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 
 
 
¶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