Claim to invalidate Decision of the Ministry for the Antimonopoly Policy and Support of Entrepreneurship of the Russian Federation and Prescription to terminate violation of antimonopoly legislation

ROSGOSSTRAKH

RUSSIAN STATE INSURANCE COMPANY



22/04/2004 # 6569/26XK



Moscow Court of Arbitration



Claimant: Public Limited Company «Russian State Insurance Company»



Respondent: Federal Antimonopoly Service of the Russian Federation



Third parties:

1. LLC «Rosgosstrakh-Accord»

2. LLC «K.F. Stelt»

3. LLC «Mega-Intellect»

4. LLC «Nordtradegroup»

5. PLC «Insurance Company «Accord»

6. PLC Insurance Company «Accord-Garant»

7. LLC «Shareholding Insurance Company «Socinvest»

8. PLC «Insurance Company «Vostok»







C L A I M

to invalidate Decision of the Ministry for the Antimonopoly Policy and Support of Entrepreneurship of the Russian Federation

of 10/03/2004 # AK/3064

and Prescription # 2-06/27-04 of 10/03/2004

to terminate violation of antimonopoly legislation



10 March 2004 the Panel of the MAP of the Russian Federation determined (decision # 30/64) that PLC «Rosgosstrakh» acted in violation of Article 6 of the Federal Law «On protection of competition on the market of financial services» by engaging in concerted actions restricting competition on the regional market of insurance services and designed to divide the territory of the market of insurance services of the Republic of Bashkortostan and by types of insurance services provided, as well as to remove other organizations from it.



By virtue of its Prescription # 2-06/27-04 (Decision of 10/03/2004 # AK/3065) MAP of the Russian Federation directs to terminate the violation of the said article of the Federal Law «On protection of competition on the market of financial services» on the grounds as stated.



We consider the Decision of 10/03/2004 # AK/3065 of MAP of the Russian Federation and the Prescription # 2-06/27-04 of 10/03/2004 ungrounded and unlawful, violating the rights and legitimate interests of PLC «Rosgosstrakh», based on the following grounds:



1. According to MAP of the Russian Federation, as a result of the election of physical persons 5 February 2003 to the boards of directors of LLC «Shareholding Insurance Company «Socinvest» , PLC «Insurance Company «Accord-Garant», PLC «Insurance Company «Vostok» over 50% of the membership of the boards of directors of the said insurance companies were filled with physical persons performing their work duties at PLC «Rosgosstrakh» and at LLC «Rosgosstrakh-Accord» forming the Group «Rosgosstrakh».



MAP of the Russian Federation asserts that such physical persons are A. Sokolov, S. Odintsov and Yu. Shpizel.



In effect, A. Sokolov had never been employed by PLC «Rosgosstrakh», and S. Odintsov has not been an employee of PLC «Rosgosstrakh» since 03 March 2003.



In other words none of the above persons either during the period examined by MAP of the Russian Federation, or currently has any employment contractual relationship with PLC «Rosgosstrakh» (Appendix 7).



Furthermore S. Odintsov and A. Sokolov were not on the governing bodies of PLC «Rosgosstrakh» or LLC «Rosgosstrakh-Accord», took no directives from PLC «Rosgosstrakh» or LLC «Rosgosstrakh-Accord» for voting at the meetings of the Board of Directors. S. Odintsov and A. Sokolov were nominated for election to the boards of directors of insurance companies by legal entities which were not part of the Group «Rosgosstrakh» (LLC «K.F. Stelt», LLC «Mega-Intellect» and LLC «Nordtradegroup»).



The conclusion about Yu. Shpizel's membership in the Group «Rosgosstrakh», according to MAP of the Russian Federation, follows from his position of Managing Director of LLC «Rosgosstrakh-Accord». However, LLC «Rosgosstrakh» was not part of LLC «Rosgosstrakh-Accord» at the time of the nomination of Yu. Shpizel to the Board of Directors or the said companies, nor is it currently (Appendix 8).



Thus, the conclusion of MAP of the Russian Federation, alleging that « over 50 percent of the membership of the boards of directors of the insurance companies LLC «Shareholding Insurance Company «Socinvest» , PLC «Insurance Company «Accord-Garant», PLC «Insurance Company «Vostok» were represented by physical persons performing their work duties at PLC «Rosgosstrakh» and at LLC «Rosgosstrakh-Accord» forming the Group «Rosgosstrakh» is groundless and inconsistent with law.



Therefore, PLC «Rosgosstrakh», the above legal entities and physical persons do not form the Group «Rosgosstrakh», and the existence of such a group was not proven by the MAP of the Russian Federation in the course of the examination of the case. The proposition of the MAP of the Russian Federation about collusion between PLC «Rosgosstrakh» and LLC «K.F. Stelt», LLC «Nordtradegroup», LLC «Mega-Intellect» is neither corroborated by the records of the case.



2. According to MAP of the Russian Federation, the above physical persons and legal entities were engaged in concerted actions, which led to a division of the territory of the insurance market and by insurance services provided, as well as removal of other insurance companies from the market of insurance services.



The only argument in support of such a conclusion of MAP of the Russian Federation can be drawn from the reduction of the network of subsidiaries of LLC «Socinvest», LLC «Accord-Garant» and LLC «Vostok». In analyzing the process of reduction of the network of subsidiaries of the said companies MAP of the Russian Federation disregarded the following circumstances:



1) The reduction of the network of subsidiaries was undertaken by the above companies prior to 5 February 2003 and before the election to the Board of Directors involving the nominations of Yu. Shpizel, A. Sokolov and S. Odintsov (Appendix 9):



- 30 June 2002 - liquidation of Tuimazin subsidiary of LLC «Socinvest» (territory of the Republic of Bashkortostan);

- 30 September 2002 - liquidation of the Southern subsidiary of LLC «Socinvest» (territory of the Republic of Bashkortostan);

- 02 March 2001 - liquidation of Belebeev subsidiary of PLC «Vostok» (territory of the Republic of Bashkortostan);

- 09 July 2001 - liquidation of Dyurtyulin subsidiary of PLC «Vostok» (territory of the Republic of Bashkortostan);

- 12 September - liquidation of Troitsk subsidiary of PLC «Vostok» (territory of the Republic of Bashkortostan);

- 02 July 2002 - liquidation of the Southern subsidiary of PLC «Vostok» (territory of the Republic of Bashkortostan);

- 18 July 2002 - liquidation of Kaliningrad subsidiary of PLC «Accord-Garant»;

- 20 January 2003 - liquidation of Novosibirsk and St. Petersburg subsidiaries of PLC «Accord-Garant»;

- 18 July 2002 - liquidation of Omsk subsidiary of PLC «Accord-Garant»;

- 18 July 2002 - liquidation of Novosibirsk and St. Petersburg subsidiaries of PLC «Accord-Garant»;



Thus, it can be concluded that the reduction of the network of subsidiaries of the above mentioned companies was undertaken in 2001-2003, that it took place within the territory of the Russian Federation as a whole, and not only in the Republic of Bashkortostan, and that it was caused by objective reasons, i.e. the need to preserve the financial stability of the above insurance companies.



2) The said reduction of the network of subsidiaries was undertaken because of a series of dismissals of employees from the principal offices and subsidiaries of the above companies in 200-2003 (Appendix 10), in the context of opening of subsidiaries of other insurance companies on the territory of the Republic of Bashkortostan (Appendix 11) and impossibility to hire skilled professionals to work for the existing subsidiaries.



The boards of directors of LLC «Shareholding Insurance Company «Socinvest» , PLC «Insurance Company «Accord-Garant», PLC «Insurance Company «Vostok» after 5 February 2003 (election of the new Board of Directors) closed down the subsidiaries of the above insurance companies, which were already out of business, and whose personnel were already partially dismissed by transfer to other companies or of their own free will.



3) In accordance with article 25 of the Federal Law «On organization of insurance business», the financial stability of the insurer is safeguarded by cost-effective insurance premium rates, insurance reserves, sufficient to enable performance under insurance, coinsurance, reinsurance, mutual insurance agreements, for equity funds, reinsurance, etc. Insurance reserves and equity funds of the insurers should be secured by assets, appropriate business diversification requirements, liquidity, return of and return on invested funds.



It is precisely the above-mentioned items, and not the number of subsidiaries, size and levels on the revenue of gross written premium, that determine the requirements to financial stability of insurance organizations established by law.

Yet, changes in the pattern of revenue of the insurance premiums in the period in question were driven by the increased number of insurance organizations, operating on the territory of the Republic of Bashkortostan, by the lack of professionals on the insurance market, as well as by the changed demand for insurance services on the territory of the Republic of Bashkortostan.



The optimization of the number of subsidiaries of the said insurance organizations enabled us to preserve LLC «Shareholding Insurance Company «Socinvest» , PLC «Insurance Company «Accord-Garant», PLC «Insurance Company «Vostok» as players on the insurance market, as well as to improve certain financial performance indicators of stability of the above-mentioned insurance companies.



4) On page 2 of the Prescription of MAP of the Russian Federation of 10 March 2004 there is an instruction to terminate the consequences of the alleged violation of article 6 of the Federal Law «On protection of competition on the market of financial services» by reversal of:



«the order of LLC «Rosgosstrakh-Accord» of 31/07/2003 # 263-01/06 «On enactment of the Procedures of performance under written business of the Group «Accord» companies» (LLC «Shareholding Insurance Company «Socinvest» , PLC «Insurance Company «Accord-Garant», PLC «Insurance Company «Vostok») and restoration of the network of subsidiaries of LLC «Shareholding Insurance Company «Socinvest» , PLC «Insurance Company «Accord-Garant», PLC «Insurance Company «Vostok», provided there is customer demand for insurance services of the said insurance companies and impossibility of break-even provision of such insurance services by LLC «Shareholding Insurance Company «Socinvest» , PLC «Insurance Company «Accord-Garant», PLC «Insurance Company «Vostok».



Yet, an order with such a title has never been issued at LLC «Rosgosstrakh-Accord».



If MAP of the Russian Federation intended to ensure elimination of consequences of violation by restoration of the network of subsidiaries, the Prescription requires precisely the opposite «eliminate consequences of violation… by reversal of:… restoration of the network of subsidiaries».



Similar errors are contained in the letters of the Regional Department of MAP of the Russian Federation for the Republic of Bashkortostan of 25 March 2004 # 5/590, # 5/591, # 5/592, # 5/593, # 5/594, sent to LLC «Rosgosstrakh-Accord», PLC «Accord», PLC «Accord-Garant» and LLC «Socinvest» (Appendix 12).



The conditions, imposed by MAP of the Russian Federation corroborate the fact that during the examination of the case it failed to disclaim the statement of LLC «Rosgosstrakh-Accord» that the optimization of the number of subsidiaries of the above-mentioned companies was driven by the diminished demand for and cost-effectiveness of the network of subsidiaries of the insurance organizations.



5) In accordance with the determination of MAP of the Russian Federation fixing the date for the examination of the case of violation of the antimonopoly legislation violation under Article 8 of the Federal Law «On protection of competition on the market of financial services» was cited. The said article makes provision for liability for non-information/non-notification of the Federal antimonopoly agency about agreements or concerted actions of financial organizations restricting competition on the market of financial services.



Yet, the liability for violation under Article 8 of the Federal Law «On protection of competition on the market of financial services» is not invoked in the Decision of 10/03/2004 of MAP of the Russian Federation (Article 19.8 of the Code of Administrative Law), which constitutes proof of the absence of the fact of engaging in concerted actions by the above physical persons and legal entities.



6) On page 5 of the decision of 10/03/2004 of MAP of the Russian Federation there is a conspicuous error, since neither LLC «Rosgosstrakh-Accord», nor PLC «Vostok» had ever had any subsidiaries in Timertau in the Republic of Kazakhstan.



7) Pursuant to para 12 of the Decree of the President of the Russian Federation the Ministry for Antimonopoly Policy and Support of Entrepreneurship of the Russian Federation was abolished. However, the said decision and prescription was issued by MAP of the Russian Federation on the 10th of March 2004.

Thus, the Decision of the Ministry for Antimonopoly Policy and Support of Entrepreneurship of the Russian Federation of 10 March 2004 and the Prescription of MAP of the Russian Federation # 2-06/27-4 of 10 March 2004 in respect of PLC «Rosgosstrakh» (inaction):

- is inconsistent with the law and other regulatory documents;

- is in violation of the rights and legitimate interests of PLC «Rosgosstrakh» in the domain of business and other economic activities, and, in particular, undermines its business reputation, as per para 7 of Article 152 of the Civil Code of the Russian Federation;

- unlawfully imposes responsibilities on PLC «Rosgosstrakh»;

- creates barriers for business and other economic activities in the domain of insurance.



8) In accordance with Article 31 of the Federal Law «On protection of competition on the market of financial services» a claim filed with the Court seeking to invalidate decisions and prescriptions of MAP of the Russian Federation suspends enforcement of decisions and prescriptions of the Federal antimonopoly body for the period of examination of the said claim by the Court of Arbitration up until the entry into force of the Arbitration award.



Based on the above and in compliance with Article 197, Article 201 of the Arbitration Proceeding Code of the Russian Federation you are hereby requested to: render the Decision of the Ministry for the Antimonopoly Policy and Support of Entrepreneurship of the Russian Federation of 10 March 2004 and the Prescription of MAP of the Russian Federation # 2-06/27-4 of 10 March 2004 in respect of PLC «Rosgosstrakh», LLC «Rosgosstrakh-Accord», LLC «K.F. Stelt», LLC «Mega-Intellect» and LLC «Nordtradegroup» invalid and unlawful.



Appendices:



1. Post receipts for mailing copy of claim to respondent.

2. Payment order for stamp duty and bank account statement.

3. Certificate of State registration of PLC «Rosgosstrakh» as legal entity.

4. Documentary proof of authority of person signing claim.

5. Decision of Ministry for the Antimonopoly Policy and Support of Entrepreneurship of the Russian Federation of 10 March 2004.

6. Prescription of Ministry for the Antimonopoly Policy and Support of Entrepreneurship of the Russian Federation # 2-06/27-4 of 10 March 2004.

7. Documents certifying absence of labor agreement between PLC «Rosgosstrakh» and A. Sokolov, S. Odintsov.

8. Copy of excerpt from Articles of LLC «Rosgosstrakh-Accord».

9. Documents in support of reduction of network of subsidiaries of insurance organizations.

10. Documents in support of reduction of number of personnel of head office and subsidiaries of insurance companies.

11. Documents in support of increase in number of subsidiaries of insurance organizations in Republic of Bashkortostan.

12. Letters of Regional Department of MAP of the Russian Federation for Republic of Bashkortostan of 25 March 2004 ## 5/590, 5/591, 5/592, 5/593, 5/594, sent to LLC «Shareholding Insurance Company «Socinvest» , PLC «Insurance Company «Accord-Garant», PLC «Insurance Company «Vostok», LLC «Rosgosstrakh-Accord», PLC «Accord».





Sincerely,



Managing Director signed D. Khachaturov