Consolidated Comment on US VC Partners GP LLC et al. v. OFAC, and Selected Documents Associated with the Litigation (System Ed. Note) [A]

TURBOFAC Commentary (11385 words)

Consolidated Comment on US VC Partners GP LLC et al. v. OFAC, and Selected Documents Associated with the Litigation (System Ed. Note)

 

Contents:

*Introduction

 

1) BACKGROUND – CERTAIN ISSUES COMMON TO MOST CASES

 

2) [RESERVED]

 

3) THRESHOLD LEVEL BLOCKING DETERMINATIONS; ISSUES COMMON TO ALL CASES

……*The Blocking of the Investment Funds Themselves

……*The Audubon Case

……*The Blocking of the Assets of the Investment Funds

……*The Status of the U.S. Person Management Companies and General Partners; Notable "No Interest" Determinations

……*Other Effects of the Blocking of the Investment Funds

 

4) THE "NEGOTIATION" ISSUE TREATED IN VARIOUS CONTEXTS: NEGOTIATIONS INVOLVING BLOCKED PROPERTY CONSTITUTES A ‘DEALING’ IN SUCH PROPERTY

 

5) LICENSING POLICY CONCERNING THE UNBLOCKING OF FUNDS FOR LEGAL AND OTHER PROFESSIONAL FEES; DEVIATIONS FROM THE “LEGAL FEE GUIDANCE

 

6) OTHER LICENSING POLICIES RELATED TO DIVESTMENTS AND THE BLOCKING OF ASSETS OF THE INVESTMENT FUND—INCL. CORPORATE GOVERNANCE ISSUES

……i) the CN Odyssey LP Case; A U.S. Company Blocked As a Result of Majority Ownership by a Blocked Investment Fund

……ii) Licensing Policy with Respect to U.S. Portfolio Companies in Which Blocked Investment Funds Hold Minority Interests

……iii) Licensing Policy with Respect to the Exercise of Blocked Minority Shareholders’ Contractual Rights

……iv) the Unilateral Forfeiture of Corporate Rights as a ‘Dealing’ in a Blocked Contract

……v) The May 31, 2019 “MAPANYTHING” License

 

7) EXAMPLES OF ACTIVITIES ENGAGED IN PURSUANT TO A “WIND DOWN” LICENSE

 

8) SPECIFIC LICENSES ISSUED IN CONNECTION WITH SETTLEMENT NEGOTIATIONS

……i) LICENSE No. UKRAINE-EO-13662-2020-366732-1 and -2 (Unblocking for Certain Expenses)

……ii) LICENSE No. UKRAINE-EO13662-2020-366977-1 (The “Unwinding License”) and “Make Whole Payment” Offer

…………*Consolidation of Blocked Funds Authorized/Not Authorized

…………*“Capital calls” and the Unwinding License

…………*“Fresh Funds” and the Unwinding License

…………*The Fresh Funds Licensing Policy/Statement

……iii) LICENSE No. UKRAINE-EO13662-2020-366979-1 (The Unblocking License)

 

9) LITIGATION UPDATE (NOVEMBER 6, 2020)

 

10) LITIGATION UPDATE (JUNE 25, 2021)

* * * * *

 

* INTRODUCTION

 

This comment addresses the items found in the PDF file associated with All Notable Documents Filed in Connection with US VC Partners GP LLC et al v. OFAC (the “VC Partners Docket File”).

 

The Complaint and other litigation-related items disclosed in US VC Partners GP LLC et al v. OFAC (1:19-cv-06139) (S.D.N.Y. 2019) report on a number of important aspects of OFAC practice—both with respect interpretation of the regulations and licensing policies—that are not elsewhere clarified in public guidance or on the agency's website. The initial and amended complaint are especially helpful on issues concerning the relationship between sanctions regulations and corporate governance in general, as well as for their reporting of notable applications of the 50% rule. Other notable issues addressed include (i) the circumstances under which "negotiation" constitutes a violation of a blocking prohibition in the absence of a license, (ii) the circumstances under which OFAC is willing to allow payment for legal and other professional fees out of blocked funds in the investment fund context, and (iii) the scope and meaning of the terms “maintenance” and “wind down” as they appear in OFAC-issued licenses and as they related to the investment context.

 

This comment makes extensive use of the OFAC-endorsed methodology described in General Note on the a contrario (or "Negative") Reading of Certain Specific and General Licenses, whereby the terms of specific licenses are read to imply that the activities authorized by the licenses would be prohibited but-for the issue of the licenses.

 

Note that while this comment includes direct links to individual item pages, the page numbers referred to below are, unless otherwise specified, pages in the VC Partners Docket File.

 

The individual item pages that are associated with documents disclosed in the VC Partners litigation are the following:

 

i) ENF 51231 (Notable Notification of Blocking - Investment Funds and the 50% Rule (US VC Partners GP))

ii) US VC Partners GP LLC et al v. OFAC (1:19-cv-06139) (S.D.N.Y. 2019) - OFAC Deputy Director's Declaration;.

iii) Sample Annual Report of Blocked Property (Private Equity Fund)

iv) License No. UKRAINE-EO13662-2019-360487-1 (transmittal letter and reported terms of license)

v) LICENSE No. UKRAINE-EO13662-2020-367531-1 (and related OFAC e-mail correspondence)

vi) LICENSE No. UKRAINE-EO13662-2020-366979-1 (With transmittal letter and related correspondence)

vii) LICENSE No. UKRAINE-EO13662-2020-366977-1 (With transmittal letter and related correspondence)

viii) License No. UKRAINE-EO13662-2018-355905-1, 2, 3 (With transmittal letter and license applications)

ix) LICENSE No. UKRAINE-EO-13662-2020-366732-1, -2

 

1) BACKGROUND – CERTAIN ISSUES COMMON TO MOST CASES

 

The broader litigation arises out of a series of stand-alone licensing applications made to OFAC involving issues that overlap substantially. Because of this overlap, we address the issues below on a subject-by-subject basis, rather than a case-by-case basis.

 

The root cause of all of the issues raised in the Complaint is OFAC's blocking of at least five distinct investment funds that were legally unrelated at the level of their corporate identities, but related in terms of the identities of the persons holding indirect interests in, and managing, the investment funds. The five blocked investment funds are USVC Partners, L.P. (USVCP LP), Israeli VC Partners L.P. (IVCP LP), CN Odyssey LP, CN MapAnything LP, Audubon Road Loan Funding LP.

 

Although the specific facts of each broader case are different depending on the particular investment fund at issue, all of the fact patterns involve the same fundamental issues at the level of the blocking of the investment funds. Each of the individual funds at issue are private equity funds. They take the “limited partnership” (“LP”) structure that is common in the industry. The following facts are common across investment funds at issue in this case: 

 

i) Each of the five investment funds (the "LPs") were U.S. persons.

 

ii) Each of the U.S. person LPs were structured such that there was (apparently, in each case only) one "limited partner," one "general partner" (“GP”) and one "management company."

 

iii) The GPs of the fund were, in all cases, “U.S. persons” for the purposes of the URSR (either because of place of incorporation, the principal place of business being "within" the U.S., or both). In all cases, the U.S. person "general partners" controlled the actual investment funds in the sense that they had the authority to make investment decisions for the funds. The GPs had contractual obligations with the fund itself. It is not clear how much of the GP’s own money was invested in the investment funds at issue, though 1-3% of the fund capital is typical in the industry.

 

iv) The "management companies" associated with the funds were, in all cases, also U.S. persons. In exchange for a quarterly management fee, the management companies provided the investment funds with "among other services, day-to-day managerial and administrative services" (see e.g., p. 23). This includes services such as paying rent and utilities. Such fees were apparently fixed, and owed whether or not the fund was profitable.

 

v) At the time of the Complaint, each of the funds appeared to have only one "limited partner"—or external investor—whose liability was limited to the amount of the investment in the fund. In four of the five cases, the "limited partner" was one of two offshore entities ("Weft" or "RIT") that were blocked by operation of law. In the case of Weft, it was owned 50% or more by an SDN (Viktor Vekselberg). In the case of RIT, it was owned 50% or more by an SDN company (Renova Group) that was, itself, owned 50% or more by Vekselberg. One of the five investment funds (Audubon Road Loan Funding LP), had a limited partner that was a U.S. entity that was wholly owned by Weft (p. 28).

 

Each of the limited partners described above were treated as persons blocked by operation of law—as a result of their relationships with Vekselberg and/or Renova Group, pursuant to 589.201—since each of them were owned 50% or more by entities that were, themselves, owned 50% or more by one or more SDNs. This is fairly straightforward.

 

As it relates to the further blocking determinations discussed below, note that, unlike a typical C corporation, the relationship between limited partners and the assets of private investment funds such as the ones at issue here is governed by a contract (Limited Partnership Agreement). Limited partners are entitled to a given share of the assets of the fund on the basis of an agreement with the fund itself, which is negotiated with the GP. Interests in such funds are ordinarily not negotiable instruments that can be freely sold or transferred, and a limited partner ordinarily cannot withdraw its funds from an investment fund as it can with an ordinary bank account. The limited partner's funds are pooled with those of the GP (and other LPs, to the extent that a fund has multiple LPs).

 

Finally, in each case here, the investment funds were structured such that, as is typical in the private equity industry, the general partner was entitled to a significant share of the profits of the investment fund. This is referred to as "carried interest" (typically around 20%), and is determined pursuant to a contractual relationship between the GP and the fund itself, negotiated with the limited partner. See e.g. p. 664, describing the relationship between US VC Partners, L.P. (the investment fund) and the SDN limited partner “Renova Innovation Technologies Ltd.”

 

Description of Ownership and Relationship with SDN: Renova Innovation Technologies Ltd. ("RlT") is the sole limited partner of USVCP [US VC Partners, L.P.]. We believe that [the SDN] Renova Group may directly or indirectly own more than 50% of RIT. RIT is entitled to all of the distributable cash proceeds from USVCP (the "Proceeds") until RIT has received (i) full reimbursement of its capital contributions (the "Reimbursement") and (ii) an amount adequate to provide RIT with a 7% annually compounded internal rate of return on all distributions made pursuant to clause (i) prior to the date of distribution (the "Preferred Return"). Following RIT's receipt of the Reimbursement and the Preferred Return, US VC Partners GP LLC, the general partner of USVCP ("USVCP GP"), is entitled to 100% of the Proceeds until USVCP GP has received an amount equal to 20% of the Preferred Return. Thereafter, the Proceeds are split so that RIT receives 80% of any such Proceeds and USVCP GP receives 20% of any such Proceeds. USVCP GP is 100% owned by US. citizens.

 

In the scenario described above, the “20% of any such Proceeds” owed to USVCP GP would be the “carried interest.”

 

2) [RESERVED]

 

3) THRESHOLD LEVEL BLOCKING DETERMINATIONS; ISSUES COMMON TO ALL CASES

 

*The Blocking of the Investment Funds Themselves

 

The Complaint reports that, on the basis of all of the facts above, OFAC took the position that each of the five U.S. person investment funds were, themselves, all treated as blocked by operation of law. The 50% rule (589.406) operates such that:

 

"A person whose property and interests in property are blocked pursuant to §589.201 has an interest in all property and interests in property of an entity in which it owns, directly or indirectly, a 50 percent or greater interest...."

 

The full blocking the investment funds on this basis would constitute a somewhat irregular application of the 50% rule, as the regulatory language is structured to refer to "ownership" of an entity itself, rather than an ownership interest in the assets of a given entity. In this case, it cannot be said that the SDNs at issue indirectly "owned" a majority of the actual limited partnerships that OFAC determined were blocked. Entities indirectly owned by the SDNs were, however, contractually entitled to a majority of the fund's assets at such time as those assets were distributed. In any event, OFAC apparently considers this sort of contractual entitlement sufficient to render an entire investment fund blocked at the entity (rather than specific asset) level.

 

The point may have been moot in this case due to the majority interests of blocked persons, but compare Libya - General License No. 4, in which OFAC appears to take the position that a blocked person being entitled to even a minority share of the proceeds of an investment fund would render the entirety of the fund, or at least the fund’s assets, blocked, such that a license would be required for U.S. person fund managers to continue to operate the fund. The basis for this would not be the 50% rule. Instead, it would be a determination that, given the nature of investment funds as containing co-mingled funds of all partners, a blocked person has an "interest" in all of the assets in the fund. In other words, the Complaint cannot be read as if OFAC takes the position that, were the SDNs' indirect interests in the U.S. person funds less than 50%, the funds would have necessarily not been considered blocked.

 

Note however that one practical difference between an SDN being the only limited partner in a U.S. person investment fund (as here), and being just one of many minority investors (as contemplated in Libya - General License No. 4), is that, in the latter case, OFAC is likely to grant a license to allow the fund to operate normally, provided that all distributions owed to the blocked investors are placed in blocked accounts. As discussed below, in this case, OFAC has made it extremely difficult for the fund to continue operations in an orderly fashion, even where any immediate economic benefit to the SDNs at issue is foreclosed.

 

*The Audubon Case

 

The Audubon LLC case, charted at p. 28 of the Complaint, is notable as it appears to be one the most convoluted applications of the 50% rule on the public record. As discussed above, "Weft" was blocked by operation of law due to majority ownership by an SDN individual; Audubon Inc. was blocked by operation of law due to the ownership by Weft of that company; the Audubon Road Investment Fund was blocked by operation of law because Audubon Inc., as limited partner, was entitled to a majority of the proceeds of the investment fund; the Audubon LLC Investment Fund is blocked because it is majority owned by the Audubon Road Investment Fund, and the loans to the heirs of an estate were, in turn, blocked because the Audubon LLC (Investment Fund) had an interest in those loans as the creditor/lender. As blocked property, the loans could not be paid, transferred, refinanced or "dealt in" in any way without a license from OFAC.

 

*The Blocking of the Assets of the Investment Funds

 

Because the investment funds themselves were considered blocked entities, all assets in which the funds had an “interest” were also considered blocked. As discussed further below, this included i) minority equity interests in portfolio companies, ii) portfolio companies majority-owned by the blocked funds and iii) wholly owned holding companies owned by the blocked investment funds.

 

The blocking of minority equity interests had the effect of the corresponding shares themselves being blocked, such that they could not be sold, transferred or voted. All other contractual obligations by and between portfolio companies and the investment funds were blocked (i.e., the contractual obligations could not be discharged without receipt of an OFAC license). Here, such agreements apparently entailed rights of first refusal, the right to appoint and serve as directors, and consent rights with respect to the issuance of debt or equity securities. In the case of a portfolio company majority owned by the fund, the entire company was considered blocked. These issues are discussed further below.

 

*The Status of the U.S. Person Management Companies and General Partners; Notable "No Interest" Determinations

 

The Complaint reports that no blocked person had any "interest" in any of the U.S. person management companies or general partner entities associated with the blocked investment funds. From a corporate law perspective, this makes sense as the limited partners have no actual stake in the general partners or the management companies. There is only a series of contractual relationships linking (directly or indirectly through the funds themselves) the blocked limited partners and investment funds to the general partners and management companies.

 

However, while U.S. persons were free to deal with the management companies and general partners, they could not do so in a way that would have entailed any direct or indirect dealing in property in which the blocked fund itself had an interest. Here the term “interest” is used more in a legal than the abstract sense in which it is sometimes used, as the blocked investment funds obviously have an abstract “interest” in the ability of the GPs and management companies to operate.

 

*Other Effects of the Blocking of the Investment Funds

 

As discussed further below in the context of specific licensing determinations, the blocking of the entirety of the investment funds and all property in which those funds have an interest was such that, in all cases, the U.S. person management companies were forbidden from receiving the management fees to which they were contractually entitled, and the general partners could not receive their carried interest and other funds to which they were entitled pursuant to the applicable limited partnership agreements.

 

In addition, as noted above, the general partners and management companies were outright forbidden from operating the fund, seeing as the entirety of the investment funds were treated as blocked. It was not practicable to simply ensure that the SDNs did not receive distributions from the funds, since any action affecting those funds would constitute a dealing in blocked property. The investment funds could not pay their attorneys or any other professional fees without a license from OFAC; nor could the GPs and management companies withhold such funds. Nor could they negotiate with the blocked limited partner, or, as detailed further below, negotiate the sale of any of the fund's assets (at least not without a license).

 

4) THE "NEGOTIATION" ISSUE TREATED IN VARIOUS CONTEXTS: NEGOTIATIONS INVOLVING BLOCKED PROPERTY CONSTITUTES A ‘DEALING’ IN SUCH PROPERTY

 

A notable grey area concerning the scope of the standard blocking regulation is the determination of what does and does not constitute "negotiation" that cannot be engaged in without the receipt of a license. Refer to General Note and Associated Scenario Matrix re: the Legal Status of Discussions, Negotiations, Contracts and other Pre-transactional Activities (System Ed. Note).

 

In this case, the negotiation issue was treated by OFAC in a variety of different contexts in a way that sheds light on OFAC's views concerning the relationship between blocking prohibition and "negotiation" generally.

 

The Plaintiffs reported that:

 

On May 17, 2018, IVCP-GP and IVCP Management submitted a specific license application...seeking authorization to sell up to 4,414,866 ordinary shares of Portfolio Company C, an Israeli company, to Purchaser 1. Purchaser 1 is a venture fund in Israel with no relation to IVCP or Plaintiffs, and, upon information and belief, is not controlled, directly or indirectly by an SDN. The 4,414,866 ordinary shares that IVCP-GP and IVCP Management sought authorization to sell represented approximately 2.8% of the total issued and outstanding equity interests of Portfolio Company C, and the entirety of IVCP’s ownership interest of Portfolio Company C. The license application explained that the proposed transaction contemplated a sale for $3.20 per share. (Emphasis added, p. 37.)

 

On May 25, 2018, only a week after the above-referenced license application was submitted, the same U.S. person general partners and management companies submitted a request seeking authorization to, among other things: “engage in communications, negotiations, and all activities ordinarily incident and necessary to engaging in communications and negotiations, with third parties to reach a solution for the divestment or transfer of equity, debt and/or other holdings” that the U.S. person GPs and management companies “directly or indirectly control and manage” for the blocked investment funds (Emphasis added, p. 38).

 

The second application requested authorization to engage directly with blocked entities, as well as "third parties—who are not blocked persons—regarding the divestment or transfer of equity, debt and/or other holdings that” the U.S. person GPs and management companies controlled and managed for the blocked investment funds.” The second application acknowledged that the non-blocked U.S.-based general partners and management companies would need “additional, specific authorization from OFAC...to effect any divestment or transfers,” but that, at [that] stage, they intended “only to negotiate” (p. 39).

 

What explains why the May 17, 2018 license application sought authorization for the sale of blocked shares at a price already negotiated with a non-U.S. person, while the subsequent application requested authorization only for the same sort of negotiation that was already completed by the time the May 17, 2018 application was submitted?

 

The apparent reason for the difference in the scope of the requests is that the first license application pertained to blocked equity that was held by an investment fund blocked as a result of indirect ownership by an SDN that was, at the time of the negotiation, the subject of Ukraine GL 12. Ukraine GL 12 authorized "all transactions and activities otherwise prohibited by the [URSR] that are ordinarily incident and necessary to the maintenance or wind down of operations, contracts, or other agreements...involving one or more [] blocked persons [specified in the GL] and that were in effect prior to April 6, 2018."

 

This language in Ukraine GL 12 was evidently interpreted to cover the negotiation of the sale of assets held by an investment fund blocked by operation of law due to the relationship with an SDN listed on the GL (i.e. Renova Group). However, Ukraine GL 12 explicitly excluded from its scope "[t]he divestiture or transfer of debt, equity, or other holdings in, to, or for the benefit of the blocked persons identified above," which is why authorization for the actual sale of the equity was requested in the May 17, 2018 license application. In addition, the second application dealt in part with assets indirectly owned by a blocked person that was not listed on Ukraine GL 12.

 

The foregoing is notable inasmuch as—presuming that the activities reported did not entail a violation of the law—one can infer that "negotiation" of the sale of equity held indirectly by an SDN constitutes a transaction "ordinarily incident and necessary to the maintenance or wind down of operations, contracts, or other agreements" involving an SDN owner of the equity at issue. In this case, the negotiation was done by a non-blocked U.S. person on behalf of a blocked investment fund. Note that the language used in Ukraine GL 12 interpreted to cover such negotiation is that of the typical “maintenance or wind down” license.

 

OFAC did not act on the license application referred to directly above, but did license "negotiations" in other contexts.

 

In another case, the Complaint reports that (U.S. person) “Portfolio Company B," in which a blocked investment fund had only a minority interest, was issued a license authorizing it “to engage in all activities necessary and ordinarily incident to negotiate with [blocked investment fund] CN MapAnything L.P…regarding a potential purchase of shares in [Portfolio Company B] held by CN MapAnything [L.P.]” (p. 46).

 

In another context, the Complaint reports a license authorizing non-blocked U.S. persons:

 

USVCP and USVCP Management “to engage in all transactions ordinarily incident and necessary to (i) the wind-down of operations, contracts, or other agreements that were in effect prior to April 6, 2018 involving equity, debt and/or other holdings in their possession or control blocked on or after April 6, 2018 as a result of the designations of . . . Vekselberg and . . . Renova [as SDNs] . . . (the ‘Blocked Positions’) . . . ; and (ii) negotiate, but not execute, the sale of the Blocked Positions” (p. 44-45).

 

In another context, the Complaint reports a license authorizing a portfolio company (Portfolio Company A) that was blocked by operation of law as a result of majority ownership by a blocked holding company (CN Odyssey LLC) owned by a blocked investment company (CN Odyssey LP), and the blocked holding company itself, to “engage in all activities necessary and ordinarily incident to negotiate and execute a Redemption Agreement with CN Odyssey [LLC], . . . including the purchase of shares in [Portfolio Company A] held by CN Odyssey [LLC]” (p. 59). 

 

In another context, OFAC granted the non-blocked U.S. person debtors of a (blocked) loan, with respect to which a blocked investment company was creditor, authorization "to engage in all activities necessary and ordinarily incident to negotiating and executing certain agreements and related activities with" the blocked investment company, and non-blocked U.S. person representatives of the blocked investment company” (p. 52). 

 

See also LICENSE No. UKRAINE-EO13662-2020-367531-1, authorizing a non-blocked investment fund in which one of the blocked entities was invested to engage in “the conduct of negotiations with [a blocked investment fund], a person whose property and interests in property are blocked pursuant to the Regulations, regarding the termination of [the blocked investment fund] as a limited partner in the [non-sanctioned] Partnerships, including the potential offer of all or any portion of [the blocked investment fund’s] interest in the [non-sanctioned ]Partnerships to the other non-defaulting partners or to any other non-sanctioned potential purchaser.” (p. 507).

 

Finally, see License No. UKRAINE-EO13662-2018-355905-1, 2, 3 (With transmittal letter and license applications), authorizing a blocked investment fund (US VC Partners, L.P.) and its non-blocked management company to “negotiate, but not execute, the sale of” assets.

 

FAQ # 400, FAQ # 505 and FAQ # 547 make clear that "negotiation" with an individual, natural person SDN is prohibited without a license, presumably insofar as such negotiation would constitute a dealing in "blocked services" of that individual SDN (i.e. the provision of services to the SDN or receipt therefrom, in accordance with the “services” rationale laid out in Penalty Notice - ExxonMobil Corporation (2017)).

 

In contrast, the cases above describe "negotiation" impliedly being considered within the scope of a blocking prohibition in a variety of other contexts. It seems evident that U.S. persons cannot engage in "negotiations" pertaining to the potential "transfer" of blocked property without a license (except, perhaps, when the property is already subject to a writ of attachment. See Crystallex International Corporation v. Bolivarian Republic of Venezuela (1:17-mc-00151-LPS, Dkt. 234) (D. Del) (2021)).

 

On the basis of the negotiation-related licenses issued and discussed above—and in particular that they are issued to both the GPs acting on behalf of the blocked investment company as well as non-blocked U.S. person potential purchasers of blocked equity—it seems that OFAC's position is that all “negotiations” constitute, at a minimum, a "dealing" in the blocked debt or security at issue. In any event, these cases make clear that the "service" to or from an individual SDN is not the only legal basis on which "negotiation" can be considered to fall within the scope of the standard blocking regulation, and, indeed, one need not even negotiate with a blocked entity. The property being blocked is sufficient to bring negotiation within the scope of the blocking regulation. See again the Pre-transactional Activities Note for commentary on OFAC’s position as to what activities rise to the level of “negotiation” that would require a license.

 

Finally, recall again License No. UKRAINE-EO13662-2018-355905-1, 2, 3 (With transmittal letter and license applications), authorizing a blocked investment fund (US VC Partners, L.P.) and its non-blocked management company to “negotiate, but not execute, the sale of” assets, and note that OFAC appears to consider “negotiation” to constitute the making of an offer capable of acceptance (see Pre-transactional Activities Note). It would appear as though the way in which one makes use of a license such as License No. UKRAINE-EO13662-2018-355905-1 is to make offers capable of acceptance, but such that the acceptance of the offer would be contingent on the receipt of a specific license from OFAC. That way, one could “execute” an agreement, but not actually “execute, the sale of the” property at issue. This, however, is not entirely clear.

 

5) LICENSING POLICY CONCERNING THE UNBLOCKING OF FUNDS FOR LEGAL AND OTHER PROFESSIONAL FEES; DEVIATIONS FROM THE “LEGAL FEE GUIDANCE

 

The Complaint reports that OFAC granted a license authorizing USVCP and USVCP Management:

 

“to engage in all transactions ordinarily incident and necessary to (i) the wind-down of operations, contracts, or other agreements that were in effect prior to April 6, 2018 involving equity, debt and/or other holdings in their possession or control blocked on or after April 6, 2018 as a result of the designations of . . . Vekselberg and . . . Renova [as SDNs] . . . (the ‘Blocked Positions’) . . . ; and (ii) negotiate, but not execute, the sale of the Blocked Positions.” And further, that “[f]unds up to the sum of USD 1,631,495 in accounts of USVCP that are blocked originating from authorized payments to such accounts received on or after April 6, 2018 may be used for the payment of legal fees owed to Latham & Watkins LLP and Pearl Cohen Zedek Latzer Baratz LLP” (p. 45).

 

As it relates to OFAC's policy concerning the "dissipation" of blocked assets, the licensing decision is notable for two reasons. First, it did not "grant the principal relief that Plaintiff USVCP Management requested in the Management Fees License Application—the ability to collect its management fees..." (P. 45). In this case, OFAC appears to treat the management company more as an ordinary creditor of a blocked person. By contrast, the legal services specific license is highly significant, as it appears to be the only example on record—other than those described further below—of OFAC breaking its typical "fresh funds" policy, which holds that payments for legal services must be made from funds that are not blocked as already within the possession or control of U.S. persons, with the very rare and limited exceptions described in Legal Fee Guidance (2010).

  

Compare the licensing decisions described at p. 50 (p. 40 the Complaint), which are likewise notable and irregular. Pp. 49-50 report that OFAC authorized, in addition to the payment of legal fees from otherwise blocked funds, a U.S. person management company to receive at least some reimbursable expenses in connection with the otherwise licensed sale of the investment fund's blocked holdings, including accounting fees, insurance, and registration and corporate fees.

 

Given the timing of the license, this decision would appear to be based on the fact that the fees were actual outlays by the U.S. person management company in connection with the consummation of an underlying transaction for which OFAC had granted a specific license. Importantly, however, OFAC refused the requests for management fees and the "carried interest" owed to the general partner as a result of the specifically licensed sale. In that case, OFAC specifically stated:

 

"it would be contrary to current licensing policy, at this time, for OFAC to authorize the receipt of the requested holdback reserves, management fees, ‘success fee,’ or carried interest. . . . Accordingly, this portion of your request is hereby denied.”

 

But see section 6(v), below, detailing how OFAC reversed course on its “unblocking” stance in key respects.

 

6) OTHER LICENSING POLICIES RELATED TO DIVESTMENTS AND THE BLOCKING OF ASSETS OF THE INVESTMENT FUND—INCL. CORPORATE GOVERNANCE ISSUES

 

As noted above, the effects of the blocking of the U.S. person investment companies had the knock on effects of (i) blocking all of the minority portfolio company equity investments and associated contractual rights of the investment companies, (ii) preventing the management companies and general partners from acting on behalf of the investment companies in any capacity, and (iii) in one case, the blocking the entirety of a non-financial, U.S. person portfolio company with employees and physical operations in the U.S.

 

As described by the government at oral argument at P. 564:

 

OFAC adopted a pattern of authorizing negotiations toward eventual resolution or sales of portfolio companies held in these blocked entities, while reserving the ability to approve or disapprove the final deal that was negotiated.

 

That characterization accords generally with the “wind down licenses” at License No. UKRAINE-EO13662-2018-355905-1, 2, 3 (With transmittal letter and license applications). The authorization section of those licenses, issued soon before the filing of the Initial Complaint in this case, provides as follows:

 

SECTION 1 - AUTHORIZATION: (a) Subject to the conditions and limitations stated herein, US VC Partners Management, LLC and US VC Partners, L.P. ("USVCP") (the "Licensees") are hereby authorized to engage in all transactions ordinarily incident and necessary to (i) the wind-down of operations, contracts, or other agreements that were in effect prior to April 6, 2018 involving equity, debt and/or other holdings in their possession or control blocked on or after April 6, 2018 as a result of the designations of Viktor Vekselberg and the Renova Group pursuant to Executive Order 13662 and the Ukraine-Related Sanctions Regulations, 31 C.F.R Part 589 (URSR) (the "Blocked Positions"), as

described in the Application; and (ii) negotiate, but not execute, the sale of the Blocked Positions.

 

In its transmittal letter, OFAC stated that the license was being issued to “[i]n order to mitigate harm to U.S. companies, employees, and investors.” This is probably not, however, only a reference to U.S.-based portfolio companies whose operations would be negatively impacted by the blocking of the investment fund, since the license applies to all of USVCP’s positions, and those positions included minor equity stakes in companies. (See p. 667), reporting holdings in one company representing “approximately less than 1% of the total issued and outstanding equity interest in” the portfolio company. Instead, the reference to “U.S. companies, employees, and investors” appear to refer to the non-blocked U.S. person management company and the natural person fund manager. To the extent that License No. UKRAINE-EO13662-2018-355905-1, 2, 3 reflect a broadly applicable licensing policy, it is a notable one, and not otherwise discernible from OFAC’s regulations or public guidance.

 

As discussed further below, OFAC, in conjunction with a separate, highly unusual licensing decision, eventually “liberalized” its position on requiring a specific license for the execution of sales. License No. UKRAINE-EO13662-2018-355905-1, 2, and 3, by contrast, appear to reflect a more default position concerning the unwinding of blocked positions of a blocked U.S. person private equity fund. Immediately below are examples of OFAC issuing specific licenses to actually execute, rather than merely negotiate, divestment-related transactions.

 

i) the CN Odyssey LP Case; A U.S. Company Blocked As a Result of Majority Ownership by a Blocked Investment Fund

 

With respect to (iii), OFAC's licensing policy appears to be to allow the company to continue its ordinary course of business, but in a way that prevents any blocked person from enjoying any immediate financial benefit, and to allow the company to attempt to extricate itself from ownership/control by a blocked person. As charted on p. 15 of the Complaint, non-blocked U.S. persons CN Odyssey GP and Sparrow Capital are the general partners and management companies of CN Odyssey LP, respectively. CN Odyssey LP owned a majority stake in (U.S. person) Portfolio Company A through CN Odyssey LLC, also a U.S. person. This investment meant that U.S. person Portfolio Company A was, itself, blocked by operation of law. Accordingly, OFAC granted the U.S. person portfolio company a license allowing it to continue operations, redeem shares owned by the blocked investment fund bringing the blocked fund’s ownership in the company below 50%, and ultimately have the blocked fund’s ownership stake completely transferred to a non-blocked person on the condition that any proceeds from the sale of the blocked fund’s interest be placed in a blocked account. See pp. 59-60.

 

ii) Licensing Policy with Respect to U.S. Portfolio Companies in Which Blocked Investment Funds Hold Minority Interests

 

As noted above, the effect of a blocked investment fund owning a significant minority stake in a company is not only that the shares themselves are blocked, in the sense that they cannot be transferred, but that all contractual rights and obligations arising from the blocked equity stake is, likewise, blocked. In that connection, the Complaint reports three licenses (UKRAINE-EO13362-2018-354715-1, UKRAINE-EO13362-2018-354213-1 and UKRAINE-EO13362-2018-354356-1, discussed at pp. 51-53), each of which permit roughly the same of activity. OFAC authorizes the sale of blocked shares held by a blocked investment company to a third party, the proceeds are deposited into a blocked account in the name of the blocked investment company, and the non-blocked U.S. person general partner (and management company) are not authorized to access any portion of the proceeds owed to them pursuant to the limited partnership agreement. Compare CTC Media: Selected Correspondence with the SEC (2014-2016), reflecting the same licensing policy. OFAC seems content to permit the transfer of all blocked person holdings in U.S. person companies to third parties, but always on the condition that the blocked person enjoys no immediate financial benefit from any divestment.

 

iii) Licensing Policy with Respect to the Exercise of Blocked Minority Shareholders’ Contractual Rights

 

Beyond the divestment policy, OFAC has shown some flexibility as it pertains to the ability of blocked minority shareholders to exercise the rights to which they are entitled as a result of their equity stakes; presumably a pre-condition of licensing in such cases is an argument that an “innocent” U.S. person company will suffer unless such licenses are granted. For example, the Complaint reports that:

 

On September 5, 2018, Portfolio Company B submitted an application to OFAC for a second specific license seeking authorizations necessary for Portfolio Company B to raise capital through a new investment. Specifically, certain documents needed to be executed on behalf of CN MapAnything LP so that it could provide its consent to the investment. On September 24, 2018, OFAC granted Portfolio Company B and “any new or existing investors” a specific license, License No. UKRAINE-EO13362-2018-355286-2 (“Portfolio Company B License No. 2”), authorizing them “to engage in all activities necessary and ordinarily incident to negotiate and execute certain agreements and related documents with CN MapAnything LP . . . or . . . [CN MapAnything-GP], in connection with a new investment by [Investor 1]” in Portfolio Company B. Portfolio Company B License No. 2 provided that “[i]t is a condition of this License that any future dividend payments owed to [CN MapAnything LP], [CN MapAnything-GP], or [SDN] Viktor Vekselberg be placed into a blocked interest-bearing account located in the United States.”

 

This is a notable example of what was essentially a license for a U.S. person to discharge its obligations pursuant to a blocked contract/agreement, here the obligation to get consent from a blocked shareholder prior to raising new capital. Compare again CTC Media: Selected Correspondence with the SEC (2014-2016), with OFAC authorizing a U.S. person company to recommend a director nominated by a blocked person pursuant to a shareholders’ agreement.

 

iv) the Unilateral Forfeiture of Corporate Rights as a ‘Dealing’ in a Blocked Contract

 

Other corporate governance issues touched upon in the Complaint involve the relationship between blocked shareholders and boards of directors. The Complaint reports that blocked investment funds owned shares entitling them to seats on boards of directors of two foreign companies (Paras. 169 and 171 at p. 64), where the blocked company unilaterally “resigned” from the board to allow the portfolio company to take actions that require unanimous Board consent.

 

However, in the case of another portfolio company, which was presumably a U.S. person (para 167 at p. 53), the blocked shareholder remained on the board, preventing the portfolio company from engaging in any transactions that would require unanimous board consent. It would appear that the reason for the differential in results is that OFAC would consider the unilateral forfeiture of contractual rights—i.e. a blocked person resigning the board seat to which it is contractually entitled—to constitute a dealing in a blocked contract in which a U.S. person company could not engage without a license. Non-U.S. companies, however, are not subject to any such restrictions. Compare again CTC Media: Selected Correspondence with the SEC (2014-2016) (suggesting that a U.S. person company permitting a director appointed by a blocked shareholder to remain on a board pursuant to a pre-existing shareholders agreement does not require a license, but the director must recuse himself from any and all decisions pertaining to the company’s business).

 

v) The May 31, 2019 “MAPANYTHING” License

 

Of the licenses issued to the blocked investment funds that allow them divest positions to non-sanctioned persons, License No. UKRAINE-EO13662-2019-360487-1 (transmittal letter and reported terms of license) is the most detailed (see p. 471).

 

The OFAC transmittal letter recounts what was requested by the Plaintiffs in the license:

 

•      Approximately [$ REDACTED] in payments for services including legal, accounting and corporate registration;

•      Up to [$ REDACTED] in holdback reserves in unknown future costs and liabilities;

•      Up to [$ REDACTED] in management fees to Sparrow;

•      Approximately [$ REDACTED] ( 5% of share purchase price) “success fee” to Sparrow; and

•      Approximately [$ REDACTED] in carried interest to CN MapAnything GP LLC.

                                                                                                                 

The request for holdback reserve and management fees is denied, while the license (the full text of which is unavailable) authorized the following amounts to be transferred to the blocked plaintiff fund from the proceeds of the stock sale”

 

a. “Up to $250,000 for payment of already-incurred legal fees due to Latham & Watkins”;

b. “Up to $200,000 for payment for legal fees for the sale”;

c. “Up to $15,000 for registration and corporate fees”;

d. “Up to $50,000 in accounting fees”; and

e. “Up to $300,000 in insurance related costs and fees.”

 

See p. 49, and see also p. 566, in which the government describes in a letter (sent just before oral argument) that “on July 14, 2020:

 

“OFAC issued a license authorizing a substantial payment from blocked funds to CN MapAnything GP LLC (“MapAnything GP”), a U.S. entity that is affiliated with one of the plaintiffs in this action, in an amount intended to represent entitlements owed to MapAnything GP from newly-issued proceeds of a divestment from a U.S. company by a blocked Vekselberg-owed entity for which MapAnything GP served as general partner. Specifically, the license released to MapAnything GP their portion of funds initially held back from the liquidated, Vekselberg-owned, equity interest in the U.S. company.”

 

7) EXAMPLES OF ACTIVITIES ENGAGED IN PURSUANT TO A “WIND DOWN” LICENSE

 

License No. UKRAINE-EO13662-2018-355905-1, 2, 3) authorize the following:

 

SECTION 1 - AUTHORIZATION: (a) Subject to the conditions and limitations stated herein, US VC Partners Management, LLC and US VC Partners, L.P. ("USVCP") (the "Licensees") are hereby authorized to engage in all transactions ordinarily incident and necessary to (i) the wind-down of operations, contracts, or other agreements that were in effect prior to April 6, 2018 involving equity, debt and/or other holdings in their possession or control blocked on or after April 6, 2018 as a result of the designations of Viktor Vekselberg and the Renova Group pursuant to Executive Order 13662 and the Ukraine-Related Sanctions Regulations, 31 C.F.R Part 589 (URSR) (the "Blocked Positions"), as described in the Application; and (ii) negotiate, but not execute, the sale of the Blocked Positions. (Emphasis added).

 

The licenses were all subject to the condition that “[t]he Licensees [] submit monthly reports to [OFAC with a] a description of any activities conducted, amounts of any payments made, and the names of any payees as well as their addresses.”

 

The activity reports at pp. 50-66 of for the first of the three licenses (EO13662-2018-355905-1), the “application” consists of the submissions at pp. 10-39 of the pdf file here do not amount of OFAC interpretations of the scope of the authorization section of the licenses, but one suspects that such activities were deemed legal, particularly those of a type reported on more than one occasion.

 

The primary interpretive question is, in the context of a blocked private equity fund holding blocked positions, what constitutes the “the wind-down of operations, contracts, or other agreements that were in effect prior to April 6, 2018 involving equity, debt and/or other holdings in their possession or control”? Of note, this license, unlikely Ukraine GL 12 is merely a “wind down” license, rather than a license that authorizes transactions “ordinarily incident and necessary to the maintenance or wind down of operations, contracts, or other agreements.” What if any significance is there to the lack of a “maintenance” authorization in License No. UKRAINE-EO13662-2018-355905? If the activity reports are an indication, it is not necessarily the case that all activities authorized pursuant to the license consist of affirmative steps toward divestment. Below is a list of the notable activities reported pursuant to the wind down licenses, with page numbers for the remainder of section 7 referring to those in the pdf file here.

 

·      The opening of blocked bank accounts for the receipt of proceeds (p. 50).

·      Entering into an “Mutual Non-Disclosure and Exclusivity Agreement” with a potential counterparty for the exchange of information and negotiation of a potential sale of blocked assets (p. 54) (note: negotiation licenses generally imply authorizations to execute NDAs).

·      Executing proxy statements with respect to portfolio companies so the licensee could vote in favor of the approval of shareholder meeting minutes and reappointment of portfolio company’s auditors (p. 58) (note: no obvious nexus to divestment)

·      Paying taxes (p. 60)

·      Execution of “Amended and Restated Voting Agreement, an Amended and Restated Investors' Rights Agreement. a Written Consent of the Stockholders, an Amended and Restated Right of First Refusal and Co-Sale Agreement, and a Side Letter Agreement between USVCP” and portfolio company that waive certain of USVCPs rights under the pre-existing agreements (p. 64)

 

8) SPECIFIC LICENSES ISSUED IN CONNECTION WITH SETTLEMENT NEGOTIATIONS

 

From April through June, 2020, OFAC and the Plaintiffs were involved in settlement negotiations, perhaps having come to an agreement in principle to settle the case, with there subsequently having been disagreement as to whether the licenses that OFAC issued were of a scope and nature that were agreed upon (see p. 994). In the midst of those negotiations, OFAC issued to extraordinary, seemingly unprecedented licenses, both on June 29, 2020. The two licenses, which Plaintiffs in the court case characterize as “sua sponte” (i.e. disconnected to a specific license application), are LICENSE No. UKRAINE-EO13662-2020-366977-1 (the “Unblocking License”) and LICENSE No. UKRAINE-EO13662-2020-366979-1) (the “Undwinding License”).

 

For context concerning the licenses below, first take note certain statements made by the government to the court at 8/26/2021 oral argument:

 

And, in fact, OFAC would license payments by any other pot of money to Plaintiffs on account of amounts owed to them by Mr. Vekselberg or his entities. Plaintiffs have never accepted that as a viable alternative. Assuming Mr. Vekselberg were to pay, that would presumably come from funds that he has offshore, and he is reportedly a multibillionaire with assets all over the world. OFAC is prepared to facilitate a make good payment to Plaintiffs of whatever amounts are due to them as long as it's not coming from blocked funds. (P. 543).

 

And:

 

OFAC's goal is very simple. They want to impose blocking regulations according to law. Whatever assets are blocked, they try to preserve them. They don't want them to be dissipated. They encourage anyone who is an innocent affected counterparty to try to get paid out of non-blocked money, money that their counterparty has available elsewhere because that leaves OFAC with the pot of assets that it uses as leverage in trying to negotiate and improve the world or eliminate the harm that led to the sanctions in the first place. (P. 553).

 

We have yet to see “innocent affected counterparty [getting] paid out of non-blocked money [in which a blocked person has an interest],” or “make good payment” articulated as a formal OFAC licensing policy, but it is not necessarily inconsistent with what is on record.

 

In any event, the licenses below suggest further flexibility, at least when OFAC is subject to protracted litigation, as it concerns both (i) the receipt of blocked funds owed to a U.S. person by a blocked person, as well as (ii) OFAC willingness to allow divestments to proceed without a need for each individual transaction to be approved by a specific license issued as a follow-on to a pre-existing negotiation license.

 

i) LICENSE No. UKRAINE-EO-13662-2020-366732-1 and -2 (Unblocking for Certain Expenses)

 

LICENSE No. UKRAINE-EO-13662-2020-366732-1 (Apr. 6, 2020) and LICENSE No. UKRAINE-EO-2020-366732-2 (June 10, 2020) are contained at pp. 247-250 of the VC Partners Docket File. While the two licenses contain some redactions that make it impossible to say for sure, it appears as though the only difference between the “-1” and “-2” versions of the license are that the -2 version extends the expiration date for the transactions described in the -1 version. It is possible that the second version authorized the unblocking of property that was not within the scope of the first version of the license.

 

The licenses authorize the Plaintiffs’ bank to unblock property that is not specified in the redacted versions of the licenses. However, the DOJ letter at p. 237 of VC Partners Docket File states that LICENSE No. UKRAINE-EO-13662-2020-366732-1 and LICENSE No. UKRAINE-EO-13662-2020-366732-2 were issued to “authorize requests from Plaintiffs [in the litigation] to receive a total of approximately $1.4 million in blocked funds to meet expenses.” The property at issue was presumably cash held in U.S. person bank accounts. These are referred to as “emergency licenses” in the transmittal letter referenced below.

 

ii) LICENSE No. UKRAINE-EO13662-2020-366977-1 (The “Unwinding License”) and “Make Whole Payment” Offer.

 

As discussed above, OFAC issued, on April 12, 2019, a “Wind down” license (License No. UKRAINE-EO13662-2018-355905-1). On June 29, 2020, OFAC issued what it refers to as an “Unwinding License). LICENSE No. UKRAINE-EO13662-2020-366977-1 (With transmittal letter and related correspondence).

 

The primary differences between the Unwinding License and the initial Wind Down License are (i) that the Unwinding License allows for the actual execution of sales/divestments of blocked positions, rather than the mere negotiation of them, and (ii) the “licensees” are the management companies that manage all of the blocked investment funds, as opposed to just US VC Partners Management, LLC and US VC Partners, L.P. However, both licenses contain the standard “wind down” language.

 

“SECTION I - AUTHORIZATION: Subject to the conditions and limitations stated herein, US VC Partners GP LLC, US VC Partners Management (a/k/a Columbus Nova Technology Partners), LLC, Israeli VC Partners Ltd., Israeli VC Partners Management, LLC, CN Odyssey GP LLC, CN MapAnything GP LLC, Sparrow Capital Holdings LLC (f/k/a Renova U.S. Management LLC a/k/a Columbus Nova), Audubon Loan Funding GP LLC, CN Partners LLC, Bracken Capital LLC (f/k/a Columbus Nova MB LLC), CN Fund Management LLC, and Andrew lntrater (the "Licensees") are hereby authorized to engage in all transactions ordinarily incident and necessary to [] wind down operations, contracts, or other agreements that were in effect prior to April 6, 2018 involving the equity, debt and/or other holdings in the Licensees' possession or control blocked on or after April 6, 2018 as a result of the designations of Viktor Vekselberg and the Renova Group pursuant to Executive Order 13662 and the Ukraine Related Sanctions Regulations, 31 C.F.R. Part 589 (URSR) (the "Blocked Positions")…


The Unwinding License was subject to a proviso phrased as follows:

 

SECTION 3 – WARNINGS: (a) Except as authorized in SECTION 1 hereof, this License does not authorize the transfer of any blocked property, the debiting of any blocked account, the entry of any judgment or order that effects a transfer of blocked property, or the execution of any judgment against property blocked pursuant to any Executive order, statute, or 31 C.F.R. Chapter V.

 

A wind-down license will often categorically prohibit all transfers to blocked funds, but here the Section 3 warning applied “Except as authorized in SECTION 1” of the license.

 

*Consolidation of Blocked Funds – First Not Authorized; Then (Apparently) Authorized


Documents filed with the court in the litigation contain a few notable interpretations of the scope of the Unwinding License. At p. 482, an OFAC licensing officer states that the license “does not authorize the consolidation of blocked funds held in disparate accounts into a single account.” This was in response to in an inquiry from Plaintiff’s internal counsel asking whether the license authorized the consolidation of “blocked funds from the multitude of places wherein the funds currently reside, into fewer blocked accounts as a logistical matter.” Then on September 15, 2021, the Plaintiffs filed a Third Amended Complaint of which paragraph 168 (at p. 1062) recounts that “Plaintiffs [had] repeatedly requested confirmation from OFAC’s Licensing Division that the Wind-Down License permits Plaintiffs to consolidate blocked funds from numerous disparate bank accounts where cash currently resides into one consolidated account at a single financial institution for administrative ease. Plaintiffs [had] made clear that this request for clarification is not a request for funds to be unblocked, it [was] merely a request to consolidate blocked accounts for the purpose of easing their administrative burden and reporting obligations…OFAC had originally informed Plaintiffs that each movement of blocked funds from one account to another would require its own individual license…In response to Plaintiffs’ first application to consolidate funds, however, OFAC claimed that the Wind-Down License permitted the scenario posited by Plaintiffs, and stated that no additional license was necessary.”

 

*“Capital calls” and the Unwinding License

 

As detailed in the Plaintiffs’ 3/29/21 letter to the court and attached exhibits (p. 325 et seq.), Plaintiffs repeatedly sought guidance as to whether the wind-down license described above would authorize Plaintiffs to make certain “capital calls.” Plaintiffs asked whether the Unwinding License:

 

“allow[s] for the unblocking of funds previously issued as capital distributions from the relevant non-blocked third-party managed partnerships, to be transferred directly from those blocked accounts to the non-blocked partnerships for the purpose of satisfying a past due capital call”

 

This scenario appears to describe something akin to a “setoff.” A non-blocked fund in which the blocked fund is a “limited partner”-investor paid the blocked fund capital distributions owed to it into a blocked account, and the question then is whether the Plaintiffs could, under the authority of the wind-down license, use those same funds to satisfy contractual obligations (i.e. the capital call) owed to the non-blocked fund in which the blocked fund was invested. Without a license, that activity would clearly be prohibited (see 589.405 - Setoffs prohibited).

 

The answer as to whether the Unwinding License authorized the making of capital calls appears to be no. See p. 481.

 

See also LICENSE No. UKRAINE-EO13662-2020-367531-1) authorizes the non-sanctioned fund to which the capital calls are owed to, among other activities:

 

“[receive] funds from [SDN] Viktor Vekselberg or the Renova Group (collectively, the “Payor”), [ ] to be used for the payment of capital calls and other financial obligations associated with investments in [redacted]. and (together, the “Partnerships”) held by [blocked person investment fund].”

 

That license specifies that it does not authorize “the transfer of any blocked property [or] the debiting of any blocked account,” so it is fairly clear that the making of such transfers by the Plaintiffs was not already authorized in wind-down License UKRAINE-EO13662-2020-366977-1.

 

*“Fresh Funds” and the Unwinding License

 

The third-party capital calls license (LICENSE No. UKRAINE-EO13662-2020-367531-1) authorized the receipt of “fresh funds” from “Vekselberg or the Renova Group”. It is not clear whether OFAC did not construed the Unwinding License, which is vague on the subject, to permit the receipt of fresh funds from Vekselberg or the Renova Group to the extent that the receipt of such funds was otherwise related to the winding down of operations as described in the license.


*The Fresh Funds Licensing Policy/Statement

 

Leaving aside the receipt of fresh funds in connection with authorized divestment transactions, the transmittal letter says that “OFAC [was] prepared to authorize the receipt of fresh funds located outside of U.S. jurisdiction from Vekselberg or Renova for reimbursement of outstanding management fees or other funds owed to Sparrow by Vekselberg or Renova.”

 

Accord p. 543 (Aug. 2020 oral argument TR) ( “OFAC would license payments by any other pot of money to Plaintiffs on account of amounts owed to them by [the SDN] Vekselberg or his entities…Assuming Mr. Vekselberg were to pay, that would presumably come from funds that he has offshore, and he is reportedly a multibillionaire with assets all over the world. OFAC is prepared to facilitate a make good payment to plaintiffs of whatever amounts are due to them as long as it’s not coming from blocked funds.”)

 

It is unclear whether those statements reflect a generally applicable licensing policy, or whether they were, instead, “litigation driven.” If the authorization of so-called “make good payments,” by blocked persons to U.S. persons from “fresh funds,” does not reflect a broader unwritten licensing policy, it suggests that litigation gets the goods in a way that ordinary license applications do not. If, alternatively, ‘make good payments by SDNs from fresh funds are presumptively licensable’ does reflect a more broadly applicable specific licensing policy, that could significantly alter the calculus that goes into the decision of whether to deal with a person that is not currently sanctioned, but is at a high risk of being sanctioned in the future. At any given time, there are many foreign entities that Treasury has been granted the authority to block (or otherwise sanction), but are not yet blocked. This described Vekselberg as of the March 24, 2014 issuance of E.O. 13662 up through the date on which he was actually sanctioned, and as of 6/28/2021 it describes the entirety of the Russian and Burmese Governments (and any entity owned or controlled by those governments). See subsections 1(a)(iv) and (vii) of E.O 14024 (Russia) and E.O 14014 (Burma/Myanmar). If “make good payments” are likely to be subject to a favorable licensing disposition across the board, the result could be, for example, a reduction in “de-risking” in the form of a refusal to do business with counterparties that are not sanctioned but are at a heightened risk of being sanctioned in the future because Treasury has been granted authority to sanction them.

 

In any event, it would appear as though the receipt of fresh funds from Vekselberg or Renova for the payment of management fees would NOT have fallen within the scope of the Unwinding License, notwithstanding the lack of any language specifying as much.

 

iii) LICENSE No. UKRAINE-EO13662-2020-366979-1 (The Unblocking License)

 

A letter from the DOJ (at p. 237 of the VC Partners Docket File) letter states that “[o]ne license [issued on June 29, 2020] authorizes Plaintiffs to access approximately $8.7 million in blocked funds for the payment of carried interests now due to them, legal fees, and certain operational expenses and fees incurred.” This is a reference to LICENSE No. UKRAINE-EO-2020-366979-1. The dollar amounts are redacted from the license on file, but it is clear that the “$8.7 million” referred to in the DOJ letter is a reference to LICENSE No. UKRAINE-EO-2020-366979-1.

 

The authorizations contained in LICENSE No. UKRAINE-EO-2020-366979-1 are extremely rare, from a qualitative and quantitative perspective. From a quantitative perspective, the “dissipation” of $8.7 million in blocked funds is rare under any circumstance. In this case, even more so in light of the uses to which the unblocked funds were put. The license lists:

 

“(a) $[REDACTED] in carried interests currently due to the licensees,

 

(b) $[REDACTED] in outstanding legal fees owed to Latham & Watkins LLP, and

 

(c) $[REDACTED] for operational expenses and fees incurred.”

 

With respect to (b), other licenses on file in this case appear to represent breaks from, or exception so, OFAC’s usual unblocking policy as articulated in its Legal Fee Guidance. It is, however, difficult to discern whether and to what extent the “legal fees owed to Latham & Watkins LLP” are owed in part for the challenge to OFAC’s blocking of the property at issue in the litigation. If so, the legal services provided are directly within the scope of the “Legal Fee Guidance”.

 

With respect to (a), OFAC was evidently willing to accept the Plaintiffs’ arguments that “carried interests” are “equity investments,” as opposed to contractual obligations. See the portion of the transmittal letter referring to the “release of blocked funds for the recovery of Sparrow’s equity interests in the investment (referred to as ‘carried interests’).” The distinction between the unblocking of funds for recovery of an “equity investment,” on one hand, and the satisfaction of a contractual obligation, on the other, is by no means inconsequential. See e.g. Libya - General License No. 4 (entire investment fund subject to blocking due to blocked government involvement, but OFAC licenses the continued operation of the fund and the ability of non-sanctioned U.S. person investors to close out their positions). Carried interests in the private equity context are different from ordinary investments because they are compensation paid to an investment manager in excess of the amount that the manager actually contributes to the partnership, but OFAC does evidently characterize carried interests as “equity”

 

The most notable (and consequential) aspect of the unblocking license, at least from a qualitative perspective, is the unblocking of funds “for operational expenses and fees incurred.” On the basis of the four corners of the license and transmittal letter, the unblocking “for operational expenses and fees incurred” is fairly anodyne. Where payments for operational expenses (e.g. salaries, rent, utility payments) are necessary for a blocked U.S. person to continue operating as a going concern, OFAC will consider requests for the unblocking of funds to make such payments. (Compare FAC No. SDG-234338 (Notable Blocking Notices), FAC NO. SDG-234338).

 

In this case, however, other documents filed in the litigation make clear that the unblocking of funds for “operational expenses and fees incurred” include 80% of the back “management fees” owed by the blocked investment fund to the non-sanctioned U.S. person fund manager. See p. 1076 of the VC Partners Docket File (“The Unblocking License permitted Plaintiffs to withdraw from blocked funds 80% of the back-management fees to which they are entitled”) (emphasis added). See also p. 551, in which counsel for OFAC, referring to the unblocking license, says “OFAC now has done licenses that allow [Plaintiffs] to receive a substantial payment of their management fees, although not all, that is correct, they're not getting quite full pay, but a substantial chunk of money. They're also getting money on account of what OFAC refers to as carried interest, their investment entitlements flowing from these entities…”

 

The back management fees is, undoubtedly, a contractual entitlement, rather than an “equity interest,” but they are, at least partially and insofar as they represent fees for management subsequent to the blocking of the fund, “operational expenses,” as opposed to debts that would be owed to an ordinary creditor.

 

Also of note is the paragraph in the transmittal letter that reads as follows:

 

‘After completion of a divestment pursuant to the Unwinding License, OFAC is prepared to authorize on a case-by-case basis, and upon request from Sparrow, the release of blocked funds for the recovery of Sparrow’s equity interests in the investment (referred to as “carried interests”), if any, and reasonable operational expenses and fees incurred by Sparrow. As you may know, OFAC licenses the release of blocked funds in limited circumstances only. OFAC, however, will take a favorable view towards these requests to enable the recovery of U.S. persons’ investments and certain operational expenses and fees incurred, provided they are reasonable and are supported by proper documentation. In addition, as previously communicated, OFAC is prepared to authorize the receipt of fresh funds located outside of U.S. jurisdiction from Vekselberg or Renova for reimbursement of outstanding management fees or other funds owed to Sparrow by Vekselberg or Renova.’

 

The above cannot be said to reflect OFAC’s across-the-board “licensing policy” concerning blocked funds and assets since the context of the statements is a protracted litigation in which the blocking of the funds is challenged, but the statements of licensing policy are notable as a rare example of OFAC being willing to unblock of funds of a blocked foreign person to satisfy obligations that that the blocked person owes to U.S. person service providers (here “Sparrow,” the U.S.-based private equity firm).

 

9) LITIGATION UPDATE (NOVEMBER 6, 2020)

 

On Sep 17, 2020, the government's motion to dismiss was granted, and the Plaintiffs' motion for the return of the blocked property was denied (Dkt. 77, p. 251 of the VC Partners Docket File). In the ruling, the court rejected the Plaintiffs’ Fourth Amendment (seizure of property) and Fifth Amendment (due process) claims, as well as the Plaintiffs' claims under 5 U.S.C §§ 706(2)(A) and (B) (the APA), the latter of which were characterized as follow-ons to the constitutional claims. The court did, however, allow Plaintiffs' to file an amended complaint to assert claims under 5 U.S.C. § 706(1) of the APA (prayer to "compel agency action unlawfully withheld or unreasonably delayed").

 

On Nov 6, 2020, Plaintiffs filed their amendment complaint (Dkt. 82, p. 261 the VC Partners Docket File), making the claims that were denied in the Sep 17, 2020 opinion, as well as the 5 U.S.C. § 706(1) claims that were not initially made. As of the date of the filing of the Amended Complaint, OFAC had evidently not acted on certain of the applications at issue throughout the litigation, with the failure to do so being characterized by Plaintiffs as “unreasonable delay” for APA purposes.

 

10) LITIGATION UPDATE (JUNE – SEPTEMBER, 2021)

 

On June 25, 2021, the government filed an administrative record of which Plaintiffs have indicated they will challenge the completeness. See p. 566. The discovery dispute is ongoing, running concurrent with a dispute over the nature of the Plaintiffs’ live claims (a question that, by necessity, bears on the proper scope of the administrative record).

 

On September 15, 2021, Plaintiffs’ filed for leave to file a Third Amended Complaint. (See pp. 1008-1085 of the VC Partners Docket File for redline version of the Third Amended Complaint, compared to the Second Amended Complaint. The Third Amended Complaint does appear to provide factual information that is relevant to any of the discussion above, except that new paragraph 168 recounts OFAC changing its mind on the question of whether the “Wind Down License” LICENSE No. UKRAINE-EO13662-2020-366977-1 authorized the consolidation of blocked accounts (see comments to the license file).