Identifier
Created
Classification
Origin
08SOFIA406
2008-06-17 14:39:00
UNCLASSIFIED
Embassy Sofia
Cable title:  

BULGARIA: 2008 REPORT ON INVESTMENT DISPUTES AND

Tags:  EINV KIDE CASC PGOV BU 
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VZCZCXYZ0015
PP RUEHWEB

DE RUEHSF #0406/01 1691439
ZNR UUUUU ZZH
P 171439Z JUN 08
FM AMEMBASSY SOFIA
TO RUEHC/SECSTATE WASHDC PRIORITY 5170
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHINGTON DC
UNCLAS SOFIA 000406 

SIPDIS

E.O. 12958: N/A
TAGS: EINV KIDE CASC PGOV BU
SUBJECT: BULGARIA: 2008 REPORT ON INVESTMENT DISPUTES AND
EXPROPRIATION CLAIMS

REF: STATE 55422


UNCLAS SOFIA 000406

SIPDIS

E.O. 12958: N/A
TAGS: EINV KIDE CASC PGOV BU
SUBJECT: BULGARIA: 2008 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. While Bulgaria
was undergoing its privatization process, the subsidiary of Claimant
A purchased a controlling interest in a Bulgarian fertilizer company
and became a primary holder of the fertilizer company's shares.
Shortly thereafter, a Ukrainian partner in Claimant A's subsidiary
acquired all the claimant's shares in the fertilizer company through
a scheme involving a bogus loan. The Ukrainian partner did this by
utilizing a separate holding company that it controlled and which
was registered in Cyprus. Acting on behalf of the subsidiary of
Claimant A, but without its consent or authority to act as power of
attorney, the Ukrainian partner signed a loan agreement between the
claimant's subsidiary (on behalf of the fertilizer company) and the
separate holding company for $4 million in order to purchase pipes.
When, as expected, the fertilizer company could not repay the loan,
the Ukrainian partner's holding company sued and gained control over
Claimant A's subsidiary and consequently acquired all the
subsidiary's shares of the fertilizer company.

On August 30, 2000, Bulgaria's Regional Court in Vratsa issued a
decision regulating the transfer of 86% of the shares (9,683,000
total) of the fertilizer company from Claimant A's subsidiary to the
Ukrainian partner's holding company.

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

Since that time, Claimant A has been ensnared in a legal battle
centered on questions of jurisdiction and reciprocity. Bulgarian
courts claimed that they did not have jurisdiction because the case
is between two companies that were registered abroad. And when
Claimant A 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.

However on July 14, 2003, Sofia's City Court issued a decision
ordering the Ukrainian partner's holding company to restore the
shares it had acquired through the unauthorized loan to Claimant A's
subsidiary. In response, the holding company submitted an appeal to
the Sofia Appellate Court, and on December 18, 2003 it overruled the
decision of Sofia's City Court.

Following the above decision, Claimant A submitted an appeal before
the Supreme Court of Cassation (SCC),which was heard by its
Commercial Division (case No. 144/2004) on June 16, 2004. This is
Bulgaria's highest court and its decision was considered final for
all parties concerned. On September 10, 2004, a three-judge panel
of the SCC upheld the decision of the Sofia Appellate Court in favor
of the holding company. On March 8, 2005, a five-judge panel of the
Supreme Court of Cassation issued its final decision and turned down
yet another appeal.

Meanwhile, a separate case went forward in the Vratsa District Court
based on a claim made by Bulgaria's state-owned natural gas company
and Bulgaria's state-owned electric company to find the fertilizer
company insolvent. The court declared the fertilizer company
insolvent on December 14, 2004.

Despite the District Court's ruling, Bulgaria's Post-Privatization
Agency (PPA) initiated legal proceedings against Claimant A for
failing to meet commitments under its privatization contract. In
addition, the PPA sent, on April 11, 2005, a letter requesting that
Claimant A pay $7.4 million for non-performance under the
privatization contract. The U.S. Embassy asked the PPA to
reconsider this in light of the Bulgarian Court's determination that
Claimant A is not the owner of the plant. The director of the PPA
responded that it was her understanding 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. We relayed this information to the
attorney for Claimant A with a request to confirm. No response has
been received. The privatization agreement in fact allowed for the
transfer of shares to third parties, while Claimant A retained all
liabilities and responsibilities. There have been no new
developments in the status of this dispute since last year's report
was submitted.


(A.) Claimant B (ongoing)

(B.) 1999

(C.) In 1999, Claimant B, through its daughter company, started to
develop a copper/gold deposit located in Chelopech based on a
contract it had with the Government of Bulgaria, which granted
Claimant B concession to mine underground resources (gold, copper,
pyrite ore) from Bulgaria's Chelopech Deposit. Though Claimant B is
a Canadian company with about 40 percent of the shares held by U.S.
companies and individuals, we are including the dispute in this
report, as it is considered a landmark case in Bulgaria and
significantly impacts U.S. shareholders.

In order to proceed with its development of the Chelopech mine,
Claimant B was asked to submit an Environmental Impact Assessment
(EIA) to the Bulgarian Ministry of Environment and Waters (MoEW.)
In November 2005, Claimant B submitted an EIA conducted by an
independent team of experts, which was to be followed by EIA public
hearings a month later. However, the Ministry of Environment and
Waters refused to accept the EIA.

In March 2006, Claimant B filed an appeal against the MoEW for its
silent refusal to rule on the EIA. At the end of 2006, a
three-member panel of Bulgaria's Supreme Administrative Court
revoked the MoEW's refusal to respond to the EIA and obligated the
MoEW 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 that its Resolution
10363/24.10.2006 was final and that the MoEW must review the EIA.
In June 2007, Claimant B filed a claim in the European Commission
against the MoEW for refusing to rule on the EIA, which had delayed
a new investment worth 250 Million Euro.

In response, the GOB tentatively suggested a "compromise." In March
2008, the Bulgarian Prime-Minister and MoEW publicly announced their
intention to establish a Public-Private Partnership (PPP) with
Claimant B, whereby the state would acquire a 25 percent interest in
Claimant B's new copper and gold mining operations. In return, the
state would process the project for free. The government explained
that the dividend the state would acquire from its interest in its
25% share in the mining operation would go to a so-called "Silver
Fund", a government-endorsed pension fund. This pension fund would
draw equity from privatization proceeds and concession fees.
Claimant B confirmed that it has entered, in-principle, into an
agreement with the GOB concerning the proposed expansion of the
Chelopech copper-gold mine and processing facility. Although this
deal is still tentative, it appears that if it were to occur,
Claimant B would be satisfied with the arrangement, as it would
enable it to carry on with its investment. This case is not yet
resolved.


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