Russia’s most famous fund manager, US born Michael Calvey, the co-founder of Baring Vostok Capital, argued that he is innocent and that no crime was committed in his testimony to a Russian court on March 4, bne IntelliNews can exclusive reveal and publishes here a copy of Calvey’s complete testimony.

The testimony reads like a novel. It lays out the details of the deals that surround Baring Vostok’s investment into Vostochny bank that the prosecution claim was a criminal scheme to enrich Calvey and his partners. It is a fascinating case study of how business is done in Russia with constant crises, looming defaults, desperate hunts for white knight investors and dealing with erratic changes in the regulations by the regulator.

To prove his innocence Calvey plunges into the details and explains the intricacies, citing long lists of holding companies, banks and funds – some of them famous, many of them little more than pieces of paper in a registrar in Cyprus – that get pulled into deals to get through the minefield of day to day business.

At the end of his testimony Calvey concludes: “In short, there was no theft, there were no damages, and the only beneficiary of the transactions was the supposed victim, the Bank itself.”

The trial continues, although those close to the case say they hope it will be over before the end of this year if not before. Calvey remains upbeat and said he wants to stay in Russia and keep working despite having spent more than a year in jail and under house arrest on trumped up charges that were the result of a corporate dispute with partners.

But he remains on trial and with Russian courts’ conviction rate of almost 99% there is a real danger that the court will find against him and possibility sentence him to more jail time.

The arrest of Calvey in February 2019 after a dispute with his Russian partners into the Vostochny bank went sour became a cause celebre and has badly hurt Russia’s investment image. Baring Vostok has been responsible for bring billions of dollars into Russia and made its investors stunning returns.

Investors are now watching closely to see what happens and Calvey’s fund has been put in a semi-limbo until the trial is over. While the corporate dispute with his Russian partners has been settled with an out of court payment of $35mn, the case against Calvey continues, despite the fact there is no longer any claim of embezzlement after Baring Vostok made the payment. The issue is that even after the money question was settled so no damage was done, the prosecutor is expected to argue that a crime was still committed for which Calvey should be punished.

A day in court

Calvey’s claim to be innocent is the key to getting the case dismissed and the focus of his testimony: to put of the record the facts of the case in the hope that justice will be done.

“I have familiarized myself with the charge brought against me and understand the accusations. The conclusions made in it have absolutely no connection with the actual events that happened. I would like to give testimony to the court about the actual circumstances of the case,” Calvey said in the opening remarks to his testimony, which he delivered in Russian, despite being offered a translator by the court.
The charge that has been brought against Calvey is that he developed a criminal plan, which involved the illegal issuance of two deliberately non-repayable unsecured loans to First Collection Bureau (PKB) by Vostochny bank, which was part owned by Baring Vostok. PKB is the largest debt collection services company in Russia and is employed but all the market leaders to collect bad debts. The investigators argue that the Vostochny-issued PKB loads were stolen, even though they were in fact used to pay off the Bank’s off-balance sheet obligations.
The back story to this crucial transaction is that Vostochny bank, while still under its previous ownership, built up significant off-balance sheet obligations back in 2011. It bought back its own shares, but since it couldn’t house them on its own balance sheet, moved them to a third-party bank.
In 2015, a Baring Vostok capital injection saved Vostochny Bank from collapse, with the private equity firm becoming its majority shareholder. The crises didn’t stop there, however.

The CBR suddenly changed the rules in 2015 forcing banks to make 100% provisions for collateral held offshore that created yet another crisis at the bank. Vostochny was required to immediately settle the off-balance sheet obligations it picked up in 2011. As majority shareholder, Baring Vostok had to find a rapid solution to this problem, and as such, settled the obligations using funds from Vostochny PKB loans.
Calvey then plunges into the details of the PKB deal, which is heavy in detail. There are share buy backs using Cypriot-based special purpose vehicles. There are Eurobonds that are used as collateral that nearly get lost. There are investment companies with secret shareholder agreements. And there are partners that run out of patience and present loans for redemption or make margin calls at short notice.

Later in 2018 it was under capitalised and as part of the Central Bank of Russia (CBR) clean up of the sector its shareholders were ordered by the regulator in about April 2018 to increase its capital or face losing its banking licence.

That is where the arguments started between Baring Vostok and its Russian partners, lead by Artem Avetisyan, who among other things, was a stakeholder in Uniastrum bank that was supposed to be merged with Vostochny to close this hole of circa RUB8bn. In brief the Russian investors didn't want to pay their part of the recapitalisation.

All of this chaotic tale belies why Baring Vostok bought into Vostochny in the first place: it should have been a simple rescue and turnabout story before selling it one to a strategic buyer. That is what Baring Vostok does for a living. And it was working: Baring Vostok had invested heavily in the bank, which had been restructured, was in profit and growing nicely in the background throughout this tale.

Calvey in his testimony plods through the complicated structures – as far as he knows them. What also comes out from the story is that even when relations with Baring Vostok partners were good there was a lot going on that they were not privy to and only came to light later after Baring Vostok took control following a share issue.

Many names get dragged into the story: Gazprombank and Expobank that was once owned by British businessman Peter Hambro as well as Russian banking wunderkind Igor Kim. Da Vinci Capital comes in a little later, as well known Russian fund that played a key role in Russia’s capital markets reform in 2012.

 played an important role in dealing with the PKB debt, putting together a complicated scheme to move the bank’s treasury shares off shore to a Cypriot holding in a deal using the bank’s Eurobonds as collateral that nearly went very badly wrong after the CBR suddenly changed the rules in 2015.

“The Bank was in a very difficult position. It was on the verge of losing its Eurobonds in the amount of RUB 5,000,000,000 and of having its license revoked. There was very little time. The repayment to BCS was supposed to take place in December 2015. In such a short period of time, it was extremely difficult to resolve the issue of refinancing [a holding vehicle set up as part of the scheme] Balakus’s debt. My colleagues and I got involved in searching for a solution to the problem,” Calvey explained in this particular part of the story and then goes on to describe his on wheeling and dealing to rescue the situation.

And the deal that Calvey came up with, that involved a Czech firm J&T Group, lead back to PKB’s involvement and another slew of un-memorable holding company names, plus the involvement of Da Vinci Capital, another well-known Russian fund.

All this preamble – more than half of Calvey’s entire testimony – leads to the pay off: “Neither I nor my colleagues have ever considered those loans to be “non-repayable”. We always operated on the assumption that the funds should be repaid to the Bank. At that time, as I said, we were looking for a new strategic investor for the Bank. This was one of the ways to pay off PKB’s debt. That is why, in negotiations with potential investors, we always disclosed the existence of this debt and the need to repay it,” Calvey said.

Uniastrumbank & IFTG

In the second part of Calvey’s testimony he dives into how Uniastrumbank became a shareholder and its business with Vostochny – another long and complicit explanation of wheeling and dealing to raise funds to pay off the PKB loan, which ended in success.

A new problem came up after Da Vinci Capital suggested investing into a holding called IFTG and using this to repay PKB loans. IFTG owns, amongst other things, the ITI Group that is a derivatives trade and also runs a crypto currency fund and more recently a pre-IPO fund. The issue was there was what appears to be a shareholders agreement that had the result of limiting its returns and blocking the sales of assets that would have solved all the bank’s problems.

The second part of the testimony ended in another pay off: “Your honor, the prosecution insists that the loans to PKB were not repaid but were replaced by a “low-value asset”. But such an action on my part and on the part of my colleagues would have to be motivated by some kind of self-serving interest,” Cavely said in his summation.

“It is impossible to understand from the charge why my colleagues and I needed to intentionally create restrictions for the Bank in the equity of IFTG, considering the fact that Baring Vostok’s participation in IFTG was precisely through the Bank. Moreover, the entire process of issuing these shares and investing in IFTG was managed by Da Vinci Capital. It is difficult for me to imagine that I could have intentionally harmed the Bank, in which Baring Vostok funds had invested huge sums of money,” Calvey added.

“Your honor, for me the idea of [causing] a loss for any Baring Vostok investment is in principle simply inconceivable to me, since I have been their investment adviser for many years and any unjustified losses would be a loss, first of all, to my reputation and [would result in] a loss of trust on the part of investors,” Calvey concluded adding a two point summary of his whole argument:

“The facts are, admittedly, complicated because of the many technical details. Nonetheless, there are really just two simple and important facts on which the court can and should focus attention:

The PKB loan proceeds were used exclusively to repay the Bank’s own obligations to BCS, and not my obligations or the obligations of any of the accused parties. Not one of the accused parties received any benefit from the transactions. The PKB loan cannot be considered embezzlement, since the only beneficiary of the loan was the Bank itself. The BCS agreements, which we submitted as evidence, should be enough by themselves to immediately drop the charges against us and close the case.

The Bank suffered no harm as a result of the PKB loans. On the contrary, it benefited not just once but at least three times: the first time, when its obligations to BCS were repaid, and the Bank received back its RUB 5 billion in collateral; the second time, when, upon the receipt of shares in IFTG, it acquired rights to IFTG’s four fintech assets, valued at RUB 4 billion according to the investigation’s expert assessment; and the third time, when the Bank received RUB 2.6 billion from PKB as an additional payment to settle any potential problems.

In short, there was no theft, there were no damages, and the only beneficiary of the transactions was the supposed victim, the Bank itself.”