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	England and Wales High Court (Commercial Court) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Commercial Court) Decisions >> Marlwood Commercial Inc & Ors v Kozeny & Ors [2008] EWHC 1538 (Comm) (16 June 2008) URL: http://www.bailii.org/ew/cases/EWHC/Comm/2008/1538.html Cite as: [2008] EWHC 1538 (Comm)

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IN THE HIGH COURT OF JUSTICE
QUEENS BENCH DIVISION
COMMERCIAL COURT

		Royal Courts of Justice
		16th June 2008

MR. JUSTICE CHRISTOPHER CLARKE:

1. The trial fixed for January 2009 cannot go ahead as planned, that is to say as a full trial of all the issues. This is because the criminal proceedings currently proceeding in the United States against, amongst others, Mr. Pinkerton, an AIG employee, will not be completed by then, and until they are the documents that have been served on the Defendants by the prosecution and the evidence in the proceedings, which are relevant to this case, will not become available, nor will witnesses involved in the criminal case be available to be interviewed in order to give evidence.
2. Mr. Richard Millett QC, on behalf of Mr. Kozeny, submits that the most efficient course to take in those circumstances is to use some of the time available in January 2009 for the purpose of deciding some of the issues that arise, and one in particular.
3. In May 2006 Mr. Jonathan Hirst QC, sitting as a Deputy Judge of this court, heard an application to lift the stay of the actions that was then in place and to dismiss them. The question before him arose in this way. The case concerns very large investments made by the Claimants, or those behind them, in 1998, in vouchers and options relating to the oil industry in Azerbaijan which became available on privatisation.
4. The Claimants are all offshore companies registered in the British Virgin Islands, now worthless shells, which were used as corporate vehicles for the proposed investments in Azerbaijan. They are ultimately owned by substantial United States interests. The Omega Claimants are owned by various Omega hedge funds. The Omega funds were managed by Omega Advisors Inc., which I will describe as 'OAI'. Their chief executive officer was Mr. Leon Cooperman. A senior employee of OAI, and a member of its investigation committee, was Mr. Clayton Lewis. Water Street is an investment vehicle for Columbia University. Marlwood is a subsidiary of the National Union Fire Insurance Company of Pittsburg, itself a subsidiary of AIG, the well known US based insurers. Mr. Lewis was the investment manager of all the Claimants.
5. The claim as now put is, in part, that, induced by fraudulent concealment and deceit OAI, Columbia University and AIG agreed that their investment funds should purchase options and vouchers through the Claimants, as a result of which the Claimants entered into the various agreements for the purchase of those options and vouchers.
6. The Claimants then provided Minaret, Mr. Kozeny's company, with approximately $156m to purchase vouchers and options. Mr. Kozeny concealed from the Claimants the fact, revealed by him to Mr. Lewis, that he, Mr. Kozeny, had bribed senior Azeri officials in connection with obtaining the vouchers and options. Mr. Lewis dishonestly concealed the fact of that corruption from OAI, such that he was given a power of attorney to act for the Claimants. There was, it is said, a conspiracy of silence whereby Mr. Kozeny and Mr. Lewis conspired to injure the Claimants by not revealing the corruption underneath. Mr. Kozeny knowingly assisted Mr. Lewis in his dishonest breach of his duties. Fraudulent representations were made by Mr. Kozeny and Mr. Lewis to Columbia University and AIG that all anti-corruption laws had been and would be complied with.
7. The claim is for the losses which were made on the investments. The privatisation turned out to be a disaster. The vouchers and options obtained are worthless. If the Claimants and their funders had known the truth they would never have entered into the relevant agreements.
8. Mr. Millett contends that all these claims are ill-founded because Mr. Lewis is to be treated as the directing mind of each of the Claimant companies. That being so, there can have been no deception arising from any failure to disclose that there was underlying corruption, nor any misrepresentation that there was none. Mr. Lewis, and therefore the Claimants, knew the true facts. There was no relevant person to conceal the true facts from, or to reveal them to. There was no conspiracy to injure by deception for there was no deception. It is nothing to the point, he submits, that the funders of the Claimants may have suffered loss, for that does not affect the attribution to the Claimants of Mr. Lewis' knowledge of the corruption.
9. These contentions are based on essentially two matters. Firstly, it is said that Mr. Lewis did everything relevant so far as the Claimants were concerned. There were two de jure directors of the Claimants but they were mere nominees. He was the only individual charged by each Claimant with the de facto control and management of its entire business, which was to act as the vehicle for making investments in the Azerbaijan privatisation. The Claimants were his creatures. Most of them were not even acquired by the funders until after the co-investment agreement had been executed by the Claimants, and a large number of options and vouchers had already been acquired. Their mind was his mind, their knowledge was his knowledge. For the role of directing mind there is said to be no other candidate.
10. Secondly, reliance is placed on the statement of Mr. Cooperman, made in connection with certain contemplated criminal proceedings in the United States against OAI. On 19^th June 2002 an agreement was made between the United States authorities and OAI whereby the United States agreed not to prosecute OAI. OAI forfeited $0.5m and accepted responsibility for Mr. Lewis. In that statement, Mr. Cooperman made a number of statements to the effect that Mr. Lewis had virtually complete autonomy, or a high degree of autonomy, and was in control of his business unit, subject to keeping within specified risk limits.
11. The statement also indicated that in relation to the particular investments now in issue, i.e. Azeri vouchers and options, it was necessary for Mr. Lewis to obtain the approval of Mr. Cooperman at the outset, and that he gave that approval, as did OAI's investment policy committee. The statement then includes a statement that: "Utilising his delegated authority Lewis controlled this investment and negotiated the deal". It is also pleaded that Mr. Lewis needed approval from a Finance and Investment Steering Committee in the case of Water Street Investments, and an Investment Committee in the case of Marlwood's investments, and that the relevant committees gave that approval. In the case of Columbia University, Water Street entered into agreements with Mr. Lewis' company under which he was directed to enter into the Co-Investment and Custodian Agreement. The same occurred in relation to Marlwood.
12. In April 2006 Mr. Hirst had to consider the significance to the claim of Mr. Lewis' knowledge of the corruption which he had before any of the investments. He held that for the purpose of this action it should be declared that:

(1) Mr. Kozeny, with the assistance of Dr. Bodner, was involved in corrupting high level Azeri government officials on a substantial scale in order:

(i) to protect Mr. Kozeny's ability to purchase large quantities of vouchers and options, and

(ii) to ensure that SOCAR would be privatised. Mr. Lewis came to know about this and appreciated that he could take advantage of it.

(2) If it be established that at the time of contracting a Claimant had the knowledge of Mr. Lewis in respect of the said corruption then the contracts which such Claimant entered into with the Defendants in relation to their investments in Azerbaijan would be unenforceable.

(3) If it be established that a Claimant had the knowledge of Mr. Lewis in respect of the said corruption then the court should decline to entertain such Claimants' claims in deceit, conspiracy, and breach of fiduciary duty, but not necessarily such Claimants' claims for an account, on the basis of the maxim of the law ex turpi causa non oritur actio.

13. Mr. Hirst did not however decide that Mr. Lewis' knowledge was to be attributed to the Claimants. He regarded that as an issue which should not be determined upon a summary application because (a) it was fact sensitive, and, (b) the law on attribution is complex and conflicting.
14. The attribution issue is the principal issue that Mr. Millett submits can and should usefully be heard in January. He accepts that there is authority, in what he submits is a different context, that a company is not fixed with the knowledge of one of its officers or agents who is a party to a fraud or an irregularity in relation to the company. Re Hampshire Land [1896] 2 Ch 743 proceeds on the basis that knowledge is to be imputed to a company because there is a presumption that the relevant officer or agent will have communicated the information he has received to his principal, but no such assumption can be made if what the agent knows is a fraudulent or irregular activity of which he is a part. It needs only common sense to realise that he cannot be expected to own up to that.
15. Hampshire Land was approved by the House of Lords in J.C. Houghton & Co. v. Northard Lowe & Wills [1928] A.C. 1. That principle cannot apply, Mr. Millett says, if the company was a one-man band, or the individual whose knowledge is sought to be attributed to the company was the company for this purpose, with the result that that individual was the company's sole directing mind and will. Further, in order for the company not to be affected with the knowledge of the wrongdoer it is, Mr. Millett submits, necessary for the wrongdoer to have had the company as his target, that is to say to have intended to do it harm. It is in that sense that the company must be a victim. Here Mr. Lewis intended the Claimants no harm. He intended that they should profit from the arrangements. Nor, Mr. Millett submits, will a company escape having the wrongdoing agent's knowledge imputed to it, because it may be a secondary victim, in the sense that the actions of the wrongdoer may expose the company to fines or the risk of loss (see McNicholas v. The Commissioners of Customs & Excise [2000] STC 553, Re BCCI No. 15 [2005] 2 BCLC 328).
16. The result is, Mr. Millett submits, as it should be. The policy of the law is that the court will not lend its aid to someone who founds his action upon an illegal act, whether it be an illegal contract or a contract whose purpose is illegality, or one which is intended to be carried out in an illegal way. It would be inconsistent with that policy to allow a company to disassociate itself of its sole directing mind. Were it otherwise, a company with a sole director or a single directing mind would be unable to enforce an illegal contract because the person with that mind was acting fraudulently.
17. Mr. Dominic Dowley QC, for the Claimants, submits that what is here under consideration is whether or not there should be an attribution of knowledge to an inanimate entity. Attribution is a fiction of the law. In such a case, it is necessary to ask: what is the purpose for which the knowledge of the agent is sought to be attributed to the company? A distinction must be made between:

(a) Cases where a company is sought to be made liable or responsible by a third party or a public authority for the defaults of its officers, servants or agents, e.g. El Ajou v. Dollar Land Holdings PLC [1994] 1 BCLC 464, Meridian Global Funding Management Asia v. Securities Commission [1995] 2 AC 500, McNicholas v. The Commissioners of Customs & Excise, and Re BCCI No. 15, and

(b) Cases where the company is seeking to recover from the agent himself, or those who have joined with him in doing that which is injurious to the company, or simply to recover a debt or under a policy, e.g. Hampshire Land, J.C. Houghton v. Northard Lowe & Wills, Belmont Finance Corporation v. Williams Furniture [1979] 1 Ch 251, Arab Bank v. Zurich Insurance Company [1999] 1 Lloyds Reports 262.

Knowledge is readily attributed to the company in the former and readily kept separate in the latter category.

18. Whether Mr. Lewis is the directing or controlling mind of the Claimants is not the point. Even if he was it does not follow that his knowledge would be attributed to the Claimants. It is not, Mr. Dowley submits, or should not be, the policy of the law to allow the wrongdoing director, or his associates, to get away with it by saying that their knowledge is to be treated as the company's knowledge.
19. The present case is a fortiori that of Arab Bank. Here the Claimants are the victims of the fraud, they produced the money, although there is, I am told, an issue about that, but in Arab Bank the prime victims were the lenders of the director's false valuations. The company was a secondary victim, in the sense that it was exposed to suits for negligence. The essential issue is whether Mr. Kozeny can rely on his corruption of Mr. Lewis to defeat the claims of otherwise innocent claimants who have lost about $156m.
20. The parties have set out their respective submissions with care, and at a little length. That has been a helpful process. I am, however, as an interloper to the hearing might have missed, not determining the attribution issue, but whether that issue, and any others, should be determined in January.
21. I have come to the conclusion that is the right course. I reach that conclusion for these reasons: Firstly, this is a solid issue. Mr. Dowley submitted that its lack of merit was such that it was inappropriate for it to be hived off for separate consideration. Whilst I see the force of that submission I am not persuaded by it. It seems to me that Mr. Millett's submissions on the application of the law to the facts, or what he contends to be the facts, have considerable force. It may be that the critical considerations are, or include:

(a) whether anyone other than Mr. Lewis can properly be identified as the directing mind of the Claimants;

(b) whether, if not, the court should adopt a special rule of attribution to the effect that in a case such as this the directing mind of companies used as mere vehicles for innocent investors should be regarded as those persons who have the ultimate power of decision in relating to the making of those investments, a proposition which Mr. Millett would no doubt characterise as a disguised lifting of the corporate veil, or

(c) whether the case falls within the same area as that mapped out by Lord Justice Hoffman, as he then was, in El Ajou when he said: "If the persons beneficially interested in a company prefer for tax or other reasons to allow that company to be for all legal purposes run by offshore fiduciaries they must accept that it may incur liabilities by reason of the acts or knowledge or those fiduciaries".

One of those liabilities may be a liability to have the individual in question's knowledge, i.e. the fiduciary's knowledge, attributed to the Claimants.

22. Secondly, the resolution of this issue may be determinative at any rate of the claims in deceit, conspiracy, and breach of fiduciary duty. It is also an issue that is not going to go away, and may indeed be required to be determined in any event prior to (at any rate logically) any subsequent decision as to whether the knowledge of persons other than Mr. Lewis, such as Mr. Cooperman, extended to knowledge of the corruption and is attributable to the Claimants. If Mr. Lewis is the only person whose knowledge is relevant no useful purpose will be served by examining the knowledge of others.
23. Thirdly, it does not appear to me that the issue will take that long to try. There will have to be evidence of, (i), the structure of the Claimants and their parents and funders, both constitutionally and in terms of organisation, (ii), Mr. Lewis' role and authority in connection with the relevant investments, and, (iii), as to how decisions in relation thereto were made, and how the relevant transactions were affected. Some of this may be in dispute. Much is likely to be documented. It is not apparent to me that there are many potential witnesses other than Mr. Cooperman, Mr. Vincent, and representatives of AIG and Columbia University. A substantial portion of the argument seems to me to be likely to involve arguments about the law.
24. Fourthly, I bear in mind that this is an action in which Mr. Kozeny is and has been for some time subject to a very substantial freezing order. I share the reluctance expressed by Mr. Hirst to allow nothing to happen in the action until some date in the Autumn of 2009, or possibly the Spring of 2010.
25. Fifthly, the parties have the January slot available. That does not mean that if it cannot be used for the full trial it must be used for something, but its availability should be taken advantage of if something usefully can be done.
26. There are two principal countervailing considerations. The first is duplication of cost and expense. If Mr. Millett's points fail there will have to be a trial of the claims in deceit, conspiracy and breach of fiduciary duty, at which the court will have to investigate whether persons other than Mr. Lewis had, as is alleged, his knowledge, and whether the knowledge of those persons is to be attributed to the Claimants. In that event, the content of some, perhaps much, of the factual testimony, will feature at the second stage, and some of those who give evidence in January will have to give evidence again. However, it seems to me unlikely that any of the ground covered by the evidence given in January will have to be re-ploughed to any great extent. Further, the exercise of compiling that evidence will have been necessary in any event.
27. I bear in mind that the aggregate cost of determining issues separately may exceed the cost of determining both of them at the same trial. Nevertheless, it seems to me that considerations of duplication are not sufficient to make trying the attribution issue in January inappropriate.
28. There is a further point under this heading, which is that the Claimants are seeking to draw from an emptying well. They have successfully frozen some $30m or $40m of assets, well below their claim. The sum available to them is likely to reduce as it is eaten up by costs. One of Mr. Kozeny's properties is subject to a charge in favour of his solicitors for their costs. However, I am not persuaded that that is a circumstance that means that I should take a different course.
29. The second consideration is whether determination of the attribution issue would constitute a treacherous shortcut. The prospect that it might do has led many judges to be wary of preliminary issues. However, the report of the Commercial Court Long Trials Working Party recommended, notwithstanding earlier appellate encouragement of caution in this respect, more widespread use of the court's power to determine part of the proceedings separately by directing separate trials of particular issues and the order in which issues are to be tried. The court is engaged in a pilot study, following, and endeavouring to implement, the report's recommendations. That does not mean that the parties are to be treated as litigious guinea pigs, but it does mean that the court is likely to be more receptive than may have been the case heretofore to making orders of this kind. I am satisfied that in this case, particularly having regard to the declarations made by Mr. Hirst, which are final, it is appropriate for the attribution issue to be determined in January.
30. The parties have engaged in the drafting of a list of issues, a process which, if I may be allowed to say so, appears to me to have achieved a slight degree of over elaboration in relation to the matters now in question. It was suggested in the course of argument that quite a lot of these issues could be determined in January, but the list of potential candidates for that purpose has substantially whittled down.
31. In relation to attribution, the question that is suggested is that contained in para.4.1.1 of the latest list of issues. That question is this: "Is the knowledge of Mr. Lewis of the corruption, and/or if relevant Mr. Kozeny's alleged personal influence over high level Azeri government officials, to be attributed to the Claimants and/or their subsidiaries, in particular…" and then nine subsidiary questions are specified. It seems to me that the form that the issue should take is that the first question should be asked but without the nine particulars. Those particulars will no doubt provide the parties with a helpful indication of the range of factual matters that may inform the resolution of the issue, and I see no reason why they should not stay in any determined list of issues, but I do not regard it as appropriate to burden whoever has to decide matters in January 2009 with a series of examination questions. He or she can choose his own route to the answer.
32. The attribution issue must however be determined upon the assumption, which Mr. Kozeny disputes but is content to have assumed for the purpose of the issue, that Mr. Lewis did not confide his knowledge of corruption to anyone and that he and Mr. Kozeny agreed that he should not do so. The need for this assumption is because the Claimants contend that that is an important circumstance, that, amongst other things, precludes the attribution of Mr. Lewis' knowledge to the Claimants.
33. The next issue that was identified was that which appears at 4.1.4.1, and is this: if not, that is to say if Mr. Lewis' knowledge is not to be attributed to the Claimants, whose knowledge is to be attributed to the Claimants? I incline to the view that issue 4.1.4.1 is appropriate to be determined in January. If there is to be determined in January whether Mr. Lewis' knowledge is to be attributed to the Claimants, it will be appropriate to determine who else's knowledge is to be attributed to them if it is not his. The number of candidates for this role cannot be that large. If, however, this issue is to be determined in January, it seems to me that it will require some defining in order to define the purposes to which the question relates.
34. I have used the expression: "I incline to the view that issue 4.1.4.1 is appropriate to be determined in January" because at the conclusion of this judgment I wish to re-visit, in the light of this judgment, whether there are any considerations that arise in relation to the issues other than 4.1.1 that should be taken into account before finally making an order.
35. In relation to the issues under para.5.4, it is suggested that there could usefully be determined in January a following issue, which appears as 5.4.2: "Have the Claimants affirmed and/or adopted or is it now too late for the Claimants to rescind the agreements on which they sue? Does that have any bearing on the recoverability of any secret profit?" The point on which Mr. Kozeny seeks to rely is this. It is said that the Claimants cannot claim an account of the profits said to have been made by Minaret or Oily Rock from selling to the Claimants (if that is what they did) their vouchers or options, as opposed to those of third parties, because decided authority provides that a purchaser who complains of improper self-dealing by the seller cannot claim an account of such profit without rescinding the contract: see Burland v. Earle [1902] AC 83, and Cooke v Deeks [1916] AC 554.
36. It seems to me that that issue is an appropriate candidate for determination in January, but before finally deciding I wish to discuss with counsel whether some re-formulation of the issue is appropriate. It occurs to me that the question ought perhaps to be: Does that, or the fact that the agreements have not been rescinded, have any bearing on the recoverability of any secret profit? I also wish to consider whether or not it is necessary or desirable for the purposes of this issue to make any assumptions in either party's favour. I suspect not, but that is for consideration.
37. Issue 5.5.2 is this: Are the Claimants precluded from claiming an account because of any knowledge of corruption and/or personal influence to be attributed them if it is? Prima facie that seems to me a sensible issue to resolve in January. It raises the question as to whether the Claimants, if Mr. Lewis' knowledge is attributed to them, or if they otherwise have such knowledge, can recover for monies paid away under a contract of whose illegality they were on that assumption aware. It seems to me necessary to specify what type of account is being referred to and is intended to be under consideration in para.5.5.2 since a number of different accounting remedies are sought in the pleadings.
38. The last remaining issue for consideration is 5.5.1: are the Claimants entitled to an account if, as the Defendants allege, it was not their funds that were received by the Defendants and/or if, as the Defendants allege, they receive what they pay for? This issue was not greatly discussed at the hearing. I understand the point to be that the Defendants say that the Claimants did not provide any of the funds but only their funders, and on that basis the Claimants cannot be entitled to an account relating to the disposition of funds which they did not provide.
39. Secondly, as I understand it, the Defendants allege that such monies as were provided by whomsoever were provided in return for the vouchers and options that were purchased and accordingly there can be no claim for an account of those monies, as opposed to damages for deceit, fraudulent conspiracy, and the like, in circumstances where the Claimants, if it is the Claimants, have paid monies over for that which they expected to receive under the contracts pursuant to which they were paid. The fact, if it be such, that the Defendants have used the monies for their own purposes, either to repay their loans or to improve Mr. Kozeny's lifestyle, is neither here nor there.
40. I should like to consider with counsel the extent to which, in the light of what I have determined in relation to the other issues, it is appropriate for this matter to be determined at the January hearing, in particular whether it is feasible for the January hearing to consider whether or not it was the Claimants' funds that were received by the Defendants, which would appear to me to be a matter of tracing who paid what to whom and upon what footing, and, secondly, whether it is possible for the hearing to determine what it was that the Claimants paid for, what it was that they received, and whether the two are the same.
41. Lastly, in relation to the issues, it seems to me that it would probably be desirable for the formulation of the issues to be determined in January to be tied in with the pleadings, in the sense that there should be some reference in the issues to the averments in the pleadings to which the issues relate. The pleadings are of very considerable length, and although the basic theme is clear the complexity is considerable. I am anxious to guard against a situation where nobody is quite clear, in particular the judge, as to which pleaded allegations the questions that are required to be determined are said to be relevant.
42. I proceed now to consider the second aspect of the matter heard before me last week, which is the question of the fortification of the undertaking in damages given. The freezing orders granted by Mr. Justice Longmore in December 1999 and February 2000 were fortified by bonds in the sum of £50,000 and £70,000 respectively. On 10^th October of last year Mr. Justice Gross ordered the Claimants to procure an undertaking in damages from their funders in relation to any loss or damage suffered after the date of the order. I am told that that proved to be difficult for certain regulatory reasons in respect of some of the funders of the Claimants.
43. However, on 6^th December 2007 OAI provided an undertaking to that effect. That was not regarded by Mr. Justice Gross as sufficient, and on 25^th January of this year he required the Claimants to provide either a guarantee from National Union Fire Insurance for $30m, or satisfactory evidence that OAI had current net assets of at least $40m (its balance sheet appeared to show an equity of about $39m) or alternative funding arrangements to support OAI's cross-undertaking. In the end $30m was deposited by another company in the OAI group in court to fortify that undertaking.
44. Mr. Millett submits that his points about attribution of knowledge, fortified as they are, he says, by Mr. Cooperman's statement and the Claimants' pleadings, have so dented the Claimants' case that he would be entitled to apply to have the freezing order discharged. Had Mr. Cooperman's statement been considered by Mr. Justice Gross, and had he had the pleadings, which contained what he submits is the Claimants' inadequate answer on the directing mind and will point, before him, he might well have made a different decision. But in order to short cut that cumbersome process the appropriate procedure, if matters are to be determined in January, is to order that the security already in place shall extend to loss and damage suffered from the date when the freezing orders were made.
45. Mr. Justice Gross appears to have made the order limited in the way that it was taking into account three considerations. Firstly, there was no evidence before him of any loss having been suffered to date. Secondly, he had no wish to encourage Mr. Kozeny to pursue unfounded claims. Thirdly, he wished to concentrate the minds of the funders of the litigation on these proceedings. It may be that he also had in mind, since he gave an indication to that effect during the course of the hearing, that a claim under the cross-undertaking was not going to be very attractive.
46. I am not persuaded that I should make any variation to the order of Mr. Justice Gross for these reasons. Firstly, this is not an application to discharge the freezing orders. The existence of those freezing orders is predicated on the Claimants having a good arguable case. If that hurdle is surmounted, I doubt that the extent to which any undertaking in damages ought to be fortified should be dependent on where on the spectrum of good arguability the case rests. There is some force in the proposition that the less well arguable the case is the greater the likelihood is that the undertaking will be called upon. But it seems to me that, once the relevant threshold is crossed, the prime determinant of the extent of any fortification is the possible loss likely to be suffered if the order turns out to have been wrongly granted, together with other discretionary considerations.
47. Secondly, whilst I accept that Mr. Millett has a number of powerful points, it seems to me that there are a number of powerful points in favour of the Claimants which are to be resolved, so far as presently relevant, in January.
48. Thirdly, I am not persuaded that there has been a sufficient change of circumstances such as would justify a variation of the unappealed order of Mr. Justice Gross. In particular, I am not convinced that Mr. Cooperman's statement, available since August 2007 and exhibited to Miss Sharma's fifth witness statement, which as I understand was before Mr. Justice Gross, makes all the difference. It was not suggested to him that it did. Evidence has been put before me from Miss Sharma of loss suffered by Mr. Kozeny prior to 10^th October 2007. I am bound to say that I do not find it convincing, even on a preliminary basis.
49. The freezing orders are said to have cast a blight upon Mr. Kozeny's properties, but the suggestion that there has been a diminution in value caused by the freezing orders appears to be belied by a number of facts and circumstances. Peak House in Aspen, Colorado, is said to have been affected by the stigma of the freezing orders. A price of $22m is said to have been achieved in 2001, although the property was purchased for $20m in 1997, had $5m spent on it, and had $3m worth of furnishings. But as appears from the subsequent witness statement of Miss Hawks, that property was the subject of a restraining order obtained by the Claimants in Colorado and was sold with the consent of the court. It is not apparent to me that it was sold at an undervalue, and if there was a diminution in value it would appear to be on account of the freezing order obtained in Colorado. It is further apparent that renovations took place between April 1996 and late 1998, and that Mr. Kozeny failed to pay for them in a timely manner.
50. In the case of Blue Lagoon, it is said that funds could not be raised to develop the property as a result of the freezing orders, but the evidence suggests that Mr. Kozeny was unable to raise the necessary money for two years before those orders. It is apparent that by early 1998 he was desperately short of funds and had difficulties in repaying Alfa Bank, a Russian Bank, which had lent money at high rates of interest, and in fact used monies derived from the Claimants to pay them.
51. In relation to Turnstar, it is said that the assumption made by others that he was a forced seller reduced its sale value and funds could not be raised to complete the works. But the property appears to have been valued at a decent price after the freezing order, and it seems to be likely to be worth more than the less than $20m asserted to be its present value, because S.J. Berwin put forward a proposal to raise a bank loan for that sum on the security of the property.
52. In relation to Lyford House, it is said that funds could not be raised to complete this development on account of the freezing order, but it seems that the building was completed in October 1998, payment was demanded by the vendor for unpaid development costs in November 1998, and the vendor then exercised the option to buy the property back when payment was not forthcoming. All of that was well before the freezing orders.
53. Mr. Kozeny refers to his property in Eaton Square and says that he was unable to complete the buildings works at that property so that the Grosvenor Estate forfeited it. But it appears that the Grosvenor Estate served notice of forfeiture for breach of certain covenants, involving, as I understand it, non completion of building works, and the works ceased in October 1999, that is to say before the first freezing order, on account of non payment by Mr. Kozeny.
54. Mr. Kozeny also contends that he has been unable to raise funds because of the freezing orders, whereas in the past he was able to raise substantial amounts, as is evidenced by the loan from Alfa Bank, of $50m to Oily Rock, and that he has been denied business opportunities as a consequence of those orders. That seems to me somewhat unconvincing also. Mr. Kozeny is a person who asserts his own dishonesty in these proceedings. He appears to have had to use money derived from the Claimants and paid to Minaret for vouchers in order to pay the Alfa Bank. The interest rate charged by that bank indicates that he was a poor credit risk in 1997, and even more so in 1998.
55. Mr. Kozeny has been indicted by a Federal Grand Jury on charges of breaches of the Foreign Corrupt Practices Act and money laundering, and has been arrested in the Bahamas with a view to extradition, so far successfully resisted. He was also indicted in 2003 by the District Attorney of Manhattan on 15 counts of grand larceny and two of money laundering. It is also apparent that, prior to the Claimants' investments, Mr. Kozeny and his companies were desperate for cash. None of this suggests that, but for the freezing orders, he would have had ready access to funds, or have been the recipient of valuable and legitimate business opportunities.
56. Mr. Millett objects that if Mr. Kozeny was entitled to an undertaking in damages, which he received when the orders were originally made, there is no reason for him to be required to prove what those damages may be now, and he points out that Mr. Kozeny is not seeking to vary the $30m figure which was fixed by Mr. Justice Gross without, apparently, any proof of loss. It seems to me, however, that when I am asked to widen the matters for which the $30m is to stand security I am entitled to take into account the likelihood of it being needed for those matters. I also note that no suggestion appears to have been made until late 2007 that the undertakings should be further fortified.
57. The Claimants have submitted that, if their claims fail on the basis that Mr. Lewis' knowledge was to be imputed to them, it is unlikely that the court would award damages under the undertaking, even if persuaded that Mr. Kozeny had suffered any loss. The Claimants will, in that event, have failed because, although innocent themselves, Mr. Lewis' knowledge is to be imputed to them. In those circumstances, Mr. Kozeny is unlikely to have any claim to the beneficial exercise of the court's discretion.
58. I have my doubts on this. If the Claimants fail because of the attribution of Mr. Lewis' knowledge it will be because the Claimants are not innocent, their directing mind will have been a guilty one, and because the law does not permit recovery in reliance on illegality. If so, the action will turn out to have been one which should not have been brought and Mr. Kozeny should not have been restrained in anticipation of its success. I therefore doubt, although I do not decide, that the fact that he is a dishonest individual, and was so in relation to the core of this case, deprives him of any right to claim under the undertaking.
59. I do, however, take into account the fact that the information put before me in relation to loss appears plainly incorrect or misleading in several respects. That is, it seems to me, a factor which would contribute to the inequity of enforcing the undertaking. It also marries with Mr. Justice Gross' wish not to encourage Mr. Kozeny to pursue unfounded claims. The basis put forward as to which claims might be made under the undertaking in damages in the event that Mr. Kozeny was unsuccessful seem to me to fall into that category.
60. Taking all these matters into account I am not persuaded that there are any sufficient grounds for varying the order of Mr. Justice Gross, and I decline to do so. Accordingly, I shall order that the January hearing will deal, and deal only, with the issues that I have identified, subject to further consideration with counsel of the matters to which I have referred, and there should be no further fortification of the undertaking. I shall also consider what further directions to give in the light of the conclusions that I have reached.