Regarding the Open Session on the Cassation Appeal

PJSC TOAZ (“Togliattiazot”) hereby informs that on 28 September 2021, at 10am (9am Moscow time), an open court hearing will be held in the Sixth Cassation Court of General Jurisdiction at 1 Krymskaya Ploschad, Samara, Russian Federation. The hearing concerns an appeal by TOAZ representatives, defendants in the criminal case and those in the corresponding civil case against the July 05, 2019 decision of the Komsomolsky District Court of Togliatti and the November 26, 2019 appellate ruling of the Samara Regional Court. The September hearing was scheduled by the court on 17 February 2021.

Due to the significant public interest in the situation related to TOAZ and the corresponding criminal case, we publish the following documents: the July 2019 ruling, the November 2019 appellate ruling, and the February 2021 decision scheduling the upcoming 28 September hearing. Additionally, we publish a notification by the judge of the Sixth General Jurisdiction Court of Cassation, dated 30 March 2021, which scheduled backup times for the hearing at 10am (9am Moscow Time) on 29 September or 30 September. We further publish the appeals filed by the following lawyers: Simachev D. T. and Mazur V. V. on behalf of TOAZ (which has been recognized as a victim); Gofstein A.M. on behalf of Makhlai S. V.; Tikhomirova I. G. on behalf of Makhlai V. N.; Moskovsky A.V. on behalf of Korolev E. A.; Koronets S. A. and Chernenilov N. V. on behalf of OOO Tomet (which has been recognized as a civil defendant).

We would like to remind that the criminal case in question, filed under part 4 of Article 159 of the Criminal Code of the Russian Federation, was initiated in December 2012 at the request of Uralchem United Chemical Company (UCCU). The former heads of TOAZ, Makhlai Vladimir Nikolaevich, Makhlai Sergey Vladimirovich, Korolev Evgeny Anatolyevich, as well as Andreas Zivy and Beat Ruprecht, the heads of Nitrochem Distribution AG, the Swiss company that was the key trader of TOAZ products at that time, were convicted in absentia through the two court rulings which are currently being appealed. They were found guilty of stealing all of the ammonia and carbamide produced by TOAZ between November 12, 2007 and March 10, 2012 with a market value of RUB 84,180,250,411.56. The theft was allegedly carried out under the guise of deliberately selling the production to Nitrochem at below-market low prices, so that it could be subsequently resold on the global market at full value. According to the courts, this resulted in minority shareholders, UCCU and Evgeni Sedykin, not receiving the dividends they expected. However, the courts have established - and no one disputes this fact - that Nitrochem wired RUB 65,525,294,273.20 rubles to the bank accounts of TOAZ as the payment for the delivery of said production.

TOAZ has repeatedly stated that it considers the criminal case initiated by its minority shareholders, UCCU and Mr Sedykin, who have been in a long-term corporate conflict with TOAZ, to be groundless and absurd. TOAZ does not consider itself an injured party and does not claim to have suffered any kind of damage.

The court should have established whether the prices at which ToAZ sold products to Nitrochem between 2007 and 2012 were at the market rate. In doing so, it should have taken into account the huge scale of the corresponding transactions, which represented approximately 10% of the global sales of these products. It should have also considered that the products were shipped through a unique ammonia pipeline that spans over 2400 kilometers.

The finding that TOAZ’ prices were below market rates was based solely on the conclusions of a comprehensive economic and legal study carried out by Ms. Semilyutina and Mr. Valentey, who are employees of the Institute of Legislation and Comparative Law under the Government of the Russian Federation (IZISP). The study contained so many serious and obvious mistakes that Ms. Semilyutina had to be interrogated three times in order to correct at least some of those errors.

The contents of the expert study and interrogations mentioned above are therefore unsuitable, and are filled with methodological and arithmetic errors. They were obtained in violation of the criminal procedure law of the Russian Federation, which makes them inadmissible as evidence in court. Such evidence has no legal force and therefore cannot be used as the basis for the claimants’ case, for the following reasons:

Violation of the expert evaluation assignment procedure: the study was not assigned to a state expert organization, despite the fact that one was available; it was instead assigned to experts who did not possess the required expertise or qualifications, and who did not have any experience in conducting evaluations of this kind. The objectivity of the experts is dubious because Ms. Semilyutina and Mr. Valentey had previously conducted an examination of the same issues in a tax dispute involving TOAZ before an arbitration court. In that case, their conclusions on TOAZ’ pricing levels differed from the ones they drew in this criminal case;
The expert evaluation procedure in and of itself was also violated: the investigators appointed a comprehensive economic and legal study involving experts in different fields: Mr. Valentey, who has a degree in Economics, and Ms. Semilyutina, who is a legal expert. Each of the experts had to conduct their respective research in the field in which they had expert knowledge. However, after the study was completed, Ms. Semilyutina was the only one who was interrogated (three times) despite the fact that Mr. Valentey had been the only expert research the economic aspects that were the focus of the interrogations. During these interrogations, Ms. Semilyutina independently provided calculations regarding the pricing of TOAZ products, altering the price and volumes used by Mr. Valentey in his final report. Ms. Semilyutina is a lawyer with no background in economics and therefore had no right to modify the calculations and conclusions made by an expert economist. Still, it was her testimony which served as the basis for the indictment and the court’s decision. Valentey never validated these modifications, because he was never questioned during the investigation or in court;
Throughout the trial, when the experts were assessing sale prices, they systematically ignored the numerous cases in which TOAZ products were sold to Nitrochem at prices that actually exceeded the average market rate calculated by Mr. Valentey. In fact, experts took into account only cases of so-called "underpricing", which is illegal because they deliberately ignored many transactions in which TOAZ sales prices were at the market level or higher. This radically distorted the experts' conclusions and made their report unreliable.
The unreliability of the report was established in court. In their report, the experts stated that they studied specific customs cargo declarations (CCDs), quoting specific dates and numbers. However, a significant part of the CCDs (approximately 500) are missing from the case file, such as, for example, all of the CCDs for ammonia and carbamide in 2008, which lies within the period of the alleged offense. A list of the CCDs that are missing can be found in Annex 4 to the appeal filed by Dr. Gofstein Cassation Appeal by Dr. A.Gofstein (Annex 4) (in Russian);
The judges of the first and second instances also violated procedure by refusing to allow the defendants to cross-examine the experts in court. The defense reasonably demanded that they be asked the following questions:
- Were they pressured to sign an expert report made by someone else? Mr. N.M. Kazantsev, another expert from the same institution, testified that he had initially been assigned to conduct the same examination, but was suspended without explanation when he told the investigator that his calculations indicated that TOAZ prices corresponded to the market rate.
- How did the experts calculate the prices if they didn't have the CCDs they would need to make their calculations?
- Why did the experts violate the requirements of the Expert Evaluation Methodology by not applying volume discounts for a loyal customer?
- What led the experts to reach contradictory conclusions in their report from those they reached in a separate case covering the same time period and information?
The judges of the first and second instances violated procedure by refusing to appoint new experts to carry out a new evaluation when it became obvious that Ms. Semilutina and Mr. Valentey's conclusions on TOAZ prices were contradictory.

For more information about all the violations related to the appointment and production of the expert evaluation, refusals to interrogate the experts or to appoint a new examination, see paragraph 5 of the Cassation Complaint filed by TOAZ Cassation Appeal by PJSC TOAZ (in Russian).

Neither the verdict of the court of first instance nor the appeal ruling of the second instance contain any other evidence determining the prices at which TOAZ exported its products to Nitrochem.

The Komsomolsky Court of Togliatti, when announcing the verdict, satisfied Uralchem's civil claim for a total amount of RUB87,665,334,675.76, which was upheld by the Samara Regional Court. This amount consists of compensation for material damage caused to UCCU (in the amount of RUB10,320,751,411.84); and compensation for material damage caused to TOAZ (in the amount of RUB77,344,583,263.92).

At the same time, the court decided that UCCU is to recover the funds in favor of TOAZ. The judge of the first instance illegally excluded TOAZ from the civil trial, despite the fact that it was formally recognised as a victim.

UCCU's civil claim was considered without notifying the foreign civil defendants in accordance with the procedure established by law. The Komsomolsky District Court of Togliatti judge summoned the civil defendants to court sessions which were due to be held only after the verdict was announced. Those sessions were therefore obviously never held.

As can be seen from the criminal case file, the court of first instance, in compliance with the procedure established by Articles 453 and 456 of the Code of Criminal Procedure of the Russian Federation (through the Ministry of Justice of the Russian Federation), sent court notices summoning the foreign civil defendants to court sessions scheduled for July 11, 12, 18, 19, 25 and 26, 2019. However, the judge of the Komsomolsky District Court of Togliatti announced his verdict on July 05, 2019. (violations committed during the consideration of the civil claim filed by UCCU: paragraph 10 of the TOAZ cassation appeal Cassation Appeal by PJSC TOAZ (in Russian).

It should be noted that the judge of the Sixth Cassation Court of General Jurisdiction, in his decision of February 17, 2021 which scheduled the cassation court hearing for September 28, 2021, explicitly referred to the need to summon residents of foreign states. The modalities of the requirement to summon foreign residents are established by Article 453 of the Criminal Procedure Code of the Russian Federation (i.e. through the Ministry of Justice of the Russian Federation). This confirms the validity of the arguments of the cassation complaints filed by TOAZ and by the defense attorneys. These complaints concern irregularities that should entail the cancellation of the resolution to satisfy the civil claim filed by UCCU.

Moreover, satisfying the civil claim filed by UCCU is illegal because the judges of the first and second instance failed to justify how they calculated the amounts to be recovered. The judges also ignored the fact that TOAZ received over 65.5 billion rubles from Nitrochem for the allegedly stolen products.

According to Part 3 of Article 42 of the Criminal Procedure Code of the Russian Federation, a victim is to be compensated for any property damage caused to them. In accordance with articles 1064 and 15 of the Civil Code of the Russian Federation, a person whose right has been violated can claim full compensation for the losses they suffered. The principle of full compensation implies that, as a result of such compensation, the victim should be put in the position in which they would have been if their property right had not been violated.

It is obvious that, even if the charges are proven, this provision may mean that TOAZ's losses will amount to the difference between the RUB65,525,294,273.20 they received and the market value of all the products they shipped (RUB84,180,250.411.56). Only this difference, amounting to RUB18.654.956.138.36 (84,180,250,411.56 minus 65,525,294,273.20), can be recovered if UCCU's civil claim is satisfied, and only if it was confirmed by an expert evaluation of the prices at which TOAZ products were being sold to Nitrochem. The evaluation report should be unbiased and devoid of the serious shortcomings we have described above.

The judicial practice of the higher courts of the Russian Federation (such as in the high-profile criminal cases of YUKOS and Kirovles) has followed this approach when resolving civil claims: the amount of a satisfied civil claim is determined as property damage actually caused to the victim and is calculated by taking into account the value of the alienated property minus the amount that was paid to the victim. Appendix 5 to the cassation complaint filed by Dr. Gofstein contains "A legal opinion on the ratio of the amount of stolen property to the amount recoverable under a civil claim brought in a criminal case for theft as compensation for property damage caused by a crime" (prepared by P.S.Yani, Doctor of Law, Professor of the Department of Criminal Law and Criminology of the Faculty of Law of Lomonosov Moscow State University, member of the Scientific Advisory Council at the Supreme Court of the Russian Federation, editor-in-chief of the Criminal Law magazine Cassation Appeal by Dr. A.Gofstein (Annex 5 - Opinion by Prof.P.Yani) (in Russian).

In addition, UCCU's civil claim, which has been satisfied, includes more than 3.5 billion rubles in interest (recovered in favor of UCCU). This is prohibited by paragraph 12 of the Resolution of the Plenum of the Supreme Court of the Russian Federation No. 23 of October 13, 2020 "On the Practice of Consideration by Courts of a Civil Claim Within a Criminal Case" and therefore confirms the illegality of UCCU's claims.

The conclusions of the courts of the first and second instances regarding the application of the norms of civil and corporate legislation contradict the fundamentals of the law and cannot hold up to proper scrutiny. It is also fundamentally wrong to believe that a company's products in any way belong to a shareholder of that company rather than to the company itself. This alone negates the idea contained in the courts’ rulings that TOAZ products were allegedly stolen from its shareholders. It is also impossible to apply a law that came into force with a significant delay. Therefore, UCCU should not have been able to benefit from the concept of beneficiary ownership, which did not exist during 2007-2012. UCCU should also not have been able to use the regulations of the Civil Code of Russia to file a claim on behalf of TOAZ. Separately, it is astonishing that the court used the “common” meaning of legal terms rather than their legal definition. The court directly confessed to doing this in order to define an “affiliated entity”, stating that trying to stick to legal definitions would have been “clearly futile”.

The liberty with which the courts of two instances in this criminal case unreasonably substituted specific norms of the law with non-existent concepts and notions that have been invented specifically for this situation causes great concern about the possibility of further replication thereof by unscrupulous participants in corporate disputes in order to illegally seize other people's property. If the decisions of the first and second instances are upheld, this precedent will cancel the generally recognized principle of inviolability of property, thus inaugurating an era of uncertainty for Russian business.

A detailed analysis of the violations of the norms of civil legislation is given in the cassation complaint filed by Tomet Cassation Appeal by OOO TOMET (in Russian).

TOAZ expects an objective review of the present criminal case by the Sixth Court of Cassation of General Jurisdiction and a lawful and reasoned resolution overturning the judgment of the Komsomolsky District Court of Togliatti dated July 05, 2019 and the appellate determination of the Samara Regional Court dated November 26, 2019.

1. Cassation Appeal by A.Moskovsky (in Russian).

2. Cassation Appeal by OOO TOMET (in Russian).

3. Cassation Appeal by Dr. A.Gofstein (in Russian).

- Cassation Appeal by Dr. A.Gofstein (Annex 1) (in Russian)

- Cassation Appeal by Dr. A.Gofstein (Annex 2) (in Russian)

- Cassation Appeal by Dr. A.Gofstein (Annex 3) (in Russian)

- Cassation Appeal by Dr. A.Gofstein (Annex 4) (in Russian)

- Cassation Appeal by Dr. A.Gofstein (Annex 5 - Opinion by Prof.P.Yani) (in Russian)

4. Cassation Appeal by I.Tikhomirova (in Russian).

5. Cassation Appeal by PJSC TOAZ (in Russian).

6. Sentence by Komsomolsky District Court of 05.07.2019 (in Russian).

7. Decision on Appeal by Samara Regional Court of 26.11.2019 (in Russian).