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Court showdown pits billionaire against ex-partners

Alex Shnaider alleges that the co-defendants were behind an elaborate scheme to steal his $50-million investment.

Charla Jones/The Globe and Mail

A former senior executive in the Russian oil industry facing off against Russian-Canadian billionaire Alex Shnaider over a joint venture gone bad takes the witness box in a Toronto courtroom on Tuesday, in a murky saga riddled with extraordinary allegations of fraud, bribery and kidnapping plots.

The man set to testify is Michael Shtaif, a Russian-Canadian businessman who according to court documents has held senior positions with the former Russian oil exploration companies TNK-BP and Yukos. He faces allegations from Mr. Shnaider that he and a group of co-defendants were part of a scheme to defraud the billionaire of millions.

But in a five-year no-holds-barred legal battle, Mr. Shtaif alleges in court filings that Mr. Shnaider or his associates tried to force him out of a oil and gas joint venture, had armed men seize a company's Moscow offices, bribed Russian police to have him face "spurious" charges and even plotted to kidnap him. Mr. Shtaif alleges that the ordeal wrecked his reputation and forced him to flee Moscow for Calgary with his wife and young son.

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Toronto-based Mr. Shnaider, 44, who denies all the allegations against him, made his fortune with his company Midland Resources Holdings Ltd., centred on the steel business in Eastern Europe. He has made his name by dabbling in Formula One racing, hanging out with former hockey stars and financing Toronto's new Trump Tower, plucking the building's $20-million penthouse for himself.

He is suing Mr. Shtaif and several other men, alleging they were behind an elaborate scheme to steal his $50-million investment – a scheme that allegedly involved fraudulently incorporated companies and an accomplice convicted of two murders in Russia. Mr. Shtaif and his co-defendants deny the allegations.

Both sides accuse each other of making false allegations in court filings and leaking them to the media, in order to smear or pressure the other side. Both sides have demanded hundreds of millions in damages. The allegations have not been proven.

The soft-spoken Mr. Shnaider, who has lived in Toronto since moving here with his parents at age 13, was in court in recent weeks as his lawyers testified. He testified himself earlier this year in the trial, which began in February and is expected to continue for months.

The story behind the tangled allegations over his falling out with Mr. Shtaif dates back to 2005, when the two men agreed to set up a joint venture to acquire undervalued oil and gas properties in Russia. According to court documents, it later emerged that Mr. Shtaif's company, Magellan Energy Ltd., was a "sham," set up by a Toronto man with multiple aliases and previous convictions for fraud and other offences as well as fines and penalties from the Ontario Securities Commission. Mr. Shtaif says he was not involved in Magellan's allegedly fraudulent origins.

Mr. Shnaider, who alleges he was first induced to invest by the promise of $70-million from other partners that never materialized, then agreed to set up a new company with Mr. Shtaif and other businessmen to take over Magellan's business.

Even more would soon go wrong between the two men. Mr. Shnaider alleges that Mr. Shtaif colluded with a convicted Russian murderer in a complex sequence of events involving an attempt to purchase an interest in a Russian oil property. According to court filings, about half of a batch of promissory notes worth $12-million (U.S.) and held in safety deposit boxes in a Russian bank as an advanced payment – apparently a common feature in Russian business deals – allegedly ended up missing.

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It was this allegation that Mr. Shnaider and his lawyers say prompted them to go to the Russian police about Mr. Shtaif. But Mr. Shtaif, in his testimony this week, is expected to reiterate the case spelled out in court documents that he, too, is a victim of fraud.

In the Ontario Superior Court last week, Mr. Shtaif's lawyer, Colin Stevenson, was stopped by Madam Justice Mary Sanderson from asserting in a question to a witness that Mr. Shnaider had paid $525,000 to police to prompt them to seize some of the missing promissory notes. Mr. Shnaider's lawyers say in court documents that the money went to private "forensic consultants" to prompt police to act more quickly, and was not a bribe.

"There's obviously a huge controversy over what that payment was," the judge said.

Mr. Shnaider's former Toronto lawyer on the case, John Keefe of Goodmans LLP, was in the witness box last week. He testified under cross-examination that he did not believe that Mr. Shtaif faced any threats in Russia, but acknowledged he did not have any evidence for his doubt.

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About the Author
Toronto City Hall Reporter

Jeff Gray is The Globe and Mail’s Toronto City Hall reporter. He has worked at The Globe since 1998. From 2010 to 2016, he was the law reporter in Report on Business, covering Bay Street law firms and white-collar crime. He won an honourable mention at the National Magazine Awards for investigative journalism in 2010. More

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