BULGARIA: 2007 REPORT ON INVESTMENT DISPUTES AND

UNCLAS SOFIA 000794

SIPDIS

SIPDIS

DEPT FOR EB/OIA

E.O. 12958: N/A
TAGS: EINV KIDE CASC PGOV BU
SUBJECT: BULGARIA: 2007 REPORT ON INVESTMENT DISPUTES AND
EXPROPRIATION CLAIMS

REF: STATE 55422


1. The United States government is aware of two (2) claims of U.S.
persons that may be outstanding against the Government of Bulgaria
(GOB).


2. List is keyed according to reftel instructions.

A) Claimant A (ongoing case)

B) 2000

C) In 1999, Claimant A established a subsidiary, which purchased a
controlling interest in a Bulgarian fertilizer company through the
privatization process. The subsidiary was holder of the fertilizer
company shares. Shortly after the privatization, the Russian
partner in the subsidiary of Claimant A, through a scheme involving
a bogus loan, acquired the fertilizer company shares from the
subsidiary through another Cyprus-registered holding company, which
he controlled.

The Russian partner -- without a power of attorney or any other
authority from the claimant -- signed a loan agreement between the
claimant's subsidiary (on behalf of the fertilizer company) and his
separate holding company for $4 million to purchase pipes. When, as
expected, the fertilizer company could not repay the loan, the
holding company sued and gained control over claimant's subsidiary
and therefore the fertilizer company. On August 30, 2000, the
Vratsa Regional Court issued a decision regulating the transfer of
9,683,000 shares of the fertilizer company from the claimant's
subsidiary to the Russian partner's holding company.

Shortly after the holding company took over the shares of the
fertilizer company, the Privatization Agency agreed to sell the
remaining 14 percent of the shares still held by the GOB to the
holding company.

The claimant has since been caught in a legal dilemma in Bulgaria
between the questions of jurisdiction and reciprocity. On one hand,
the Bulgarian courts claimed that they did not have jurisdiction
because the case is between two American registered companies.
However, when the claimant won its case before the New York Supreme
Court in June 2001, Bulgaria refused to recognize the New York
court's decision because the United States and Bulgaria do not have
a reciprocity agreement.

The Sofia City Court issued a decision on July 14, 2003, ordering
the Cyprus-registered company to restore the above shares to the
claimant. Further to an appeal submitted by the Cyprus-based
company, on December 18, 2003, the Sofia Appellate Court overruled
the Decision of the Sofia City Court.

Following the above Decision, the claimant submitted an appeal of
cassation before the Supreme Court of Cassation (SCC),which was
heard by its Commercial Division (case No. 144/2004) on June 16,

2004. This is the highest court and its decision is final for all
parties concerned. On September 10, 2004, a three-judge panel of
the SCC upheld the decision of the Sofia Appellate Court. On March
8, 2005, a five-judge panel of the Supreme Court of Cassation issued
its final decision and turned down yet another appeal.

In the meantime, a separate case in the Vratsa District Court went
forward based on the claim of the Bulgarian state natural gas
company BULGARGAZ and the Bulgarian state electrical company NEC for
proclamation of declaring the fertilizer company insolvent. The
court declared the fertilizer company insolvent on December 14,

2004.

Despite the court ruling, the Post-Privatization Agency (PPA) has
initiated legal proceedings against the claimant for failing to meet
commitments under the privatization contract. In addition, the PPA
sent, on April 11, 2005, a letter requesting the claimant pay $7.4
million for non-performance under the privatization contract.
Embassy asked the PPA to reconsider this in light of the Bulgarian
Court's determination that claimant is not the owner of the plant.
The director of the PPA responded that she found it very unusual
that the privatization agreement allowed for 100% of the company
shares to be transferred, while all liabilities for performance
under the privatization agreement stayed with the buyer (IBE). We
relayed this information to the attorney for IBE with the request to
confirm. No response to this request has been received. The
privatization agreement in fact allowed for the transfer of shares
to third parties, while IBE retained all liabilities and
responsibilities.

A) Claimant B (new case)

B) 1999

C) In 1999, through its daughter company, Claimant B started
developing the Chelopech deposit on the grounds of a Contract for
Granting Concession for Mining Underground Resources
(Gold-Copper-Pyrite Ores from the Chelopech Deposit). The
gold/copper mine at the time was sustaining financial losses and
exhibiting low morale amongst its staff due to shortage of funds for
mine upgrades. The implementation of the project will avoid the
liquidation of the mine providing full-time employment to more than
860 people. Claimant B agreed to dedicate funds to developing
municipal infrastructure and assist in improving municipal services.
Consistent with the Investment Promotion Act and the Rules for its
implementation, in February 2006 Claimant B received a Certificate
for First-Class Investment. In this Canadian company, about 40
percent of the shares are held by U.S. companies and individuals.

In November 2005, Claimant B deposited with the Ministry of
Environment and Waters (MoEW) an Environment Impact Assessment (EIA)
statement done by an independent team of experts, followed by EIA
public hearings held a month later. At the beginning of 2006, a
date was set for a meeting of the Higher Council of Environmental
Experts (HCEE) at the MoEW for consideration of EIA. The
consideration, however, was postponed by MoEW which requested
clarification of the issue regarding the hygiene protection belt
around the tailings management facility. The MoEW minister Djevdet
Chakarov argued his obstruction was based on his ambition to protect
the state interest, as well as the opposition of some intellectuals
against the further implementation of the project. In March 2006,
HCEE reconvened and approved the EIA overwhelmingly (with 22 in
favor and only 1 against). Instead of passing a resolution on the
EIA, in April 2006 MoEW further delayed the procedure by asking the
Ministry of Economy and Energy (MEE) to issue its opinion on the
EIA, which was positive.

Again in March 2006, Claimant B filed an appeal against the MoEW's
silent refusal to rule on the EIA. At the end of 2006, a
three-member panel of the Supreme Administrative Court revoked the
MoEW's silent refusal and returned the case to MoEW, obligating the
minister to issue a resolution on the EIA, which the MoEW appealed
against. In April 2007, a five-member panel of the Supreme
Administrative Court re-confirmed its Resolution 10363/24.10.2006 as
a final one. To date, the MoEW has not yet complied with the court
resolution and has not passed a resolution on the EIA.

In 2006, the USG supported the Canadian Embassy's efforts to draw
attention to the case, by pointing to it as an example of business
climate deterioration and discussing it in meetings with AmCham. In
early 2007, Ambassador Beyrle mentioned the case privately during
meetings with high-level GOB officials. In 2007, representatives of
Claimant B met with USG executives in Washington D.C. and Brussels.


The minister does not have any legal ground to obstruct the
investment project, and the reason for his obstructive behavior is
his attempts to mislead the court by pushing for a whole new EIA
procedure and thus causing a further delay of Claimant's project
operations.


3. Claimant reference list:
Claimant A: IBE Trade, U.S. Company
Claimant B: Dundee Precious Metals, Canadian-U.S. Company
BEYRLE