evidence he did not understand the negative implications of the switch of clients until June 8. He was duped by Poltoranin and misled by the lawyers at White & Case.
[312] White & Case's May 31 memo Ex. 379/Tab 181 and June 22 memo Ex. 178/Tab 243 reflected that White & Case did not review the May 29 Safety Deposit Box Agreement or receive a copy until June 14, 2006. In Ex. 431/Tab 635, an email from Tokovinin to Shtaif dated February 17, 2013, Tokovinin confirmed that neither he nor Kuznetsova reviewed the Safety Deposit Box Agreement or commented on it before it was signed.
[313] Ex. 182/Tab 253, a White & Case memo to Shtaif dated June 26, 2006 contained the following:
(This switch had other, unexpected implications, not intended by Euro Gas, as described below. … )
…It was subsequently discovered that the Deposit Box Lease Agreement of 29 May resulted in Mr. Poltoranin having the right to unilaterally withdraw the Promissory Notes at the expiry of the storage period. As had not been understood by Euro Gas on 29 May, "Client 1" under the Deposit Box Lease Agreement of 29 May has the right to unilaterally withdraw all assets deposited upon the expiry of the storage period. [Emphasis added.]
[314] On May 29, 2006, Shtaif emailed Ex. 34/Tab 175 to Shnaider:
… As you're aware, I used 12 Million USD to acquire SibinTek. TBills and they're still in the safety deposit boxes in SberBank waiting until White & Case will complete due diligence this weekend and make changes to corporate register in our favour …[to show Trovalion as the registered owner.]
[315] I do not accept Shtaif's evidence that on May 29, 2006, Kuznetsova advised him there was no problem with the title and that Reagent was the owner of 40% of the SibinTek shares. As at May 29, it is clear from the contemporaneous documentation that the White & Case lawyers were continuing to take steps to satisfy themselves that Reagent owned the shares it was purporting to sell to Geros and Geros was purporting to sell to Trovalion. The documents White & Case had requested from Bekker on May 23 had not been provided.
[316] I find that on May 29, 2006, White & Case did not understand the negative consequences of switching Client 1 and Client 2 in the Safety Deposit Box Agreement signed that day. It incorrectly assumed that the notes could only be accessed in the presence of representatives of both Reagent and Euro Gas.
[317] Free Trading Shares. At the end of May 2006, Roberts and Groag continued to have concerns about Shtaif's and Shnaider's involvement in the unauthorized sale of 4 million free trading shares. On May 29, Roberts emailed Groag Ex. 676/Tab 171: "I do not know where the truth lies but I do know that Stanton told me that the 4 million was split between Mike, John and Alex …"
[318] Move from Magellan. Near the end of May, Shnaider 107 and Shtaif agreed that Shnaider would call Marechal of the Zolty law firm and ask him to provide a new corporate vehicle to replace Magellan. Marechal provided a British Virgin Island company, Koll, and he wrote Ex. 26/Tab 172 to Shtaif, indicating that a percentage should be indicated for the initial shareholding. "The sharing between you is not technically clarified but since the effective funds until now came fully from Midland, we should indicate to the banks a percentage which makes sense to them, such as 80/20." In Ex. 26//Tab 172, Shtaif replied: "For the time being you can indicate this [80/20], but I will have to discuss ownership with Alex and Eduard."
[319] Therefore, when Koll was organized, the initial share allocation was 80%/20% ( Ex. 25/Tab 8, p. 3-4). Shnaider said 110-111 he and Shtaif agreed to meet a few days later in Moscow to negotiate the share allocation.
[320] White & Case Attempts to Complete Due Diligence and SibinTek Closing Documents. Between May 29, 2006 and June 14, 2006, White & Case attempted to confirm that Reagent had title to 40% of the SibinTek shares that Trovalion was purchasing. I find it was unable to do so.
[321] In a June 26 memo, Ex. 182/Tab 253, White & Case reported to Shtaif as follows:
… It was intended that the completion of the acquisition would take place in Tyumen later in the week of May 29 (or early the following week) once the sellers had rectified the share register to demonstrate that they had title to the shares. We proceeded to prepare documents for completion …. No further information or documentation was received from the sellers.
[322] Move From Magellan. On May 30, 2006, Roberts wrote Groag about Magellan's dispute with Howard: "I have discussed this with Allan [Beach] who recommends a settlement be reached with some stock or warrants."
[323] Koll Share Ownership. On May 31, 2006, Shnaider said 115-117 he and Shtaif negotiated Koll share ownership. They agreed that Shnaider and Shyfrin or Midland would own 67.21% of the Koll shares in exchange for Midland's $50 million investment. Shtaif and his team would own the balance. He referred to Ex. 27/Tab 6, his contemporaneous handwritten notes.
[324] Shtaif gave evidence 3446-3447 that he and Shnaider agreed that Midland would invest $120 million and would own 67.21% of the Koll shares. He said he provided a spreadsheet, Ex. 361/Tab 568, to Shnaider at the May 31 meeting, showing Midland paying $120 million for 67.21% of the Koll shares.
[325] I accept Shnaider's and Shyfrin's evidence they were never prepared to invest $120 million in Koll. At the end of May 2006, Shyfrin was reluctant to invest at all.
[326] SibinTek. As noted earlier, Kuznetsova had told Shtaif on May 29, 2006 she needed to prepare further documents. The Share Purchase Agreement, Ex. 180/Tab 119, was between Trovalion and Geros. It did not mention Euro Gas at all. The purchaser Trovalion was to pay Reagent $12 million on behalf of Geros. Shtaif had given control of Treasury Notes in the name of Euro Gas, a non-party to the agreement, to another non-party to the agreement Poltoranin. On May 31, 2006, Kuznetsova and Tokovinin wrote Ex. 379/Tab 181 to Shtaif:
To substantiate the transfer of the Promissory Notes by Euro Gas instead of Trovalion, Reagent should issue notice to the sellers confirming the settlement of debt under certain share agreements while Euro Gas should issue the notice to the sellers confirming the off-setting of the Promissory Notes against the purchase price payable by Trovalion to the sellers. …
[327] Meetings with Shnaider re SibinTek. On May 31, 2006, Shnaider text-messaged Shtaif asking him to meet with two brokers including an Armen Sarkisikin who represented an entity other than Geros and claimed their client was the true owner of the SibinTek shares. Shtaif said when he met with them, he knew their client was not the true owner. He gave the following evidence at 3600: "Well, first of all, I asked … for a simple thing. I said I'd like to see the minute book. I'd like to see the corporate registry. I'd like to see your entitlement to claim that you are the shareholder." [Emphasis added] He said they showed him "some phantom book with something in it that they just opened and closed" and refused to provide a copy. He said he told Shnaider they were "full of it" and offered to bring Geros, the true owner of the shares, to meet Shnaider.
[328] Shnaider gave evidence that after that meeting, he asked Shtaif to "double check to make sure his people really had title to the shares." Shtaif told Shnaider not to worry.
[329] Appointment of Magellan Director of Security. Shtaif gave evidence that on May 31, Ex. 35/Tab 192, Mr. Sergei Solovyev, a policeman at the commercial crime division in the Central Police District of Moscow, was appointed as Magellan's Director of Security. [This is the same Sergei Solovyev Shtaif mentions in numerous emails in evidence sent in June and July of 2006.]
[330] Potential Funding for Magellan. On May 31, 2006, Mr. Salem of Duration wrote Ex. 473/Tab 700 to Hazout:
We are considering making an investment of $5-15 million. However, I would first like to further my due diligence and would welcome any material on the ownership of the oil fields acquired and the official confirmation of the 2P reserves acquired or … in the process of being acquired by Magellan…
June 2006
June 1-13, 2006
[331] SibinTek. On June 1, 2006, Shtaif sent Shnaider Ex. 25/Tab 8 p. 4, an SMS message: "W&C sent recommendations everything is clear and will help us register in Tyumen."
[332] Although Shtaif said White & Case had advised him that Reagent had good title to 40% of the SibinTek shares and he had not been impressed with the ownership claims made by the brokers he had not met on May 31, Shtaif said he met with Sergei [whom he said was still a policeman] and asked the police to investigate, just in case Poltoranin/Reagent was improperly claiming to be an owner of 40% of the SibinTek shares.
[333] Move away from Magellan. On June 1, 2006, Roberts sent Shtaif Ex. 584/Tab 184, a draft letter to be used to terminate International's/BDW's subscription agreement.
[334] Changing Roles. On the same day, Groag emailed Ex. 587/Tab 187 to Roberts, mentioning he had discussed with Shtaif that Roberts was prepared to commit up to two weeks per month in the management of Koll for a salary increase from $80,000 to $160,000 per year.
[335] Free Trading Shares. By June 2, 2006, Voskoboinikov had requested the refund of the US$250,000 he had advanced to Aberdeen to purchase 50,000 Magellan free trading shares at $5 per share.
[336] SibinTek. On June 5, Shtaif emailed Shnaider Ex. 35/Tab 192: "They [White & Case] are heading to Tyumen or are already there. They will make sure the register of the company is changed so that the beneficiary is Trovalion, our subsidiary in Cyprus. …"
[337] At one point in his evidence, Shtaif said he concluded on June 6, 2006, from a document White & Case received from Regional Alliance, Ex. 381/Tab 196, that Reagent owned 40% of SibinTek. An "expert commission" had reviewed extract #11647 from the Unified State Register of Legal Entities, Certificate of Registration number 000292594, and concluded that SibinTek's incorporation and issue of securities were valid and that SibinTek's shares were owned 60% by Sibmash and 40% by Reagent; Shtaif: 3611-3612 and 3787. He said the large stamp on the document indicated that the information had been verified and was up to date. [Vinogradov gave evidence that all Regional Alliance had was an extract from the State Register showing SibinTek's founders in 2000. It was not up to date.] At another point in his evidence, Shtaif said he knew Regional Alliance was not a law firm and he did not rely on it to certify title. He relied only on White & Case. He understood that White & Case had to complete its due diligence.
[338] Vinogradov and Ganus both gave evidence that the documents provided by Regional Alliance were not the documents the White & Case lawyers needed to conclude that Reagent owned 40% of the SibinTek shares in June of 2006. The only reliable indicator of ownership was the seller's internal register showing details of all share transfers right up to the date of the sale. The seller was the only party with access to its own current internal corporate register. Although White & Case had asked Bekker to produce that internal register, she had not done so.
[339] On June 7, 2006, White & Case lawyer Jones had emailed Ex. 38/Tab 213 to Shtaif: "We haven't yet heard from Irina Bekker following our email requesting outstanding information/documents required for completion …" She enclosed a 26 page completion checklist dated June 7 setting out items that still needed to be completed. As of June 7, all of the items on the checklist in white still needed to be completed. In white under Stage A Completion Actions, #1 was "Full report from current SibinTek shareholder register to be provided to White & Case in Tyumen." Ex. 38A/Tab 200. Shtaif sent an email Ex. 468/Tab 200 to Groag: "See what I have to put up with to close the deal."
[340] I find Shtaif 3600 understood that the White & Case lawyers needed to see the internal register they had asked Bekker to produce before they could satisfy themselves that the sellers had title. That is why he had asked to see the corporate registry on May 31.
[341] Move from Magellan. A special board meeting was held on June 7 to transfer ownership of Koaploma and Trovalion to Koll Resources Limited. Ex. 595/Tab 201.
[342] SibinTek. On June 8, 2006, Shtaif learned from Regional Alliance that the result of the reversal of Clients 1 and 2 on the May 29 Safety Deposit Box Agreement would be that at the end of the lease agreement [July 14, 2006], Client 2 [Keloglu] would lose all rights to the contents of the box, whether or not he held the key and whether or not the conditions for closing had been met. I find that as of June 8, 2006, it was clear to Shtaif that if the SibinTek deal did not close before June 14, 2006, the $12 million [in notes] would be in jeopardy. Shtaif said 2613-3614 he was shocked and had a "mild heart attack."
[343] I accept Vinogradov's evidence (detailed later after June 20, 2006) and I reject Shtaif's evidence that he immediately disclosed the problem to Shnaider and Shyfrin, instructed Polonsky to provide Midland with complete access to the file, requested Polonsky and Vinogradov to look at the matter and demanded that Polonsky find ways to eliminate the risk. Shtaif said 3601-3602, 3614-3615 he went to the police again on June 8, 2008, filed another complaint against Poltoranin and asked the police to pursue an investigation of possible fraud. [Shtaif did not produce any documents to corroborate that he made a June 8 complaint to the police.] He said the police went to Tyumen, met with the SibinTek General Director and followed up on the ownership of the shares. [He gave inconsistent evidence on what he learned from the police. At one point he said they did not share the full details of their investigation with him. Elsewhere in his evidence he said that based on Sergei's investigation, he concluded that Reagent had title to 40% of the SibinTek shares.]
[344] Free Trading Shares. Shtaif said when he received De Freitas' productions in this lawsuit, he found out about a lot of "back door dealing." He referred to a letter from the Magellan transfer agent sent by Nusbaum to Shtaif on June 12, which appears to show that one of the companies De Freitas had set up for Shnaider, T H Capital, had received 300,000 Magellan shares. However, De Freitas gave evidence 5968-5969 that no free-trading shares of Magellan were ever deposited into the accounts he had set up for Shnaider.
[345] SibinTek. On June 13, 2006, Shtaif emailed Ex. 382/Tab 206 to Groag who forwarded it to Shnaider and Shyfrin, setting out that the sellers had confirmed beyond a doubt that they were the "true and only owners of SibinTek." Contrary to his earlier statement that he had not relied on Regional Alliance, he said he based Ex. 382 on the Regional Alliance report [Ex. 381/Tab 196 dated June 6] and other (unspecified) information from White & Case. In Ex. 382, Shtaif continued:
We have 12 million lodged in SberBank notes that the sellers are now entitled to. Tomorrow we can sign off the ownership in the company with representatives of White & Case and make all the necessary changes in the government official institutions to register Trovalion as the legal owner of the property…
They brought in all the documents that were requested by White & Case and have confirmed their readiness to sell … since they have performed they now demand a full payment, which in accordance with our contract they are entitled to … I did not agree to sign off and transfer SberBank notes before notifying you. Legally we are bound since the sellers have performed … Our agreement includes the payment of ½ of the 12 million now and the final payment after they complete the removal of General Director and when White & Case will change ownership in favour of Trovalion…. I just talked to White & Case and they will be ready tomorrow to assist in closing. Technically backing out is not an option. So will you agree that if I will only transfer half, this will stimulate the sellers to help us in achieving results?
[Emphasis added.]
[346] Later that day, Shtaif emailed Ex. 385/Tab 213 to Shnaider, saying "we have certified documentation that the sellers are entitled to the property and can sell it."
[347] On June 13, Shnaider wrote in Ex. 25/Tab 8: "…Did White & Case give you an opinion that it is safe to pay?" Shtaif responded in Ex. 385:
Yes, once we receive the ownership transfer we are in the position to enter our name into the register… technically there is no reason why we should not pay in full now… we have White & Case resolution. There is no reason why we cannot close… Tony has seen the White & Case opinion and thinks there is no legal reason why we should not proceed.
[348] Shnaider responded in Ex. 37/Tab 213: "Can I see the White & Case opinion please?" In response, Shtaif 5056 sent Ex. 38A/Tab 213, the White & Case completion checklist as of June 7 that did not contain any White & Case opinion that it was safe to close the transaction.
[349] In my view, these two documents, Ex. 382 and Ex. 385, are worthy of emphasis.
[350] Shtaif's June 13 representation in Ex. 382 – that the sellers had confirmed beyond a doubt that they were the true and only owners of SibinTek shares – was misleading. Shtaif conceded he knew on June 13, 2006 he could not rely on Regional Alliance and that White & Case had not yet confirmed the sellers had title. He knew the internal register of SibinTek was the critical document and he knew White & Case had not seen it. I find Shtaif knew when he represented to Shnaider that the sellers had brought in all the documents that had been requested by White & Case that his representation was false. Shtaif said "technically there is no reason why we should not pay in full now." That was false. As of June 13, the sellers were not entitled to full payment. On June 13, Shtaif knew if the deal did not close, the Treasury Notes would be at risk. Shtaif conveyed the misleading impression that there were no problems with the SibinTek deal. I find Shtaif's representation that White & Case had given its opinion it was safe to pay was false.
[351] Had Shtaif agreed to give Poltoranin the guarantee mentioned in Ex. 216 and to forfeit $6 million even if the transaction did not close, that would have been consistent with his statement "technically backing out is not an option." Unless he had entered into the guarantee mentioned in Ex. 216, his statement: "Our agreement includes payment of half the $12 million now" made no sense. If he had entered into that guarantee, when he referred to "our agreement," he was referring to his and Poltoranin's agreement, not Magellan's agreement. Whether or not he had given a guarantee to pay half, Shtaif was pushing hard to get approval to pay $6 million even though he knew the deal was not ready to close. When he indicated his intention to release half of the notes, he knew that whether or not the deal closed that the very next day, Poltoranin could get access to the notes.
June 14-19, 2006
[352] White & Case, having learned that the Safety Deposit Box Agreements signed on May 29 were due to expire on June 14, 2006, and that as Client 1, Poltoranin would be able to remove the Treasury Notes from SberBank Safety Deposit Box whether or not the conditions for closing had been satisfied, convened a meeting on June 14 with Bekker and Tsyankov at its offices in Moscow. [See White & Case June 22 memo, Ex. 178/Tab 243 and also Ex. 174/Tab 237 prepared by Kutnetsova and Tarabrin.] Shtaif did not attend. Those present prepared a nine point protocol, Ex. 174/Tab 238, outlining, among other things, the things Poltoranin and Geros needed to do before the transaction could be closed. Step 1 was as follows: "Reagent will endeavour to provide White & Case with formal confirmation (i.e., an excerpt from the register) of its ownership of over 40% of the shares in the company."
[353] Ex. 41A/Tab 241, a June 21 White & Case memo addressed to Shtaif, also described the June 14 meeting and included the following at page 3:
At the June 14 meeting it was also discussed how to deal with the US$12 million promissory notes to be released to Reagent that are currently stored in the SberBank deposit box, in light of the fact that (under the current arrangement with SberBank) Reagent has the right unilaterally to withdraw this amount at the expiry of the storage period. … We understand that the parties intend to proceed as follows. The total amount is to be divided into two equal parts of 6 million US dollars each, and stored in different deposit boxes. One of these remains in the possession of Reagent; the other will be held. Shtaif interested person; the key to Reagent deposit boxes to be deposited in the other box. Please confirm this arrangement was actually put into effect; if not, please let us know what the current arrangement with Reagent is.
[354] Shtaif gave evidence 5100 that on June 14 while Polonsky and Tarabrin were meeting with Tsyankov and Bekker, he was at the police station, ready to take action in case Poltoranin tried to abscond with the notes. 3620-3622. Shtaif sent Shnaider an SMS Ex. 25/Tab 8: "Alex, I am in the meeting with law enforcement agency regarding acquisition of SibinTek. We will not have any issues. It goes up to the top. I will call later."
[355] I reject the submission of the Defendants that Shyfrin knew about the problem with the SibinTek notes on June 14 because Shtaif went to the police on June 14, 2006. Shyfrin said when he learned about the problems with the notes, he instructed Shtaif to go to the police. I find on June 14, 2006, Shyfrin did not direct Shtaif to go to the police station. Shtaif did not say Shyfrin directed him to go to the police on that date.
[356] Shtaif gave evidence that after Tarabrin had called him to say the protocol had been executed, he left the police station and met with Poltoranin, Bekker and Tsyankov. He tried to convince them to reverse the order of the clients. Poltoranin would not agree. He deposited six Treasury Notes with a value of $5.4 million in Box 0159 for a further period of 30 days, and he again designated Poltoranin as Client 1. The other six notes with a value of $6.6 million were placed in another safety deposit box. Shtaif said he later learned that Poltoranin had the key to that box.
[357] On June 14, 2006, Shtaif emailed Ex. 386/Tab 217 to Shnaider: "…I have secured that all legal due diligence by White & Case has been completed and procedure approved. Today I've spent approximately 8 hours with White & Case compiling procedure that will ensure our full legally binding transfer of ownership and as stated I have only locked half the funds in safety deposit box until the change of ownership is complete."
[358] After Shnaider queried Shtaif's reference to deposit of half the notes, Shtaif 3641 wrote Ex. 386/Tab 217 to Shnaider: "All the funds are locked in two separate boxes in SberBank. Half the funds will be opened after the sellers come back from Tyumen as per my last email. The remaining balance will be available after they complete the removal of the unwanted parties."
[359] For Shtaif to have released half of the notes on June 14 was consistent with the content of his June 13 emails there was no reason not to release all the notes, but that he would be releasing half.
[360] Shtaif's email to Shnaider that he had only locked half of the notes in the Safety Deposit Box was consistent with Vinogradov's evidence that he later was advised by a SberBank representative that after June 14, Poltoranin and Keloglu were only named as Client 1 and 2 on one box, Box 0159. Vinogradov concluded that after June 14, if there was another box at SberBank containing Treasury Notes, it was in Poltoranin's name alone.
[361] I have also considered Shtaif's evidence 5064 that his statement "I have only locked half of the funds in safety deposit box" was a "true statement." He said locked one half means that now this is committed and there's no way back. I don't have the key to the safety deposit box. Mr. Poltaranin does... I have the key to the other box 0159. Shtaif 5083 said he never saw a deposit agreement for the box for which Poltaranin had a key.
[362] I find Shtaif and Poltoranin did not implement the protocol devised by White & Case on June 14, 2006. Instead, Shtaif and Poltoranin agreed 6 notes would be put in a box in the name of Poltoranin alone. Six notes would be put in Box 0159.
[363] Shtaif's June 14 memo to Shnaider ("we will not have any issues. All is arranged through White & Case. People on the way to change the register of the company") was false and misleading.
[364] Move from Magellan. On June 14, 2006, Roberts emailed Ex. 360/Tab 215 to Groag, Shnaider and Shyfrin referring to Google searches that he had done on the Pink Sheets website for Magellan and International. He had ascertained that the same answering service answered the telephone of Magellan and International. He suspected Howard had set up both Magellan and International and had been pulling the strings for both.
[365] On June 15, 2006, Roberts wrote to Groag: "Mike has to understand his limitations. … We cannot have Mike controlling the process."
[366] Greenspoon gave evidence that on June 16, 2006, Shnaider told him they were having problems with Magellan and asked him to attend a Magellan Board meeting on June 20, 2006.
[367] Shtaif gave evidence 3676 that before he traveled to Toronto for the Board meetings on June 20, 2006, he had a conversation with Polonsky and Vinogradov, because he wanted to ensure that the Midland lawyers had had full access to the White & Case file on SibinTek. Vinogradov gave evidence that sometime before June 21, Shyfrin asked him to take a look at the SibinTek deal. He didn't have any information on SibinTek. He called Shtaif, who suggested that Vinogradov call Polonsky. When he did, Polonsky advised he needed Shtaif's permission before he could release information to Vinogradov because Euro Gas was White & Case's client. Polonsky promised Vinogradov he would start releasing SibinTek information to Vinogradov as soon as Shtaif had provided his authorization.
[368] I find that before June 20, 2006, Vinogradov had had no access to any part of the White & Case file on SibinTek.
[369] Roberts said when he met with Groag the night before the June 20 meeting, Groag advised him about developments on Reef and SibinTek in Russia, including the switch of Client 1 and Client 2 in the May 29 Safety Deposit Box Agreement and its implications, including that Poltoranin could access the Treasury Notes even if the SibinTek deal did not close. Roberts said 6258 Groag told him that the lawyers were not too concerned because they did not think Poltoranin would steal the notes and risk going to jail. Roberts said he advised Groag about developments in Toronto involving Magellan.
[370] Roberts gave evidence that he discussed the possible implications of the switch of Clients 1 and 2 with Shnaider and Nusbaum at dinner on June 19, 2006. They did not perceive the notes to be at high risk. Shtaif, who was sitting at a different table, said, "If you're not happy with what I've done, I'll resign." Shnaider said, "You were just fooled, I don't want you to resign."
[371] In his evidence Shtaif did not mention any discussion about SibinTek on June 19, 2006. I find Shtaif, Roberts and Groag did not advise Shnaider about the switch in Safety Deposit Box Clients before the June 20 meeting. I base this finding in part on the evidence of Shnaider 1274-1275, which I accept, and in part on the content of the contemporaneous documents, including but not limited to Ex. 692/Tab 796, a July 6 email from Groag referring to a communication in which Shnaider noted that since the [June 20] meeting Shnaider and Shyfrin had become aware that Mike had exposed the Trovalion $12 million in the most crude manner and Polonsky's reference in email Ex. 205/Tab 449: "It was not until late June/early July … that we had any dealings with Midland."
June 20, 2006
[372] As of June 20, 2006, Shyfrin said:
I was reluctant to go ahead because I almost lost my trust in Shtaif. Usually when people lie to me I'm not dealing with them anymore … I was convinced by Mr. Shnaider … that maybe it was an unfortunate event, maybe and that we already have lost one and a half million to Bokserman and we already send 12 million to buy SibinTek and maybe SibinTek will be a good deal to recover whenever we lost and make money. So out of respect to my partner I stayed. Although I can repeat, I was very reluctant to stay in the business.
[373] Shyfrin said January 29, 2013 at 40 that on June 20 he thought that Shtaif was well experienced in the oil and gas business. While Shyfrin (January 29, 2013 at 20) still believed that Midland's $50 million was not enough to buy more assets and create a small-sized oil company and that more investment was needed, he was under the impression that Shtaif had other investors: "… I was kept under impression by Shtaif continually that investors already on the horizon. They are coming with the big-money. It will not be a problem. It will not be a problem. We were kept under continuous impression like that…"
[374] Final Magellan Board Meeting. On June 20, 2006, Shnaider, Groag, Roberts and Shtaif met to rescind Midland's subscription in Magellan. Lawyers Beach, Greenspoon and Nusbaum attended the first part of the final Magellan Board meeting.
[375] Board Minute. Ex. 28/Tab 225 is the Minute of the final Magellan Board meeting. Shtaif said the lawyers recommended that certain matters not be recorded in the minutes, including the discussion about SibinTek, the $12 million transfer and Vinogradov's investigation of the switch of Clients 1 and 2 in the May 29, 2006 Safety Deposit Box Agreement. Roberts gave evidence that Greenspoon advised that the details of the unwinding of Magellan should not be detailed in the Minutes. Greenspoon denied 3014 providing that advice.
[376] Beach Notes. Beach took notes, Ex. 538/Tab 226, of the portion of the meeting he attended. They read as follows:
Larry Nusbaum, pump and dump, 504 issue answers – Florida attorney … 4,000 free trading shares without legend early January 2006 504-… 4 million bad shares… Not well done. very transparent fraud… transfer agent "First American." Never filed in Texas as required if legit 504 issuance. No registration. The promoter was possibly "underwriter." Who? Stanton director pri <?? Howard, Watson, Alec Minute no priors ret found connections? Duty? Public? 11000 @130. Market making issuing.Vlad $250,000 Stanton - broker Paraguay NASD Porteus - Stanton transfer agent has been told to stop. Notice caught on too quickly to get pumped. Feb 19 Greg and De Freitas applied to the board. Stanton confirmed only 4700. Magellan not a reporting issuer… Nothing known to come back to bite directors. press releases _ Who prepared and authorized? Suggest a press release rescinding Midland + no assets…. $120 mil PR was unknown and unapproved. No obligation under US law to report to regulatory Legal justification for revocation? Fraud sufficient grounds. No record of significant public sales…Vlad $250000. Secondary – company not involved… Should issue note to Midland with security…White & Case acts for Euro Gas. Cyprus treaty Russia 5% tax… Magellan sent 12 million to Euro Gas for Trovalion deal (subsidiary of Magellan). Now on deposit in Russian bank pending minor regulatory conditions… Delaware no requirement of any director All can resign. Any ongoing MS legal will be to Euro Gas Moscow … Should leave reimbursement to board on Table. Commission should be reversed to Midland by direction… Alex resigns with nominee Avi will do rescission agreement. Larry will do PR and unanimous written resolutions – Two PRs the rescission and the resignations.
[377] Roberts' June 20, 2006 Notes. Ex. 598/Tab 765 are notes Roberts said he made at the final Magellan meeting and the inaugural Koll meeting. As early as March 24, 2010, Ex. 689/Tab 794, the Plaintiffs challenged their authenticity. At trial they asked this Court to find they were unreliable.
[378] The Plaintiffs' Challenge to Roberts' June 20 Notes. Before his examination for discovery, Roberts produced a copy of Ex. 598. At his discovery he was asked to produce his original notes so they could be examined and tested. Roberts said they were missing and blamed the Plaintiffs' law clerks who had had custody of them before the discovery for photocopying.
[379] At trial, the law clerk from Weir Foulds, Rose Plue, gave evidence. She said she never saw Roberts' original notes. She took the utmost care when copying Roberts' documents. She copied the photocopy of his notes that Roberts had produced and put it back where it had been. There was no way that original notes could have been removed.
[380] Counsel for the Plaintiffs submitted that in early 2010, when they first challenged the authenticity of his notes, Roberts could have taken steps to locate and produce the original notes. Instead, he waited and located them on the eve of trial. Lindblom gave evidence 8853-8854 that after 18 months, there is no test to determine when a document was written. Had Roberts produced his original notes at discovery or shortly thereafter, Lindblom could have determined if they had been written or added to within 18 months of early 2010. (Roberts 7704-7705.)
[381] In his evidence, Lindblom 8854-8855 made it clear that Roberts had made a number of additions to his notes after he wrote them, including: Newco as signing bonus on p. 3; GR MS beside "no real risk"; "VV is reviewing White & Case" on p. 4. Lindblom was not able to say whether the words "flip-flop" had been recorded in the normal sequence.
[382] On discovery Roberts admitted he wrote in his notes, in square brackets, things that he was thinking but did not say. He conceded he also made entries of unuttered thoughts that he did not put in square brackets.
[383] I found Beach to be a reliable and objective witness. As there were marked differences between Roberts' and Beach's notes, and as Roberts admitted that his notes included things he was thinking but that were not said that he did not mark with square brackets, and as he clearly made additions to Ex. 598 that in my view were material, e.g., "VV reviewing White & Case; MS no real risk," I am unable to have any confidence in the accuracy of Roberts' notes. I have not relied upon them.
[384] Beach gave evidence that at the beginning of the Magellan meeting, Nusbaum gave advice that Magellan was a fraudulent sham private company that had been incorporated in November 2005 and that did not have legitimate public company status. He advised Midland to demand the rescission of its subscription agreement and the return of its investment. Shnaider and Shyfrin did so, then resigned from the Magellan Board Ex. 30/Tab 235 [to avoid a conflict]. The remaining Board members – Shtaif, Groag and Roberts – agreed on behalf of Magellan to rescind the Midland share subscription and repay to Midland what was left of its $50 million Shnaider 120-121. By June 20, 2006, Magellan had already disbursed $12 million to buy Treasury Notes for the SibinTek share purchase, $1.5 million to Bokserman and $171,591.39 of other expenses.
[385] Amounts Owing to Directors – Magellan Promissory Notes. Beach gave evidence about a discussion at the final Magellan Board meeting regarding payment of Magellan fees and expenses. Shtaif was seeking to be reimbursed for approximately a million dollars in various expenses he or his company had incurred. Beach said 5841 no agreement was reached at the Magellan meeting with respect to those expenses. Beach's notes include the following: "Should leave reimbursement to Board on table."
[386] Roberts gave evidence 6299 that before any funds were returned to Midland, he and Groag wanted payment from Magellan of amounts they said were owed as directors. They agreed 6300 Nusbaum would prepare and Magellan would execute Magellan promissory notes payable to Shtaif, Roberts and Groag - Shtaif US$1,282,847, Groag US$86,848 and Roberts US$44,796. Shtaif gave evidence 3412 that Nusbaum, Beach and Greenspoon discussed a Magellan note payable to Shtaif.
[387] I reject Roberts' evidence that at the Magellan meeting, the Magellan directors agreed to issue Magellan promissory notes in favour of Shtaif, Groag and Roberts. I accept Beach's evidence as reflected in his notes that the Magellan directors decided to table the matter.
[388] Costs of Reversing Magellan. Beach gave evidence that at the June 20, 2006 Magellan meeting, the directors agreed that the costs of cleaning up and reversing the Magellan transaction should be borne by Shtaif.
[389] Discussion re SibinTek Notes. Roberts gave evidence that on June 20, 2006, Shtaif very briefly mentioned the problem arising out of the switch of the clients 1 and 2, saying there was no real risk. Everyone thought Poltoranin wanted to close and would not risk going to jail by not closing. Shtaif gave evidence there was a discussion about the SibinTek Treasury Notes, including the switch of Clients 1 and 2 and its possible implications. Shnaider 121-122 and Greenspoon 3013-3014 gave evidence there was no such discussion. Beach recorded the discussion as follows: "Magellan sent 12 million to Euro Gas for Trovalion deal (subsidiary of Magellan). Now on deposit in Russian bank pending minor regulatory conditions."
[390] I accept the evidence of Shnaider 121-122 and Greenspoon 3013-3014 there was no discussion about risks relating to the notes at the June 20 Magellan meeting. I find the discussion about SibinTek was as recorded in Beach's note. I find that on June 20, 2006, Shnaider and Shyfrin were unaware the SibinTek notes were at risk.
[391] Koll Inaugural Meeting June 20, 2006. Later on June 20, 2006, the inaugural Board meeting of Koll was held. Shnaider, Shtaif, Groag and Roberts attended. The Minutes are at Ex. 32/Tab 230.
[392] Shtaif said that he came to the Koll meeting on June 20 expecting Midland to invest $120 million in Koll and to receive 67.21% of the Koll shares as he and Shnaider had agreed on May 31, 2006. Shtaif 4767 and Roberts gave evidence that at the June 20, 2006 Koll meeting, Shnaider refused to honour his earlier agreement. Shtaif said 4768 in May 2006, other investors had been prepared to participate in Koll. However, since Shnaider and Shyfrin had agreed on May 31, 2006 to invest an additional $70 million, between May 31 and June 20, he had not taken any steps to line up other investors.
[393] Roberts said not to have gone ahead with Koll would have been "catastrophic" for Shtaif. He had roughly $4,000,000 of his own money invested. Roberts 3482 and Shtaif had no choice but to agree. Reef and SibinTek were scheduled to close within 30 days.
[394] For reasons given earlier, I have already found that on May 31, 2006, Shtaif and Shnaider had agreed that the Plaintiffs would receive 67.21% of the Koll shares in return for Midland's $50 million investment.
[395] Appointment of Directors. At the inaugural Koll meeting, the parties agreed on the appointment and remuneration of officers and directors. Shtaif was to be CEO, with an annual net salary of $600,000. Groag was to be Chairman at an annual net salary of $150,000 and Acting CFO at an annual net salary of $250,000 [a total of $400,000 net]. Roberts was to be Executive Director at an annual net salary of $80,000 plus $80,000 for additional work. Shnaider and Shyfrin were to be non-executive directors, at an annual net salary of $80,000 each. Shtaif gave evidence they also agreed on the minimum duration of his and Groag's terms. The Minutes contain the following: "It was also agreed that directors would have a one year rolling contract with a 3 year commitment both to and by Koll. It was agreed the President & CEO would have a 5 year commitment."
[396] Shnaider said 138-139 they did not agree on the duration of their appointments as set out in the Minutes.
[397] Debts Due to Directors. The Minutes Ex. 32/Tab 230 reflect that the Board agreed Koll would pay Magellan's ex-directors the debts owing to them by Magellan as a signing bonus. Shnaider gave evidence 140-141 he agreed that Koll would make payments, but only after Koll was cash flow positive. Roberts said the debts due to directors were to be paid in Koll's June payroll run.
[398] Did Midland Promise to Put $36.3 Million Back into Koll Immediately? Shtaif and Roberts gave evidence that Midland promised to immediately pay the $36.3 million back into Koll.
[399] Shnaider gave evidence 140 that he and Shyfrin did not commit or agree to put the $36.3 million back into Koll immediately. They agreed to transfer up to $50 million to Koll as required.
[400] Greenspoon gave evidence that he did not remember any discussion at the Magellan meeting about the return of the funds to Midland being conditional upon Midland agreeing to repay the money to Koll immediately.
[401] The June 20 Koll minutes make no reference to an immediate payment. Whether or not the Plaintiffs intended on June 20 to reinvest the $36.3 million, within the next few days, once Vinogradov learned of the problems with the SibinTek transaction and informed Shnaider and Shyfrin about them, they were not prepared to do so. The July 7, 2006 loan agreement provided: "The lender shall extend to the borrower from time to time, solely at the discretion of the lender, one or more loans up to the aggregate of US$50 million…"
Events Post June 20
June 21, 2006
[402] June 21 Meeting in Toronto re Unwinding Magellan. The Minutes of a meeting of Magellan dated June 23, 2006 meeting but held on June 21, are Ex. 460/Tab 690. Shtaif and Roberts gave evidence that on June 21, Shtaif, Groag and Roberts resigned as directors of Magellan,/Tab 249.
[403] Documentation Unwinding Magellan: Settlement Agreement dated June 21, 2006 between Midland and Magellan Ex. 29A/Tab 234 provided that Midland would return all of its common shares in Magellan. Magellan would repay Midland the remaining available funds [approximately US$36.3 million], assign to Midland all of its right, title and interest to the issued and outstanding shares of Trovalion and Koaploma, their rights and benefits under the SibinTek and Reef Share Purchase Agreements, and give Midland a secured demand promissory note in the amount of US$1,671,591.39, Ex. 29C/Tab 236.
[404] Roberts said Nusbaum prepared the Settlement Agreement Ex. 29A/Tab 236. Greenspoon gave evidence that he prepared the Settlement Agreement.
[405] Assignment Agreement. Greenspoon said he prepared Ex. 29B/Tab 236, the Assignment Agreement, assigning the capital stock in Trovalion Industries and Koaploma Management to Midland.
[406] Promissory Note. Tab 249 was a promissory note from Magellan to Midland for $1,671,591.39 [representing the $1.5 million paid to Bokserman and $171,591.39 in expenses.]
[407] Magellan's Promissory Notes dated June 23, 2006. Roberts gave evidence that by June 21, 2006, Midland's CFO and Groag had prepared a reconciliation of amounts owed: to Shtaif, $1,282,847; to Roberts, US$44,796; to Groag, $86,848. Nusbaum's office had prepared Magellan promissory notes in those amounts [Ex. 31/Tab 246]. Shtaif signed each of the notes on behalf of Magellan before he resigned as its CEO.
[408] Shtaif said 4731 he thought he had sent copies of the notes to Shnaider and Shyfrin as an attachment to his email dated June 24. [He said 4733 he would print it out and bring it to court but he did not do so. Counsel for the Plaintiffs suggested the only attachment was the Board minutes.]
[409] I accept Shnaider's evidence 620-625, 630-631 that neither he nor Shyfrin knew about Ex. 31 or approved them at any Magellan Board meeting or otherwise. He did not see those notes on June 21.
[410] Greenspoon said 3025-3026 he had no involvement in preparing Ex. 31. He said he did not discuss them with Beach or Nusbaum. Beach said 5842 he had never seen Magellan promissory notes in favour of Shtaif, Roberts and Groag. Nusbaum was not called to give evidence. I accept the evidence of Greenspoon and Beach that they did not prepare the notes and conclude they were not prepared by Greenspoon, Nusbaum or Beach. The Magellan notes in favour of Shtaif, Groag and Roberts contained spelling mistakes. For example, "principal sum" was spelled "principle sum." Magellan was spelled incorrectly. This contrasts with the other documentation prepared on June 20.
[411] While there is a note about a discussion during the Koll meeting about Koll paying signing bonuses ex Magellan, that offers no reason why Magellan would give promissory notes to its ex-directors. Roberts said 6299 it made no sense to create a liability for tax purposes in a company being jettisoned. They agreed that they would execute notes evidencing what Magellan "owed." Koll would pay those amounts as signing bonuses. From a Koll audit perspective, these amounts would be listed as signing bonuses and deductible by Koll for tax purposes.
[412] I find that on June 20, the Magellan Board decided in effect that Magellan would not give promissory notes to Shtaif, Groag and Roberts. Shtaif and Roberts knew it. I find the notes were not discussed at the June 21 meeting. If Shtaif signed them on that day, he did so knowing that on June 20 the Magellan Board had decided Magellan would not give promissory notes to Shtaif, Groag and Roberts.
[413] SibinTek. On about June 21, Midland's Chief of Security reported to Shyfrin that Poltoranin, the purported owner of Reagent/40% of the SibinTek shares, was a convicted murderer. Shyfrin said that news alarmed him, because "convicted murderers could not be trusted with $12 million."
[414] I have found Vinogradov had no opportunity to review the SibinTek file before June 21, 2006. In an email Ex. 205/Tab 449 Polonsky confirmed that Midland's first involvement with SibinTek was in late June 2006. He wrote: "It was not until late June/early July 2006 (after Euro Gas got itself into difficulty over the promissory notes) that we had any dealings with Midland." [Emphasis added.]
[415] Vinogradov gave evidence 1605-1606 that on June 21, he received Ex. 174/Tab 238 the first of the SibinTek documents from White & Case. He reviewed Ex. 180, the SibinTek Share Purchase Agreement and some other documents including White & Case's June 21, 2006 memo. While he said 1613-1614 at first he didn't understand the whole situation, he thought there was a problem. He 1624-1626 immediately contacted Shnaider Ex. 41/Tab 241, telling him the SibinTek transaction was "a big mess." He called White & Case to seek further information. He asked Regional Alliance for all of its documents and collected all the information he could. He soon learned since Client 1 and 2 had been switched, the promissory notes were at risk.
[416] After June 21, Vinogradov continued to receive documents from White & Case and Regional Alliance. [In the White & Case memos to Shtaif in evidence Tabs 238, 239, 181, 243, White & Case repeatedly advised Shtaif that the internal shareholder register had been requested and had not been received, and that White & Case was not yet satisfied that the sellers were the registered owners of any of the shares of SibinTek.]
[417] After he received White & Case's June 22, 2006 memo, Vinogradov called Tarabrin who explained that the White & Case lawyers still (as of June 22) had not received the documents they needed to satisfy themselves that the vendors had title to the shares.
[418] Vinogradov said 1696-1698 although the Share Purchase Agreement was with Geros, if Poltoranin had no title to the Reagent shares he was purporting to sell to Geros, Geros could not transfer title of those shares it was purporting to sell to Trovalion. Vingradov and Ganus both concluded 1629-1643 that White & Case had not received satisfactory proof that Poltoranin, Reagent, Bekker or Geros had title to 40% of the SibinTek shares.
[419] Shyfrin gave evidence (January 29, 2013 at 43-46) that when Vinogradov and Ganus reported "the hair-raising news" that Poltoranin had no legal ownership of 40% of SibinTek, he understood that the $12 million was at "huge risk." When he confronted Shtaif and asked him what he had done to protect the notes, Shtaif told him he had put all the notes into two deposit boxes. When Shyfrin asked who had the keys, Shtaif said he had given a key to Poltoranin. When Shyfrin asked, "What was the condition for Poltoranin to open the box? Were they supposed to receive something in advance, shares or documents?" Shtaif answered no.
[420] Shyfrin gave evidence that in his opinion, only an idiot or a criminal would have dealt with a convicted murderer and given away $6 million for nothing. Shtaif blamed White & Case. Shyfrin said he didn't believe a smart businessman would have needed White & Case to tell him not to give $6 million to a convicted murderer. Although Shyfrin had done business in Russia for many years, he said he had never been involved in "such a stupid transaction with promissory notes."
[421] I have accepted Vinogradov's opinion 2268-2273 that he believed the sellers had no right or title to sell 40% of the SibinTek shares to Trovalion. [In assessing Vinogradov's evidence, I have not relied on the evidence of Keefe about information he received from White & Case on January 23, 2008. That evidence was not admitted for its truth.] I have relied on the contemporaneous documents including the White & Case memos and have concluded that on May 29, 2006, the SibinTek deal was not ready to close; the documents that had been provided did not prove that the sellers had good title to the shares; Shtaif wanted the closing accelerated; Tokovinin and Kuznetsova did not review the Safety Deposit Box Agreement that Keloglu and Poltoranin signed on May 29 until June 14, 2006. After May 29 White & Case tried to take further steps needed to close. White & Case learned about the switch of Clients 1 and 2 and the implications from Regional Alliance. They continued to take steps to satisfy themselves on title and to protect the notes, but they were never provided the documents they needed to satisfy themselves that Reagent had title to the SibinTek shares.
June 22-30, 2006
[422] SibinTek. On June 22, 2006, referring to the June 14 meeting, Polonsky wrote to Shtaif in Ex. 178/Tab 243:
You asked us to attend a meeting (June 14) with the sellers and Reagent. At this meeting we were provided with …the promissory notes deposit agreements dated 24th and 29th of May. At the 14 June meeting a protocol (setting out further steps and conditions for completion of the acquisition) was negotiated and executed, and alternative arrangements for the promissory notes (including an extension of time and a division into two deposit boxes) were discussed. These are described in our memorandum of the 14 June meeting. Following the meeting, we drafted (in conjunction with Yuri Monastyrsky of the specialist litigation firm Monastyrsky Zyuba) a letter from Euro Gas to send to SberBank alerting SberBank to certain errors in the promissory note deposit agreement of May 29; this was sent to you on June 14.
Today Regional Alliance confirmed that the letter of June 14 was not sent to SberBank … Regional Alliance also stated today that the alternative arrangements discussed at the June 14 meeting were subsequently varied, so that Reagent retains the right to take possession of all the promissory notes …. Regional Alliance provided us today with further documentation relating to the promissory notes; we have been discussing these with Yui Monastyrsky with a view to developing possible approaches to restrict the release or payment of the promissory notes to Reagent.
[Emphasis added.]
[423] White & Case's letter to SberBank cautioning it not to release the Treasury Notes is Ex. 472/Tab 218. Although Shtaif gave evidence 3678 that he and Keloglu personally delivered Ex. 472 to SberBank, he produced no document to corroborate his evidence, such as an acknowledgment of receipt. I find he did not deliver the letter.
[424] Free Trading Shares. On June 23, 2006, De Freitas emailed Ex. 318/Tab 668 to Shnaider: "As far as I'm concerned, Michael Shtaif is the only one who has made money on the Magellan deal to date." At trial, Shtaif characterized De Freitas' email as "self-serving," saying that De Freitas was trying "to cover his [own] tracks."
[425] SibinTek. White & Case hired and paid for an independent litigation lawyer, Monastrysky, to advise it, including whether it should seek an injunction to prevent the release of the SibinTek Treasury Notes to Poltoranin. The Minute of that meeting is Ex. 460/Tab 690. Monastrysky's memo of the meeting is Ex. 183/Tab 259. Vinogradov and Ganus attended the meeting convened for that purpose on June 23, 2006; Shtaif did not.
[426] Ganus said by June 23, 2006, they were beginning to understand that it was unlikely that the seller would provide good title to the SibinTek shares. Vinogradov 1675-1676 and Ganus 1648-1650 gave evidence that by the end of the June 23 meeting, those in attendance had agreed that to recover the notes, they should not initiate the civil proceedings, but should use the criminal process. They understood 1677-1678 that even if they involved the police, it might not be possible to recover them before the Safety Deposit Box Agreement expired on July 14.
[427] Shtaif's Activities Late June 2006 re Treasury Notes. Shyfrin said on June 23 he demanded Shtaif open a criminal file with the police. In late June [and early July] he understood Shtaif thought Sergei could "do something." On June 29, Shtaif sent Ex. 25/Tab 8 an SMS to Shyfrin: "Eduard, Sergei policeman still outside of Moscow. He is finalizing the file and will be ready to discuss tomorrow…" Shtaif told Shyfrin he had arranged a meeting with Sergei Solovyev, Mr. Gardt and Mr Andreev, the General Director of SibinTek. Shyfrin said he decided to wait to see what would happen.
[428] Shnaider gave evidence Shtaif advised him he was going to open a criminal file with a Colonel Sergei Solovyev and to pay him US$30,000 to arrest the notes. [This is the same Sergei Solovyev Shtaif had said on May 31 was being appointed as Director of Security for Magellan.] Shtaif said Sergei had not left the Commercial Crime Division of the Central Police District in Moscow and denied paying him $30,000.
[429] A June 26, 2006 White & Case memo, Ex. 182/Tab 253, prepared by Polonsky, Tarabrin and Borilatov, noted:
… we were informed by Regional Alliance on 22 June 2006, no such plan was implemented. This is reflected in one of the Deposit Box Agreements concluded on June 14, 2006 (the other has not yet been provided to us.) We understand the situation to be as follows: The total amount of the … notes has been divided into two parts, one is 180 million Rubles the other 143,520,000 Rubles and each is stored in a separate deposit box … we understand Mr. Keloglu has the key from one of the two deposit boxes… this fact does not prevent Mr. Poltoranin to unilaterally withdraw the promissory notes at the expiry of the storage period…
[430] After learning that Midland's $12 million were at risk, Shyfrin again wanted to back out of the deal. He said in the seven months he had known Shtaif, there had been one disaster after another. However, Shtaif and Roberts were telling them how successful the venture would be. He and Shnaider decided to remain in the venture to recoup their past losses (Shnaider 196-199; Shyfrin January 29, 2013 at 63-64) but they needed (1) financial control of Koll (Ex. 44/Tab 255); (2) Midland's in-house lawyers involved in every transaction.
[431] Shnaider gave evidence that he thought at that time that if they pulled the plug they would lose millions of dollars. However, given Roberts' and Shtaif's assurances, he thought if Shtaif were to concentrate on finding oil deals and Koll were taken public, they would be able to recoup their losses.
[432] On June 27, 2006, Shnaider wrote Ex. 44/Tab 255 to Groag: "Due to last week's events that became known to us only after the inaugural meeting, Midland has decided it would like to have full control of the funds in the future…"
[433] On June 30, 2006, Groag wrote Ex. 692/Tab 796: "On Tuesday I sent Alex the draft of the Koll inaugural minutes which we held on June 20. He replied saying that since that meeting they have become aware that Mike had exposed the Trovalion $12 million in the most crude manner… " [Emphasis added.]
[434] On June 30, 2006, Roberts wrote Ex. 693/Tab 264 to Groag: "As far as Alex and Eduard taking control, I expected as much. That is likely what I would do, after seeing this debacle."
[435] On June 30, 2006, Groag emailed Ex. 461/Tab 263 to Roberts and Shtaif: "I spoke to Mike about your idea of us three as a seamless team, with you [Roberts] as President, Mike as COO/Russia CEO and I [Groag] as chairman going forward alone (without Midland)…" Mike's response was "Ask Greg to start moving." Both Shtaif and Roberts said it was not accurate to say that they wanted to move forward without Midland. However, if Midland pulled out, they would have moved forward alone.
July 2006
July 1-6, 2006
[436] On July 1, 2006, Roberts emailed Ex. 601/Tab 266 to Groag:
We can go forward without Midland but that would not be my preference given the representations we have made and the explaining that we will have to do with the Street… it would be a huge loss to our team and to the business to lose Alex and Eduard. That being said, I am surprised that Alex and Eduard have not pulled out. … I can't imagine that they are too pleased with the way things have gone … I would be very surprised if they will continue without changes in the status quo. Alex is well respected in Canada and in Russia. … I would certainly understand if they make the decision not to proceed. …
Mike has many strengths, but he does not have the experience to take a company public and then run the Canadian public company… It is patently obvious given what has transpired (with International, John, David, etc.) that Alex and Eduard have lost confidence in Mike's ability to lead the company. Mike has to understand he has many strengths but a few weaknesses … we need a person responsible for closing that has transactional experience. … (c) we need to operate a public company. From what I've seen, these are not Mike's strengths, but they are yours and mine.Several bankers have told me clearly that you and I have to expand our roles for the market to really perceive this as a real opportunity, as they do not see Mike having the appropriate experience to do it all. This has become obvious to us and I believe Alex and Eduard have real issues with this as well.(d) you have done a great job as chairman and are eminently qualified for that role.To ensure success you have to be very active in Russia which requires in my view no less than 50% of your time.
… to go forward we need to first determine if Alex and Eduard want to continue… If Alex and Eduard do not want to continue,we must still have this open dialogue with Mike regardless of the decision… I believe the executive team has to be fortified I have suggested that I would become President with you maintaining the role as Executive Chair and Mike maintaining the role of CFO with very defined roles as I see it, (with Mike's role being restricted and yours and mine being considerably increased)…(c) I am happy to consider the President's role which would require me to leave IPICO, as long as you assume more of an operational role in Russia….(d) the Market clearly has to understand that Mike is the visionary, the Key to our success,but that you and I are in operational control with a solid board and advisory committee in place to ensure success…
[Emphasis added.]
[437] On July 4, 2006, Shnaider emailed Ex. 48/Tab 271 to Shtaif:
Due to all circumstances that took place in the last few weeks I would like to propose the following to you; Midland provides a $50 million (including the $12,000,000 at SberBank now) loan at interest Libor plus 2% to Koll Resources instead of an investment into the company.This will make me and Eduard much more comfortable going forward. I agree that Koll would be owned by myself and Eduard (not Midland) yourself and the management according to our agreement. I don't understand why we take control only of Euro Gas Russia and not Euro Gas BVI. We always spoke about BVI.
[Emphasis added.]
[438] Shtaif responded Ex. 47/Tab 271:
This is an interesting proposal… If this means once we pay off the loan you do not own the same position in the company, then we should discuss this ASAP… Euro Gas Russia effectively manages everything, so unless there is a specific reason why you need BVI company I do not see any reason to transfer ownership at this time.
[439] Shnaider responded:
We don't want to reduce our shareholding. We would like to remain with 67% of the shares. We have no particular schedule for the loan repayment. We propose that our loan would be repaid once the company will be in a position to do so. We also agree to subordinate our loan to a loan …
[Emphasis added.]
[440] Shtaif wrote Ex. 47A/Tab 271:
Alex… Our agreement is that you would "invest" the funds to keep the shares. You cannot "loan" the funds and own shares… you should invest or be a lender- the choice is yours! I do not like to renegotiate after the deal has been concluded… At this time I would rather keep things as we have agreed in the first place…
[441] Shnaider gave evidence 218-219 that he made it clear that he and Shyfrin would not proceed if Shtaif did not agree to his proposal, including the transfer of ownership of Euro Gas to Koll.
[442] Changes to Contract. On July 5, 2006 Shnaider and Shtaif spoke by telephone. Shtaif said the conversation was very acrimonious. They came to an agreement on new terms.
[443] On July 6, 2006, Shnaider emailed Ex. 49/Tab 276 to Shtaif confirming the new terms:
This is to confirm our conversation earlier today where we both agreed to revise our involvement with Koll Resources. The following has been agreed: the shareholding in the company will remain the same as per the inaugural meeting of Koll Resources that took place in Toronto on June 20. Midland's $50 million will be treated as a loan bearing interest of LIBOR +2%. We will have an option to convert the loan to preferred shares. We will ask our lawyers in Toronto to draft such agreement. The draft of this agreement will also be used by M. Shtaif. Shtaif has had various expenses up to date that will be treated exactly as Midland's loan. These expenses are not related to BDW, International or SibinTek. Midland agrees that all ongoing expenses of Koll and acquisitions will be financed from Midland loan. All BDW International and SibinTek expenses will be financed by M Shtaif. Please confirm.
[444] During his examination-in-chief, Shtaif said 3482-3483 he confirmed his acceptance of Ex. 49 by email. However, he said 4776 he "was being extorted. Shnaider didn't care about the other shareholders of Koll." The revised terms were not discussed with any of Koll's other directors. Shnaider gave evidence that all of Shtaif, Groag and Roberts agreed to the new terms.
[445] On about July 5, 2006, Shtaif said police from the Central District uncovered a Snamick Security Agreement [not a Compensation Agreement]. Shtaif denied 3874 that the document he had received from the police was Ex. 185/Tab 12, which is a Snamick Compensation Agreement dated November 11, 2004, whereunder Poltoranin had agreed (due to its inability to fulfill his obligations under a loan contract dated December 22, 2002) to transfer 400,000 shares of SibinTek to Siberian Alliance of Machine Building and Services Companies ("Siberian Alliance.")
[446] I reject Shtaif's evidence that the Snamick Agreement he received from the police in July of 2006 was different from Ex. 185. I find as of July 2006, the Agreement in hand seemed to show that Poltoranin had already transferred the shares he was purporting to sell to Trovalion to another party, the Siberian Alliance.
[447] Recovery of SibinTek Notes. Shtaif gave evidence 3697-3700 that after Poltoranin did not show up at the meeting that had been arranged for July 6, 2006, he texted Ex. 42/Tab 281 to Shyfrin: "Please tell your people to become involved."
July 7-13, 2006
[448] SibinTek. Shtaif said White & Case had never advised him that there was a problem with Reagent's title. As of July