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The trouble with Kotva
For the first time, the department store's embattled general director speaks out
 | | Not responding to the rumors and criticism was a mistake, Harazim now believes. |
By Villu Arak
Staff Writer, The Prague Post
Feb. 17, 2005
If the owners of the Kotva department store at namesti Republiky had their way, the superbly located building would have been sold last year to Markland, an Irish property firm. But the sale, which is yet to be concluded, has been mired in a war of words over its legal basis.
In the court of public opinion, Kotva's reputation has suffered from the company's inability to escape the shadow of the troubled Trend investment fund that once owned a minority stake in the department store. The current dispute, however, apparently stems from a 1999 settlement between Trend and Forminster Enterprises Ltd., which had previously acquired Kotva's majority shares.
Businessman James Woolf, who has unsuccessfully sought to gain control of the department store, disputes the settlement, sources say. He is said to be seeking some Kotva stock on the basis of a 1998 option agreement between Trend and Deutsche Bank (DB, which acted through Morgan Grenfell, its fully owned subsidiary). The agreement was signed in lieu of the bank's funding of Trend's efforts to recover assets that had been removed from its portfolio. The agreement gave DB the option to buy, at a preset price, any Kotva shares that Trend recovered. However, as the funding ran out and the recovery effort was ended, Trend settled with Forminster, which kept its Kotva stake. Meanwhile, DB transferred its option rights to Flow Corporation, a company owned by James Woolf, who is disputing the legality of Trend's decision to settle. Last year, news of the shopping center's possible sale to Markland reportedly prompted Woolf to threaten legal action against the buyer. As a sale has not taken place yet, no lawsuit has been filed against the buyer.
TIMELINE
An abbreviated chronology of the battle over Kotva shares and assets
THE TREND YEARS
1991 Musicians Martin Kratochvil and Michal Kocab establish the Trend investment fund during the first wave of coupon privatization
1995 August Miroslav Halek's Kralovehradecka brokerska buys Trend's investment management arm for a sum said to be over 300 million Kc (over $12,820,513), about a third of the fund's value. The payment was reportedly taken out of Trend funds. At the time of the sale, Trend owned 16 percent of Kotva, which amounted to 13 percent of Trend's assets
1995 December Trend sells all of its Kotva stock for 1,080 Kc per share. Later that month, Trend spends 337 million Kc to buy a 31 percent stake in Kotva at 1,555 Kc per share. This is the biggest stake Trend will ever hold in Kotva
1996 March Trend unloads 9 percent of its Kotva shares to cover a contractual penalty
1996 May Trend dumps the remaining 22 percent stake in Kotva at 400 Kc per share. In the ensuing months, former Trend-owned shares in Kotva are mixed with non-Trend Kotva stock and find various new owners
1996 November The Finance Ministry puts Trend in forced administration, following the stripping of 1.1 billion Kc in assets from the fund by former managers. John Moffitt is hired to recover Trend's assets
LIFE AFTER TREND
1997 January Forminster Enterprises Ltd. buys 56 percent of Kotva. Soon thereafter, a state prosecutor blocks these shares in connection with an investigation concerning Miroslav Halek
1997 Trend launches efforts to recover 47 percent (16 plus 31) of Kotva from Forminster. (Meanwhile, investment fund Mercia, a former Kotva shareholder, seeks to recover 37 percent of Kotva shares from Forminster.) Trend's Kotva share recovery efforts eventually involve over 30 lawsuits
1998 Through a subsidiary, Deutsche Bank (DB) helps Trend pay off its debts and finance the Kotva share recovery. In lieu of the loan, DB gets the right to buy any Kotva shares that Trend recovers, at 1,350 Kc per share
1999 March The loan proceeds run out
1999 May Trend has less than 30,000 Kc in cash and no other assets that it can sell to pursue the share recovery. Debts start to mount and Trend's attorneys stop pursuing litigation. Opponents would later argue that more funding would have been made available had Trend pursued it
1999 December Forminster agrees to pay Trend 350 million Kc to settle the dispute over Kotva shares, and keeps the shares (The previous year, Forminster had signed a 35 million Kc settlement with Mercia)
2000 January Prior to the settlement coming into force, a Hradec Kralove court declares Trend bankrupt
2000 February DB transfers option rights to Flow Corporation, owned by James Woolf
2000 March Flow files a claim for financial damages in the Trend bankruptcy proceedings, arguing that Trend violated the option agreement by settling. The bankruptcy court has yet to decide on the claim
2000 September Flow submits a claim to the London Court of International Arbitration. Trend's bankruptcy trustee blocks Trend from spending money on defense, arguing that the proceedings are not in accordance with the bankruptcy law
2002 February London Arbitration Court finds that by ending the share recovery effort and by settling with Forminster, Trend breached its agreement with DB's subsidiary. As agreement rights have been transferred to Flow, Arbitrator Gary Born awards Flow 109 million Kc in damages. But Trend is bankrupt and the ruling has not been enforced. Kotva management argues that the award neither invalidates the Trend settlement nor suggests that Flow has any claim against Kotva
2002 James Woolf makes an offer to purchase the Kotva building. The offer is deemed to undervalue the building and is rejected
2004 News reports of Kotva's sale to Irish developer Markland prompt Woolf to promise legal action against the buyer should the deal go ahead
2005 An announcement regarding the sale of Kotva's assets is expected |
As legal skirmishes have ground on behind the scenes, Kotva's management has withheld a public response to claims that the current owners of the Kotva building are not entitled to it. The department store's management chose to remain silent — until now. Kotva's general director, Richard Harazim, has decided it's time to take his case public. In an exclusive interview with The Prague Post, he contends that following the 1999 settlement, Kotva is perfectly entitled to sell its assets to any interested buyer and that outside claims to Kotva have no valid basis.
This is far from the final word in the Kotva matter; there are questions that Harazim either can't or won't answer. And new developments occur almost weekly. Watch these pages for updates.
The Prague Post: Kotva's reported sale to Markland last year is mired in rumors that any sale would run into legal disputes over Kotva's ownership. Departing from Kotva's policy, your decision to speak out was prompted by a recent article in this paper where such doubts were mentioned once again. Still, why speak out now?
Richard Harazim: I think it was proven that the strategy of being silent and hoping that it dies away was wrong. People took it as a sign of weakness. If you don't react to something false, people take it as if the allegations were true. But even more importantly, we probably wouldn't have come out if people that we didn't expect it from hadn't started using the same logic and approach of openly trying to scare investors away.
TPP: Why do you think these rumors are flying about?
RH: There are two sorts of people playing this card. One is represented by James Woolf, who somehow derives that he has a claim for the building, and therefore a potential sale of the building reportedly damages his rights. As far as we're concerned, his claims are virtual and have no foundation. Mr. Woolf mixes several legal cases into totally wrong conclusions, which doesn't prevent him from spreading his misguided claims to all potential interested parties.
Then there is another group of people who try to take advantage of our effort to find a suitable investor. They are a group of small shareholders who we believe are trying to blackmail us. In our opinion, they filed a case relating to the legal title of the building just to have leverage enabling them to ask for money in order to get rid of the lawsuits.
The group has been headed by Andrew Weiss, a professor at Boston University, who is the chief investing officer of Weiss Asset Management [WAM]. WAM is an investment company controlling BGO (Brookdale Global Opportunity), an 11 percent shareholder in Kotva. Mr. Weiss met us in spring last year and requested that Kotva buy his shares; otherwise he would prevent us from talking to potential investors. We refused and we filed a criminal complaint against him, as we believed we had just experienced naked blackmail.
After our refusal to buy his shares, WAM did file lawsuits through no-name offshore structures so as to gain leverage for further 'negotiations' with Kotva. In this he was helped by Vladimir Hoffman and others working here in the Czech Republic. What happened to Hoffman [prosecutors charged him and another person with blackmail Feb. 4] must be a result of our complaints and the activities of Andrew Weiss and his group.
TPP: In 2002 Mr. Woolf unsuccessfully sought to buy Kotva. In 2004 there were reports that Irish property firm Markland was purchasing Kotva. According to media reports, Mr. Woolf then threatened to sue Markland if the sale went ahead. Did Markland purchase Kotva?
RH: That's something I can't deny or confirm. Markland was interested. We dealt with them and the outcome of the negotiations will be known soon. Why does Mr. Woolf act the way that he does? I have just one explanation in my mind: He wants the building. If we sell it to somebody else, he can't have the building. And he believes he has the instruments in his hand to either make it impossible for us to sell or to make it very difficult for us to sell — in which case he might squeeze some benefit for himself.
Should his threats scare away everybody, he is in the position to say, 'Look, you can get rid of the threat. But you will pay me this [much].' Which in fact is what is happening right now. Alternatively, if he does scare the investors away, he would then be the only one who can come and say, 'This is the bid and this is the best you can get,' because there is no one else to bid. ...
We say that James Woolf and, nowadays, also Deutsche Bank, don't have any legal basis [for their claims] and we won't yield to this pressure. We won't buy ourselves out of this pressure. We will try to explain to everyone that these are just empty threats. ... We've prepared legal measures that should help us to fight for our position.
TPP: You mentioned Deutsche Bank. [In 1998, its wholly owned subsidiary Morgan Grenfell gave Trend a loan to pay its debts and help finance Trend's share recovery. Supporting this loan, DB and Trend signed an option agreement whereby Trend had to offer DB any Kotva shares it recovered, for 1,350 Kc per share.] After Trend settled with Forminster in 1999, DB transferred the rights to this agreement to Flow Corporation, owned by James Woolf. Is this the basis upon which Mr. Woolf is basing his claim against Kotva?
RH: Yes, this must be how, somehow, he derived his claims against Kotva. This must be the source of why he believes that he has some right against Kotva. If there is a claim, it's against Trend. There is absolutely no way to somehow construe a claim against Kotva.
But once again, if it were only for Mr. Woolf, whose belief in his own ideas is famous, the reactions from our side wouldn't be so sensitive. It is also DB that interferes with our business nowadays, and that is something we have to react to. In our minds, it is totally improper for a bank of this magnitude to misuse the strength and position of an influential institution in order to gain an advantage for their client in a competition. What is even worse and more surprising, the methods adopted by them are beyond our belief.
TPP: What kind of methods are you referring to?
RH: The potential buyer's lawyers were contacted by a Mr. Redfern, who identified himself as speaking on behalf of DB and informed the law firm that DB requests 5 million euros [150 million Kc/$6.55 million] from the buyer. If they [DB] don't receive the money, they threatened intensified litigation. The lawyer answering the call was obviously interested what the legal basis for such litigation might be, but he was told that this will not be discussed.
We couldn't believe this. We wrote several letters [to people] all over DB complaining about this ridiculous interference with our contracts. Finally, we got hold of DB people in London, who first of all denied that Mr. Redfern acted on behalf of DB — but, incredibly, after some hesitation confirmed they did request the money and they still do.
Since then we have maintained a very interesting conversation in which we try to find out what exactly makes DB believe they have any legal title to any money. And DB repeats they simply want money from us or the investor; otherwise they [will] sue.
TPP: How do you plan to respond to Deutsche Bank's demands?
RH: We still can't believe we are dealing with official DB, and we try to get to relevant departments in DB that would examine the actions taken by DB up to now. After that we are prepared to address other institutions, including regulating bodies in Germany and the UK, not to speak about court actions.
TPP: Are you surprised that Deutsche Bank appears to share James Woolf's views?
RH: We had a meeting with James Woolf and Deutsche Bank. We explained our legal position and we asked them in three letters to tell us the exact source of why they believe that they are entitled to anything. They never responded with an explanation. I am sure that by now they do understand their legal position and yes, I am surprised by their actions.
TPP: Who are the current owners of Kotva?
RH: The owners are thousands of shareholders. In fact, it is nearly 8,000. Of course, some of them are bigger than others. The biggest one is Forminster [Enterprises Ltd.] with 56 percent of the shares. Then there are companies such as Fidea [Consulting] and BGO. There are three or four that you can name and the rest are minority shareholders from coupon privatization.
TPP: How did Forminster become Kotva's majority shareholder?
RH: That's something I only know from hearsay. I wasn't present when all of this happened.
I understand that Forminster acquired the shares from a broker in 1997 and some of these Kotva shares can be sourced back to Trend. The way I understand this, Trend came under the control of people from Hradec Kralove, Mr. [Miroslav] Halek and his group. I can't really discuss the issues between 1997 and 1999, because I wasn't involved. All I know is that in December 1999 there was a settlement between Forminster and Trend. From there on, I don't think there can be any doubt as to who the [majority] shareholder is. The settlement should be the new start for Forminster. Forminster got its shares [and] Trend got its settlement with Forminster.
TPP: So Kotva has nothing to hide?
RH: No. The problem is, how do you prove that there is nothing? If there is direct reasoning, like, if James Woolf said, 'You breached my rights on this and this; I'm going to file a lawsuit,' you would have materials you would give to lawyers. They would study it. ... But how do you protect yourself from 'There is something. We're not going to reveal what it is, but we will sue after you buy'? It's impossible [to protect oneself]. Of course, the buyers' lawyers say that we must have hidden something from them. But there is nothing. You can't prove that something hasn't happened. That's the problem.
TPP: Forminster is registered in Cyprus. Who are the principals and are you in any way involved with the company?
RH: Not any more. ... That was the settlement that I was helping with. For a period of one year, I worked for them. Then, in the framework of the settlement, I became a director for Forminster. But that was only in the scope of the liabilities prescribed by the settlement. Since then, I don't have any relationship with Forminster at all. It's just a shareholder like everyone else.
TPP: But then there are some small shareholders who, you say, have an agenda to push. How would you describe your relationship with them? They have to be dealt with somehow.
RH: Right. It's a few of them who have an agenda. Never heard from the rest. In a certain way, I kind of understand their position. The principal mistake with Kotva is that it's on the stock exchange. I don't believe that we fulfill the conditions of any organizer of public market. We shouldn't be on the stock exchange and we shouldn't be on RM-S [off-exchange trading]. I don't think we fulfill just one of their conditions. The majority of the shares are blocked — Forminster can't trade its shares. The rest of the shares are concentrated with the remaining parties, and for free trade there are just a few shares.
It's difficult for larger shareholders to get rid of their shares. There is nearly zero liquidity on the market. But I don't think this is an excuse for them to press the company to take care of their shares. They should press whomever they wish: the organizer of the markets, or maybe the Finance Ministry, but we can't be forced to buy their shares.
TPP: As you said, Forminster's shares in Kotva continue to be frozen. How does that affect Kotva's possible sale?
RH: I'm talking from the position of the manager of Kotva, not from the position of Forminster. I'm not really concerned about the sale of shares. We're not selling the shares of Kotva. We're selling assets of Kotva as such. From this perspective, I don't really care what's happening to the shareholder structure. The important information is whether the board of directors that decides the sale is validly elected and whether we have the authority. This was the subject of due diligence, of course, with everybody.
TPP: How would you draw the red line between Trend and Kotva, so the two wouldn't be confused?
RH: If you imagine the total assets of Trend at a certain point in time, the number of shares in Kotva fluctuated. The biggest number of Kotva shares that they owned was 31 percent and even that was just for a short period of time. When Miroslav Halek and his guys gained control over Trend, I believe the value of the Kotva shares was something like 13 percent of Trend's portfolio and Trend owned 16 percent of Kotva. The link between Kotva and Trend is artificial and on purpose.
When John Moffitt [a financial consultant hired as Trend's chairman] started to fight for Trend's assets, he made a deliberate decision to build the fight on the name of Kotva. And if he hadn't run out of money in his effort, I am sure Kotva and Trend would be even less distinguishable.
Since then, you've seen the crazy shortcuts from Trend to Kotva. Like when Czech Business Weekly published an article in which they said that Kotva is an example of Czech tunneling skills. As if we here, in Kotva, have tunneled from the company! That's the general perception. I believe it's because John made a very good job of making Trend understood as Kotva.
In reality, Trend had an uncertain and disputed claim to recover a disputed amount of Kotva shares from Forminster. Trend then settled with Forminster. Even though the dispute is over, people still use the notoriety created for their own benefit. It's crazy. And it is even more crazy that after 10 years of investigation, it is still to be determined whether Halek's actions were criminal.
TPP: If and when Kotva's sale is announced, there would supposedly be a clean break from perceptions of the past. Given that you're not opposed to Kotva being purchased by an interested investor, how do you envision Kotva's immediate future?
RH: I'm not opposed to selling assets from Kotva to an interested buyer. It would mean exchanging the assets of Kotva for cash. Kotva wouldn't have to take care of the building. Instead, it would sit on a bank account and would have to devise ways to invest the money. The whole principle of enterprising in Kotva would change.
As far as the links to Trend and its troubled history, this will be over only when minority shareholders who try to squeeze the advantage from us trying to sell the building realize that the assets were sold and won't press any more. As for James Woolf, the same thing. Maybe, when the assets are sold, he will realize that he can't buy them anymore. That is the positive way. Or there is the negative way. As I said, we took some measures. There are some criminal complaints against various persons and there is going to be some litigation. Maybe, negatively, people will stop pushing their nose into Kotva when they learn that they just can't do it.
TPP: How much have these disputes distracted Kotva from doing what it is supposed to do — running a shopping center?
RH: A lot. Even in the main transaction where we negotiated the sale of the building, 30 percent was attributed to technical questions, the usual stuff that you would undergo when selling a building. About 70 percent was attributable to the other things. If it wasn't for that, and we had the right buyer, the transaction would have been done already.
TPP: What would you like to see happen to Kotva in 2005?
RH: The best future for Kotva is to find an investor who offers a fair price and to sell the real estate. As long as Kotva is in its current situation, there will always be fights and disputes. But the building needs to be refurbished to fight the competition. So I would wish for the conclusion of a fair transaction by which the company would exchange its main assets and would start a completely new phase in its life.
TPP: If the building were sold, would you wish to remain in your current position, overseeing the daily activities of the shopping center?
RH: Not really. I've been in this position for five years. It's just about time to change. Even from a personal perspective, it would be welcome for me to open some new horizons.
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