Yukos Update

In July 2014 the Permanent Court of Arbitration of the Hague ordered Russia to pay more than $50 billion in damages to former Yukos shareholders. On January 28, 2015 Russia appealed to the District Court of The Hague, claiming that the arbitrators did not have the authority to rule in the dispute, that procedural errors were made and that damages were miscalculated.

This action comes as the Russian economy is in trouble, with the decline in the price of oil, inflation reaching double digits, prices rising, imports decreasing and the ruble declining in value dramatically.

Financial consequences for the Russians can be severe, and Russian international actions in the political arena do not garner support in the court of public opinion. The most immediate consequence of the failure to comply with the Court of Arbitration decision is the imposition of penalties, to the tune of $1.7 billion annually. Another possibility is the freezing of Rosneft assets to assure payment.

Be on the lookout for my article with Sheila A.S., discussing the arbitration award, scheduled for publication.

Deferred Tax Assets and Scienter

The U.S. District Court for the SDNY held that plaintiffs in a 10b claim adequately pled, at the motion to dismiss stage, that an IPO registrant improperly reported a deferred tax asset (DTA) as a GAAP asset. The court found the argument plausible that defendants knew that Fairway Group Holding Corp. did not have the capacity to grow as projected. This means that if cumulative losses occurred as pled, it was unlikely that Fairway would earn enough income to realize the DTA. The court held that GAAP violations standing alone are not sufficient to support a finding in favor of scienter. However, GAAP violations coupled with allegations of fraudulent intent to not reduce the value of DTA, may support the plaintiffs’ position. Fairway’s alleged action would not have alerted investors of unsupported growth plans. (In re Fairway Group Holding Corp. Securities Litigation, USDC, SDNY, No.14 Civ.0950 (LAK) (AJP), January 20. 2015.)

ADR Provisions in Client-Accounting Firm Engagements

Suggest considering the inclusion of ADR provision in accounting firm-client engagement letters. This may save time and money and is fair to all parties.

See my article with Arthur Felsenfeld entitled ADR Clauses in Accounting Engagement Letters that appeared in Dispute Resolution Journal, Vol.69. no.3.

No More Extraordinary Items?

Although FASB has eliminated extraordinary items as we know them, those items will not simply disappear.  Expect them to be reported as pre-tax line items in income statements without the “extraordinary” label. Reporting companies will not be prohibited from disclosing the tax effects of those items.