Broker says sanctions block payment of $1.3m Russian bonds

Law360, London (April 28, 2022, 5:51 p.m. BST) – A bond broker has told a court it is not liable to repay $1.3 million it received under a deal on Russian bank bonds, as it would violate US sanctions.

The brokerage firm Continental Capital Markets Ltd. said in its defense filed with the High Court on Monday that it is not obliged to pay just over the $1.3 million it agreed to pay for 1.5 million bonds issued by Sovcombank PA. This would put all participants in the deal at risk of incurring secondary US sanctions, the company added.

The broker had agreed to sell the bonds to Stifel Nicolaus Europe Ltd. – an international brokerage and investment banking firm – after being approached by one of Stifel’s agents.

The two brokerage firms agreed to the sale on Feb. 23, saying the transaction would settle two days later, Continental said in its defense dated April 22.

Stifel told the court he was still entitled to the money under the terms of the contract because he “remains ready, willing and able to transfer the obligations upon payment,” Stifel said in his March 10 filing.

But the US Treasury hit Sovcombank with sanctions on February 24 after Russia invaded Ukraine, which Continental says in its defense prevents it from paying because it is illegal to transfer ownership of a sanctioned entity.

The sanctions prohibit US financial institutions based in America from carrying out transactions related to Sovcombank or dealing with its assets.

Continental argues that once the sanctions against Sovcombank were in place, the transfer of bond payment meant that each party to the transaction, including Euroclear PLC – an international securities depository – risked secondary US sanctions and other financial sanctions. or criminal.

The broker also argued that the contract was subject to Euroclear’s terms and policies, which state that the custodian is not obliged to participate in an illegal transaction, and its “force majeure” clause. Clauses are used in contracts to deal with “force majeure” events, unexpected events beyond our control that disrupt a party’s ability to keep the promises it has made under the contract.

UK and EU sanctions subsequently made it virtually and legally impossible to complete the deal, so none of the brokers’ obligations arose nor were they released, Continental told the court.

The UK government froze the UK assets of Sovcombank on February 28 and the bank has been deleted of the SWIFT cross-border payment messaging system on March 12.

Stifel is claiming $1.3 million in principal debt, $4,176 in interest and costs.

Neither side responded to requests for comment on Thursday.

A subsidiary of the Venezuelan state oil company was ordered by a US court in July 2021 to reimburse a default on $150 million bondwhen he argued that he could not repay his debt due to the sanctions.

Stifel Nicolaus Europe Ltd. is represented by Tom Lowenthal of Blackstone Chambers, mandated by Kieran Rayani, European General Counsel at Stifel.

Continental Capital Markets Ltd. is represented by Farhaz Khan QC of 3VB and Leonora Sagan of Fountain Court Chambers, on behalf of Yasseen Gailani of Quinn Emanuel Urquhart & Sullivan UK LLP.

The business is Stifel Nicolaus Europe Ltd. v Continental Capital Markets Ltd., Case Number LM-2022-000043, in the Commercial Court, Queen’s Bench Division of the High Court of England and Wales.

— Additional reporting by Daniel Wilson, Najiyya Budaly and Caroline Simson. Editing by Joe Millis.

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