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Police ‘bribe’ paid from Moscow safe, court told

Toronto billionaire Alex Shnaider alleges that a group of co-defendants were part of a scheme to defraud him in a Russian energy joint venture.

Fernando Morales/The Globe and Mail

A $525,000 "bribe" for a Russian police officer allegedly came from an open safe full of cash in the Moscow offices of Toronto billionaire Alex Shnaider's company in July, 2006, a former Russian oil executive told court on Monday.

Michael Shtaif, who now lives in Canada, is facing off in a Toronto courtroom with Mr. Shnaider in a civil trial over a joint venture they set up in 2006 to invest in underdeveloped oil properties in Russia – a venture that faltered amid tangled allegations of fraud and bribery.

Mr. Shnaider, whose Midland Resources Holding Ltd. empire is based on steel mills in Eastern Europe but includes real estate such as Toronto's Trump Tower, is suing Mr. Shtaif. He alleges that the former oil executive and a group of co-defendants were part of a fraudulent scheme that saw Mr. Shnaider invest $50-million in the joint venture.

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Mr. Shtaif and his co-defendants deny the allegations. In a counterclaim, Mr. Shtaif alleges that Mr. Shnaider tried to push him out of the joint venture, paid a bribe to the Russian police and wrongly influenced them to launch a criminal investigation targeting him. Mr. Shnaider denies the allegations. None of the allegations have been proven. Both sides have demanded hundreds of millions in damages.

Mr. Shtaif told court on Monday that in July, 2006, Mr. Shnaider and his business partner and Midland co-founder, Eduard Shyfrin, decided to pay Russian police a $1-million "bribe" to seize $12-million (U.S.) in promissory notes from a Moscow bank. The notes were supposed to be an advance payment for a Russian oil field, in a complex transaction being overseen by Mr. Shtaif.

Using promissory notes held at a bank in this way is common in Russian business deals, court has heard. But concerns were raised about the status of the seller's ownership of the oil field. And the deal was complicated by an "inadvertent" switch of the complex arrangements at the bank that gave the sellers, who would also later face a fraud investigation, premature access to the safety deposit boxes where the notes were held.

Only half of the notes were later recovered, resulting in a $525,000 payment to police, Mr. Shtaif said, calling the plan to pay for the recovery of the notes "unethical" and "unlawful."

Mr. Shnaider and his lawyers insist the payment was not a bribe, and went to "forensic consultants" to prompt the police to act quickly.

Mr. Shtaif told the court that on July 24, 2006, before heading to meet with police and reclaim the promissory notes they had seized, he went into Midland's Moscow offices. There he saw an unnamed man that Mr. Shtaif said was a police officer, and a Midland lawyer, who told him the officer was there to collect payment the minute Mr. Shtaif retrieved the seized notes and phoned Mr. Shyfrin.

"The safe was open," Mr. Shtaif said. "There was a lot of cash in the safe."

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Mr. Shtaif also testified that lawyers for Mr. Shnaider's company had him sign a partly false police complaint, in order to transfer the Russian police investigation of the promissory notes to a different police district in Moscow, where, Mr. Shtaif testified, Midland had "contacts" who would move more quickly.

In order to file the complaint in a different police district, a false account of a meeting at a restaurant in that area, called Noah's Ark, between Mr. Shtaif and the man selling the Russian oil field was inserted into the police report with the help of the investigating officer, Mr. Shtaif testified.

Mr. Shtaif also denied allegations on Monday from Mr. Shnaider that Mr. Shtaif had paid a $30,000 bribe to another police officer whom Mr. Shtaif had earlier asked to investigate the oil deal.

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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. He spent six years as the law reporter in The Globe’s Report on Business, covering Bay Street law firms and writing about fraud, insider trading and corporate tax avoidance. More

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