Citation: Midland Resources Holding Limited v Shtaif., 2014 ONSC 997 Court File No. 08-CL-7446 DATE: 20140219

ONTARIO

SUPERIOR COURT OF JUSTICE

(COMMERCIAL LIST)

(*)

B E T W E E N:

MIDLAND RESOURCES HOLDING LIMITED, ALEX SHNAIDER and EDUARD SHYFRIN

Plaintiffs

- and -

MICHAEL SHTAIF, THE ESTATE OF ANTHONY GROAG, GREGORY ROBERTS, EUGENE BOKSERMAN, ILYA ENTIN, IRWIN BOOCK a.k.a. IRWIN KRAKOWSKY and STANTON DE FREITAS

Defendants

A N D B E T W E E N:

MICHAEL SHTAIF, GREG ROBERTS, EUGENE BOKSERMAN and ILYA ENTIN

Plaintiffs by Counterclaim

And

MIDLAND RESOURCES HOLDING LIMITED, ALEX SHNAIDER, EDUARD SHYFRIN and KOLL RESOURCES LIMITED

Defendants to the Counterclaim

M.A. SANDERSON J.

)

)

) Kenneth Prehogan, Kim Mullin, Symon ) Zucker for the Plaintiffs

)

)

)

)

)

) Colin P. Stevenson, J. Daniel McConville for

) Colin P. Stevenson, J. Daniel McConville for

2014 ONSC 997

2014 ONSC 997 (*)

Apr. 6-May 16, 2006 Shtaif: Deceit/Continuing Misrepresentation that BDW had paid

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2014 ONSC 997 (*)

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REASONS FOR DECISION

INTRODUCTION

[1]This litigation is about a joint venture to acquire and develop Russian oil fields,

involving two companies, Magellan Energy Limited ("Magellan") and then its successor, Koll Resources Limited ("Koll.")

[2]The parties blame each other for the failure of the venture.

[3]In their pleadings, the Plaintiffs alleged, among other things, that the Defendants individually and in concert, caused them damages by forming and illegally using sham public companies, deceitfully inducing them to join and continue in the joint venture, breaching their contract and fiduciary duties, obstructing justice, and suppressing evidence. The Plaintiffs claimed that the Defendants are personally liable for their loss.

[4]The Defendants counterclaimed, alleging that in addition to breaching and inducing breaches of their contracts, the Plaintiffs engaged in extortion, bribery of the Russian police, coercion/duress, attempted kidnapping, violent seizure of corporate assets, groundless and malicious criminal prosecution of Shtaif. One obtains a flavour of the litigation from the Amended Statement of Defense and Counterclaim of the Defendants Shtaif, the Groag Estate,

Entin and Bokserman, which contained the following at paragraphs 7-10:

7 The theory of the plaintiffs … that they were induced to make a substantial investment in the joint venture based on an elaborate conspiracy to defraud them … [was] concocted, reckless and irresponsible. This claim is an abuse of process.

8 The Plaintiffs are the fraudsters. Through fraudulent and illegal means, the plaintiffs have taken control of 100 % of the Joint Venture Properties with the result that these defendants have lost their entire interest, even though it was these defendants who created the joint venture in the first place.

9 When these defendants and Anthony Groag (who died on July 19, 2007) gave notice that they intended to commence proceedings in March 2007 against Alex Shnaider ("Shnaider") and Midland Resources Holding Limited ("Midland"), the plaintiffs conspired to have Shtaif wrongfully convicted and incarcerated in Russia through spurious criminal charges, bribes and other fraudulent acts, as a means to end the litigation.

10These defendants and Anthony Groag's estate are the real plaintiffs and their claim is set out below by way of counterclaim.

About the Presentation of Evidence in these Reasons

[5]Transcript References. With the exception of Shyfrin's evidence in January 2013, all of the arguments and viva voce evidence was recorded on consecutively numbered pages from the beginning to the end of the trial. Page number references are shown in one of two ways: as part of the sentence (e.g. "Shnaider gave evidence 130 that..." or "Roberts said 7904…") or at the end of the sentence (e.g. "Shtaif 5056.")

[6]Exhibit References. In the text of the Reasons, exhibit references contain two referents, e.g., "Ex. 51/Tab 283." The tab numbers refer to the document's location in the Joint Book of Documents. Once an Exhibit is mentioned with both numbers, generally only the Exhibit number will be given thereafter.

[7]Emails andText (SMS) Messages. Many of the Exhibits referenced in these Reasons are emails and text messages. Some are not explicitly identified as either emails or text

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messages; others that are said to be emails may actually be text messages. As nothing turns on the point, no effort has been made to ensure that each one is correctly identified as to whether it is an email or a text message.

THE PARTIES

The Plaintiffs

[8]Shnaider. At all material times, the Plaintiff, Alex Shnaider ("Shnaider"), a Canadian citizen and resident of Toronto, indirectly owned 50% of the Plaintiff Midland Resources Holdings Limited ("Midland"). He continues to own 33.6% of the shares of Koll Resources Limited ("Koll").

[9]Shyfrin. Eduard Shyfrin ("Shyfrin"), a resident of the United Kingdom and citizen of the Russian Federation, indirectly owned 50% of Midland. He continues to own 33.6% of the shares of Koll.

[10]Midland. In 1994, Shnaider and Shyfin incorporated Midland, a Guernsey/Channel Islands corporation, to purchase and resell Ukrainian steel worldwide. As time passed, it purchased Russian, Ukrainian and Macedonian steel mills; the electrical grid of Armenia; meat, rubber and copper processing plants, real estate businesses, shipping companies and numerous other enterprises. Today it has business interests throughout the world.

The Defendants

[11]The Defendant and Plaintiff by Counterclaim Michael Shtaif ("Shtaif"), a Canadian citizen, a resident of Calgary, was the initiator of the subject of this litigation, a Russian oil and gas venture. He continues to own 29.3% of the shares of Koll.

[12]The Defendant and Plaintiff by Counterclaim, Anthony Groag ("Groag") died on July 19, 2007. His Estate continues to beneficially own 1.6% of Koll.

[13]The Defendant and Plaintiff by Counterclaim Eugene Bokserman ("Bokserman"), a Canadian citizen and resident of Toronto, continues to own 0.5% of the shares of Koll.

[14]The Defendant and Plaintiff by Counterclaim Ilya Entin ("Entin"), a Canadian citizen, resident of Calgary, continues to own 0.05% of the shares of Koll.

[15]The Defendant and Plaintiff by Counterclaim Gregory Roberts ("Roberts"), a lawyer and businessman, continues to own 1% of the shares of Koll.

[16]The Defendant Irwin Boock ("Boock"), also known as Irwin Krakowsky, presented himself to the parties at all material times as John Howard. Boock has been noted in default.

[17]The Defendant Stanton De Freitas ("De Freitas") was a director of Magellan until his resignation from the Magellan Board on May 25, 2006.

[18]Hereafter in these Reasons I refer to the Defendants/Plaintiffs by Counterclaim as the Defendants.

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CHRONOLOGY

Genesis of the Magellan Joint Venture

The Pre-Contractual Period

[19]Shtaif gave evidence 3111 that by 2005 he had worked in Russia for about 15 years in senior executive positions in the oil and gas industry. Early in 2005, he decided to start his own oil production company. His CV is Ex. 289/Tab 1.

[20]Shtaif's plan was to acquire undervalued Russian oil and gas companies, consolidate them in one company and take it public. He began raising funds and reviewing potential acquisitions, Ex. 292/Tab 15.

[21]Shtaif and Bokserman 5704 had known each other for many years. In early 2005, they entered into a Commission Agreement, Ex. 484/Tab 672, in which Bokserman 5760 agreed to assist Shtaif in finding investors for Shtaif's new business.

[22]Shtaif had met Groag in Russia. In August 2005, Shtaif hired Groag, who had worked as General Auditor for BP for 35 years and CEO for Standard Chartered Bank for five years. Shtaif 3897, 3900, 3908, 3920; Shnaider 1109. Groag's CV is Ex. 302/Tab 2.

[23]By the fall of 2005, Shtaif had identified and targeted several investors, including a Mr. Poju Zabludowicz of Tamares Energy, who had expressed interest in investing in the venture.

[24]I note Ex. 292/Tab 15, Shtaif's Ruscan business plan dated October 9, 2005, specified he was trying to raise $10 million in phase 1, $20 million in phase 2.

October 2005

[25]Shtaif Meets Howard/Watson (Boock). Shtaif gave evidence 4480 that in October 2005, he was introduced to "John Howard" [in T.O.] by Alik Iskender, a friend of a friend. Counsel for the Plaintiffs submitted there were obvious red flags from the time of their first contact that should have caused Shtaif to refuse to deal with "Howard."

[26]On October 26, 2005, within days of their online introduction and even before they met in person, Howard sent Ex. 445/Tab 16 to Shtaif, proposing that Shtaif 3126-3129 become the President or Executive Vice-President of BDW Holdings Ltd. ("BDW"), "simply run the show," and receive 6 million free trading shares, 6 million restricted shares and 6 million options in BDW at a penny.

[27]In chief, Shtaif gave evidence 4327-4334, 4365 that he did not find "Howard's" offer suspicious. He was cross-examined effectively on discovery answers that he had found it suspicious. Howard usually emailed Shtaif using a David Watson's email address. After "David Watson" sent him an email dated October 27, 2005, Shtaif replied, "Dear John," and

suggested they meet face to face. On the same day, Shtaif emailed Ex. 297/Tab 19 to Howard: "I have a deal on the table in the magnitude of US$40-50 million. It has huge reserves…" Watson replied: "We would… like to do business." After David Watson responded to Shtaif's email, Shtaif again replied to Howard: "Dear John…I wanted to call you to discuss business opportunity on the phone, but I do not have any numbers to contact you…" On October 28, 2005, Watson replied: "Dear Michael … I will call you … Also how do you want the stock to be issued?" [Emphasis added.]

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[28]Shtaif and Howard discussed an investment by BDW in Shtaif's venture. On October 29, 2005, Shtaif wrote: "… Can you please provide me with details of the company we are discussing … just a short summary will do." Howard/Watson/Boock replied: "BDW is a public corporation with about 50 million shares issued …"

November 2005

[29]In Ex. 298/Tab 20, Howard offered to provide a corporate vehicle for the oil and gas venture, Magellan Energy Ltd. ("Magellan") that he represented to be a Delaware public company trading on the Pink Sheets, a U.S. based, over the counter stock exchange.

[30]We now know that neither Magellan nor BDW were legitimate public companies.

[31]On November 4, 2005, in Ex. 298/Tab 20 Shtaif wrote, "Hopefully, shortly we can talk in person … Does BDW have enough resources to start due diligence and possible acquisition … or do you have to raise the funds?... Is it possible to send me some info regarding the company?"

[32]On November 8, 2005, Howard emailed Ex. 299/Tab 22 to Shtaif: "BDW Holdings is a publicly traded company in the U.S. that is pursuing oil and gas projects that can be developed and in some cases see increased production. How much do we need to say? Send a list of questions. That might be easier."

[33]On November 9, 2005, Ex. 447/Tab 23, Shtaif emailed Howard: "… the only thing I would need is your latest financial report…"

[34]On November 11, 2005, Howard sent Shtaif Ex. 300/Tab 25, an unaudited balance sheet for BDW showing it had cash and marketable securities of $8,051,123.25. Howard wrote: "The balance sheet reads as is because we revived a dead shell, i.e., a public entity that was not trading and had no assets or liabilities. " In examination in chief, Shtaif said when he received the balance sheet, he had no reason to be suspicious. During cross-examination, when confronted with answers given on his discovery to the effect that he had been skeptical about whether BDW had the $8 million, Shtaif said 4349 he was "inquisitive." He wanted to know who he was dealing with, whether the company was "legit" and whether it had the financial wherewithal to complete the transaction:

Q.Your testimony here today that the fact that you asked for this -- for evidence of $8 million being in this company, you're saying the fact that you didn't receive that information, that even though you didn't receive the information, you were not at all suspicious.

A.Suspicious is a word that I wouldn't use. I was inquisitive. I wanted to know who I'm dealing with, whether the company is legit, whether they have the financial wherewithal to complete the transaction. …

[35]Shtaif said 4342 he understood that BDW was "just a start-up company." On November 13, 2005, he asked Howard to provide information about the source of BDW's $8 million. On November 16, 2005, Howard advised Shtaif that the $8 million had been raised "by private placement. …Alik should be forwarding the document you need." [Shtaif said 4353 he never received the information requested.] Ex. 301/Tab 27.

[36]At about that time, Shtaif decided to use Magellan as his corporate vehicle. On November 24, 2005, BDW issued 12 million shares to Shtaif.

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December 2005

[37]Shtaif Meets Shnaider. Sometime in late November or early December of 2005, Bokserman contacted Shnaider, seeking to introduce him to Shtaif. As already noted, in early 2005, Bokserman and Shtaif's company Euro Gas had entered into Ex. 484, a commission agreement. Bokserman thought Midland might be interested in getting into the Russian oil and gas business.

[38]Bokserman 5765-5767 knew that the Pink Sheet OTC exchange where Magellan traded had been associated with fraudulent activity. His own employer, Octagon Capital, refused to accept share certificates from Pink Sheet companies [such as Magellan and BDW] because of concerns about fraud Ex. 522/Tab 29. He said 5767-5768 on December 2, 2005 he warned Shtaif, emailing him Ex. 522, a copy of Octagon's policy that it will not accept share certificates from Pink Sheet companies. Bokserman claimed that while he did not email Shnaider, he did have a personal conversation with him.

[39]I reject Bokserman's evidence. Bokserman knew Magellan was a Pink Sheet company. Had he warned Shnaider in a personal conversation that Pink Sheet companies were often associated with fraud, the Plaintiffs would have been wary about investing in Magellan.

[40]On December 6, 2005, at a meeting where De Freitas met Shtaif for the first time, Boock was introduced to De Freitas as "John Howard." De Freitas, who also lived in Toronto at the time, had known Boock for many years and knew that Howard's real name was Irwin Boock. De Freitas admitted in cross examination that he suspected at the time that Boock was calling himself Howard to keep quiet his past infractions with the United States Securities and

[41]On the same day, Shtaif emailed Ex. 304/Tab 30 to Groag:

I am currently in Toronto finalizing discussions with Canadian investors. Things are progressing well and I should have an operational account open shortly. Today I am meeting with all the representatives of the public entity, corporate lawyer, principals, market makers, off-shore advisors, auditors, representatives of financial institutions, etc. They have committed to fully participate... Has David contacted you? I'm getting frustrated with his silence... If David cannot deliver, the Canadians offered to finance everything themselves, but I did not agree.

[Emphasis added.]

[42]I reject Shtaif's evidence that the Canadians to whom he was referring in Ex. 304 included Shnaider. On December 6, 2005, Shtaif met with Howard and De Freitas, the representatives of the public entity [BDW]. I find that "the Canadians who offered to finance everything" were Howard and De Freitas, not Shnaider. [Shtaif knew he could not "finalize" discussions with Midland until he had met with Shyfrin and Shnaider together. That did not happen until December 11 and December 13, 2005.]

[43]On December 8, 2005, Howard forwarded a draft BDW/Magellan Letter of Intent. Paragraph 5 provided that BDW would pay Magellan $8 million on closing.

[44]Bokserman had known Shnaider since Shnaider was a teenager. They had become close friends in 2000 or 2001 Shnaider 13 had flown Bokserman to Moscow several times on his private jet, and had taken him as his guest to the Formula One Grand Prix in Istanbul. Shnaider had made some relatively small investments based on Bokserman's investment advice. Shnaider 16, 30; Bokserman 5760-5762.

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[45]Shnaider gave evidence that Bokserman told him that Shtaif, a Canadian accountant, formerly a Vice President of Operations for BP-TNK, was proposing to set up an oiI and gas

undervalued oil and gas properties. Shtaif told Shnaider 16 he was looking to raise a minimum of $120 million and that he had already spoken to a number of potential investors. He referred to one in particular: BDW, a sophisticated Bay Street investor that had already committed to fund US$70 million.

[46]Shnaider said 16-20, 30, 518-519 Bokserman confirmed everything that Shtaif had said. The fact that BDW was committed to investing US$70 million in Magellan demonstrated that someone else believed in Shtaif. He felt BDW's involvement would help ensure a successful IPO. Bokserman denied 5694 confirming that BDW was a sophisticated Bay Street investor. I accept Shnaider's evidence that Bokserman confirmed everything Shtaif had said.

[47]Shtaif gave evidence that at their first meeting, he and Shnaider had a "serious" discussion that lasted about two hours. Shnaider told him Midland was interested in getting into the oil and gas business. Within about half an hour, Shnaider had offered to invest $200 million, take an 80% interest and give Shtaif and his team a 20% carried interest. Shtaif said he told Shnaider he did not want another stakeholder to control his company. They negotiated back and forth, stopping at a $50 million investment by Midland.

[48]Shnaider denied offering to invest $200 million. He said 18-19 Midland was never prepared to invest more than $50 million in Magellan. Before he could commit Midland to invest even $50 million, he needed the approval of the other Midland shareholder, Shyfrin.

[49]On Sunday, December 11, 2005 in Moscow, Shtaif met with Shnaider and Shyfrin for the first time. Shyfrin gave evidence January 29, 2013, p. 12-13 that on December 11, Shtaif

Shnaider and Shyfrin they must invest quickly. A number of others, including Tamares and Rothschild Bank, were lined up to invest. (Shyfrin, January 29, 2013, pp. 12-14; Shnaider 503-504; Shtaif. 3168-3169). Shyfrin said he knew the owner of Tamares, Poju Zabludowicz, was a very wealthy man (Shyfrin 164). He said Shtaif's references lent legitimacy to his claims.

[50]On Monday, December 12, 2005, Shtaif emailed Ex. 306/Tab 32 to Bokserman, advising he had met with Shnaider and Shyfrin in Moscow the day before, and was going to meet again with them on (Tuesday) December 13, 2005.

[51]Shyfrin said Jan. 29, 2013 p. 158 Shtaif told them he knew of a number of oil fields that his company could purchase at less than market value. After they were consolidated and his company taken public, the profits would be enormous. Shyfrin was reluctant to invest in Magellan because he did not want to be distracted from Midland's core businesses. However, he went along with Shnaider (Shyfrin January 29, 13-14; Shnaider 18-20.)

[52]Both Shnaider and Shyfrin were of the view that $50 million was insufficient to fund the proposed venture or to create even a medium sized oil company (Shyfrin Jan. 29, 2013 at 166-167). Without BDW's $70 million, a $50 million investment by Midland would not have made sense. Both Shyfrin and Shnaider gave evidence that if there had been no other

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committed investor, they would not have agreed to proceed Shyfrin Jan. 29, 2013 at 17; Shnaider 26-27. With a total investment of $120 million, Magellan would be better able to raise additional funds from commercial banks and leverage equity to buy additional assets.

[53]Shtaif told Shyfrin and Shnaider that BDW was transferring $8 million to Magellan. Shtaif gave evidence that although Shnaider and Shyfrin tried to "squeeze him" for 40% of the equity in Magellan, Midland was to receive only 32% of the Magellan shares.

[54]Shnaider gave evidence 21, 33-34 the Plaintiffs proposed that Shtaif and his team would receive 20% of the Magellan shares, BDW about 40%, Midland about 40% [inclusive of options]; Midland would buy 25 million shares in Magellan at $2 per share. They agreed Shtaif would transfer 7 million options to Shnaider and Shyfrin, leaving Shnaider and Shyfrin with approximately 40% of Magellan. They also agreed that Magellan would own the operating company.

[55]Magellan Engagement Letter. On December 19, 2005, Shnaider emailed Ex.

307/Tab 34 to Shtaif asking for an update. In response, on December 20, Shtaif circulated Ex. 4/Tab 36, an "engagement letter" on Magellan letterhead, mentioning that Shtaif had set up Magellan on the over-the-counter exchange, BDW had already transferred $8 million to Magellan and would be investing $70 million; and that the operating company, Euro Gas, would be transferred to Magellan to "protect the interest of all the shareholders. "

[56]At trial, Shtaif agreed the statement in Ex. 4 that the $8 million had already been transferred to Magellan was "incorrect." Shtaif acknowledged 4406-4407 that before he circulated Ex. 4, he had not received confirmation from Howard that the $8 million transfer had been made.

[57]I accept Shnaider's evidence 26 that in considering whether to commit Midland to invest in Magellan, he relied on the representation in Ex. 4 that BDW had already transferred $8 million to Magellan, and had committed to invest a further $70 million in Magellan, that Magellan was a public company and that the operating company, Euro Gas, would be transferred to Magellan to protect the interest of all the shareholders. I accept Shnaider's evidence that Shtaif's promise to transfer Euro Gas to Magellan was a matter of priority for the Plaintiffs.

[58]In late December 2005, Shnaider asked Mr. Avi Greenspoon ("Greenspoon") a lawyer at the Goodman's firm in Toronto, to coordinate the Plaintiffs' proposed subscription agreement re Magellan. Ex. 280/Tab 37 is a Greenspoon email dated December 23, 2005.

[59]On December 27, 2005 Watson emailed Ex. 453/Tab 38 addressed "To Whom it May Concern" to Shtaif, advising that BDW was prepared to transfer the "first portion" of its funding to Magellan totalling $2 million; Shtaif agreed 4428 he understood from it that BDW had not transferred any money to Magellan as of December 27, 2005. Shtaif agreed 4428 that [contrary to his representation in Ex. 4], he certainly knew by December 27, 2005 and before January 4, 2006 [when the Plaintiffs made a firm decision to invest in Magellan] that BDW had not transferred $8 million to Magellan.

[60]Shnaider gave evidence 37 that Shtaif never advised him or Shyfrin that BDW had not transferred $8 million to Magellan.

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January 2006

[61]On January 4, 2006, Shnaider emailed Ex. 5/Tab 41 to Shtaif, confirming that Midland would invest $50 million in Magellan provided it received 40% of the Magellan shares and $120 million in total had been raised. Shtaif gave evidence 3174, 4438 that Ex. 5 was inconsistent with his understanding of what had been agreed – Midland was not to receive 40% of the shares. There was no condition that $120 million would be raised.

[62]As of January 6, 2006, Shtaif clearly knew that Magellan had no Canadian bank account and that BDW had still not transferred any funds to Magellan – no $8 million as represented in Ex. 4, and no $2 million as promised in Ex. 453.

[63]On January 9, 2006, before the Magellan Board met for the first time on January 20, 8 million Magellan shares had been transferred to Howard and 12 million Magellan shares had been transferred to Shtaif.

[64]Ex. 310/Tab 42 is an email from Shtaif 3186 to Groag dated January 11, 2006 enclosing a presentation for Magellan. Shtaif 4448 wrote: "It needs revisions and obviously has mistakes … I cannot devote too much time in preparation of a 'perfect' presentation..."

[65]The Magellan Board is Appointed. Shtaif said he and Groag decided around January 2006 to limit Magellan's investors to BDW and Midland, and its Board to Shtaif, Groag and two appointees to be made by each of BDW and Midland. [BDW appointed Roberts and De Freitas; Midland appointed Shnaider and Shyfrin. ]

[66]BDW Appointments to Magellan Board: Roberts. Roberts said in January 2006 Howard called to ask him to become a director of Magellan and offered him US$80,000 a year and 2 million restricted Magellan shares to do so. Roberts said 6059 in 2005 he had purchased IPICO, a South African high-tech company and at the time of Howard's call was in the process of taking it public on the TSX Venture Exchange. He said he agreed only to attend Board meetings until after IPICO had been taken public.

[67]Roberts said he thought David Watson and his wife were the owners of BDW and that Watson was BDW's president and CEO. He understood that Howard was a successful stock promoter. He lived extremely well. He had been to his home once and had stayed at his villa in St. Maarten.

[68]Roberts conceded 7326 he knew Boock's birth name was Irwin Krakowsky, he had

been convicted of fraud in relation to a mortgage on his own parents' home [Ex. 672/Tab 780 is Lexis printout of R. v. Krakowsky]. While incarcerated he had met and married Birte Boock and taken her name. He had been released from prison in 1997.

[69]Roberts, a lawyer, had represented Boock in the past but said he had never done any corporate or securities work for him or represented him on any criminal, corporate or securities matter [except as a trustee or escrow agent.] He had done civil litigation for him. Before this litigation started, Roberts said he was not aware of any of Boock's other criminal or OSC charges.

[70]By January 12, 2006, out of his 8 million Magellan shares, Boock had allocated 2 million to Roberts; Ex. 565/Tab 43 is the share certificate.

[71]BDW Appointments to Magellan Board: De Freitas. Boock asked De Freitas, a provider of offshore services based in St. Vincent and the Grenadines, to become the other BDW nominee on the Board of Magellan. De Freitas said he received 1.5 million shares from

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Howard. Other records reflect and I find that out of Boock's 8 million Magellan shares, he allocated 3 million to De Freitas.

[72]Magellan January Stock Price Increases. On January 12, 2006, Howard emailed Ex. 311/Tab 44 to Shtaif: "… The stock should start moving up so you should start thinking about raising money with this stock at $5 plus … "[Emphasis added.] Shtaif gave evidence that at that time, he had "no idea what Howard was saying. On January 19, 2006, Shtaif emailed Ex. 312/Tab 47 to Howard: "As per our discussion, you can issue the shares [in] … BDW to my company …"

[73]First Magellan Board Meeting. On January 20, 2006, Shtaif, Groag, Shyfrin and Shnaider attended Magellan's first Board meeting in Moscow. Roberts and De Freitas did not attend. The minutes of the January 20, 2006 meeting are Ex. 6/Tab 49.

[74]Appointment of Officers and Directors. Shnaider gave evidence 33-34 that the Board appointed Groag Chairman and non-executive director; Shtaif CEO and Executive Director; Shnaider and Shyfrin non-executive directors.

[75]Shareholdings. The Magellan shareholding was discussed. The minutes reflect that the Board approved issuance of 25,454,545 shares to BDW, 25 million to Midland, 18 million to Shtaif, 8 million to Howard for a total of 76,454,545 [with options, a total of about 94 million].

[76]Shtaif insisted that the Board grant him broad authority to negotiate and consummate acquisitions of oil and gas properties in Russia

[77]Euro Gas. Further to the promise that Euro Gas would be transferred to Magellan in order that the company operating Magellan could be made accountable (to "protect the interest of all shareholders"), the Magellan Board approved either Magellan's immediate unconditional purchase of Euro Gas BVI or the unconditional surrender of Euro Gas' shares to Magellan.

[78]Disclosures and Alleged Non-Disclosures at the First Magellan Board Meeting. Shnaider 36-37 and Shyfrin 19 gave evidence that Shtaif did not disclose before or at the January 20, 2006 meeting that he held 12 million shares of BDW, or that Howard had asked him to become its president.

[79]Shtaif said 3195 they did discuss his shareholding and options in BDW at the meeting. Shnaider did not care about them. At any rate, he thought his shareholding in BDW was "irrelevant." At that time, BDW shares were trading at less than a cent a share. 4669, 4470.

[80]I reject Shtaif's evidence that he disclosed that he owned 12 million shares in BDW. The January 20, 2006 minutes reflect no such discussion. Mention was made in the minutes of 8 million shares to be issued to Howard. No mention was made that of those 8 million shares, Howard had already received 3 million, Roberts 2 million and De Freitas 3 million.

[81]There is nothing in the January 20, 2006 Magellan minutes recording that BDW had failed to pay the $8 million. I accept Shnaider's evidence 37 that at the January 20, 2006 meeting, Shtaif did not disclose that BDW had not in fact transferred the $8 million that he had earlier represented had been paid to Magellan. I reject Shtaif's evidence on that point 4471-4472.

[82]On January 24, 2006, Shtaif emailed Ex. 7/Tab 51 to Shnaider including the following: "As agreed 25 million shares … options I will issue to you once I receive them,

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since they are in my name. As agreed, 7 million options at $.20 for consideration of one dollar US." Ex. 7 corroborates Shnaider's evidence that Shtaif promised to transfer 7 million options in Magellan to Midland, leaving it with roughly 40% of the Magellan shares.

[83]Free Trading Shares/Manipulation of Magellan Stock Price. On January 28, 2006, Howard emailed Ex. 455/Tab 52 to Shtaif, setting out his strategy. He suggested 4 million Magellan free trading shares should be created. He emphasized that Shtaif should not discuss his proposal with any Board member but De Freitas:

I think there should be a series of PRs as it helps meld things from a psychological perspective in the market. There should be four, (1) your appointment [as CEO of Magellan], (2) Tony, (3) the agreement with BDW and appointment of Stanton and Greg, (4) agreement with and appointment of Alex. This will move the stock to at least an eight dollar bid… Second we should complete a 504D offering and create 4 million free trading shares . … I have the two names you sent me. I think we split it up 1 million apiece including Alik who will be putting it under my auspices so that the market moves orderly…. I think this should only be discussed between us, not even off the record with

directors. Stanton will be part but will not discuss it unless we say it is okay . [Emphasis added.]

[84]Shtaif conceded in cross-examination that he knew that Howard was proposing to create 4 million free trading shares.

[85]Based on the content of Ex. 455, I find that on January 28, 2006, Shtaif was aware that Howard was intending to take steps to increase the Magellan stock price to eight dollars. He knew the agreement with Midland would help to move up the stock. He was also proposing that 4 million free trading shares be issued and that information about them be withheld from the Magellan directors other than De Freitas.

[86]Shtaif gave evidence he did not agree with Howard's proposal to issue 4 million shares without the approval of the Magellan Board. Ex. 456/Tab 52 contains a set of emails sent on Sunday, January 29, 2006. Shtaif emailed Howard: "With regards to issuing 4 million shares … We need a unanimous board approval … What is your proposal for the public float? Who will receive the shares?? … Tony has clearly stated that we will not dilute the company anymore unless the board approves new issue … [Emphasis added.]" Howard replied the same day: "I had the old Board put into place what is known as a 504D… Just need the lawyer to send it in and we can create free trading certificates. Who gets them? Just us..." [Emphasis added.]

[87]On the same day Howard emailed Ex. 457/Tab 52 to Shtaif: "… send me a copy of your signature with your name typed underneath and I will make sure that new certificates are ordered." Shtaif responded: "As discussed please find attached signature page to issue shares certificate.

[88]I find that as early as January 29, 2006, after Howard advised him that only he and Howard would benefit from the 4 million shares and that no approval of the current Board would be needed, Shtaif agreed to the issuance of the 4 million Magellan free trading shares. On January 29, 2006, Shtaif sent Howard a signed signature page so the 4 million shares could be issued. He did not intend to discuss or share the benefits of the 4 million shares with Groag and Roberts.

[89]On January 30, 2006 at 9:26, Shtaif emailed Howard, Ex. 457/Tab 52: "… I just wanted to clarify issue of 4 million shares. Are these shares issued to us, and are we selling them to the public?" [Emphasis added.] Howard responded:

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Hi Michael, The shares are issued under what is called the Texas 504D to four Texas corporations and then transferred accordingly. … the decision to sell and how many … is … a call that we make, dependent on market conditions … We do not want the stock to jump to $100 overnight because the Securities and Exchange Commission would suspend trading … because the move was too high too fast.

[Emphasis added.]

[90]Shtaif told this Court that he had no knowledge of the 4 million free trading share issuance until after he retained Nusbaum in May of 2006 and Beach confirmed that Magellan was a sham.

[91]On January 30, 10:01 a.m. Watson emailed Shtaif: "We got the shares."

[92]I reject Shtaif's evidence that he did not know 4 million free trading shares had been issued. I find that by January 30, 2006, Shtaif knew they could not sell too many of them at any one time or the SEC would suspend trading, and that the shares should not be discussed with Groag or Roberts. He offered 1.4 million of them to Shnaider to induce Midland to invest.

[93]Midland Subscription Agreement. On or around January 31, 2006, Midland signed Ex. 8/Tab 54, a subscription agreement promising to pay Magellan $50 million for 25 million shares. The January 31, 2006 Midland/Magellan subscription agreement did not contain a provision making it conditional on BDW paying $70 million to Magellan. However, Midland did not remit $50 million or any payment with Ex. 8. Shnaider said he had made it clear in Ex. 5 that Midland would only invest in Magellan if $120 million in total would be raised.

February 2006

[94]Purchase/Sale of Free Trading Shares. By February 2006, Shtaif was actively seeking buyers of the 4 million illegally issued free trading shares. In February 2006, Shtaif introduced his friend and business partner Vlad Voskoboinikov ("Voskoboinikov") to De Freitas. De Freitas admitted he facilitated the private sale of Magellan free trading shares through his online brokerage Aberdeen Online. Voskoboinikov filled out the forms necessary to open a trading account with Aberdeen and to purchase 50,000 Magellan shares at $5 per share. On these forms the name of the seller was left blank.

[95]Both Shnaider 46 and Shyfrin Jan. 29, 2013 at 20 gave evidence that in February [and March] 2006, Midland was continuing to withhold payment of its $50 million, waiting until BDW had paid its $70 million to Magellan.

[96]SibinTek First Contact. In February 2006, Shtaif said he met Irina Bekker (Bekker) to discuss an oil field in Tyumen owned by a closed Russian joint stock company called SibinTek. Shtaif thought it was underdeveloped and undervalued.

[97]The Second Magellan Board meeting. February 19, 2006 was the day of the Second Magellan Board Meeting in Moscow. Ex. 9/Tab 58 is the Minutes of that meeting.

[98]Shnaider, Shyfrin, Shtaif, Groag, Roberts and De Freitas were present. Roberts met Shtaif, Groag, Shnaider and Shyfrin for the first time. De Freitas had already met Shtaif and Roberts, but was meeting Shnaider and Shyfrin for the first time.

[99]Roberts gave evidence that at the beginning of the meeting, after some introductory comments, Shnaider asked him how he knew Howard and De Freitas. He responded 6106 he had known them in his law practice. Shtaif said that Roberts did disclose he was a retired lawyer and that he had earlier acted for Howard and De Freitas. Ex. 9 does not reflect such a

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disclosure. Roberts submitted 7364 he did not need to disclose that information because it was not material. He believed that Howard was the promoter, not the owner, of Magellan.

[100]Alleged Non-Disclosure of Howard's Identity at February 19 Meeting. Shnaider said 49-50 Roberts did not disclose that he had previously acted for Howard/Boock, that Howard's real name was Boock or Krakowsky or that he had been convicted of fraud. Had Roberts disclosed this information, Shnaider said 53 he would have realized that this was a "pump and dump" scheme, and would have declined to further participate in Magellan.

[101]Shyfrin gave evidence 21-22 that Roberts did not advise the Board that Howard was an alias for Irwin Boock or that he had been convicted of fraud. Had they known, they "would have stopped this business immediately. "

[102]Shtaif gave evidence 4480-4486 that Roberts did not disclose that Howard's real name was Boock or details about his past. That would have been important information for the CEO and directors of Magellan to have known. He said had he known, he would not have continued to deal with Howard.

[103]Shnaider gave evidence 51 that Roberts did not disclose to the Board that before the Board meeting, he had already received 2 million shares from Howard: Ex. 565/Tab 43.

[104]I have accepted Shnaider's and Shyfrin's evidence that Roberts did not disclose he had acted as a lawyer for Howard and De Freitas in the past.

[105]I find neither Roberts nor De Freitas disclosed Howard's true identity to the Magellan

Board.

[106]Payments to Magellan/Re $8 million Non-Payment. At the February 19 Board meeting, Shtaif did not disclose to the other members of the Board that the $8 million he had earlier represented that BDW had already transferred to Magellan, had not been paid. Shtaif gave evidence that by the February 19, 2006 Board meeting, neither Midland nor BDW had made any payments to Magellan.

[107]Acquisitions. De Freitas said Shtaif presented his business plan, including his planned acquisitions. The Magellan Board authorized the purchase of the SibinTek and Reef oil fields through two subsidiaries, Trovalion and Koaploma.

[108]Free Trading Shares. Shtaif first gave evidence that there was no discussion about free trading shares at the February 19, 2006 Board meeting. Later, he modified his earlier answers and said 6128 that De Freitas advised the Board that a previous Board of Magellan had authorized the issuance of 4 million free trading shares under the exemption from the registration requirements in Rule 504D of Regulation D of the Securities Act 1933 (US).

[109]I reject the evidence of Roberts about disclosure of his past dealings with Boock. Roberts attempted to rationalize his non-disclosure as being privileged. If Roberts believed the information could not be disclosed because it was privileged, given its materiality, he should not have agreed to join the Board. I find Roberts did not disclose other material information, including Howard's real name Boock or Boock's prior conviction for fraud.

[110]I accept Shtaif's, Shnaider's and Shyfrin's evidence that they would have considered Howard's alias and criminal past to be material to their decision to pursue the joint venture.

[111]Roberts and De Freitas did not disclose Howard had already transferred to them 2 million and 3 million Magellan shares respectively.

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[112]Roberts pleaded at paragraph 41 of his Statement of Defense and Counterclaim that "Canadian institutions would not invest in the equity of a U.S. company listed on the Pink Sheets," advice that he claimed to have given to the Magellan Board during the February Board meeting.

[113]On February 19, 2006, just after the First Board Meeting Roberts attended, he expressed some doubt about whether BDW would be able to obtain an equity line. He emailed Ex. 554/Tab 59 to Irwin Boock at [email protected]:

Love this deal... I do not know how close you are to obtaining an equity line. If you are in doubt, we could likely sell BDW's interest to Eduard for at least $3 per share right now, maybe as high as $12.

…We can hold onto our interest and let it run… [Emphasis added.]

[114]I find none of Roberts, Shtaif or De Freitas disclosed at the February 19, 2006 meeting that it would be necessary for BDW to raise the $70 million, let alone that they had any doubts about its ability to do so.

[115] Euro Gas. Shnaider gave evidence that despite Shtaif's promise to transfer Euro Gas to Magellan at the outset of the venture, he had failed to do so. Shtaif gave evidence 3198, 3254-3258 he had received an opinion from PWC or KPMG that the doctrine of mind and management would have applied had Euro Gas become a subsidiary of Magellan. Since Shtaif was the General Director of Euro Gas and the CEO of Magellan, Magellan would have been taxed in Russia.

[116]Shnaider said 48 that shortly after the February 19, 2006 meeting, the Board decided that Magellan Russia would be incorporated as Magellan's operating company.

[117]Magellan. On February 20, 2006, De Freitas opened a bank account for Magellan at TD Canada Trust in Toronto.

[118]On February 27, 2006, Groag emailed Ex. 323 to Howard, copied to Shtaif: "Only after all the subscription payments have been received in full by Magellan can the float be issued." After receiving Groag's email, Howard wrote Shtaif:

Michael, I thought we had an agreed upon procedure in place …. I'm very confused. We have

previously spoken, including when you were here, that we would proceed with the is suance of the 504D shares structured under previous management. Shares less those required for market maker would be sent to Stanton, and you and Alex would open the appropriate accounts ….

[119]As of February 27, 2006, I have found that Groag was unaware that Shtaif had already agreed to the issuance of 4 million free trading shares. When he received Groag's February 27 email, I find Howard was upset and complained to Shtaif. I find Howard's February 27, 2006 email to Shtaif accurately summarized Howard's agreement with Shtaif regarding the free trading shares. I reject Shtaif's evidence he thought Howard was referring to options [not free trading shares]. I find Shtaif understood that Howard was referring to the 4 million free trading shares he knew had already been issued. Shtaif knew that some of those shares were being sent to De Freitas' company, to be sold as Shtaif and Howard directed. Shtaif knew the proceeds were being allocated to himself and Howard. Shtaif's were to be forwarded to his personal account. Since Shtaif had promised Midland part of his own allocation, he also knew that De Freitas was opening an account to receive those proceeds. Shnaider gave evidence that he was not aware there was anything illegal about the additional 1.4 million shares Shtaif had promised to allocate to Midland.

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[120]BDW Subscription Agreement. After promising to do so for months, on February 28, 2006, Watson finally emailed Ex. 324/Tab 61 to Shtaif, enclosing BDW's Subscription Agreement for $70 million of the Magellan shares. [Watson's signature was in electronic form.] Immediately after Magellan received Ex. 324, Groag wrote Howard asking him to provide a schedule of dates on which Magellan could expect to receive BDW's subscription payments.

March 2006

[121]Roberts gave evidence 7373 that from February 19, 2006 until April 28, 2006, he was not involved in the business of Magellan because he was "really busy as the CEO of IPICO, a pretty hot technology company." He said he was not copied on any emails. He estimated his total time spent on Magellan matters up until April 28 was about 10 hours. Although he knew that BDW had agreed to invest $70 million in Magellan, he said he did not stay in touch with Boock about his fundraising efforts.

[122]IPICO went public the first week of March 2006.

[123]On March 2, 2006, De Freitas wrote Ex. 12/Tab 62 to Shnaider:

Since our meeting and subsequent telephone conversation we have found a St. Vincent and the Grenadines (SVG) International Business Company named TH Capital Corporation that is available and ready for use immediately. In addition we have reserved the IBC name JK Fog herty Investment Corporation that will be registered and utilized for separate business activities.

[124]De Freitas gave evidence 5969 his initial transaction with Shnaider had "nothing to do with Magellan," although the two company accounts might eventually have held Magellan shares. However, he did not recall any transfers/deposits of Magellan shares into those companies/accounts.

[125]BDW Payment Schedule. On March 5, 2006, Howard emailed Ex. 325/Tab 63 to Groag, enclosing BDW's proposed payment schedule: $10 million by March 31, $30 million by April 30, $30 million by the end of May.

[126]Neither Groag nor Shtaif copied Shyfrin and Shnaider with Groag's request for a BDW payment schedule, or with Howard's March 5, 2006 response. Shtaif said Groag shared that payment schedule with Shyfrin and Shnaider. Shtaif said on discovery he was "doubtful" that BDW would meet the payment schedule. However, he did not advise the Plaintiffs at any time before May 16, 2006 about the schedule or his doubts. I accept Shnaider's evidence that he was unaware that BDW would be paying its $70 million subscription in tranches.

[127]Shtaif's Insistence on Unhampered Management of Magellan. Shyfrin and Shnaider gave evidence that Shtaif viewed any assistance from Midland as unnecessary interference.

[128]On March 16, 2006 Groag emailed Shyfrin:

…At our last board meeting we empowered Shtaif to purchase six targets and we must let him carry this out on our behalf unencumbered…. Eduard [we] must have your assurance that Shtaif can … carry out the orders of the Board and commit to purchase the first three acquisitions without any further delays . … [Emphasis added.]

[129]Ex. 330/Tab 67 is a letter from Watson to Shtaif dated March 28, 2006, purporting to offer $2.75 per share for the Magellan shares for which Midland had subscribed. Midland had agreed to pay $2 per share, but as of late March 2006, had still not paid any of its $50 million

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to Magellan. Shnaider gave evidence that he and Shyfin had continued to make it clear to Shtaif they would only pay Midland's $50 million when BDW had paid its $70 million.

[130]On March 31, Shtaif emailed Ex. 331/Tab 70 to Howard: "I am going to hammer Eduard to deposit full amount …" [Emphasis added.]

[131]Howard emailed Ex. 331/Tab 70 to Shtaif: "Funds should hit yesterday or worse today from ILGY." [By March 31, 2006, BDW's name had been changed to International/ILGY.]

[132]On March 31, 2006, Groag emailed Ex. 10/Tab 71 to Shnaider and Shyfrin:

It falls to me to remind you that unless these funds are credited to [the] Magellan TD bank account as of close of business today, I will have no alternative but to call an extraordinary meeting of the Magellan Board for Monday, April 3, 2006 … given the sharp increase in the share price over the last few days … Magellan has received a written offer for shares at a price higher than the Midland subscription price.

[Emphasis added.]

[133]Shnaider gave evidence 56, 58 he had not seen the "written offer for shares at a price higher than the Midland subscription price." Shyfrin gave evidence January 29, 2013 at 23-24 he spoke to Groag by telephone and asked for the name of the offeror at a higher price. Groag refused to provide the name, saying it was a "commercial secret." Shtaif gave evidence 3272 that he showed Shyfrin the BDW offer, Ex. 330. They had a long discussion about it.

[134]Later that day, Groag emailed Ex. 10/Tab 71 to Shnaider to advise that BDW had met its obligation to fund by March 31, 2006. I have inferred that Shtaif asked Groag to send that email.

[135]Shtaif conceded 4614 that Groag's representation to Shnaider and Shyfrin in Ex. 10 that BDW had met its obligation to fund was "inaccurate." He blamed Groag, saying 3277 Groag had told him on March 31 that he had spoken to Howard and De Freitas who both had confirmed that funds had been deposited. De Freitas gave evidence 6001-6002 that he did not recall having had such a conversation with Groag. Groag later wrote on April 6 Ex. 337/Tab 86 that when he made the statement that BDW had met its obligation to fund, he had been relying on what Shtaif had told him.

[136]Ex. 332/Tab 72 is an email from Shtaif to Watson dated March 31, 2006: "Just wanted to get confirmation that the funds were transferred and what amount. " Shtaif said that on March 31 he also left a message for Mr. D'Alessandro, Manager at the TD Bank, seeking information on amounts the Bank had received. D'Alessandro had not responded.

[137]I accept Shnaider's and Shyfrin's evidence that BDW's commitment to subscribe $70 million, and Shtaif's and Groag's representation that as of March 31, BDW had met its obligation to fund, were crucial to their decision to advance $50 million on April 4, 2006.

[138]I reject Shtaif's evidence that Groag told him he had spoken to both Howard and De Freitas and they had both advised him that the funds had been deposited. I find on March 31, when he represented that BDW had met its obligation to fund, Groag was relying [see Ex. 337] on information Shtaif had provided, and that Shtaif had told him that BDW had paid, without first confirming with De Freitas or the TD Bank that BDW had in fact met its obligation to fund.

[139]Shtaif knew that International was the offeror for shares at a price higher than the Midland subscription price. Shtaif "doubted" that BDW would be able to meet its own commitment to invest $70 million "let alone pay an additional $68.5 million."

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[140]I find Ex. 330, "Watson's" March 28 letter, was bogus, prepared to induce Midland to immediately pay its $50 million. Ex. 10/Tab 71 was sent for the same reason. Shtaif noted in Ex. 352/Tab 72, a letter to Howard, it had had the desired effect: "Tony's email expedited things somewhat." I find De Freitas caused "the sharp increase in the [Magellan] share price over the last few days" mentioned in Ex. 10 for the same reason.

shared plan and that Howard, Shtaif and De Freitas were all acting in concert to induce Midland to immediately pay its $50 million.

April 2006

[142]Roberts' April 1, 2006 Letter to the Plaintiffs. On April 1, 2006, Roberts emailed Ex. 673/Tab 783 Shyfrin, Shnaider, De Freitas and Groag:

… John has asked me to determine the interest of my group of investment bankers in financing Magellan in the sum of between $200 million and $300 million. I have canvassed 3 investment banks [GMP Securities Inc., MGI Securities Inc. and Wellington West] and all are interested… We will need to get our business plan to them for consideration .

[143]Roberts gave contradictory evidence about his involvement as a Magellan Board member prior to mid-May. On the one hand, as I have already mentioned, he said he did not even receive emails in February, March or April of 2006, and he had spent fewer than ten hours on Magellan issues. On the other hand, when he was commenting on Ex. 673, he gave evidence he had been doing his job and by April 1, the investment bankers were already "excited" about Magellan's prospects.

[144]Roberts wrote "John" had asked him to determine the interest of investment bankers. I

find Howard/Boock had asked him to send Ex. 673 to Shyfrin and Shnaider on April 1, 2006. I find in Ex. 673, Roberts made the statement that three investment banks were interested before he had formally approached any of them. I reach this conclusion in part based on his earlier evidence about his involvement in Magellan before April, and subsequent correspondence in May 2006 with the investment bankers.

[145]SibinTek. Shtaif gave evidence he discussed the purchase of the SibinTek oil field with White & Case, the Russian international law firm that handled the transaction, for the first time around the end of March or the beginning of April 2006.

April 4, 2006: Midland Wires $50 million to Magellan

[146]On April 4, 2006, Midland wired $50 million to Magellan. Shnaider 62; Shyfrin, January 29, 2013 at 25.

[147]I accept Shnaider's evidence 61 that had they known BDW had not made any

payments, he and Shyfrin would not have ordered the transfer of Midland's funds when they did. I accept Shnaider's evidence that he initially understood "BDW has met its obligations to fund" to mean that BDW had paid the whole $70 million. When later he was told it had paid only $10 million he was unhappy, but he thought that by making a $10 million payment, BDW had shown its commitment to Magellan.

[148]On April 4, 2006, Shtaif emailed Ex. 333/Tab 80 to De Freitas and Watson inquiring if the funds from International and Midland had been credited to Magellan's account. The TD

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bank manager D'Alessandro emailed Shtaif directly: "We have received an incoming wire in the amount of $50 million."

[149]I find that on April 4, 2006 when he received D'Allessandro's message, Shtaif knew that BDW had not paid any of its subscription to Magellan. He knew that four days earlier, he had told Groag and Groag had told Shnaider and Shyfrin that BDW had met its funding commitment. Shtaif said 4625 he did advise Shnaider and Shyfrin.

[150]In his capacity as President and Chief Executive Officer, Shtaif had insisted on being given and had been given unlimited access to the US$50 million in the Magellan bank account. I find Shtaif did not advise Shyfrin or Shnaider on April 4 or April 5, 2006 that BDW had not paid anything. Had he done so, the Plaintiffs would have been unhappy they had been falsely induced to pay Midland's $50 million and at the very least, just as they later did, would have insisted on limiting Shtaif's discretion, including tighter financial controls over the disbursement of Magellan's funds.

[151]I have found that as early as January, De Freitas had been artificially manipulating the Magellan share price.

[152]On April 4, 2006, Shtaif emailed Ex. 333/Tab 80 to De Freitas: "… I hear you are having fun at the sea … since you have gone, the market slowed to a standstill. So it is time to stop having fun and come back to reality …"

[153]Shtaif Gains Access to the $50 Million in Magellan's TD Bank Account. On April 4, 2006, Shtaif emailed De Freitas: "I need … details on how to access account electronically."

[154]Free Trading Shares. On April 4, 2006, Shnaider emailed Ex. 13/Tab 77 to De

Freitas: "I just want to verify that 1.4 million shares of Magellan have been deposited in the account that you have set up. Have some of the shares been sold? I ask because I spoke to Mike … and he told me that those shares have been distributed and some have been sold. Can you please keep me up to date?" De Freitas responded: "The process for getting the 1.4 million shares is underway and should be in the account by next week for sure. The delay is the transfer agent of the company. No shares have been sold to date."

[155]Euro Gas. On January 30, 2006 in connection with Magellan, Shtaif had emailed Ex. 457/Tab 52 to Howard, as follows: "I will need original documents or notarized copies … so I can start registering the company to conduct business in Russia. Russian authorities are very strict. Fax[ed] notarized copies are not accepted." [Emphasis added.] Yet on April 4, 2006, knowing Marechal would need originals or notarized copies to incorporate Magellan Russia, the company that was to replace Euro Gas as the operating company for Magellan, Shtaif sent photocopies.

[156]I find Shtaif knew that sending photocopies would delay the incorporation of Magellan Russia, and in turn delay the transfer of management functions from Euro Gas to Magellan Russia.

April 5-30, 2006

[157]BDW Promises of Payment. On April 5, 2006, Shnaider emailed Shtaif seeking confirmation that Midland's funds had been deposited into Magellan's bank account. Shtaif responded to Shnaider Ex. 11/Tab 80: "I just wanted to inform you that the funds have arrived at the bank. We currently have over $60 million in the bank..." Shtaif admitted 4637-4638

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that statement was "inaccurate." He knew Shnaider would understand from Ex. 11 that BDW had paid $10 million [in addition to Midland's $50 million wired April 4, 2006].

[158]Shtaif said 4610 he did not receive Ex. 334/Tab 81 until De Freitas forwarded it to him on April 5, 2006. By April 5 at the latest, both De Freitas and Shtaif knew the only money in Magellan's account had come from Midland. De Freitas 6002-6003.

[159]After receipt of Midland's $50 million was confirmed, De Freitas emailed Shtaif and Boock/Watson: "We're in business!" Shtaif replied: "Good job. Thank you for the information. I will call you later on."

[160]Free Trading Shares. On April 5, Shnaider wrote Shtaif: "… I checked with Stanton and he told me that … no shares have been sold." [Emphasis added.] Shtaif replied: "… I was under the impression that it was already done. There have been sales of shares recently between $10 and $13 per share. … Meanwhile, we have requests for large blocks of shares to buy from authorized float re 4 mil." [Emphasis added.]

[161]Shtaif gave evidence 3303 that on April 7, 2006, he informed Shyfrin that BDW had not deposited $10,000,000 in the TD account and showed him a printout of Magellan's TD Bank account.

[162]I reject that evidence. Shtaif said at one point he could not access the Magellan account at all until April 8, 2006 and could not make printouts until after he had signed banking forms in Toronto on April 10, 2006. I accept Shyfrin's evidence that on April 7, 2006, Shtaif did not give him a printout of Magellan's account or inform him that BDW had not paid anything.

[163]Euro Gas. Ganus, a Midland lawyer in Russia, gave evidence that on April 7, 2006, he emailed Shtaif telling him what I have found Shtaif already knew: the documents Shtaif had forwarded for the incorporation of Magellan Russia were insufficient. He needed originals. Shtaif denied receiving Ganus' April 7 email.

[164]Access to Magellan TD Bank Account. Shtaif said that on April 8, De Freitas provided the password to access the Magellan account.

[165]BDW Non-Payment. On April 8, 2006, Shtaif emailed Ex. 338/Tab 88 to Howard: "There are no funds in the account from ILGY. When should I expect them? …"

[166]Shtaif's Access to Magellan Bank Account. Having travelled from Russia to Toronto, on April 10, 2006, Shtaif personally introduced himself to the TD Bank Manager, D'Allessandro, and signed banking cards to obtain full access to the Magellan account, including the ability to print account information thereafter.

[167]Shtaif gave evidence he "chased" Howard for payment of ILGY's subscription between April 13 and 28, 2006. On April 13, 2006, Shtaif emailed Ex. 339/Tab 89 to Howard: "… The initial funds are still not deposited by David…." Shtaif said on April 13 after he returned to Moscow from Toronto, he printed a bank statement, gave it to Shyfrin and told him there were still only $50 million in Magellan's account. I accept Shyfrin's evidence that Shtaif did not do so. I find that Shtaif did not want Shyfrin and Shnaider to know that Magellan had received nothing from BDW.

[168]Reef/Euro Gas. On April 13, 2006 Euro Gas and Yuri Samsanov and Asia Energy entered into a Letter of Intent with repect to the purchase of Reef Energy, a company that owned an oil field in Perm, Russia.

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[169]Shtaif Access To TD Account. On April 14, 2006, Shtaif emailed D'Allessandro: "… I need to have an active not a dormant account..."

[170]BDW Non payment. On April 15, Shtaif emailed Ex. 340/Tab 90 to De Freitas: "…. Eduard asked me at least 10 times if ILGY deposited funds. … I am very determined not to give them any ammunition to use against ILGY. Remember, I am a shareholder in ILGY as well, so I need to protect the company…" [Emphasis added.]

[171]Free Trading Shares. On April 17, 2006, Bokserman emailed Ex. 14A/Tab 93 to Shnaider: "Alex, did you give any thought to the offer I mentioned last Thursday to sell some Magellan shares at $6-$7?" Shnaider responded: "You have to ask Shtaif as I have no shares for sale right now." Later the same day, Shnaider wrote to Shtaif again, Ex. 14B: "What do you think? I am not in a hurry but I don't understand much in this."

[172]I reject Shtaif's evidence 4547 that when Shnaider asked him about the free trading shares, he replied, "What are you talking about? Nobody should have any shares."

[173]Shtaif Fundraising for BDW. Shtaif was not doing anything to raise funds for BDW. Roberts gave evidence that Howard had been complaining about that. Shtaif sent Howard Ex. 327/Tab 91 dated December 12, 2005, for distribution to investment bankers. In cross- examination, Shtaif agreed it was a stale document.

[174]Access to Magellan Bank Account. Ex. 550/Tab 94 is a fax De Freitas sent the TD Bank on April 18, 2006 at Shtaif's request, giving instructions to wire $1.5 million out of the Magellan account to Boddington Holdings/Bokserman.

[175]The earlier commission agreement, Ex. 484, between Euro Gas Consulting Inc. and BPL Corp. (Bokserman) entitling Bokserman to a 7% commission, had been restructured. Magellan had agreed to pay 3% commission and Shtaif had agreed to give Bokserman some of his Magellan shares to make up the difference between the 3% and the 7%. Shtaif 3152, 3329-3330; Bokserman 5707.

[176]SibinTek. There is an issue in this lawsuit as to whether Reagent, the purported owner of 40% of the SibinTek shares, had title to them and could sell them to Trovalion, then a subsidiary of Magellan. Shtaif gave evidence that around April 20, 2006, White & Case provided him with Ex. 371/Tab 95, a SibinTek transaction overview. He said he understood from it that White & Case had confirmed Reagent's ownership of 40% of the SibinTek shares.

[177]Shtaif referred to Ex. 372/Tab 581, an agreement allegedly between Magellan and Trovalion dated April 21, 2006 regarding the purchase of the Treasury Notes, as evidence that Trovalion approved their purchase. Counsel for the Plaintiffs contested the authenticity of Ex. 372.

[178]Shtaif gave evidence 3543 that White & Case prepared Ex. 372. He said 3540-3541 he had asked Vinogradov, a Midland in-house lawyer, to translate it from Russian to French because Marechal, the signing office for Trovalion, could not speak or read Russian. After Vinogradov translated it and forwarded it to Marechal for signature, Marechal signed it and returned it to the Midland offices. Shtaif said he received it about a week later. Vinogradov denied 1905-1914 translating and forwarding Ex. 372 to Marechal.

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[179]The authenticity of Ex. 372 is questionable at best. I have placed no weight on its contents. I find White & Case did not prepare Ex. 372. Ex. 372 does not contain a White & Case document footer [similar to those on Tabs 119 and 581]. Marechal was not a signing officer for Trovalion as of April 21, 2006. Had Ex. 372 been sent to Marechal for signature, Marechal, a lawyer, would have known he was not authorized to sign it and would have refused to do so. Shtaif produced what he said was the original of Ex. 372. It had not been folded. The envelope that had contained Ex. 372 had been folded.

[180]On April 22, 2006, White & Case delivered a list of due diligence needed to be done with respect to the SibinTek transaction.

[181]Reef. White & Case prepared a Share Purchase Agreement/Tab 99 for Reef dated April 24, 2006.

[182]On April 27, 2006, Shtaif emailed Ex. 343/Tab 101 to Howard: "I will call you as soon as I arrive in London tomorrow. Just for your information – funds did not arrive. I will check later on today. Please let me know what the status of payment is?"

[183]On Friday, April 28, 2006, Shtaif emailed Howard: "Hi John, I just checked the account and the funds did not arrive yet." Howard responded, blaming "the idiots at the bank" for non-payment. In Ex. 343/Tab 101 he wrote: "Watson will take care of it Monday."

[184]BDW Non-payment. Just before the third Magellan Board meeting scheduled for April 28, 2006, Groag wrote to Howard Ex. 337/Tab 86: "Shtaif has advised … that International's promised 10 million is in Magellan's TD account. Please see if International can expedite the balance… before the next Board meeting. " [Emphasis added.]

[185]I have drawn two conclusions from Ex. 337: (1) Groag did not know that Magellan had not received any funds from BDW/ILGY. (2) Shtaif was not being honest with Groag.

[186]It is clear that just before the Friday April 28 Board meeting commenced, Shtaif knew no funds had arrived from BDW/International. They would not arrive before the following Monday.

[187]Third Magellan Board Meeting in London. Ex. 15/Tab 102 includes the Minutes of the April 28, 2006 Board meeting. Shnaider, Shyfrin, Shtaif, Groag, Roberts and De Freitas attended.

[188]Roberts said 6126 Shyfrin asked De Freitas if ILGY had made a deposit into Magellan's bank account. De Freitas confirmed that International had just done so. Roberts said all of the directors believed De Freitas' representation. [De Freitas said he advised that funds were on the way. He did not mention a specific amount.]

[189]Shtaif gave evidence 5966 that Shyfrin and Shnaider came into the meeting and immediately were "yelling about the $10 million." They asked De Freitas whether or not the $10 million had been paid. De Freitas said it had just been transferred. Shtaif said: "It was sort of a light conversation with respect to … what steps will be undertaken for BDW to produce full $70 million into account by the end of May 2006."

[190]Having received Ex. 343/Tab 101, Howard's email, I find that on April 28, 2006, Shtaif knew that no money had been paid by International. When De Freitas represented that International's payment had just been made, Shtaif did not advise Shyfrin, Shnaider, Groag or Roberts that BDW had not paid anything. I find Shnaider and Shyfrin believed Magellan had received funds from BDW/International.

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[191]I find on April 28, 2006, De Freitas told the Board that BDW had paid. He did not mention a specific amount. Groag understood $10 million had been paid. Initially Shnaider understood $70 million had been paid. After the meeting, Roberts, Groag, Shtaif and De Freitas discussed the need for ILGY to pay the balance. Shtaif and De Freitas both knew ILGY had paid nothing. Groag did not know.

[192]Reef and SibinTek. Shtaif said the focus at the April 28 meeting was on the ongoing business of Magellan. He made a presentation and advised that the Board Agreements had been signed for Reef and SibinTek.

[193]Free Trading Shares. Roberts gave evidence 7514 that at the April 28 Board

issued and that Magellan's previous Board had approved the issuance of the 4 million shares. The current Board had agreed that the 4 million shares could be issued to create a free float but it had not passed a resolution to issue the 4 million shares.

[194]Groag's memo, Ex. 570/Tab 138, noted that nobody mentioned free trading shares at the April 28, 2006 Board meeting.

[195]I do not accept Roberts' evidence on the discussion about free trading shares at the April meeting. I accept Groag's version of events contained in Ex. 570, his May 20 email, mentioning there was no discussion of free trading shares at the April 28 Board meeting.

[196]I find Roberts did not mention Magellan's Pink Sheet status on April 28.

[197]Shtaif said 447 on April 28 Howard had arranged to meet with all the Board members at dinner that evening. However, neither Shyfrin nor Shnaider attended. John Howard and Mrs Howard had dinner with Shtaif, De Freitas, Groag, Greg Roberts and Mrs Roberts.

[198]Shtaif said Groag told Howard at dinner he was going to put him on notice that BDW must pay the full $70 million within 30 days pursuant to the Subscription Agreement.

[199]Roberts said 7415 at dinner, he and his wife sat with Mrs. Howard and talked about London. [Howard was at the other end of the table.] Roberts did not want to argue with Howard when his own wife was present. Later that night he telephoned Howard and told him ILGY's subscription would be terminated unless it paid the balance owing within 30 days. Howard told Roberts ILGY was still doing due diligence and was trying to float an issue on the Stockholm exchange. Roberts said he thought that was B.S.

[200]On April 29, 2006, Groag gave notice, Ex. 16/Tab 104, to International that in the event it had not transferred the final outstanding balance of US$60 million by June 2, 2006, the Board would hold a meeting to cancel any of International's shares that had not been paid in full. I have found that Shtaif knew that BDW had paid nothing as of April 28. Shtaif was present when Groag copied Shnaider, Shyfrin and the other Board members with Ex. 16, the April 29 notice to International. Roberts 6140-6141 prepared Ex. 16. Again, Shtaif was not being honest with Groag and was using him to give the impression that $10 million had been paid and he expected BDW to pay the full $70 million.

[201]Shtaif conceded that the notice incorrectly specified that the outstanding balance owed by BDW/International was $60 million. [Since BDW had paid nothing, the outstanding balance owing to Magellan as of April 24, 2006 was $70 million.]

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[202]I do not accept Shtaif's evidence 3344-3352, 4684 he was unable to check Magellan's bank balance on April 29, 2006 because he had no computer, smart phone or Internet access in London and the electronic key that De Freitas had brought him on April 28, 2006 did not work. Shtaif was with Groag on April 29, 2006 when Groag emailed Ex. 16 to International.

He could have accessed the Internet on April 29. I find he did not check the Magellan bank on the weekend because he already knew from Ex. 343 that no money had been paid.

[203]On April 30, 2006, Groag emailed Ex. 120/Tab 107 to De Freitas and Howard, copying Shnaider, Shyfrin, Shtaif and Roberts, in which he forwarded the following email he had received from De Freitas:

…I wish to advise the MEL Board that Stanton De Freitas and/or Gregory Roberts are independent directors appointed to the Board on the recommendation of John Howard, an individual responsible for introducing International Energy Ltd. (CEO David Watson) to MEL Management.

Both Stanton De Freitas and Greg Roberts are not directors, shareholders or management of International Energy and cannot speak to with any specificity the terms or conditions of the pending fulfilment of the subscription of International Energy to Magellan's shares.

May 2006

[204]Shtaif gave evidence 4672 he was pursuing the Magellan business plan, not helping BDW raise funds. He said he "could not take time to fly to Toronto to help BDW raise money." Shtaif gave evidence 3349 that Howard had asked him to give a presentation to investment bankers from Knight Securities ("Knight"), New York. He and Roberts did so in mid-May in Toronto. He said in cross-examination BDW asked to bring Knight to listen to Shtaif's presentation.

[205]Shtaif gave evidence he did not dedicate serious efforts to fundraising for BDW. [Had Shtaif believed International might be able to raise its $70 million subscription, he would have had good reason to assist it since he owned 6 million BDW free trading shares, 6 million BDW restricted shares and had 6 million BDW options. If Magellan and BDW were what he was representing them to be, Shtaif's interest in BDW would have been valuable.]

[206]I find in April and May of 2006, Shtaif's lack of effort to fundraise for International is one more indicator that he did not believe it would pay the $70 million to Magellan. Shtaif did not advise Midland about this.

[207]Free Trading Shares. On May 1, 2006, Shtaif emailed Ex. 314/Tab 108 to De

Freitas:

We have agreed to sell 50,000 shares at five dollars per share. Vlad [Voskoboinikov] is the general director of Euro Gas Russia and director of Euro Gas BVI…"

I sent information regarding Vlad. He is the person that I talked to you that is doing all the th ings for us. His signature is incredibly important to us. Without it, we cannot purchase properties. Hence, this is the reason for the volume and the price. John is fully aware and supportive of this decision. So go ahead and issue the shares for him….

[Emphasis added.]

[208]Shtaif gave evidence that he expected the proceeds from the sale of shares to Voskoboinikov to be paid to Magellan, but unfortunately, the money was never deposited to Magellan's bank account.

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[209]Free Trading Shares. On May 2, 2006, De Freitas sent documents to Voskoboinikov for the sale of 50,000 Magellan free trading shares at $5 per share, Ex. 504/Tab 714. On them, the name of the seller was left blank.

[210]On May 2, 2006, in response to the formal notice Magellan had given to International on April 29, Howard wrote Ex. 344/Tab 110 to Groag: "…I am perplexed as to why this email was sent and am also somewhat dismayed."

[211]Groag wrote Shtaif: "How do you want me to reply? John did not manage to meet with me last night even though we had arranged it. He said he and Greg had a theatre booking?" Shtaif's reply to Groag, Ex. 345/Tab 111, included the following: "… Just make him feel that there is no pressure and that there is no immediate danger that their shares would be sold to anyone else…"

[212] Euro Gas. On May 2, 2006, Shtaif emailed Ex. 346/Tab 112 to Howard:

I just remembered that you did not pass on to me original and Corporation documentation that was sent to you by the Secretary of State of Delaware. How can I get it? I need the originals to start incorporation of Magellan Russia. Can you have it for me when I arrive in Toronto, or can you courier it to me? I promised this Information to BNP but I have run out of excuses … [Emphasis added.]

[213]Despite his knowledge that original Magellan documents would be necessary for the incorporation of Magellan Russia, and Ganus' April 7 request, Shtaif did not ask Howard to forward original documents until May 2, 2006.

[214]Groag's Email to Howard re Magellan Board Meeting. On May 3 Groag wrote to Howard:

…On April 7, I wrote an email to John, and again on April 24, 2006, advising that I had expectations that Midland would ask at 28 April Board meeting if all subscriptions had been paid in full…

My expectations manifested themselves on 28 April when Midland asked this question very early on in the proceedings. I differed [deferred] answering until post Shtaif's presentation and as this went on far longer than expected, I was never obliged to answer.

However I was fully expecting that the question would be fired at me and at the close of the Board meeting, the directors other than Midland who had rushed off to another meeting, discussed over beer the need for ILGY to render the balance of their outstanding share subscription payments.

[Emphasis added.]

[215]Euro Gas. On May 5, 2006, three days after he had written Ex. 346 to Howard, Shtaif emailed Ex. 363/Tab 662 to Shnaider, blaming Midland's lawyers for the delays and complaining: "I still did not receive anything from Valentin Vinogradov incorporating Magellan Russia. It has been one and a half months and I'm starting to get concerned. It should not take this long. I asked him two weeks ago and he told me that he would get back to me, but so far nothing."

[216]After receiving Shtaif's complaint, Shnaider emailed Ex. 229 to Vinogradov on May

5: "You promised Michael Shtaif that you will incorporate Magellan Energy Russia, but he has not heard anything from you and we are all getting very concerned about it." Vinogradov responded to Shnaider: "

Yes, indeed, I promised to register. But I also requested the documents which we needed to incorporate the company. Last time I saw Michael I reminded him that we still needed … the

originals duly made and apostiled… The request for documents was set out on 7 April. So the

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company will be urgently incorporated upon receiving the requested documents …" [Emphasis added.]

[217]SibinTek. On May 6, 2006, Euro Gas signed Ex. 373/Tab 116, an MOU re the purchase of SibinTek.

[218]BDW Non Payment. On May 9, 2006, Shtaif emailed Ex. 348/Tab 585 to Howard, noting there had been no movement in the Magellan bank account. Shtaif did not copy Shnaider and Shyfrin.

[219]Euro Gas. On May 10, 2006, Ganus wrote Ex. 233/Tab 645 to Shtaif: "We will register the managing company as soon as we get … documents. There is one question left to be answered, who will be the director of the company? …" Shtaif replied: "... I am expecting originals to come from the Secretary of State of Delaware early this week…." Shtaif 3457- 3461. [We know on May 2, 2006 Shtaif had emailed Howard asking for original "that was sent to you by Secretary of State of Delaware" – yet he told Ganus he was waiting for originals from the Secretary of State of Delaware.]

[220]Although Ganus had requested Shtaif to provide original documents in early April, Shtaif waited until May 2, 2006 to request originals from Howard and advised Ganus he was waiting to receive them from Delaware. Having only asked Howard for them on May 2, 2006,

Euro Gas to Magellan Russia in April and May 2006 to keep control over the joint venture.

[221]BDW Non Payment/Relationship Shtaif/Howard. As of May 11, 2006, Shtaif knew International had still not paid anything on its $70 million subscription. However, on May 11, Shtaif emailed Ex. 350/Tab 587 to Howard: "If … Eduard will get confirmation that only they funded the account, he will have all the ammunition that he needs to call an extraordinary meeting of the Board … Then everything that we have worked for will be for nothing… We are on the same side." [Emphasis added]

[222]As noted earlier, Shtaif had almost total control over the funds in the Magellan bank account. De Freitas was co-signer of Magellan cheques. On May 11, 2006, Shtaif 4711 directed the TD Bank to transfer $1 million from Magellan's bank account to Euro Gas, Ex. 459/Tab 118. He emailed to D'Allessandro: "Please find attached wiring instructions to Euro Gas Consulting Inc. This transfer is associated with our initial payment for the acquisition of an oil and gas property in Russia."

[223]Shtaif gave evidence this May 11, 2006 transfer was to pay a commission to Novik on the sale of Reef. He did not proffer any commission agreement to support his statement. Although Shtaif also gave evidence 4714 that he had a specific document in his productions proving that Shnaider approved this transfer, he did not produce it.

as the Reef transaction did not close until July 13, 2006.

[225]In part based on Ex. 350 to Howard, where Shtaif noted that if Shyfrin learned only Midland had funded, "everything we have worked for will be for nothing, we are on the same side," and Ex. 340 to De Freitas: "Remember I am a shareholder of ILGY… so I need to

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protect the company," and because he feared the Plaintiffs would withdraw their $50 million if they knew. I have found Shtaif was scheming with Howard and De Freitas and deliberately withholding information from the Plaintiffs that BDW had not paid anything. Shtaif's primary target was Midland's $50 million. Shtaif knew that the Plaintiffs had relied on his false representations that BDW/International had invested $8 million in Magellan and would pay $70 million more, in deciding to invest and in paying their $50 million. He knew they were relying on his statement that there were $60 million in the Magellan account, i.e., BDW had already paid at least $10 million and was about to pay the balance. I infer Shtaif knew there was a real risk that had he revealed the truth, Midland would have pulled out of the venture based on his earlier false representations. Shtaif was not relying on BDW's $70 million commitment. Midland's $50 million was sufficient to cover the commitments he was making on behalf of Magellan.

[226]SibinTek. Shtaif gave evidence 3606 that on May 13, 2006, he signed a Share Purchase Agreement Ex. 180/Tab 119, whereby Trovalion, then a Magellan subsidiary, would acquire the shares of SibinTek.

[227]The purported sellers of the SibinTek shares were three companies (OAO SP Geros, Carimex Transport und Handels GMBH and Road Expo OHG) (collectively, "Geros ") represented by Bekker. Through a series of transactions, Trovalion was to acquire 100% of the SibinTek shares for a total purchase price of US$21 million, subject to adjustment. As part of the purchase transaction, Geros was to subscribe for 25% of the equity of Trovalion. The Share Purchase Agreement did not call for any deposit [see recitals, ss.3.1, 5.1-5.6 and Schedule 3]. Upon completion, Magellan would indirectly hold 75% of SibinTek; on closing, Trovalion would pay US$12 million by transferring Treasury Notes in that amount to it on behalf of Geros to OOO "Reagent-M" ("Reagent") [a company that purported to own 40% of the SibinTek Shares]. The purchase price was to be paid 5 business days after the conditions of closing in favour of the buyer had been satisfied or waived. One such condition was that Trovalion had completed all legal, financial, and other due diligence.

[228]Shyfrin gave evidence that Shtaif told him SibinTek was worth at least US$250

million.

May 15-17, 2006

[229]Meetings with Investment Bankers May 15-17, 2006. In anticipation of an eventual IPO or pre-IPO raise of funds for Magellan, Shtaif and Roberts attended meetings with investment bankers in Toronto on May 15, 16 and 17, 2006.

[230]Magellan provided Ex. 493/Tab 707 dated May 16, 2006 to the investment bankers. At page 4:

Magellan Energy Ltd. (MGGL.PK) intends to become a company specializing in the extraction and production of oil and gas …Oil and gas -related activities will include acquiring additional properties with potential for increased production in addition to further development and drilling. …

At page 8:

Magellan Energy Limited … is an American company … listed on NASDAQ OTC Bulletin Board and later intends to move to AMEX or AIM.

…

Magellan Energy has been set up under the stewardship of Michael Shtaif….

[Bold in original]

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At page 11:

39,73% of MGGL is held by individuals who are the founders: Michael Shtaif, Anthony Groag and Management team.

43,84% of MGGL is held by Midland Resources Holding Ltd the energy holding of a Russian/Canadian Magnate of Steel Alexander Shnaider and his partner Eduard Shifrin [sic]. 6,85% of MGGL are held by various independent directors of the company.

5,84% of MGGL are shares issued for public float. [Bold in original]

On page 15, a private placement in May 2006 that would bring investment by private placement to $120 million was mentioned. BDW/International was not named:

…

Continuous program for acquisition of fields that will increase recoverable reserves by 120 million BOE of 2 P reserves in less than two years.

[Emphasis added.]

At page 18:

The first acquisition program … has been secured during an exclusive due diligence period that will end with the acquisition of the last field at October 31, 2005 …

…will be under our own assets and balance sheet no later than 22 June 06. The two other fields … will be under our own assets no later than 31 June 2006.

All the fields are productive except Om. Current daily production of all the fields is 1 411 BOPD Net / 42 239 BOPM.

2006 – Total company estimated reserves 2P and Other Proved Producing C1: 54,35 MBOE,

Proved non-Producing C2: 313,80 MBOE

Proved Probable C3D1: 113 + 91 MBOE

Total of 2P Reserves: 573 MBOE The total Oil in Place is 2.416 MBOE. [Bold in original]

[231]At page 29: "June 2006 TEV [Total Enterprise Value] Current Value is shown as $862

MUS.

[232]On May 16, 2006, Roberts in an email to Groag copied to Shyfrin and Shnaider, described the meetings (Ex. 18/Tab 120, Ex. 493/Tab 707) as follows:

We have finished day two of our mini road show … Yesterday Mike and I met with Brad Griffiths [GMP] and Derek Webb at MGI Securities. … [Brad] arranged a meeting with Sandy Reddin (Managing Director) of Knight Capital Group Inc., the largest market maker stock trader in the US … Sandy and Marcus … clearly indicated that they would participate in a $300-$500 million raise…

MGI introduced us to … Canaccord Capital Corporation … They … want to participate…

Brad Griffiths [GMP] then introduced us to two very large institutional buyers (Salida Capital Corp.) and First Street Capital Markets. … I can easily say that both of these funds will invest large amounts ($10 million plus each and possibly up to $20 million each) in our company.

Tomorrow we are meeting Blackmont Capital Corporation and Wellington West Capital Markets. … We are also going to meet a senior securities lawyer, Alan Beach at Fasken Martineau… Unfortunately, Mike is leaving tomorrow... Based on the foregoing I am of the view that we will be able to raise a substantial amount of money $300-$500 million using tier 1 and tier 2 investment banks in Canada - but only if we form an international syndicate of investment bankers.

[Emphasis added]

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[233]Roberts gave evidence 6163 that investment bankers (the Street) value oil companies

based on "blue sky," meaning they would commit to invest based on Shtaif's perceived ability to execute on his business plan (which involved not only Reef but the purchase and development of several properties with the money to be raised]. The Street didn't need Magellan to own six oil fields. At one point Roberts said 6165 the investment bankers thought they could do a quick $70 million raise, then come back in September 2007 for an IPO. At another point, Roberts said he thought they would probably be able to raise $100- $150 million in the first round and more as the company achieved bulk.

[234]Knight Securities. I have already mentioned Shtaif's evidence that Howard had asked him to meet with Knight Securities to raise funds for BDW's $70 million subscription and his evidence 3364 that Knight Securities was interested in investing between $200-500 million in Magellan [not International]. In Ex. 18, Roberts wrote that "Griffiths … [had] arranged a meeting with Knight." Roberts gave evidence he thought Knight could have raised the $70 million for International. However, the bankers would have required at least six weeks to do their due diligence. Since Magellen had given notice on April 29, 2006 that International must pay its subscription by June 2, 2006, International did not have the needed 6 weeks.

[235]MGI, Salida Capital Corp., First Street Capital Markets. Roberts gave evidence 6145-6155 that on May 15, 2006, he and Shtaif met with Brad Griffiths ("Griffiths"), a senior investment banker with MGI Securities with extensive oil and gas experience. They discussed Shtaif's business plan and the investment opportunity. Shtaif said 3824, 5836 Griffiths said he would be prepared to invest $10 million personally and would take him to see Salida Capital Corp., First Street Capital Markets and Amarath Capital. Salida and First Street were each willing to invest $10-$20 million in Magellan.

[236]Canaccord Evidence. Mr. Mark Maybank ("Maybank") [who after August 2006 was President and Chief Operating Officer of Canaccord] was called to give evidence by counsel for Shtaif. While he bolstered Shtaif's evidence in some respects, on balance, in my view, his evidence was not helpful to the Defendants.

[237]Maybank said in May 2006, he and Derek Webb attended an initial preliminary meeting. He could not remember details or specifics. He could not remember who gave the presentation. For the first time Canaccord heard Magellan's "rollup story" (a story where companies seek capital injections to buy properties to add scale and mass).

[238]After he was referred to Ex. 493, he said they liked the story and the people involved and were keen to become lead underwriter on a Magellan IPO. He could not recall discussions in May 2006 about valuation of Magellan. He said at that time, Magellan had not

provided Canaccord with any audited financial statements or historical cash flow statements; it may have provided some cash flow projections. Had Canaccord proceeded as underwriter, they would have wanted to know more.

[239]At the Knight Securities meeting, Roberts said he was asked about Magellan's and International's audit status/whether they were or could be "reporting issuers" with up-to-date filings and audited financial statements, so they could be elevated from the Pink Sheets to a more senior exchange. Roberts said 7454 on the evening of May 15, he called Howard to seek an answer to those questions. Howard advised it was unlikely that either Magellan or International could be audited. Roberts considered that to be a significant problem. Roberts gave evidence 6148-6151 it was clear that the Canadian investment community would have supported Magellan in a substantial raise if it could have been listed on an exchange higher

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than the Pink Sheets. However, the investment bankers had all advised that a Pink Sheet company would not be acceptable. 6173; Ex. 542/Tab 736.

[240][I note that Roberts pleaded he had advised the Board at the February and April

meetings that Canadian institutions would not invest in the equity of a U.S. company listed on the Pink Sheets.]

[241]Roberts said 6182 he had not been paying much attention to the price of the Magellan stock. In May, after the investment bankers asked him how it had been performing, 7475, he noted it had been climbing steeply for no apparent reason. [I have already noted that on

January 28, 2006, Howard had emailed Shtaif setting out his strategy for moving the stock to at least an $8 bid. On March 31, 2006, there had been a sharp increase in the share price over the few preceding days. On April 4, 2006, while De Freitas was on holiday, Shtaif wrote:

"Since you have gone, the market slowed to a standstill... " On April 5, 2006, Shtaif wrote to Shnaider: "There have been sales of shares recently between $10 and $13 per share." On April 24, 2006, Howard mentioned a $10 quote.] Roberts said he suspected in May that "something was wrong," 6129 that someone had been manipulating the Magellan share price. Because he thought that only 4700 free trading shares had been issued, he could not understand how the share price could be so high.

[242]Extension for BDW. In his evidence, Roberts emphasized that on May 16, 2006, in Ex. 18/Tab 120 he advised the Board that International would not be able to raise the funds needed to complete its subscription by the June 2, 2006 deadline. Roberts wrote in Ex. 18:

International Energy will probably not be able to raise their full subscription amount in the time we have given them, as they could not raise the funds until the bankers met with Mike. The issue is that the investment bankers probably cannot perform their due diligence (trip to Russia etc.) and raise the funds before the end of the month … by June 15 if nothing went wrong with the due diligence - or June 30th for sure. To be fair …do we want to extend the deadline to accommodate the due diligence and allow them to raise their commitment?"

[Emphasis added.]

[243]Despite suspecting that the Magellan share price was being manipulated, having known from the outset that Magellan was a Pink Sheet company and that Canadian institutions would not invest in a Pink Sheet company, and knowing by the time he wrote the letter that Magellan could not be taken to a higher exchange, in Ex. 18, his letter copied to Shyfrin and Shnaider, Roberts reported that in his view, Magellan would be able to raise $300 million-$500 million. He did not report what he already knew: Magellan could not meet the bankers' condition that it be listed on an exchange higher than the Pink Sheets.

[244]Shnaider Learns BDW has invested nothing. On the evening of May 16, 2006, Shtaif finally disclosed to Shnaider that International had not paid anything. When Shnaider questioned how this was possible, given what De Freitas had said at the April 28, 2006 Board meeting, Shtaif said De Freitas had misled him. Although Magellan needed to get rid of

[245]Free Trading Shares. Shtaif gave evidence that on May 16, 2006, he told Shnaider he was investigating how 4 million free trading shares had ended up being issued without Board knowledge or approval. Shnaider told him he may have "inadvertently" signed some documents and opened some accounts with De Freitas' company Aberdeen Online Trading.

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[246]Shtaif's evidence about the discussion he said he had with Shnaider on May 16 about the free trading shares is supportive of my earlier finding that before May 19, 2006, Shtaif did know that 4 million free trading shares had been issued in January of 2006. His evidence about his discussion with Shnaider on May 16 contradicted his evidence that he did not learn about the issuance of the 4 million free trading shares until May 19, 2006, when Roberts explained to him that free trading shares might have been improperly issued.

[247]Shtaif and Roberts retained Beach on May 17, 2006. Shtaif's evidence that he told Shnaider on May 16 that they needed to get rid of Magellan indicates he knew it before Beach first said that would be advisable.

[248]Roberts and Shtaif did not approach Beach about moving Magellan to a higher

exchange until after Roberts said he already knew that was not possible. Although I make no finding on this point, I note the suggestion made by counsel for the Plaintiffs: Shtaif and Roberts hired Beach to discover what they already knew, and to disguise that fact.

[249]I find in Ex. 18 and in his evidence, Roberts exaggerated both Magellan's prospects and the investment bankers' acceptance of Shtaif's expertise and business plan.

[250]Shyfrin & Shnaider Consider Pulling Out of the Joint Venture . Immediately after May 16, 2006, Shyfrin and Shnaider considered pulling out of the joint venture. Shyfrin said he wanted Midland to withdraw. Shnaider convinced him to stay (Shnaider 86-88). By May 16, Euro Gas on behalf of Magellan had contracted to purchase Reef and SibinTek. They relied on Shtaif's representation to Shyfrin that Reef was worth $250 million and on the value

of SibinTek, on Shtaif's and Roberts' representations that other investors were lined up willing to step into BDW's shoes, and that Magellan would be able to raise hundreds of millions of dollars to acquire more oil fields, Roberts' assurance that in his view Magellan could raise $300-500 million using tier 1 and tier 2 investment banks. I have found Roberts and Shtaif knew those representations were false and made them to induce the Plaintiffs to continue in the joint venture. I have accepted their evidence they did induce them to do so. Shnaider said he thought they had a rough start but going forward he thought everything would be better.

[251]I reject Shtaif's evidence that Shnaider offered to invest $70 million in International's place. I have already found Shyfrin was reluctant to stay invested at all.

[252]I do not accept the submission of counsel for the Defendants that because Shnaider and Shyfrin knew on May 16, 2006 that BDW/International would not be funding any part of the $70 million and nevertheless agreed to continue 246-257, all of Shtaif's earlier misrepresentations were "inconsequential." Magellan had already paid Bokserman $1.5 million. I have rejected the submission of counsel for the Defendants that Shnaider didn't care about the $8 million, based on a passage from Shnaider's evidence [relating to the $60 million that the Defendants had advised was in the TD account on April 5, 2006]. I do not read

Shnaider's evidence to indicate that when the Plaintiffs initially decided to invest $50 million in Magellan in December 2005 and early January 2006, they did not rely on the representation in Ex. 4 that BDW had already paid $8 million into Magellan. Shnaider's evidence was to the effect that initially BDW's payment of the $8 million was material to the Plaintiffs' decision because it indicated that BDW was "committed to the company [Magellan]." His later comment "...On the fifth [of April] I'm told there's $60 million in the account... $8 million I totally forgot about it already. I thought it was spent long time ago…on due diligence seismic reports…It's nothing to do with what we are planning to do now. I was concentrating on the $70 million that they were supposed to be funding now [in April]," taken

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in context did not indicate Shnaider thought that the earlier representation that the $8 million had been paid was immaterial. In deciding to invest initially in December 2005/January 2006, the Plaintiffs did rely on that representation. I have found the Plaintiffs decided to invest in part based on the $8 million misrepresentation and that they relied on it.

[253]I find all of the misrepresentations about BDW including that the $8 million had already been paid and that a further $70 million would be invested, were important in inducing the Plaintiffs to invest. Without those assurances about BDW, initially they would not have advanced $50 million.

[254]Once he had Midland's $50 million on April 4, 2006, Shtaif made commitments to buy Reef and SibinTek. [By May 16, 2006, Euro Gas on behalf of Magellan was already contractually committed by Share Purchase Agreement dated April 24, 2006 to buy Reef, and by agreement dated May 13, 2006 to buy SibinTek.] Shtaif and Roberts made further misrepresentations to the Plaintiffs that Reef and SibinTek were worth far more than Magellan had agreed to pay for them, further inducing the Plaintiffs to continue in the venture.

[255]Move away from Magellan. On May 17, 2006, Beach 7460 sent a voicemail Ex. 542/Tab 736 to Roberts: "We need to find a way to ditch Magellan and to start with a clean company." Late on May 17, Beach wrote Ex. 19/ Tab 122 to Roberts, confirming that recommendation.

[256]Roberts gave evidence that on May 17, 2006, Shtaif advised Howard he was cancelling Howard's 8 million Magellan shares [of which Howard had transferred 2 million to Roberts and 3 million to De Freitas].

[257]On May 17, 2006, Howard emailed Ex. 351/Tab 121 to Shtaif:

What a mistake I made with you. Both Greg and Stanton have called me and voiced their concerns about comments you have made. You seem to forget that both Stanton and Greg are part of Magellan because I brought them there… You are fully aware of the fact that when shares were issued of Magellan, I took care of all the parties involved from my end firs t, and that includes Greg, Stanton,Alic and whoever else had to be looked after. … This has nothing to do with any financings or International Energy. If you think you will cancel one share of that issuance, you will find that Magellan and all its officers and directors are involved in lawsuits and that every regulatory body will be looking into Magellan and its officers and directors and that one word is associated with Magellan and its actions --- FRAUD…

[Emphasis added.]

[258]Shtaif left Toronto on the evening of May 17, 2006. It is unclear where he was between May 17 and May 24, 2006, although the times and sequences of the emails and text messages between Shtaif and others sent and received on those days are suggestive that Shtaif was in Calgary.

May 18-23,2006

[259]Roberts' participation in the joint venture to that date had been tied to BDW. He had

received 2 million Magellan shares at the time he had agreed to sit on the Magellan Board as a representative of BDW. BDW's continuing involvement was threatened. By May 18, 2006, Roberts had already started to try to convince Shtaif, Groag, Shyfrin and Shnaider that he should be appointed to the Board of whatever company replaced Magellan. He continued to represent that with his assistance, the joint venture would have no trouble raising funds to replace International's promised $70 million.

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[260]As problems with Magellan were coming to light in Toronto, events were unfolding with respect to SibinTek in Moscow.

[261]SibinTek. It is unclear why on May 17, 2006, Shtaif directed the TD Bank [Ex. 489/Tab 70] to transfer $15 million from Magellan's TD account to Euro Gas BVI 5353 [not the company that operated Magellan, Euro Gas Russia]. Shtaif said $3 million was for "operating expenses," $12 million to purchase the Treasury Notes. I query why he would transfer $3 million for operating expenses and to purchase SibinTek Treasury Notes to Euro Gas BVI.

[262]I do not accept Shtaif's evidence 4914-4915 that on May 18 or 19, 2006, White & Case, the law firm handling the SibinTek transaction for Euro Gas in Russia, advised it to purchase Treasury Notes to secure the SibinTek purchase. The SibinTek Share Purchase Agreement did not require payment until 5 days after due diligence had been completed. None of the White & Case memos in evidence reflect such advice and I find White & Case gave Shtaif/Euro Gas no such advice. Shtaif had no legitimate reason at that time to transfer $15 million to Euro Gas BVI or later to transfer $12 million from Magellan to Euro Gas Russia to purchase the notes.

[263]SibinTek. De Freitas had been designated the co-signer on the Magellan accounts. On May 18, 2006, the day after Shtaif purported to cancel De Freitas' 3 million shares in Magellan, De Freitas refused to authorize the $15 million transfer. De Freitas wrote to Shtaif in Ex. 490/Tab 127: "As a director and signing authority under Magellan accounts at TD Canada Trust, it is important that I have documentation to support every outgoing wire including … the most recent one for $15 million US for Euro Gas." [De Freitas gave evidence he was concerned that Shtaif was sending the funds to an account solely under his control.]

[264]After De Freitas thwarted the $15 million transfer from Magellan to Euro Gas BVI, Shtaif then attempted to initiate Ex. 490/Tab 127, a wire transfer of $12 million from Magellan to Euro Gas Russia Ex. 466/Tab 128. Shtaif falsely advised the TD Bank Manager: "Funds must leave the bank today or Magellan will be in default on its initial payment for the property we are acquiring in Russia."

[265]I find that following his meeting with Shnaider on May 16, when Shnaider learned of Shtaif's earlier false representations, Shtaif was afraid Midland would take steps [to rescind the deal and] remove its $50 million from Magellan. He decided to divert funds from Magellan to Euro Gas BVI before that happened. After De Freitas thwarted that attempt, he transferred $12 million to Euro Gas Russia. He did not advise Shnaider/Shyfrin/Midland what he was doing until after the $12 million had been transferred. He lied to the TD bank representative about the urgency of the transfer.

[266]Free Trading Shares. The day after Shtaif purported to cancel Howard's, De Freitas' and Roberts' Magellan shares, De Freitas revealed to Roberts the existence of the free trading scheme, including that some of the 4 million free trading shares had been allocated to Shnaider. Ex. 316/Tab 135 is an email from Groag to Shtaif: "Greg is on my phone. Stanton

told Greg that AS [Alex Shnaider] is selling the free float to friends etc. Greg is hopping. Can I call you when I'm finished with Greg?"

[267]Shtaif said 7354 after he spoke to Roberts, he instructed De Freitas to stop the sales of free trading shares. Ex. 353/Tab 129.

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[268]After he received Shtaif's instructions, De Freitas emailed Ex. 354/Tab 130 to Shtaif, c.c. to Roberts:

Michael Shtaif and others appointed by him… have gone out and sold shares in Magellan to third - parties. … my firm is facilitating the transactions that Michael and his friends… have instructed us to do after the private sale of shares has been negotiated …"

…It is true that stock was issued months ago to various parties related to John including myself and Greg who hold 144 restricted stock... John has claimed that obtaining shares in the deal up front was agreed to by you and him when structuring Magellan. Structuring Magellan was important to you so that you could attract financing from sources like Midland … prior to any discussion that involved

any investment to be made by International Energy Limited … In terms of subscriptions to free trading shares, my firm Aberdeen Online Trading has been charged with that responsibility … [Emphasis added.]

[269]On May 19, Groag emailed Ex. 316/Tab 135 to Shtaif: "What free shares? …"

[270]I find before May 19, 2006 that Roberts and Groag were unaware 4 million free trading shares had been issued in January 2006. Shtaif told Roberts and this Court he had had nothing to do with the scheme to issue and sell Magellan free trading shares privately. On May 19, 2006, and ensuing days it appears Shtaif was trying to use Roberts and Groag to help him cover his own tracks. Roberts gave evidence that he had concluded that Shtaif had not been involved. However, Roberts conceded 7524 he had not seen Ex. 456/Tab 52, Howard's and Shtaif's emails discussing who would get the shares, advising "just us" and then "We got the shares!"

[271]On May 20, 2006 Groag emailed Ex. 570/Tab 138 to Roberts:

For your eyes only. … Let me give you my analysis.

…

2.I received an email from Stanton dated May 19 at 1604 hrs, which was addressed to Mike and copied to you and me. In this email he advises that his company is NOT selling the free float - that is being done by Mike and others (any idea who these might be?) Stanton then states that the other directors have no reason to comment. Is he correct …

3.I wrote to Stanton this morning to tell him that Mike called me early this morning to tell me that he and John are back in love and to ask him to tell me at what prices these…shares are being sold…

So Greg, if what I have written above is also consistent with your memory, I believe we have a serious situation on our hands because [A.] The free flow was NOT approved for sale by the Board and no price was set by the Board. (I believe that the board must approve the issue of any shares and must determine the price range.) … [B.] The sale of the shares has been done on an insider trading basis-…

[Emphasis added.]

[272]BDW Non Payment. By May 21, 2006, Groag had finally learned what Shtaif had known since early April: BDW/International had failed to make any subscription payments for Magellan shares. Groag sent Ex. 572/Tab 140 to International:

Therefore, I can only assume that despite what I heard at the last board meeting that $10 million had been transferred by International prior to April 28, 2006 into Magellan TD bank account, International appears to have failed to make any subscription payments for Magellan founders ' shares. …

[273]Move from Magellan. By May 22, 2006, Shtaif said Shyfrin had already agreed they would abandon Magellan completely and start fresh without International.

[274]Free Trading Shares. On May 22 in Ex. 577/Tab 152, Roberts replied to Groag's May 20 email:

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In my view what John, Stanton and Alex did was not appropriate and if all of the facts were known [it] would be considered "insider trading"… They have apparently traded shares to friends and family

and Mike has stopped the practice. I do not know where the funds are but Stanton tells me that they have sold about $250,000 of stock They are all insiders… I do not know how these shares got issued (but were likely issued before we got involved) by John when he was dealing with Mike alone (i.e.

before you, Stanton, Alex and Eduard got involved … [Emphasis added.]

[275]Euro Gas. On May 23, 2006, the date Euro Gas Russia received the $12 million from Magellan for the purchase of the SibinTek shares, Shtaif had still not sent the original Magellan Minute Book to Vinogradov or Ganus so Magellan Energy Russia, which was to replace Euro Gas as manager, could be incorporated. Shtaif said it was necessary for Magellan to wire the funds to Euro Gas because the Midland lawyers had not completed the incorporation of Magellan Energy Russia. I have found that Shtaif had deliberately postponed taking the steps needed to implement the transfer of operating control from Euro Gas to Magellan Russia. Had Magellan Russia been the owner of the notes, Magellan Russia would have had to authorize the purchase of the Treasury Notes, the place and manner of their deposit, endorsement and transfer to the sellers.

[276]SibinTek. On May 23, 2006, after Euro Gas had received the funds, Shtaif emailed Ex. 33/Tab 144 to Shnaider: "We have instructed our bank in Toronto to wire the funds to Russia to acquire SberBank negotiable Treasury Notes to be ready for settlement once we receive a final go-ahead from White & Case for our Tyumen deal. I will keep you posted."

[277]On May 23, 2006, as part of its due diligence on SibinTek, White & Case sent Irina Bekker a list of documents it needed to review.

May 24-31, 2006

[278]On May 24, 2006, Keloglu, Shtaif's deputy at Euro Gas, attended at SberBank [a Moscow bank], purchased $12 million in Treasury Notes and deposited them in a safety deposit box in the name of Keloglu and Tsygankov [the lawyer for Poltoranin, the principal of Reagent] for a period of seven days. Keloglu could have deposited the $12 million or the notes in a safety deposit box in Euro Gas' name alone. Instead, he entered into a Safety Deposit Box Agreement, Ex. 375/Tab 149, that identified two clients. Client 1 Keloglu [the client with the right to access the deposit box at the end of the lease term, unless all of the enumerated conditions of access in the lease agreement had been satisfied by Client 2] and Client 2, purported owner of 40% of the SibinTek shares. I have rejected Shtaif's evidence that Keloglu was acting on his own and have found he was acting on Shtaif's instructions. This action put the $12 million out of the sole control of Euro Gas/Magellan even before due diligence on the the SibinTek deal had been done.

[279]Move from Magellan. On May 24, 2006, a week after Beach had first recommended that Magellan be ditched, Roberts wrote Ex. 575/Tab 148 to Shtaif, Groag, Shnaider, Shyfrin and De Freitas:

Am enclosing a letter from Alan Beach regarding the transfer of the current US Pink Sheet shell to a Canadian CPC shell that will trade initially on the TSX Venture Board of the Toronto Stock Exchange… Our goal is to … move the listing to the TSE … The Pink Sheet shell (that we now have) is a nonstarter for all funds and investment banks in Canada and in the US… Although we have not had an opportunity to formally discuss this move at a board meeting, it is critical that we put the process in place immediately, as the start of the process is a precondition to raising further funds ...

[Emphasis added.]

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[280]I note that Roberts did not refer to the fact that he had learned from Howard that Magellan was unauditable or could not be moved to a higher exchange. He referred to a fact

[281]Late on May 24, 2006, Roberts said he reviewed the Magellan Minute Book he had just requested to see and that Shtaif had just brought him and learned for the first time 6191 that there were two Magellans, a private company and a defunct public company that had had its charter revoked and had never been revived. He concluded that Magellan, a private company, was holding itself out to be a public company and was illegally trading on the Pink Sheets. Roberts said he called Shtaif to say he suspected Magellan was a sham corporation, then he called Howard and De Freitas to arrange a meeting the following morning.

[282]By May 25, 2006, Roberts and Groag were regularly sending allegedly "privileged" communications to each other. Roberts 7533 wrote Ex. 577/Tab 152 to Groag: "Privilege Assured … Mike and Alex should transfer the free trading stock they control (of the 4 million shares) to people who are going to drive long term value … Mike has got plenty already … I think Mike understands he can't get where he wants to go without us …"

[283]Roberts continued:

Mike spoke to Alex about me coming full time… I think we should get paid an additional $200,000 net of taxes plus say 500,000 shares… the market will only back [Mike ]… as an unknown commodity if they know someone they know and trust is involved … Really, what we are looking at is you and I fulfilling the CEO role and Mike fulfilling the COO role …

[284]The Move from Magellan. On May 25, 2006, Shnaider emailed Ex. 21/Tab 151 to the other Board members, advising that he and Shyfrin agreed with Roberts the May 24 proposal to move off the Pink Sheets and onto the TSX Venture Exchange. I reject Shtaif's evidence Shyfrin had already agreed to abandon Magellan on May 22, 2006.

[285]Meeting with De Freitas and Howard. On May 25 and May 26, 2006, Shtaif was in Toronto. Roberts gave evidence that he and Shtaif met Howard and De Freitas at 8 a.m. on May 25. Roberts said he accused Howard and De Freitas of creating a fraudulent shell. Later on May 25, De Freitas tendered Ex. 551/Tab 154, his resignation from the Magellan Board.

[286]Meeting with Beach. After leaving the meeting with Howard and De Freitas, Shtaif and Roberts 6192 asked Beach to review the Magellan minute book and 6121 to conduct corporate searches of Magellan.

[287]On May 26, 2006, Beach set out his findings in Ex. 579/Tab 159, characterizing the Magellan minute book as a "rat's breakfast." In Ex. 356/Tab 162, he commented that the Magellan corporate records were substantially incomplete, a "disaster."

[288]On May 26, Roberts forwarded Beach's email as follows to Shnaider and Shyfrin:

Greg – here are my preliminary comments on the minute book review and my Delaware searches today:

1.There was a Delaware company "The Eastwind Group, Inc." incorporated August 3, 1993. It appears that this was an active investment company with OTC NASDAQ and pinksheet listings. NASDAQ delisted it in 1998. Its charter was voided by Delaware in March 2003 for failure to pay taxes. It filed for Chapter 11 Bankruptcy in late 2000 and a trustee was appointed in January 2001. The trail dies there.

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2.The minute book Mike provided to me contains a resolution signed by "John Sparrow, Secretary" certifying that a "special extraordinary meeting was held by the shareholders to revive the company and elect a new board" at 10:00 a.m. on November 8, 2005. The same resolution changes the name to Magellan Energy Ltd. … rolls back the issued capital for 1,000, indicates that all officers and directors resigned at that meeting, and appoints Michael Shtail (sic) as President and sole director.

3.Six hours later, at 4:06 p.m. on November 8, 2005, a new "Eastwind Group, Inc." with a new Delaware ID number was incorporated. We are told by our Delaware agents that th is was not a revival of the old entity. The sole director of this new company is a "Shaun Adams." The company has 100 million shares authorized at $0.01 par value.

4.Six days later on November 14, 2005, the articles of new Eastwind were amended to change the name to "Magellan Energy Ltd." and the issued shares were consolidated on a one for 1,000 basis. Shaun Adams certified as "President" that the amendment was duly adopted by the shareholders in accordance with section 242 of the General Corporation Law.

5.There is nothing further in the minute books or public file to reflect who John Sparrow might be, or the resignation of Shaun Adams, or any new board, or evidencing the issuance by the board, whoever that might be, of any shares.

6.There is a print-out from "First American Stock Transfer" dated April 24, 2006 reflecting a total of

GR Trust at 2,000,000. There are not 286 entries, closer to perhaps 50 at most. Many of these remaining qualified holders hold only one share.

In summary, the corporate records are substantially incomplete, and what there is, a disaster. There is no possible way the TSXV or any other recognized exchange would accept a transaction involving the shares of this company without a complete and consistent share history, with credible legal opinions. I suspect that will be impossible, given the history to date. Our urgent advice would be to immediately cease any further business activities using this entity and investigate the most effective means of withdrawing any financing that has been advanced or subscribed to the safety of a clean entity. The deeper the activities get with this entity, the more difficult any withdrawal, and the more serious the repercussions.

Iawait your instructions. [Emphasis added.]

[289]Although Shnaider could not recall receiving Ex. 579, he conceded he must have

done.

[290]Ex. 114/Tab 161 is an email from Roberts to Groag May 26, 10:36 p.m., copied to Shnaider and Shyfrin:

We had a good day yesterday … We met … the Chairman of GMP … the Marketing Director at Haywood Securities and presented to Aramanth … then Welling ton West and Blackmont Capital. … Nothing has changed my views that if we reposition our marketing … and get onto the TSX, we will be very successful.

[291]Free Trading Shares. De Freitas wrote that Aberdeen had been involved in artificially bolstering the value of the Magellan shares. On May 26, 2006, the day after De Freitas resigned, Shtaif and De Freitas exchanged Ex. 555/Tab 155, including an email from De Freitas to Shtaif containing the following:

…your letter insinuated that I or Aberdeen acted recklessly with Magellan Energy Limited shares without Board approval, when in fact a verbal informal agreement was made for Aberdeen to facilitate the private sales transactions that you and/or your friends and Associates generated …What provokes me even more is that Aberdeen clients have expended in excess of US$40,000 of their own

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funds to preserve the artificial value of shares in Magellan to assist in your discussions with investment bankers and private investors.

[Emphasis added.]

[292]De Freitas confirmed at trial in his oral evidence that he had been involved in manipulating the Magellan share price.

[293]Move from Magellan. On May 28, 2006, Groag emailed Ex. 359/Tab 167 to Shtaif and Roberts, suggesting that Nusbaum, a U.S. securities lawyer and his firm make recommendations about rescission of Midland's subscription.

[294]SibinTek. Shtaif said he returned to Moscow on May 28, 2006.

[295]The Plaintiffs alleged that Shtaif conspired with Poltoranin, the principal of Reagent, the seller of 40% of the SibinTek shares, to illegally benefit from the transaction. They pointed to a number of events in Russia they alleged were suggestive that Shtaif had conspired unlawfully with Poltoranin to receive proceeds from $6.6 million in Treasury Notes Euro Gas purchased on May 23 that disappeared sometime between May 29, 2006 and July 2006, when $5.4 million in Treasury Notes were recovered. Poltoranin was subsequently charged with theft of the notes.

[296]Ex. 216/Tab 210, a Resolution in Criminal Case 74305, prepared in July 2006, mentioned a meeting attended by Shtaif in Russia on May 28: "Lt. Col. Kusakin ascertained that Poltoranin managed on May 28, 2006 at a meeting with Shtaif to get Shtaif to sign a guarantee to effect the transaction for buying those shares and to repay the forfeit the amount of $6 million in case Mr. M. Shtaif would refuse to execute this transaction..." [Emphasis added.]

[297]Shtaif denied meeting with Poltoranin on May 28, 2006.

[298]On May 28, Shtaif emailed Ex. 376/Tab 165 to White & Case lawyers Tarabrin, Marechal, Polanski and Amy Jones:

I would like to meet tomorrow 9:30-10:30 to discuss final review of our SibinTek acquisition. I did not receive the final review in the mail while I was away. Tomorrow we are scheduled to meet at SberBank to exchange shares and Treasury Notes. I cannot complete the transaction until I have the same report that I received prior to signing Reef Energy contract. Can you please advise me if it 's okay to meet tomorrow and proceed with the acquisition of the shares.

[299]Shtaif said 4941 the SibinTek closing date had been set for May 29, 2006. Regional Alliance had informed him and Keloglu that Poltoranin was flying to Moscow on the morning of the 29th. Shtaif conceded that when he sent this email, White & Case had not confirmed that it had completed its due diligence.

[300]Tarabrin was the most senior lawyer at White & Case working on the SibinTek transaction. He reported to Polonsky, a senior partner of the firm. In response to Shtaif's May 28 email, Ex. 376, Shtaif received an Out of Office Auto Reply from both Tarabrin and Amy Jones, another lawyer working on the file. Neither would be at work on May 29, 2006.

[301]It appears from a White & Case memo to Shtaif dated June 22, Ex. 178/Tab 243, that Shtaif told someone at White & Case he had met with Reagent (Poltoranin) on about May 28. Ex. 178 contains the following:

On May 29, upon your return from a business trip you called a meeting in our office. We understood from you that you wished to accelerate the acquisition, due to concerns (arising from your meetings with Irina Bekker and Reagent that Reagent would sell its claims to third parties, thus complicating

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the procedure for discharging those claims. You instructed us to prepare for completion (and that FAS consent should not be a condition precedent).

[Emphasis added.]

[302]I reject Shtaif's evidence and I find that White & Case was surprised by his request to close on May 29, 2006.

[303]Shtaif gave evidence 3571 that on the morning of Monday, May 29, he met with Polonsky, Tokovinin, Kuznetsova, Jones and Peter Kotelevtsev. I find from the White & Case memos that neither Tarabrin nor Jones was present. In chief, Shtaif gave evidence 4910-4920 that before he went to the bank, White & Case provided a written completion report, saying in effect the deal was ready to close before he went to the bank. In cross-examination he conceded 4959 White & Case did not give him any written confirmation they had completed their due diligence before he went to the bank. He said he understood that everything was ready for closing to proceed that day. They just had to "dot some I's and cross some T's." He said he based his understanding that the deal would close that day on the fact that two White & Case lawyers [Kuznetsova and Tokovinin] went with him to SberBank, he assumed, to attempt to close the transaction.

[304]Meeting at Bank. Kuznetsova and Tokovinin accompanied Shtaif to SberBank 4966. Bekker, Tsygankov and Poltoranin attended for the sellers. Shtaif said it was the first time he had met Poltoranin and Bekker. [This evidence contradicted the information in Ex. 182, a White & Case memo recording Shtaif's expression of concern arising from (earlier) meetings with Bekker and Reagent and in Ex. 216, Lt. Col. Kusakin's information that at a meeting on May 28 with Poltoranin, Shtaif had signed a $6 million guarantee.]

[305]Shtaif gave evidence Kuznetsova told him at the bank there was no problem with the title. She said Poltoranin was the registered owner of the Reagent shares. At Kuznetsova's request, he endorsed the Treasury Notes and they applied the Euro Gas corporate seal. They agreed Tsygankov and Poltoranin would take copies of the endorsed notes to demonstrate to Reagent's creditors that Reagent would be in funds to pay debts owing to them so they would remove their liens against Reagent's shares. Kuznetsova told Shtaif they were adjourning the closing for two weeks so further documents could be prepared.

[306]Shtaif gave evidence 4974 that Kuznetsova instructed him and Keloglu to extend the Safety Deposit Box Agreement for a further 14 days. Since Keloglu had been the client on the May 24 Safety Deposit Box Agreement, and since the May 29 document was an extension of that Agreement, Kutsnetsova advised him that Keloglu [not Shtaif] had to be the client again.

[307]I find the May 29 Safety Deposit Box Agreement was not an extension of the May 24 Safety Deposit Box Agreement. On the May 24 Agreement, Tsygankov had signed as the client on behalf of Reagent. On May 29 Poltoranin was named as the client. There was no reason why Shtaif could not have signed for Euro Gas.

[308]Shtaif said 3582:

On May 29 Mr. Tsysankov was requesting to be client number one. There was a discussion between Tsysankov and Kuznetsova as to the reversal of the client order. … her position was … she demanded that the key always stays with her client … which is me. … Tsyankov was requesting that the key should stay with them. That was not acceptable. And at the end they agreed that the change could be made, client one and two would be switched, but that the key would stay with Shtaif.

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[309]Keloglu and Poltoranin went into the SberBank vault, deposited the Treasury Notes, and entered into a Safety Deposit Box Agreement Ex. 469/Tab 173 for 15 days. Poltoranin became Client 1, Keloglu Client 2.

[310]Vinogradov gave evidence at trial that once Client 1 and 2 were switched on May 29, all Poltoranin needed to do was wait until the Deposit Box Agreement expired on June 14 and he could access the notes in the safety deposit box [which Shtaif had endorsed on May 29], whether or not the conditions set out in the SibinTek Share Purchase Agreement had been fulfilled.

[311]Shtaif gave evidence he did not understand the negative implications of the switch of clients until June 8. He was duped by Poltoranin and misled by the lawyers at White & Case.

[312]White & Case's May 31 memo Ex. 379/Tab 181 and June 22 memo Ex. 178/Tab 243 reflected that White & Case did not review the May 29 Safety Deposit Box Agreement or receive a copy until June 14, 2006. In Ex. 431/Tab 635, an email from Tokovinin to Shtaif dated February 17, 2013, Tokovinin confirmed that neither he nor Kuznetsova reviewed the Safety Deposit Box Agreement or commented on it before it was signed.

[313]Ex. 182/Tab 253, a White & Case memo to Shtaif dated June 26, 2006 contained the following:

(This switch had other, unexpected implications, not intended by Euro Gas, as described below. … )

…It was subsequently discovered that the Deposit Box Lease Agreement of 29 May resulted in Mr. Poltoranin having the right to unilaterally withdraw the Promissory Notes at the expiry of the storage period. As had not been understood by Euro Gas on 29 May, "Client 1" under the Deposit Box Lease Agreement of 29 May has the right to unilaterally withdraw all assets deposited upon the expiry of the storage period. [Emphasis added.]

[314]On May 29, 2006, Shtaif emailed Ex. 34/Tab 175 to Shnaider:

…As you're aware, I used 12 Million USD to acquire SibinTek. TBills and they 're still in the safety deposit boxes in SberBank waiting until White & Case will complete due diligence this weekend and make changes to corporate register in our favour …[to show Trovalion as the registered owner.]

[315]I do not accept Shtaif's evidence that on May 29, 2006, Kuznetsova advised him there was no problem with the title and that Reagent was the owner of 40% of the SibinTek shares. As at May 29, it is clear from the contemporaneous documentation that the White & Case lawyers were continuing to take steps to satisfy themselves that Reagent owned the shares it was purporting to sell to Geros and Geros was purporting to sell to Trovalion. The documents White & Case had requested from Bekker on May 23 had not been provided.

[316]I find that on May 29, 2006, White & Case did not understand the negative consequences of switching Client 1 and Client 2 in the Safety Deposit Box Agreement signed that day. It incorrectly assumed that the notes could only be accessed in the presence of representatives of both Reagent and Euro Gas.

[317]Free Trading Shares. At the end of May 2006, Roberts and Groag continued to have concerns about Shtaif's and Shnaider's involvement in the unauthorized sale of 4 million free trading shares. On May 29, Roberts emailed Groag Ex. 676/Tab 171: "I do not know where the truth lies but I do know that Stanton told me that the 4 million was split between Mike,

John and Alex …"

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[318]Move from Magellan. Near the end of May, Shnaider 107 and Shtaif agreed that Shnaider would call Marechal of the Zolty law firm and ask him to provide a new corporate vehicle to replace Magellan. Marechal provided a British Virgin Island company, Koll, and he wrote Ex. 26/Tab 172 to Shtaif, indicating that a percentage should be indicated for the initial shareholding. "The sharing between you is not technically clarified but since the effective funds until now came fully from Midland, we should indicate to the banks a percentage which makes sense to them, such as 80/20." In Ex. 26//Tab 172, Shtaif replied: "For the time being you can indicate this [80/20], but I will have to discuss ownership with Alex and Eduard."

[319]Therefore, when Koll was organized, the initial share allocation was 80%/20% ( Ex. 25/Tab 8, p. 3-4). Shnaider said 110-111 he and Shtaif agreed to meet a few days later in Moscow to negotiate the share allocation.

[320]White & Case Attempts to Complete Due Diligence and SibinTek Closing Documents. Between May 29, 2006 and June 14, 2006, White & Case attempted to confirm that Reagent had title to 40% of the SibinTek shares that Trovalion was purchasing. I find it was unable to do so.

[321]In a June 26 memo, Ex. 182/Tab 253, White & Case reported to Shtaif as follows:

…It was intended that the completion of the acquisition would take place in Tyumen later in the week of May 29 (or early the following week) once the sellers had rectified the share register to demonstrate that they had title to the shares. We proceeded to prepare documents for completion …. No further information or documentation was received from the sellers .

[322]Move From Magellan. On May 30, 2006, Roberts wrote Groag about Magellan's dispute with Howard: "I have discussed this with Allan [Beach] who recommends a settlement be reached with some stock or warrants."

[323]Koll Share Ownership. On May 31, 2006, Shnaider said 115-117 he and Shtaif negotiated Koll share ownership. They agreed that Shnaider and Shyfrin or Midland would own 67.21% of the Koll shares in exchange for Midland's $50 million investment. Shtaif and his team would own the balance. He referred to Ex. 27/Tab 6, his contemporaneous handwritten notes.

[324]Shtaif gave evidence 3446-3447 that he and Shnaider agreed that Midland would invest $120 million and would own 67.21% of the Koll shares. He said he provided a spreadsheet, Ex. 361/Tab 568, to Shnaider at the May 31 meeting, showing Midland paying $120 million for 67.21% of the Koll shares.

[325]I accept Shnaider's and Shyfrin's evidence they were never prepared to invest $120 million in Koll. At the end of May 2006, Shyfrin was reluctant to invest at all.

[326]SibinTek. As noted earlier, Kuznetsova had told Shtaif on May 29, 2006 she needed to prepare further documents. The Share Purchase Agreement, Ex. 180/Tab 119, was between Trovalion and Geros. It did not mention Euro Gas at all. The purchaser Trovalion was to pay Reagent $12 million on behalf of Geros. Shtaif had given control of Treasury Notes in the name of Euro Gas, a non-party to the agreement, to another non-party to the agreement Poltoranin. On May 31, 2006, Kuznetsova and Tokovinin wrote Ex. 379/Tab 181 to Shtaif:

To substantiate the transfer of the Promissory Notes by Euro Gas instead of Trovalion, Reagent should issue notice to the sellers confirming the settlement of debt under certain share agreements

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while Euro Gas should issue the notice to the sellers confirming the off-setting of the Promissory Notes against the purchase price payable by Trovalion to the sellers. …

[327]Meetings with Shnaider re SibinTek. On May 31, 2006, Shnaider text-messaged Shtaif asking him to meet with two brokers including an Armen Sarkisikin who represented an entity other than Geros and claimed their client was the true owner of the SibinTek shares. Shtaif said when he met with them, he knew their client was not the true owner. He gave the following evidence at 3600: "Well, first of all, I asked … for a simple thing. I said I'd like to see the minute book. I'd like to see the corporate registry. I'd like to see your entitlement to claim that you are the shareholder." [Emphasis added] He said they showed him "some phantom book with something in it that they just opened and closed" and refused to provide a copy. He said he told Shnaider they were "full of it" and offered to bring Geros, the true owner of the shares, to meet Shnaider.

[328]Shnaider gave evidence that after that meeting, he asked Shtaif to "double check to make sure his people really had title to the shares." Shtaif told Shnaider not to worry.

[329]Appointment of Magellan Director of Security. Shtaif gave evidence that on May 31, Ex. 35/Tab 192, Mr. Sergei Solovyev, a policeman at the commercial crime division in the Central Police District of Moscow, was appointed as Magellan's Director of Security. [This is the same Sergei Solovyev Shtaif mentions in numerous emails in evidence sent in June and July of 2006.]

[330]Potential Funding for Magellan. On May 31, 2006, Mr. Salem of Duration wrote Ex. 473/Tab 700 to Hazout:

We are considering making an investment of $5-15 million. However, I would first like to further my due diligence and would welcome any material on the ownership of the oil fields acquired and the official confirmation of the 2P reserves acquired or … in the process of being acquired by Magellan…

June 2006

June 1-13, 2006

[331]SibinTek. On June 1, 2006, Shtaif sent Shnaider Ex. 25/Tab 8 p. 4, an SMS message: "W&C sent recommendations everything is clear and will help us register in Tyumen. "

[332]Although Shtaif said White & Case had advised him that Reagent had good title to 40% of the SibinTek shares and he had not been impressed with the ownership claims made by the brokers he had not met on May 31, Shtaif said he met with Sergei [whom he said was still a policeman] and asked the police to investigate, just in case Poltoranin/Reagent was improperly claiming to be an owner of 40% of the SibinTek shares.

[333]Move away from Magellan. On June 1, 2006, Roberts sent Shtaif Ex. 584/Tab 184, a draft letter to be used to terminate International's/BDW's subscription agreement.

[334]Changing Roles. On the same day, Groag emailed Ex. 587/Tab 187 to Roberts, mentioning he had discussed with Shtaif that Roberts was prepared to commit up to two weeks per month in the management of Koll for a salary increase from $80,000 to $160,000 per year.

[335]Free Trading Shares. By June 2, 2006, Voskoboinikov had requested the refund of the US$250,000 he had advanced to Aberdeen to purchase 50,000 Magellan free trading shares at $5 per share.

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[336]SibinTek. On June 5, Shtaif emailed Shnaider Ex. 35/Tab 192: "They [White & Case]

are heading to Tyumen or are already there. They will make sure the register of the company is changed so that the beneficiary is Trovalion, our subsidiary in Cyprus. …"

[337]At one point in his evidence, Shtaif said he concluded on June 6, 2006, from a document White & Case received from Regional Alliance, Ex. 381/Tab 196, that Reagent owned 40% of SibinTek. An "expert commission" had reviewed extract #11647 from the Unified State Register of Legal Entities, Certificate of Registration number 000292594, and concluded that SibinTek's incorporation and issue of securities were valid and that SibinTek's shares were owned 60% by Sibmash and 40% by Reagent; Shtaif: 3611-3612 and 3787. He said the large stamp on the document indicated that the information had been verified and was up to date. [Vinogradov gave evidence that all Regional Alliance had was an extract from the State Register showing SibinTek's founders in 2000. It was not up to date.] At another point in his evidence, Shtaif said he knew Regional Alliance was not a law firm and he did not rely on it to certify title. He relied only on White & Case. He understood that White & Case had to complete its due diligence.

[338]Vinogradov and Ganus both gave evidence that the documents provided by Regional Alliance were not the documents the White & Case lawyers needed to conclude that Reagent owned 40% of the SibinTek shares in June of 2006. The only reliable indicator of ownership was the seller's internal register showing details of all share transfers right up to the date of the sale. The seller was the only party with access to its own current internal corporate register. Although White & Case had asked Bekker to produce that internal register, she had not done so.

[339]On June 7, 2006, White & Case lawyer Jones had emailed Ex. 38/Tab 213 to Shtaif: "We haven't yet heard from Irina Bekker following our email requesting outstanding information/documents required for completion …" She enclosed a 26 page completion checklist dated June 7 setting out items that still needed to be completed. As of June 7, all of the items on the checklist in white still needed to be completed. In white under Stage A Completion Actions, #1 was "Full report from current SibinTek shareholder register to be provided to White & Case in Tyumen. " Ex. 38A/Tab 200. Shtaif sent an email Ex. 468/Tab 200 to Groag: "See what I have to put up with to close the deal."

[340]I find Shtaif 3600 understood that the White & Case lawyers needed to see the internal register they had asked Bekker to produce before they could satisfy themselves that the sellers had title. That is why he had asked to see the corporate registry on May 31.

[341]Move from Magellan. A special board meeting was held on June 7 to transfer ownership of Koaploma and Trovalion to Koll Resources Limited. Ex. 595/Tab 201.

[342]SibinTek. On June 8, 2006, Shtaif learned from Regional Alliance that the result of the reversal of Clients 1 and 2 on the May 29 Safety Deposit Box Agreement would be that at the end of the lease agreement [July 14, 2006], Client 2 [Keloglu] would lose all rights to the contents of the box, whether or not he held the key and whether or not the conditions for closing had been met. I find that as of June 8, 2006, it was clear to Shtaif that if the SibinTek deal did not close before June 14, 2006, the $12 million [in notes] would be in jeopardy. Shtaif said 2613-3614 he was shocked and had a "mild heart attack."

[343]I accept Vinogradov's evidence (detailed later after June 20, 2006) and I reject Shtaif's evidence that he immediately disclosed the problem to Shnaider and Shyfrin, instructed

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Polonsky to provide Midland with complete access to the file, requested Polonsky and Vinogradov to look at the matter and demanded that Polonsky find ways to eliminate the risk. Shtaif said 3601-3602, 3614-3615 he went to the police again on June 8, 2008, filed another complaint against Poltoranin and asked the police to pursue an investigation of possible fraud. [Shtaif did not produce any documents to corroborate that he made a June 8 complaint to the police.] He said the police went to Tyumen, met with the SibinTek General Director and followed up on the ownership of the shares. [He gave inconsistent evidence on what he learned from the police. At one point he said they did not share the full details of their investigation with him. Elsewhere in his evidence he said that based on Sergei's investigation, he concluded that Reagent had title to 40% of the SibinTek shares.]

[344]Free Trading Shares. Shtaif said when he received De Freitas' productions in this lawsuit, he found out about a lot of "back door dealing." He referred to a letter from the Magellan transfer agent sent by Nusbaum to Shtaif on June 12, which appears to show that one of the companies De Freitas had set up for Shnaider, T H Capital, had received 300,000 Magellan shares. However, De Freitas gave evidence 5968-5969 that no free-trading shares of Magellan were ever deposited into the accounts he had set up for Shnaider.

[345]SibinTek. On June 13, 2006, Shtaif emailed Ex. 382/Tab 206 to Groag who forwarded it to Shnaider and Shyfrin, setting out that the sellers had confirmed beyond a doubt that they were the "true and only owners of SibinTek." Contrary to his earlier statement that he had not relied on Regional Alliance, he said he based Ex. 382 on the Regional Alliance report [Ex. 381/Tab 196 dated June 6] and other (unspecified) information from White & Case. In Ex. 382, Shtaif continued:

We have 12 million lodged in SberBank notes that the sellers are now entitled to. Tomorrow we can sign off the ownership in the company with representatives of White & Case and make all the necessary changes in the government official institutions to regis ter Trovalion as the legal owner of the property…

They brought in all the documents that were requested by White & Case and have confirmed their readiness to sell … since they have performed they now demand a full payment , which in accordance with our contract they are entitled to … I did not agree to sign off and transfer SberBank notes before notifying you. Legally we are bound since the sellers have performed … Our agreement includes the payment of ½ of the 12 million now and the final payment after they complete the removal of General Director and when White & Case will change ownership in favour of Trovalion…. I just

talked to White & Case and they will be ready tomorrow to assist in closing. Technically backing out is not an option. So will you agree that if I will only transfer half, this will stimulate the sellers to help us in achieving results?

[Emphasis added.]

[346]Later that day, Shtaif emailed Ex. 385/Tab 213 to Shnaider, saying "we have certified documentation that the sellers are entitled to the property and can sell it."

[347]On June 13, Shnaider wrote in Ex. 25/Tab 8: "…Did White & Case give you an opinion that it is safe to pay?" Shtaif responded in Ex. 385:

Yes, once we receive the ownership transfer we are in the position to enter our name into the register… technically there is no reason why we should not pay in full now… we have White & Case resolution. There is no reason why we cannot close… Tony has seen th e White & Case opinion and thinks there is no legal reason why we should not proceed.

[348]Shnaider responded in Ex. 37/Tab 213: "Can I see the White & Case opinion please?" In response, Shtaif 5056 sent Ex. 38A/Tab 213, the White & Case completion checklist as of June 7 that did not contain any White & Case opinion that it was safe to close the transaction.

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[349]In my view, these two documents, Ex. 382 and Ex. 385, are worthy of emphasis.

[350]Shtaif's June 13 representation in Ex. 382 – that the sellers had confirmed beyond a doubt that they were the true and only owners of SibinTek shares – was misleading. Shtaif conceded he knew on June 13, 2006 he could not rely on Regional Alliance and that White &

Case had not yet confirmed the sellers had title. He knew the interna l register of SibinTek was the critical document and he knew White & Case had not seen it. I find Shtaif knew when he represented to Shnaider that the sellers had brought in all the documents that had been requested by White & Case that his representation was false. Shtaif said "technically there is no reason why we should not pay in full now." That was false. As of June 13, the sellers were not entitled to full payment. On June 13, Shtaif knew if the deal did not close, the Treasury Notes would be at risk. Shtaif conveyed the misleading impression that there were no problems with the SibinTek deal. I find Shtaif's representation that White & Case had given its opinion it was safe to pay was false.

[351]Had Shtaif agreed to give Poltoranin the guarantee mentioned in Ex. 216 and to forfeit $6 million even if the transaction did not close, that would have been consistent with his statement "technically backing out is not an option." Unless he had entered into the guarantee mentioned in Ex. 216, his statement: "Our agreement includes payment of half the $12 million now" made no sense. If he had entered into that guarantee, when he referred to "our agreement," he was referring to his and Poltoranin's agreement, not Magellan's agreement.

Whether or not he had given a guarantee to pay half, Shtaif was pushing hard to get approval to pay $6 million even though he knew the deal was not ready to close. When he indicated his intention to release half of the notes, he knew that whether or not the deal closed that the very next day, Poltoranin could get access to the notes.

June 14-19, 2006

[352]White & Case, having learned that the Safety Deposit Box Agreements signed on May 29 were due to expire on June 14, 2006, and that as Client 1, Poltoranin would be able to remove the Treasury Notes from SberBank Safety Deposit Box whether or not the conditions for closing had been satisfied, convened a meeting on June 14 with Bekker and Tsyankov at its offices in Moscow. [See White & Case June 22 memo, Ex. 178/Tab 243 and also Ex. 174/Tab 237 prepared by Kutnetsova and Tarabrin.] Shtaif did not attend. Those present prepared a nine point protocol, Ex. 174/Tab 238, outlining, among other things, the things Poltoranin and Geros needed to do before the transaction could be closed. Step 1 was as follows: "Reagent will endeavour to provide White & Case with formal confirmation (i.e., an excerpt from the register) of its ownership of over 40% of the shares in the company. "

[353]Ex. 41A/Tab 241, a June 21 White & Case memo addressed to Shtaif, also described the June 14 meeting and included the following at page 3:

At the June 14 meeting it was also discussed how to deal with the US$12 million promissory notes to be released to Reagent that are currently stored in the SberBank deposit box, in light of the fact that (under the current arrangement with SberBank) Reagent has the right unilaterally to withdraw this amount at the expiry of the storage period. … We understand that the parties intend to proceed as follows. The total amount is to be divided into two equal parts of 6 million US dollars each, and stored in different deposit boxes. One of these remains in the possession of Reagent; the other will be held. Shtaif interested person; the key to Reagent deposit boxes to be deposited in the other box. Please confirm this arrangement was actually put into effect; if not, please let us know what the current arrangement with Reagent is.

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[354]Shtaif gave evidence 5100 that on June 14 while Polonsky and Tarabrin were meeting with Tsyankov and Bekker, he was at the police station, ready to take action in case Poltoranin tried to abscond with the notes. 3620-3622. Shtaif sent Shnaider an SMS Ex. 25/Tab 8: "Alex, I am in the meeting with law enforcement agency regarding acquisition of SibinTek. We will not have any issues. It goes up to the top. I will call later."

[355]I reject the submission of the Defendants that Shyfrin knew about the problem with the SibinTek notes on June 14 because Shtaif went to the police on June 14, 2006. Shyfrin said when he learned about the problems with the notes, he instructed Shtaif to go to the police. I find on June 14, 2006, Shyfrin did not direct Shtaif to go to the police station. Shtaif did not say Shyfrin directed him to go to the police on that date.

[356]Shtaif gave evidence that after Tarabrin had called him to say the protocol had been executed, he left the police station and met with Poltoranin, Bekker and Tsyankov. He tried to convince them to reverse the order of the clients. Poltoranin would not agree. He deposited six Treasury Notes with a value of $5.4 million in Box 0159 for a further period of 30 days, and he again designated Poltoranin as Client 1. The other six notes with a value of $6.6 million were placed in another safety deposit box. Shtaif said he later learned that Poltoranin had the key to that box.

[357]On June 14, 2006, Shtaif emailed Ex. 386/Tab 217 to Shnaider: "…I have secured that all legal due diligence by White & Case has been completed and procedure approved. Today I've spent approximately 8 hours with White & Case compiling procedure that will ensure our full legally binding transfer of ownership and as stated I have only locked half the funds in safety deposit box until the change of ownership is complete. "

[358]After Shnaider queried Shtaif's reference to deposit of half the notes, Shtaif 3641 wrote Ex. 386/Tab 217 to Shnaider: "All the funds are locked in two separate boxes in SberBank. Half the funds will be opened after the sellers come back from Tyumen as per my last email. The remaining balance will be available after they complete the removal of the unwanted parties."

[359]For Shtaif to have released half of the notes on June 14 was consistent with the content of his June 13 emails there was no reason not to release all the notes, but that he would be releasing half.

[360]Shtaif's email to Shnaider that he had only locked half of the notes in the Safety Deposit Box was consistent with Vinogradov's evidence that he later was advised by a SberBank representative that after June 14, Poltoranin and Keloglu were only named as Client 1 and 2 on one box, Box 0159. Vinogradov concluded that after June 14, if there was another box at SberBank containing Treasury Notes, it was in Poltoranin's name alone.

[361]I have also considered Shtaif's evidence 5064 that his statement "I have only locked half of the funds in safety deposit box" was a "true statement." He said locked one half means that now this is committed and there's no way back. I don't have the key to the safety deposit box. Mr. Poltaranin does... I have the key to the other box 0159. Shtaif 5083 said he never saw a deposit agreement for the box for which Poltaranin had a key.

[362]I find Shtaif and Poltoranin did not implement the protocol devised by White & Case on June 14, 2006. Instead, Shtaif and Poltoranin agreed 6 notes would be put in a box in the name of Poltoranin alone. Six notes would be put in Box 0159.

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[363]Shtaif's June 14 memo to Shnaider ("we will not have any issues. All is arranged through White & Case. People on the way to change the register of the company") was false and misleading.

[364]Move from Magellan. On June 14, 2006, Roberts emailed Ex. 360/Tab 215 to Groag, Shnaider and Shyfrin referring to Google searches that he had done on the Pink Sheets website for Magellan and International. He had ascertained that the same answering service answered the telephone of Magellan and International. He suspected Howard had set up both Magellan and International and had been pulling the strings for both.

[365]On June 15, 2006, Roberts wrote to Groag: "Mike has to understand his limitations. … We cannot have Mike controlling the process."

[366]Greenspoon gave evidence that on June 16, 2006, Shnaider told him they were having problems with Magellan and asked him to attend a Magellan Board meeting on June 20, 2006.

[367]Shtaif gave evidence 3676 that before he traveled to Toronto for the Board meetings on June 20, 2006, he had a conversation with Polonsky and Vinogradov, because he wanted to ensure that the Midland lawyers had had full access to the White & Case file on SibinTek. Vinogradov gave evidence that sometime before June 21, Shyfrin asked him to take a look at the SibinTek deal. He didn't have any information on SibinTek. He called Shtaif, who suggested that Vinogradov call Polonsky. When he did, Polonsky advised he needed Shtaif's permission before he could release information to Vinogradov because Euro Gas was White & Case's client. Polonsky promised Vinogradov he would start releasing SibinTek information to Vinogradov as soon as Shtaif had provided his authorization.

[368]I find that before June 20, 2006, Vinogradov had had no access to any part of the White & Case file on SibinTek.

[369]Roberts said when he met with Groag the night before the June 20 meeting, Groag advised him about developments on Reef and SibinTek in Russia, including the switch of Client 1 and Client 2 in the May 29 Safety Deposit Box Agreement and its implications, including that Poltoranin could access the Treasury Notes even if the SibinTek deal did not close. Roberts said 6258 Groag told him that the lawyers were not too concerned because they did not think Poltoranin would steal the notes and risk going to jail. Roberts said he advised Groag about developments in Toronto involving Magellan.

[370]Roberts gave evidence that he discussed the possible implications of the switch of Clients 1 and 2 with Shnaider and Nusbaum at dinner on June 19, 2006. They did not perceive the notes to be at high risk. Shtaif, who was sitting at a different table, said, "If you're not happy with what I've done, I'll resign." Shnaider said, "You were just fooled, I don't want you to resign."

[371]In his evidence Shtaif did not mention any discussion about SibinTek on June 19, 2006. I find Shtaif, Roberts and Groag did not advise Shnaider about the switch in Safety Deposit Box Clients before the June 20 meeting. I base this finding in part on the evidence of Shnaider 1274-1275, which I accept, and in part on the content of the contemporaneous documents, including but not limited to Ex. 692/Tab 796, a July 6 email from Groag referring to a communication in which Shnaider noted that since the [June 20] meeting Shnaider and Shyfrin had become aware that Mike had exposed the Trovalion $12 million in the most

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crude manner and Polonsky's reference in email Ex. 205/Tab 449: "It was not until late June/early July … that we had any dealings with Midland. "

June 20, 2006

[372]As of June 20, 2006, Shyfrin said:

I was reluctant to go ahead because I almost lost my trust in Shtaif. Usually when people lie to me I'm not dealing with them anymore … I was convinced by Mr. Shnaider … that maybe it was an unfortunate event, maybe and that we already have lost one and a half million to Bokserman and we already send 12 million to buy SibinTek and maybe SibinTek will be a good deal to recover whenever we lost and make money. So out of respect to my partner I stayed. Although I can repeat, I was very reluctant to stay in the business.

[373]Shyfrin said January 29, 2013 at 40 that on June 20 he thought that Shtaif was well experienced in the oil and gas business. While Shyfrin (January 29, 2013 at 20) still believed that Midland's $50 million was not enough to buy more assets and create a small-sized oil company and that more investment was needed, he was under the impression that Shtaif had other investors: "… I was kept under impression by Shtaif continually that investors already on the horizon. They are coming with the big-money. It will not be a problem. It will not be a problem. We were kept under continuous impression like that…"

[374]Final Magellan Board Meeting. On June 20, 2006, Shnaider, Groag, Roberts and Shtaif met to rescind Midland's subscription in Magellan. Lawyers Beach, Greenspoon and Nusbaum attended the first part of the final Magellan Board meeting.

[375]Board Minute. Ex. 28/Tab 225 is the Minute of the final Magellan Board meeting. Shtaif said the lawyers recommended that certain matters not be recorded in the minutes, including the discussion about SibinTek, the $12 million transfer and Vinogradov's investigation of the switch of Clients 1 and 2 in the May 29, 2006 Safety Deposit Box Agreement. Roberts gave evidence that Greenspoon advised that the details of the unwinding of Magellan should not be detailed in the Minutes. Greenspoon denied 3014 providing that advice.

[376]Beach Notes. Beach took notes, Ex. 538/Tab 226, of the portion of the meeting he attended. They read as follows:

Larry Nusbaum, pump and dump, 504 issue answers – Florida attorney … 4,000 free trading shares without legend early January 2006 504-… 4 million bad shares… Not well done. very transparent fraud… transfer agent "First American." Never filed in Texas as required if legit 504 issuance. No registration. The promoter was possibly "underwriter." Who? Stanton director pri <?? Howard, Watson, Alec Minute no priors ret found connections? Duty? Public? 11000 @130. Market making issuing.Vlad $250,000 Stanton - broker Paraguay NASD Porteus - Stanton transfer agent has been told to stop. Notice caught on too quickly to get pumped. Feb 19 Greg and De Fre itas applied to the board. Stanton confirmed only 4700. Magellan not a reporting issuer… Nothing known to come back to bite directors. press releases _ Who prepared and authorized? Suggest a press release rescinding Midland + no assets…. $120 mil PR was unknown and unapproved. No obligation under US law to

report to regulatory Legal justification for revocation? Fraud sufficient grounds. No record of significant public sales…Vlad $250000. Secondary – company not involved… Should issue note to Midland with s ecurity…White & Case acts for Euro Gas. Cyprus treaty Russia 5% tax… Magellan sent 12 million to Euro Gas for Trovalion deal (subsidiary of Magellan). Now on deposit in Russian bank pending minor regulatory conditions… Delaware no requirement of any direct or All can resign. Any ongoing MS legal will be to Euro Gas Moscow … Should leave reimbursement to board on Table. Commission should be reversed to Midland by direction … Alex resigns with nominee Avi

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will do rescission agreement. Larry will do PR and unanimous written resolutions – Two PRs the rescission and the resignations.

[377]Roberts' June 20, 2006 Notes. Ex. 598/Tab 765 are notes Roberts said he made at the final Magellan meeting and the inaugural Koll meeting. As early as March 24, 2010, Ex. 689/Tab 794, the Plaintiffs challenged their authenticity. At trial they asked this Court to find they were unreliable.

[378]The Plaintiffs' Challenge to Roberts' June 20 Notes. Before his examination for discovery, Roberts produced a copy of Ex. 598. At his discovery he was asked to produce his original notes so they could be examined and tested. Roberts said they were missing and blamed the Plaintiffs' law clerks who had had custody of them before the discovery for photocopying.

[379]At trial, the law clerk from Weir Foulds, Rose Plue, gave evidence. She said she never saw Roberts' original notes. She took the utmost care when copying Roberts' documents. She copied the photocopy of his notes that Roberts had produced and put it back where it had been. There was no way that original notes could have been removed.

[380]Counsel for the Plaintiffs submitted that in early 2010, when they first challenged the authenticity of his notes, Roberts could have taken steps to locate and produce the original notes. Instead, he waited and located them on the eve of trial. Lindblom gave evidence 8853- 8854 that after 18 months, there is no test to determine when a document was written. Had Roberts produced his original notes at discovery or shortly thereafter, Lindblom could have determined if they had been written or added to within 18 months of early 2010. (Roberts 7704-7705.)

[381]In his evidence, Lindblom 8854-8855 made it clear that Roberts had made a number of additions to his notes after he wrote them, including: Newco as signing bonus on p. 3; GR MS beside "no real risk"; "VV is reviewing White & Case" on p. 4. Lindblom was not able to say whether the words "flip- flop" had been recorded in the normal sequence.

[382]On discovery Roberts admitted he wrote in his notes, in square brackets, things that he was thinking but did not say. He conceded he also made entries of unuttered thoughts that he did not put in square brackets.

[383]I found Beach to be a reliable and objective witness. As there were marked differences between Roberts' and Beach's notes, and as Roberts admitted that his notes included things he was thinking but that were not said that he did not mark with square brackets, and as he clearly made additions to Ex. 598 that in my view were material, e.g., "VV reviewing White & Case; MS no real risk," I am unable to have any confidence in the accuracy of Roberts' notes. I have not relied upon them.

[384]Beach gave evidence that at the beginning of the Magellan meeting, Nusbaum gave advice that Magellan was a fraudulent sham private company that had been incorporated in November 2005 and that did not have legitimate public company status. He advised Midland to demand the rescission of its subscription agreement and the return of its investment.

$50 million Shnaider 120-121. By June 20, 2006, Magellan had already disbursed $12 million

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to buy Treasury Notes for the SibinTek share purchase, $1.5 million to Bokserman and $171,591.39 of other expenses.

[385]Amounts Owing to Directors – Magellan Promissory Notes. Beach gave evidence about a discussion at the final Magellan Board meeting regarding payment of Magellan fees and expenses. Shtaif was seeking to be reimbursed for approximately a million dollars in various expenses he or his company had incurred. Beach said 5841 no agreement was reached at the Magellan meeting with respect to those expenses. Beach's notes include the following: "Should leave reimbursement to Board on table."

[386]Roberts gave evidence 6299 that before any funds were returned to Midland, he and Groag wanted payment from Magellan of amounts they said were owed as directors. They agreed 6300 Nusbaum would prepare and Magellan would execute Magellan promissory notes payable to Shtaif, Roberts and Groag - Shtaif US$1,282,847, Groag US$86,848 and Roberts US$44,796. Shtaif gave evidence 3412 that Nusbaum, Beach and Greenspoon discussed a Magellan note payable to Shtaif.

[387]I reject Roberts' evidence that at the Magellan meeting, the Magellan directors agreed to issue Magellan promissory notes in favour of Shtaif, Groag and Roberts. I accept Beach's evidence as reflected in his notes that the Magellan directors decided to table the matter.

[388]Costs of Reversing Magellan. Beach gave evidence that at the June 20, 2006 Magellan meeting, the directors agreed that the costs of cleaning up and reversing the Magellan transaction should be borne by Shtaif.

[389]Discussion re SibinTek Notes. Roberts gave evidence that on June 20, 2006, Shtaif very briefly mentioned the problem arising out of the switch of the clients 1 and 2, saying there was no real risk. Everyone thought Poltoranin wanted to close and would not risk going to jail by not closing. Shtaif gave evidence there was a discussion about the SibinTek Treasury Notes, including the switch of Clients 1 and 2 and its possible implications. Shnaider 121-122 and Greenspoon 3013-3014 gave evidence there was no such discussion. Beach recorded the discussion as follows: "Magellan sent 12 million to Euro Gas for Trovalion deal (subsidiary of Magellan). Now on deposit in Russian bank pending minor regulatory conditions."

[390]I accept the evidence of Shnaider 121-122 and Greenspoon 3013-3014 there was no discussion about risks relating to the notes at the June 20 Magellan meeting. I find the discussion about SibinTek was as recorded in Beach's note. I find that on June 20, 2006, Shnaider and Shyfrin were unaware the SibinTek notes were at risk.

[391]Koll Inaugural Meeting June 20, 2006. Later on June 20, 2006, the inaugural Board meeting of Koll was held. Shnaider, Shtaif, Groag and Roberts attended. The Minutes are at Ex. 32/Tab 230.

[392]Shtaif said that he came to the Koll meeting on June 20 expecting Midland to invest

$120 million in Koll and to receive 67.21% of the Koll shares as he and Shnaider had agreed on May 31, 2006. Shtaif 4767 and Roberts gave evidence that at the June 20, 2006 Koll meeting, Shnaider refused to honour his earlier agreement. Shtaif said 4768 in May 2006, other investors had been prepared to participate in Koll. However, since Shnaider and Shyfrin had agreed on May 31, 2006 to invest an additional $70 million, between May 31 and June 20, he had not taken any steps to line up other investors.

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[393]Roberts said not to have gone ahead with Koll would have been "catastrophic" for Shtaif. He had roughly $4,000,000 of his own money invested. Roberts 3482 and Shtaif had no choice but to agree. Reef and SibinTek were scheduled to close within 30 days.

[394]For reasons given earlier, I have already found that on May 31, 2006, Shtaif and Shnaider had agreed that the Plaintiffs would receive 67.21% of the Koll shares in return for Midland's $50 million investment.

[395]Appointment of Directors. At the inaugural Koll meeting, the parties agreed on the appointment and remuneration of officers and directors. Shtaif was to be CEO, with an annual net salary of $600,000. Groag was to be Chairman at an annual net salary of $150,000 and Acting CFO at an annual net salary of $250,000 [a total of $400,000 net]. Roberts was to be Executive Director at an annual net salary of $80,000 plus $80,000 for additional work. Shnaider and Shyfrin were to be non-executive directors, at an annual net salary of $80,000 each. Shtaif gave evidence they also agreed on the minimum duration of his and Groag's terms. The Minutes contain the following: "It was also agreed that directors would have a one year rolling contract with a 3 year commitment both to and by Koll. It was agreed the President & CEO would have a 5 year commitment. "

[396]Shnaider said 138-139 they did not agree on the duration of their appointments as set out in the Minutes.

[397]Debts Due to Directors. The Minutes Ex. 32/Tab 230 reflect that the Board agreed Koll would pay Magellan's ex-directors the debts owing to them by Magellan as a signing bonus. Shnaider gave evidence 140-141 he agreed that Koll would make payments, but only after Koll was cash flow positive. Roberts said the debts due to directors were to be paid in Koll's June payroll run.

[398]Did Midland Promise to Put $36.3 Million Back into Koll Immediately? Shtaif and Roberts gave evidence that Midland promised to immediately pay the $36.3 million back into Koll.

[399]Shnaider gave evidence 140 that he and Shyfrin did not commit or agree to put the

$36.3 million back into Koll immediately. They agreed to transfer up to $50 million to Koll as required.

[400]Greenspoon gave evidence that he did not remember any discussion at the Magellan meeting about the return of the funds to Midland being conditional upon Midland agreeing to repay the money to Koll immediately.

[401]The June 20 Koll minutes make no reference to an immediate payment. Whether or not the Plaintiffs intended on June 20 to reinvest the $36.3 million, within the next few days, once Vinogradov learned of the problems with the SibinTek transaction and informed Shnaider and Shyfrin about them, they were not prepared to do so. The July 7, 2006 loan agreement provided: "The lender shall extend to the borrower from time to time, solely at the discretion of the lender, one or more loans up to the aggregate of US$50 million… "

Events Post June 20

June 21, 2006

[402]June 21 Meeting in Toronto re Unwinding Magellan. The Minutes of a meeting of Magellan dated June 23, 2006 meeting but held on June 21, are Ex. 460/Tab 690. Shtaif and

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Roberts gave evidence that on June 21, Shtaif, Groag and Roberts resigned as directors of Magellan,/Tab 249.

[403]Documentation Unwinding Magellan: Settlement Agreement dated June 21, 2006 between Midland and Magellan Ex. 29A/Tab 234 provided that Midland would return all of its common shares in Magellan. Magellan would repay Midland the remaining available funds [approximately US$36.3 million], assign to Midland all of its right, title and interest to the issued and outstanding shares of Trovalion and Koaploma, their rights and benefits under the SibinTek and Reef Share Purchase Agreements, and give Midland a secured demand promissory note in the amount of US$1,671,591.39, Ex. 29C/Tab 236.

[404]Roberts said Nusbaum prepared the Settlement Agreement Ex. 29A/Tab 236. Greenspoon gave evidence that he prepared the Settlement Agreement.

[405]Assignment Agreement. Greenspoon said he prepared Ex. 29B/Tab 236, the Assignment Agreement, assigning the capital stock in Trovalion Industries and Koaploma Management to Midland.

[406]Promissory Note. Tab 249 was a promissory note from Magellan to Midland for

$1,671,591.39 [representing the $1.5 million paid to Bokserman and $171,591.39 in expenses.]

[407]Magellan's Promissory Notes dated June 23, 2006. Roberts gave evidence that by June 21, 2006, Midland's CFO and Groag had prepared a reconciliation of amounts owed: to Shtaif, $1,282,847; to Roberts, US$44,796; to Groag, $86,848. Nusbaum's office had prepared Magellan promissory notes in those amounts [Ex. 31/Tab 246]. Shtaif signed each of the notes on behalf of Magellan before he resigned as its CEO.

[408]Shtaif said 4731 he thought he had sent copies of the notes to Shnaider and Shyfrin as an attachment to his email dated June 24. [He said 4733 he would print it out and bring it to court but he did not do so. Counsel for the Plaintiffs suggested the only attachment was the Board minutes.]

[409]I accept Shnaider's evidence 620-625, 630-631 that neither he nor Shyfrin knew about Ex. 31 or approved them at any Magellan Board meeting or otherwise. He did not see those notes on June 21.

[410]Greenspoon said 3025-3026 he had no involvement in preparing Ex. 31. He said he did not discuss them with Beach or Nusbaum. Beach said 5842 he had never seen Magellan promissory notes in favour of Shtaif, Roberts and Groag. Nusbaum was not called to give evidence. I accept the evidence of Greenspoon and Beach that they did not prepare the notes and conclude they were not prepared by Greenspoon, Nusbaum or Beach. The Magellan notes in favour of Shtaif, Groag and Roberts contained spelling mistakes. For example, "principal sum" was spelled "principle sum." Magellan was spelled incorrectly. This contrasts with the other documentation prepared on June 20.

[411]While there is a note about a discussion during the Koll meeting about Koll paying signing bonuses ex Magellan, that offers no reason why Magellan would give promissory notes to its ex-directors. Roberts said 6299 it made no sense to create a liability for tax purposes in a company being jettisoned. They agreed that they would execute notes evidencing what Magellan "owed." Koll would pay those amounts as signing bonuses. From a Koll audit perspective, these amounts would be listed as signing bonuses and deductible by Koll for tax purposes.

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[412]I find that on June 20, the Magellan Board decided in effect that Magella n would not give promissory notes to Shtaif, Groag and Roberts. Shtaif and Roberts knew it. I find the notes were not discussed at the June 21 meeting. If Shtaif signed them on that day, he did so knowing that on June 20 the Magellan Board had decided Magellan would not give promissory notes to Shtaif, Groag and Roberts.

[413]SibinTek. On about June 21, Midland's Chief of Security reported to Shyfrin that Poltoranin, the purported owner of Reagent/40% of the SibinTek shares, was a convicted murderer. Shyfrin said that news alarmed him, because "convicted murderers could not be trusted with $12 million."

[414]I have found Vinogradov had no opportunity to review the SibinTek file before June 21, 2006. In an email Ex. 205/Tab 449 Polonsky confirmed that Midland's first involvement with SibinTek was in late June 2006. He wrote: "It was not until late June/early July 2006 (after Euro Gas got itself into difficulty over the promissory notes) that we had any dealings with Midland." [Emphasis added.]

[415]Vinogradov gave evidence 1605-1606 that on June 21, he received Ex. 174/Tab 238 the first of the SibinTek documents from White & Case. He reviewed Ex. 180, the SibinTek Share Purchase Agreement and some other documents including White & Case's June 21, 2006 memo. While he said 1613-1614 at first he didn't understand the whole situation, he thought there was a problem. He 1624-1626 immediately contacted Shnaider Ex. 41/Tab 241, telling him the SibinTek transaction was "a big mess." He called White & Case to seek further information. He asked Regional Alliance for all of its documents and collected all the information he could. He soon learned since Client 1 and 2 had been switched, the promissory notes were at risk.

[416]After June 21, Vinogradov continued to receive documents from White & Case and Regional Alliance. [In the White & Case memos to Shtaif in evidence Tabs 238, 239, 181, 243, White & Case repeatedly advised Shtaif that the internal shareholder register had been requested and had not been received, and that White & Case was not yet satisfied that the sellers were the registered owners of any of the shares of SibinTek.]

[417]After he received White & Case's June 22, 2006 memo, Vinogradov called Tarabrin who explained that the White & Case lawyers still (as of June 22) had not received the documents they needed to satisfy themselves that the vendors had title to the shares.

[419]Shyfrin gave evidence (January 29, 2013 at 43-46) that when Vinogradov and Ganus reported "the hair-raising news" that Poltoranin had no legal ownership of 40% of SibinTek, he understood that the $12 million was at "huge risk." When he confronted Shtaif and asked him what he had done to protect the notes, Shtaif told him he had put all the notes into two deposit boxes. When Shyfrin asked who had the keys, Shtaif said he had given a key to Poltoranin. When Shyfrin asked, "What was the condition for Poltoranin to open the box? Were they supposed to receive something in advance, shares or documents? " Shtaif answered no.

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[420]Shyfrin gave evidence that in his opinion, only an idiot or a criminal would have dealt with a convicted murderer and given away $6 million for nothing. Shtaif blamed White & Case. Shyfrin said he didn't believe a smart businessman would have needed White & Case to

tell him not to give $6 million to a convicted murderer. Although Shyfrin had done business in Russia for many years, he said he had never been involved in "such a stupid transaction with promissory notes."

[421]I have accepted Vinogradov's opinion 2268-2273 that he believed the sellers had no right or title to sell 40% of the SibinTek shares to Trovalion. [In assessing Vinogradov's evidence, I have not relied on the evidence of Keefe about information he received from White & Case on January 23, 2008. That evidence was not admitted for its truth.] I have relied on the contemporaneous documents including the White & Case memos and have concluded that on May 29, 2006, the SibinTek deal was not ready to close; the documents that had been provided did not prove that the sellers had good title to the shares; Shtaif wanted the closing accelerated; Tokovinin and Kuznetsova did not review the Safety Deposit Box Agreement that Keloglu and Poltoranin signed on May 29 until June 14, 2006. After May 29 White & Case tried to take further steps needed to close. White & Case learned about the switch of Clients 1 and 2 and the implications from Regional Alliance. They continued to take steps to satisfy themselves on title and to protect the notes, but they were never provided the documents they needed to satisfy themselves that Reagent had title to the SibinTek shares.

June 22-30, 2006

[422]SibinTek. On June 22, 2006, referring to the June 14 meeting, Polonsky wrote to Shtaif in Ex. 178/Tab 243:

You asked us to attend a meeting (June 14) with the sellers and Reagent. At this meeting we were provided with …the promissory notes deposit agreements dated 24th and 29th of May . At the 14 June meeting a protocol (setting out further steps and conditions for completion of the acquisition) was negotiated and executed, and alternative arrangements for the promissory notes (including an extension of time and a division into two deposit boxes ) were discussed. These are described in our memorandum of the 14 June meeting. Following the meeting, we drafted (in conjunction with Yuri Monastyrsky of the specialist litigation firm Monastyrsky Zyuba) a letter from Euro Gas to send to SberBank alerting SberBank to certain errors in the promissory note deposit agreement of May 29; this was sent to you on June 14.

Today Regional Alliance confirmed that the letter of June 14 was not sent to SberBank … Regional Alliance also stated today that the alternative arrangements discussed at the June 14 meeting were subsequently varied, so that Reagent retains the right to take possession of all the promissory notes

….Regional Alliance provided us today with further documentation relating to the promissory notes; we have been discussing these with Yui Monastyrsky with a view to dev eloping possible approaches to restrict the release or payment of the promissory notes to Reagent.

[Emphasis added.]

[423]White & Case's letter to SberBank cautioning it not to release the Treasury Notes is Ex. 472/Tab 218. Although Shtaif gave evidence 3678 that he and Keloglu personally delivered Ex. 472 to SberBank, he produced no document to corroborate his evidence, such as an acknowledgment of receipt. I find he did not deliver the letter.

[424]Free Trading Shares. On June 23, 2006, De Freitas emailed Ex. 318/Tab 668 to Shnaider: "As far as I'm concerned, Michael Shtaif is the only one who has made money on the Magellan deal to date." At trial, Shtaif characterized De Freitas' email as "self-serving," saying that De Freitas was trying "to cover his [own] tracks."

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[425]SibinTek. White & Case hired and paid for an independent litigation lawyer, Monastrysky, to advise it, including whether it should seek an injunction to prevent the release of the SibinTek Treasury Notes to Poltoranin. The Minute of that meeting is Ex. 460/Tab 690. Monastrysky's memo of the meeting is Ex. 183/Tab 259. Vinogradov and Ganus attended the meeting convened for that purpose on June 23, 2006; Shtaif did not.

[426]Ganus said by June 23, 2006, they were beginning to understand that it was unlikely that the seller would provide good title to the SibinTek shares. Vinogradov 1675-1676 and Ganus 1648-1650 gave evidence that by the end of the June 23 meeting, those in attendance had agreed that to recover the notes, they should not initiate the civil proceedings, but should use the criminal process. They understood 1677-1678 that even if they involved the police, it might not be possible to recover them before the Safety Deposit Box Agreement expired on July 14.

[427]Shtaif's Activities Late June 2006 re Treasury Notes. Shyfrin said on June 23 he demanded Shtaif open a criminal file with the police. In late June [and early July] he understood Shtaif thought Sergei could "do something." On June 29, Shtaif sent Ex. 25/Tab 8 an SMS to Shyfrin: "Eduard, Sergei policeman still outside of Moscow. He is finalizing the file and will be ready to discuss tomorrow…" Shtaif told Shyfrin he had arranged a meeting with Sergei Solovyev, Mr. Gardt and Mr Andreev, the General Director of SibinTek. Shyfrin said he decided to wait to see what would happen.

[428]Shnaider gave evidence Shtaif advised him he was going to open a criminal file with a Colonel Sergei Solovyev and to pay him US$30,000 to arrest the notes. [This is the same Sergei Solovyev Shtaif had said on May 31 was being appointed as Director of Security for Magellan.] Shtaif said Sergei had not left the Commercial Crime Division of the Central Police District in Moscow and denied paying him $30,000.

[429]A June 26, 2006 White & Case memo, Ex. 182/Tab 253, prepared by Polonsky, Tarabrin and Borilatov, noted:

…we were informed by Regional Alliance on 22 June 2006, no such plan was implemented. This is reflected in one of the Deposit Box Agreements concluded on June 14, 2006 (the other has not yet been provided to us.) W e understand the situation to be as follows: The total amount of the … notes has been divided into two parts, one is 180 million Rubles the other 143,520,000 Rubles and each is stored in a separate deposit box … we understand Mr. Keloglu has the key from o ne of the two deposit boxes… this fact does not prevent Mr. Poltoranin to unilaterally withdraw the promissory notes at the expiry of the storage period…

[430]After learning that Midland's $12 million were at risk, Shyfrin again wanted to back out of the deal. He said in the seven months he had known Shtaif, there had been one disaster after another. However, Shtaif and Roberts were telling them how successful the venture would be. He and Shnaider decided to remain in the venture to recoup their past losses (Shnaider 196-199; Shyfrin January 29, 2013 at 63-64) but they needed (1) financial control of Koll (Ex. 44/Tab 255); (2) Midland's in-house lawyers involved in every transaction.

[431]Shnaider gave evidence that he thought at that time that if they pulled the plug they would lose millions of dollars. However, given Roberts' and Shtaif's assurances, he thought if Shtaif were to concentrate on finding oil deals and Koll were taken public, they would be able to recoup their losses.

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[432]On June 27, 2006, Shnaider wrote Ex. 44/Tab 255 to Groag: "Due to last week's events that became known to us only after the inaugural meeting, Midland has decided it would like to have full control of the funds in the future… "

[433]On June 30, 2006, Groag wrote Ex. 692/Tab 796: "On Tuesday I sent Alex the draft of the Koll inaugural minutes which we held on June 20. He replied saying that since that meeting they have become aware that Mike had exposed the Trovalion $12 million in the most crude manner… " [Emphasis added.]

[434]On June 30, 2006, Roberts wrote Ex. 693/Tab 264 to Groag: "As far as Alex and Eduard taking control, I expected as much. That is likely what I would do, after seeing this debacle."

[435]On June 30, 2006, Groag emailed Ex. 461/Tab 263 to Roberts and Shtaif: "I spoke to Mike about your idea of us three as a seamless team, with you [Roberts] as President, Mike as COO/Russia CEO and I [Groag] as chairman going forward alone (without Midland)…" Mike's response was "Ask Greg to start moving. " Both Shtaif and Roberts said it was not accurate to say that they wanted to move forward without Midland. However, if Midland pulled out, they would have moved forward alone.

July 2006

July 1-6, 2006

[436]On July 1, 2006, Roberts emailed Ex. 601/Tab 266 to Groag:

We can go forward without Midland but that would not be my preference given the representations we have made and the explaining that we will have to do with the Street… it would be a huge loss to our team and to the business to lose Alex and Eduard. That b eing said, I am surprised that Alex and Eduard have not pulled out. … I can't imagine that they are too pleased with the way things have gone … I would be very surprised if they will continue without changes in the status quo . Alex is well respected in Canada and in Russia. … I would certainly understand if they make the decision not to proceed. …

Mike has many strengths, but he does not have the experience to take a company public and then run the Canadian public company… It is patently obvious given what has transpired (with International, John, David, etc.) that Alex and Eduard have lost confidence in Mike's ability to lead the company.

Mike has to understand he has many strengths but a few weaknesses … we need a person responsible for closing that has transactional experience. … (c) we need to operate a public company. From what I've seen, these are not Mike's strengths, but they are yours and mine.Several bankers have told me clearly that you and I have to expand our roles for the market to really perceive this as a real opportunity, as they do not see Mike having the appropriate experience to do it all. This has become obvious to us and I believe Alex and Eduard have real issues with this as well.(d) you have done a great job as chairman and are eminently qualified for that role.To ensure success you have to be very active in Russia which requires in my view no less than 50% of your time.

…to go forward we need to first determine if Alex and Eduard want to continue… If Alex and

Eduard do not want to continue,we must still have this open dialogue with Mike regardless of the decision… I believe the executive team has to be fortified I have suggested that I would become President with you maintaining the role as Executive Chair and Mike maintaining the role of CFO with very defined roles as I see it, (with Mike's role being restricted and yours and mine being considerably increased)…(c) I am happy to consider the President's role which would require me to leave IPICO, as long as you assume more of an operational role in Russia….(d) the Market clearly has to understand that Mike is the visionary, the Key to our success,but that you and I are in operational control with a solid board and advisory committee in place to ensure success … [Emphasis added.]

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[437]On July 4, 2006, Shnaider emailed Ex. 48/Tab 271 to Shtaif:

Due to all circumstances that took place in the last few weeks I would like to propose the following to you; Midland provides a $50 million (including the $12,000,000 at SberBank now) loan at interest Libor plus 2% to Koll Resources instead of an investment into the company.This will make me and Eduard much more comfortable going forward. I agree that Koll would be owned by myself and Eduard (not Midland) yourself and the management according to our agreement. I don't understand why we take control only of Euro Gas Russia and not Euro Gas BVI. We always spoke about BVI. [Emphasis added.]

[438]Shtaif responded Ex. 47/Tab 271:

This is an interesting proposal… If this means once we pay off the loan you do n ot own the same position in the company, then we should discuss this ASAP… Euro Gas Russia effectively manages everything, so unless there is a specific reason why you need BVI company I do not see any reason to transfer ownership at this time.

[439]Shnaider responded:

We don't want to reduce our shareholding. We would like to remain with 67% of the shares. We have no particular schedule for the loan repayment. We propose that our loan would be repaid once the company will be in a position to do so. We also agree to subordinate our loan to a loan … [Emphasis added.]

[440]Shtaif wrote Ex. 47A/Tab 271:

Alex… Our agreement is that you would "invest" the funds to keep the shares. You cannot "loan" the funds and own shares… you should invest or be a lender- the choice is yours! I do not like to renegotiate after the deal has been concluded… At this time I would rather keep things as we have agreed in the first place…

[441]Shnaider gave evidence 218-219 that he made it clear that he and Shyfrin would not proceed if Shtaif did not agree to his proposal, including the transfer of ownership of Euro Gas to Koll.

[442]Changes to Contract. On July 5, 2006 Shnaider and Shtaif spoke by telephone. Shtaif said the conversation was very acrimonious. They came to an agreement on new terms.

[443]On July 6, 2006, Shnaider emailed Ex. 49/Tab 276 to Shtaif confirming the new

terms:

This is to confirm our conversation earlier today where we both agreed to revise our involvement with Koll Resources. The following has been agreed: the shareholding in the company will remain the same as per the inaugural meeting of Koll Resources that took place in Toronto on June 20. Midland's $50 million will be treated as a loan bearing interest of LIBOR +2%. We will have an option to convert the loan to preferred shares . We will ask our lawyers in Toronto to draft such agreement. The draft of this agreement will also be used by M. Shtaif. Shtaif has had various expenses up to date that will be treated exactly as Midland's loan. These expenses are not related to BDW, International or SibinTek. Midland agrees that all ongoing expenses of Koll and acquisitions will be financed from Midland loan. All BDW International and SibinTek expenses will be financed by M Shtaif. Please confirm.

[444]During his examination- in-chief, Shtaif said 3482-3483 he confirmed his acceptance of Ex. 49 by email. However, he said 4776 he "was being extorted. Shnaider didn't care about the other shareholders of Koll." The revised terms were not discussed with any of Koll's other directors. Shnaider gave evidence that all of Shtaif, Groag and Roberts agreed to the new terms.

[445]On about July 5, 2006, Shtaif said police from the Central District uncovered a Snamick Security Agreement [not a Compensation Agreement]. Shtaif denied 3874 that the

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document he had received from the police was Ex. 185/Tab 12, which is a Snamick Compensation Agreement dated November 11, 2004, whereunder Poltoranin had agreed (due to its inability to fulfill his obligations under a loan contract dated December 22, 2002) to transfer 400,000 shares of SibinTek to Siberian Alliance of Machine Building and Services Companies ("Siberian Alliance.")

[446]I reject Shtaif's evidence that the Snamick Agreement he received from the police in July of 2006 was different from Ex. 185. I find as of July 2006, the Agreement in hand seemed to show that Poltoranin had already transferred the shares he was purporting to sell to Trovalion to another party, the Siberian Alliance.

[447]Recovery of SibinTek Notes. Shtaif gave evidence 3697-3700 that after Poltoranin did not show up at the meeting that had been arranged for July 6, 2006, he texted Ex. 42/Tab 281 to Shyfrin: "Please tell your people to become involved. "

July 7-13, 2006

[448]SibinTek. Shtaif said White & Case had never advised him that there was a problem with Reagent's title. As of July 7, he didn't see any issues with it. However, by July 7, Vinogradov was telling him that the SibinTek deal could not close and that they needed to take criminal action to recover the notes.

[449]On July 7, 2006, Shtaif said Vinogradov prepared a document for Poltoranin to sign, reversing the order of clients in the June 14 Safety Deposit Box Agreement and 3697-3700 met with Tsygankov, Poltaranin's lawyer. After Vinogradov accused him of fraud and told him that if the order of the clients were not changed, criminal charges would be filed, Tsygankov became upset. Poltoranin and Tsygankov refused to cooperate with Shtaif thereafter.

[450]Vinogradov gave evidence 1962-1963 he set up a meeting with Tsygankov to have Poltoranin sign a document giving Trovalion control of the safety deposit boxes and to "understand if it was mistake or it was crime." He tried to explain to Tsygankov what they were doing was not right and they would have to go to police.

[451]After Shnaider texted Shtaif: "Did they sign?", Shtaif replied: "No, they decided to back out and not to proceed. Please tell your people to go for it." He later wrote: "Once they received our legal proposal they got pissed and told me to FO."

[452]Later the same day, Shtaif sent another text message to Shnaider:

…We are preparing a contract where Geros will reimburse $12 million plus all expenses within a month or they will sell its 95% of SibinTek for 12 million instead of 22 million for 75%. Worst case scenario is that we will own this company for 10 million less than we were planning. Also on Monday the police will block access to the bank to Poltoranin and we will be able to retrieve the contents of the safety deposit box that we have a key. I am afraid that after today's affair they will find every way to access the contents of the first safety deposit box that they have the key to . Once

…we accused them of having our notes illegally , they got absolutely pissed off and told me where to go. …. So we are meeting with Eduard tomorrow to plan how to retrieve the funds. Meanwhile we have the rights to claim 95% of the company …

[Emphasis added.]

[453]Shnaider responded: "This is total BS … It is useless paper that we get for $12

million."

[454] Shtaif responded Ex. 43/Tab 281:

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…. As for the documents, they claim that they are genuine and that they paid off the other people so there should not be any issues …I am ONLY concerned with the second deposit box. The one where

we have the key Sergei guarantees that Poltoranin will not get his hands on….

[Emphasis added.]

[455]Shnaider replied to Shtaif: "…I think you are all underestimating Poltoranin and his lawyer…"

[456]Changes to Contract. On July 7, 2006, Shnaider emailed Ex. 50/Tab 277 to Marechal, Shtaif, Tilis and Vinogradov, setting out the revised terms of Midland's continuing participation in Koll. He specifically requested that Shtaif confirm the revised terms to Marechal:

…We have decided with M Shtaif that Midland will not invest $50 million into Koll but will provide US $50 million into Koll as a loan for a period of three years at an interest rate of LIBOR +2%. Shtaif has also spent approximately $2 million on setting up this business and his expenses will also be treated as a loan on the same terms and conditions as Midland's loan. It has been decided that all fund transfers from Koll for the companies belonging to Koll such as Ko aploma and Trovalion should be approved by myself and Eduard only . Mike, please confirm this to Michel. Koll must also have full ownership of both Koaploma and Trovalion before any funds should be transferred to their accounts. Mike I suggest you tend to this immediately so the Perm purchase does not get delayed. [Emphasis added.]

[457]Shtaif replied (also part of Ex. 50) to Shnaider, Marechal, Tilis and Vinogradov: "I

fully concur with this email…"

[458]Shnaider then wrote Marechal, Tilis and Vinogradov: "I would like to confirm that we will be sending today as a loan from Midland $14 million plus to Koll Resources…" (68-69). [The remaining funds for the Reef deal ($5 million) were to be provided as a loan.]

[459]In the Loan Agreement Ex. 365/Tab 278 dated July 7, 2006, between Midland and Koll, Article 1 provided that Midland would extend to Koll, from time to time, solely at its discretion, loans up to an aggregate of $50 million. Vinogradov gave evidence that the Midland lawyers prepared Ex. 365 to reflect Shnaider's oral agreement with Shtaif. Ganus arranged for Shtaif to pick it up at the Midland office. Shtaif signed as CEO of Koll and returned the signed agreement to Midland on July 7 or 8. It was then forwarded to Marechal at Zolty's office for signature by Ms. Brassey, the sole director of Koll.

[460]July 8, 2006 Record Meeting. On July 8, Shyfrin, Shtaif and Groag met and confirmed the terms Shtaif and Shnaider had already agreed upon. Ex. 58A/Tab 289, an attachment to Ex. 58/Tab 289, is a minute of the meeting taken by Groag. All parties present agreed Midland would loan $50 million, Shnaider and Shyfrin would have 67.21% of the Koll equity. Midland would fund the purchase of Reef. Shtaif would repay Koll for any losses on the SibinTek notes. Midland would have control of all all operations and expenditures. Outstanding debts ex Magellan for directors, would be settled as per the June 20 agreement. Midland would seriously consider purchase of SibinTek if the owners delivered to Koll properly authenticated papers of ownership and transfer of title no later than July 15, 2006.

[461]SibinTek. On July 8, 2006, Shnaider told Shtaif: they have no right to sell him anything and asked what White & Case said about this company.

[462]Shtaif responded to Shnaider:

On Wednesday they are bringing all of the documents that were prepared for transfer of the property

to us by White & Case. They have unanimous shareholder agreement and changes to the registry and all other documents that White & Case were requesting… As per securing the safety deposit box - on

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Monday criminal charges will be laid against Poltoranin. As of that moment he will not be able to come near the safety deposit box that we have the key. The other box will also be arrested- providing that they did not find any way of moving funds - like having a fake power of attorney. On Tuesday will we know we will know for a fact. So far I can guarantee the safety deposit box that we control. The police will do the rest. Also tomorrow we are meeting with Eduard to discuss other option. I believe that we will have the contents of the second secured through arrest of Poltoranin. I will know more tomorrow after meeting with Eduard and possibly Sergei.

[Emphasis added.]

[463]Shnaider wrote Ex. 43/Tab 281 to Shtaif: "On Wednesday they will bring no

documents … and our people should coordinate with yours the actions that must be taken. I just hope there is still something to save." [Emphasis added.]

[464] Groag emailed Ex. 610/Tab 284 to Roberts on July 8:

I have seen an email between Alex and Mike in which they state they are in for the $50 million but they want 1. Shares as in inaugural minutes and 2 the $50 million is a loan at LIBOR + 2%. 3. Costs of John H etc and SibinTek are for Mike only. I understand Mike has seen written agreement.

Mike and his/our new Security guy were supposed to meet the SibinTek guy on Thursday at 3 p.m. and get the $12 million from the Bank -the guy never showed … the Security guy ( a Colonel in the KGB) has now made arrangements for the guy to be collected at dawn on Friday and go with Mike to collect the money... I gather Eduard wants his guys to go in and collect the money but their price is a little over $1M …

[Emphasis added.]

[465]Shtaif gave evidence at trial 5093-5094 that he had never seen Groag's email to Roberts, Ex. 610/Tab 284. He denied dealing with a Colonel of the KGB.

[466]Vinogradov gave evidence that by July 8, 2006, there was little time left before the Safety Deposit Box Agreements would expire on July 14 and Poltoranin would gain access to the Treasury Notes. On July 8, Shtaif, Vinogradov, Osipov of Regional Alliance, Keloglu and Shyfrin met at the Hyatt Ararat Hotel in Moscow with Mr. Vyashlab Leonov ("Leonov.") Vinogradov gave Leonov all the documents and information he had gathered. Leonov studied them and quickly analyzed what needed to be done. Grounds needed to be identified to bring forward the criminal case. Leonov advised the information to be included in the complaint and proposed it be filed in the Basmanny precinct of Moscow. After the application was received, the prosecutor had to review the complaint. Measures had to be approved, then taken. Given the shortness of the timeframe and the fact that Moscow was a big city, it was important to ensure the application was filed in the correct police precinct to avoid the loss of valuable time.

[467]Shtaif said he was concerned that Leonov had proposed abandoning what Shtaif had

been doing with the police in the Central District of Moscow. He sent an SMS to Shyfrin "… I already signed a letter with the police and criminal investigation will commence. Will this not cross with police?" Shtaif said he was advising Shyfrin about his concern that officers from two different police precincts might charge Poltoranin.

[468]Shyfrin said he didn't understand Shtaif's concern. He thought Shtaif's behaviour was very strange. Although Shtaif appeared to cooperating, Shyfrin perceived from his remarks, the expression on his face, his behaviour, that Shtaif wasn't anxious to recover the money. Shyfrin said:

Isee this message is good evidence of that state of disarray Shtaif was. Because on one hand he had to formally cooperate with the investigation not to acknowledge himself a criminal. But, on the other

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hand, I strongly believe he was involved in the case. He didn 't want, that's very strange, police to arrest the box. We were working on that. We asked them to arres t the boxes to prohibit Poltoranin from taking the money, and he's concerned with it. I don't understand that… I think by this message Shtaif gave himself away.

[469]Vinogradov gave evidence 1658-1659; 1681-1685; 1690-1691; 1965-1966 that at the meeting at the Hyatt Ararat Hotel, Osipov of Regional Alliance told him that one box containing notes belonged entirely to Poltoranin.

[470]Recovery of Treasury Notes. Since the notes were in the name of Euro Gas, Shtaif was the only person who could make the application requesting the police to take urgent measures to prevent a crime: the theft of the Euro Gas notes. Based on the advice of Leonov and the information they had received from Shtaif, Keloglu and White & Case, on July 9, Vinogradov and Ganus prepared Ex. 184/Tab 287, a Statement to Initiate a Criminal Case, to be sent to the police. Vinogradov gave evidence 1694-1696, 1699, 1703 to 1704, 1891-1892 that Shtaif did not object to anything in the draft Statement, including the following reference to the Snamick Compensation Agreement at p. 3:

In addition, at the time of the transaction, we became aware that 40% CJSC, which were the subject of the transaction, were sold by Reagent two years ago under a settlement agreement dated November 11, 2004 to SNAMICK CJSC and the sole purpose of Reagent's General Director A.N. Poltoranin, is the fraudulent acquisition of another person 's property-securities in the form of SberBank bills belonging to Euro Gas Consulting LLC.

[471]Ganus said 2404-2405, 2423-2424 at that time it seemed to him that Shtaif was cooperating unwillingly. He thought Shtaif had not told them everything he knew. He thought that Poltoranin was a fraudster for sure. He was suspicious about Shtaif and mentioned his suspicions to Vinogradov.

[472]After Shtaif signed Ex. 184, it was sent to the police and filed with Prosecutor Zakarov.

[473]Vinogradov gave evidence 1685-1688 that on July 9, the day after Osipov told him one of the boxes belonged entirely to Poltoranin, he decided to take Keloglu to SberBank to

check whether there were one or two security deposit boxes holding SibinTek Treasury Notes in Keloglu's and Poltoranin's names. He said he knew that if there was only one box, it was unlikely they would be able to recover all the notes. A bank officer advised that there was only one box in Keloglu's and Poltoranin's name. He could not advise whether there was another box in Poltoranin's name alone.

[474]On July 10, Roberts emailed Shtaif, with a copy to Shnaider and Shyfrin, Ex. 52A/Tab

290 dated July 9, 2006 on Koll letterhead, "Re Proposed Capital Structure of Koll":

…as I understand the negotiations between Alex and Mike, Alex and Eduard 's money is coming in as debt with a large equity sweetener (about two thirds of the issued shares ). … Using debt in this fashion means that we will have to keep the company private …. I fully understand why Alex and Eduard would now prefer debt. I understand they have lost some confidence in Mike and are concerned that without a super priority, they will rank pro rata with o ther shareholders if something were to go wrong… They now feel that a true equity investment may be too risky.

[Emphasis added.]

[475]Roberts gave evidence he was trying to point out that there were ways [apart from debt] that would be more acceptable to the investment community to protect Shnaider and Shyfrin. Roberts said that at the time Greenspoon agreed with his proposal that they take preferred equity. [Greenspoon gave evidence 3027-29 he did not agree. From Midland's

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perspective, Roberts' proposal that Shnaider and Shyfrin take preference shares instead of debt was not a good idea because debt ranks ahead of equity, preferred or otherwise. Greenspoon 31 said there was no reason, either legal or practical, that Midland could not have debt and that Shnaider and Shyfrin could not also have equity in Koll.]

[476]I reject Roberts' evidence that Greenspoon had agreed around July 11 with Roberts' proposal that Shnaider and Shyfrin take on preferred equity. I accept Greenspoon's evidence 3027-3029 that he did not.

[477]Changing Roles. Roberts gave evidence 6358 that in July of 2006, all the

shareholders including Shnaider agreed that Roberts would come on full-time starting March 1, 2007, about six months before the IPO, to handle corporate finance and assume the administrative duties of the CEO. He mentioned this on p. 3 of Ex. 52A. He said 6366 all the directors agreed his salary would be $350,000 a year and that he would receive a bonus every year, 30% of the option pool and an additional bonus of $350,000 in the IPO year.

[478] On July 10, 2006, Groag emailed Ex. 121/Tab 292 to Shnaider [Shtaif not copied]:

I am still sore at the way information was passed to us re International and their so -called commitment. We should have pushed Mike to get notarized documents to support t heir so-called substance. I kept asking Mike who was this David Watson.

I am also terribly angry at what happened with the SibinTek cash …

[479]Shnaider wrote to Groag (also in Ex. 121/Tab 292): "… the company will have funding for development and acquisitions as long as we feel comfortable with the abilities of management to manage the company…"

[480]Defendants' Discontent with New Contractual Terms. A day later, on July 11, 2006, Groag emailed Ex. 366/Tab 294 to Shtaif and Roberts complaining that "even when we go public, Shnaider and Shyfrin will control like Hitler the new public company….We (you Greg and I) must have a plan to unwind all these nasty arrangements well before we go public next March."

[481]Shtaif agreed "the nasty arrangements" to which Groag was referring were the new capital structure Midland's loan, and Shnaider and Shyfrin's equity in Koll. He said he didn't tell Shnaider about the plan to "unwind these nasty arrangements," although he said he did tell Shnaider on July 12 that he wanted to buy him and Shyfrin out.

[482]Ex. 55/Tab 293 is an email Shtaif sent to Shnaider early on July 11, 2006: "… Forcing me to sign this agreement in haste under duress without due process, claiming that you and Eduard will not approve payment for acquisition of Reef Energy before I execute is not legally binding and can be viewed as extortion and will not be enforceable by the courts."

[483]Shnaider gave evidence 248-251 that he told Shtaif he was not forcing him to sign

any pressure… I suggest you review the Pledge Agreement with your counsel." He continued: "Please advise Reef Energy that the purchase of their assets is postponed."

[484]Shtaif said 3744 that on July 11, on Shyfrin's and Leonov's instructions he went to Basmanny Precinct with Keloglu and Svetlana Kuznetsova of Regional Alliance to file a criminal complaint against Poltoranin. Ganus also attended.

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[485]Lt. Col. Kusakin posed questions, and using their answers and the information contained in Ex. 184/Tab 287, typed and printed statements for Shtaif, Keloglu and Kuznetsova to sign. Shtaif's statement is Ex. 238/Tab 605.

[486]Shtaif said while he was at the police station, he was forced to sign the loan agreement dated July 7, 2006, Ex. 365/Tab 278. On it he wrote:

This agreement was signed under dures s at the police station in Moscow Russia… on July 11, 2006 at 16:15 in the presence of Vladimir Keloglu, Lt. Col. of Police Kusakin, Peter Ganus lawyer from Midland Resources Holdings that brought in contract for execution. Reason for execution was the demand of Alex Shnaider and Eduard Shyfrin. The condition was that payment for Perm project would be executed only after I pledge my shares.

[487]Shtaif said Kusakin and Ganus stepped outside. After coming back in, Kusakin

casually pulled out a gun. While he didn't point it at Shtaif or threaten him, he did put the gun on the table. Moments later, Ganus came in, put the loan agreement on the table and said, "You need to sign." Shtaif said 3504 he "got the message." He had no chance to even read what he was signing Ex. 53, Ex. 53A, Ex. 54. Shtaif said being coerced to sign the loan agreement was "shocking" 4789-4790; "sort of an ambush" 3489.

[488]Ganus denied 2409-2411 seeing a gun at the police station. [As noted earlier, he said that Shtaif had earlier been provided with the loan agreement at Midland's office, taken it away and returned it signed.]

[489]At 20:55 July 11, Shtaif wrote Ex. 56/Tab 293 to Shnaider: "There is no need to reply [to Exhibit 55] since I have executed the loan agreement. "

[490]Shnaider said 84 Shtaif's allegation that he was forced to sign the loan agreement at the police station is "a total lie."

[491]I prefer Ganus' evidence over Shtaif's as to the events at the police station on July 11, 2006. Shtaif's evidence was inconsistent. At his Examination for Discovery he gave detailed evidence 4790-4799 about how he had accessed his email and sent Roberts an email Ex. 367/Tab 294 from the police station using a police computer. At trial he said 4795 he sent the email to Roberts at 11:36 p.m. on July 7. He did not mention threats or duress in that email. His first written complaint about duress after July 11, Ex. 369/Tab 301, was on July 13 – after the Plaintiffs had already made the payment for Reef.

[492]I find that Shtaif signed the loan agreement before he attended at the police station, before Midland advanced the funds to purchase Reef. Even if I am incorrect, little turns on this finding, as counsel for Shtaif, Groag and Bokserman is not asserting that the loan agreement is unenforceable on grounds of duress. Roberts, who is asserting duress, was not present at the police station.

[493]Roberts Decides To Sue on Magellan Promissory Note . Roberts gave evidence 6320 that on July 11, 2006, he spoke to Shtaif about the incident in the police station with the gun. He said Shtaif was extremely upset. Roberts thought the deal was over and emailed Ex. 539/Tab 704 to Beach:

Stop working on Midland. Alex will only put the money back as debt and wants 67% of co! Bill out and send me your account…To get the rest of the money (as no one has the authority now), I am going to commence an action, get judgment and garnish. Mike and Tony are evaluating alternatives… But it looks like things are dead now.

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[494]Roberts said if Koll were dead, he would have kept Magellan's money. He felt he had earned it from Magellan.

[495]I reject Roberts' evidence that he contacted Beach as a result of a discussion with Shtaif about his treatment in the police station. His email to Beach, Ex. 539 written on July 11, does not refer to Shtaif's complaint about the police station. It refers only to the terms agreed by Shtaif and Shnaider on July 6 and confirmed by Shtaif, Groag and Shyfrin at the July 8 record meeting.

[496]July 12 Meeting Shnaider, Groag, Shtaif. Shnaider gave evidence 262-265 that on July 12, he, Shtaif and Groag met at Midland's office in Moscow. The record note of that meeting is at Ex. 60A/Tab 303. Those present agreed Midland would advance the funds Koll required to acquire Reef on July 13, on the condition that by July 19, 2006, Shtaif would remit $525,000 to pay for Leonov's recovery fee. [At that point they did not know the precise amount of the recovery fee, $518,545.53.]

[497]They agreed that Koll would seek a capital pool company public listing on the Toronto Stock Exchange and as well a listing in London on AIM. The IPO would proceed in March 2007 using the investment bankers they had identified. Shnaider would contact Zolty to implement the decisions made at the Koll inaugural meeting. The Koll shares would be issued, 67.21% to Midland and 37. 29% to Shtaif and his team.

[498]After Shtaif advised the Plaintiffs he had transferred the first $200,000 of the

$525,000 recovery fee to Koll, Shnaider authorized the Reef payment 255-256, 265-267. Ex. 57/Tab 297.

[499]Shtaif's Offer to Buy Midland's Shares. Shtaif said he and Groag did not want to continue in a business relationship with Shyfrin and Shnaider. After the "wonderful experience at the police station," he offered to buy the Plaintiffs' shares in Koll at a price equal to the amount of Midland's outstanding loan. He said he had two large investors that he did not identify to Shnaider [Cagan Energy (Excelsior Energy and Alessandro Benedetti) and Alogics (Jack Hazout)], who believed in him and wanted to implement his business plan. Shnaider gave evidence 102 he had not seen any concrete offer from the two investors. He needed to discuss Shtaif's offer to buy their shares with Shyfrin.

[500]I do not accept Shtaif's evidence that he had other funding as of July 12, 2006 and could have repaid Midland. As detailed later, the Alogics offer would not firm up until October 2007. I draw an adverse inference from the fact that this Court heard no evidence from Cagan, Excelsior or Benedetti.

[501]Promissory Notes. I note Ex. 216 dated July 13, 2006 a Resolution of Lt. Col. Kusakin, contains the following:

On June 14, to perform the obligation, two safety deposit boxes were rented … The promissory notes that made the sum of the forfeit under the [$6 million] guarantee were placed in one of the deposit

boxes. At the request of Poltoranin, a free access to the deposit boxes at the expiration of the rent period was given to him.

[502]SibinTek Title. Roberts contended that the Plaintiffs "made up" the title issue during this litigation. He gave evidence 6459 he was of the view that there had been no SibinTek title issues to be concerned about, at least until the Snamick Agreement had surfaced. Even then, there were no title issues that could not have been dealt with. Roberts contended that funds could have been retained in escrow until the liens on the shares had been removed. That

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argument was apparently premised on Shtaif's statement that the Snamick Agreement was a Security Agreement, not a Compensation Agreement, and that Reagent could have paid the debts and insisted the creditors' liens against the Reagent shares be lifted. However, I have rejected Shtaif's evidence on that point and have concluded that under the Snamick Compensation Agreement, Poltoranin had agreed on November 11, 2004 to transfer [not lien] the Reagent shares in SibinTek to the Siberian Alliance.

[503]Roberts noted that on April 22, 2008, the Arbitration Court in Moscow had set aside the Snamick Agreement by Ex. 213/Tab 521 [on the basis that Poltoranin was not a General Director of Reagent when he signed the Compensation Agreement and had not had authority to bind Reagent.]

[504]Roberts submitted that Shnaider's and Shyfrin's decision not to close SibinTek and instructions to Vinogradov to demand Poltoranin and his lawyer return the notes before they were given an opportunity to close, constituted an anticipatory breach. Whether or not Reagent had good title was irrelevant, given this factual scenario.

[505]I find the SibinTek deal could not have closed in July 2006 for a number of reasons. I find that White & Case had repeatedly requested proof of ownership that had not been forthcoming. Even before the Snamick Agreement surfaced, and apart from it, they were not satisfied the sellers had title to the shares they were purporting to sell. I have found under the Snamick Compensation Agreement dated November 11, 2004, Ex. 185/Tab 12, Poltoranin had already agreed to transfer to the Siberian Alliance the Reagent shares that he was purporting to sell to Trovalion (a Koll subsidiary). I find that Vinogradov, Shnaider and Shyfrin reasonably concluded based on the lack of proof of title and the Snamick Agreement, that those purporting to sell shares of SibinTek had no right to do so. In my view it was reasonable for them to take the action that they did, when they did, based on the advice of their lawyers. I have rejected Roberts' submission that Shnaider and Shyfrin are responsible for Koll's SibinTek losses.

[506]In Ex. 184, Shtaif's statement to the police prepared on July 9, Shtaif referred to the Snamick Agreement dated November 11, 2004, saying it provided that Reagent's shares [i.e., the subject of the SibinTek transaction] had already been sold two years earlier.

[507]As of July 2006, the Snamick Compensation Agreement (Shtaif 3716) had not been set aside. By July 13-July 14, 2006, the police had decided that there was a basis to conclude that Poltoranin was about to steal Treasury Notes intended to pay for shares he knew weren't his to sell. See Ex. 216/Tab 210.

[508]Recovery of the Treasury Notes. Vinogradov gave evidence 1700-1702 that a few days after Shtaif's statement was filed with the police, on about July 15 (3765-3766), the police went to SberBank and recovered six notes from Box 0159 having a value of approximately US$5.4 million.

[509]Payment of Consulting Fees. Shnaider gave evidence 266-267 the payment to Leonov's company Largo & Western was made through a Lithuanian bank. Ex. 141/Tab 311; Ex. 286/Tab 299; Ex. 162/Tab 308; Ex. 188/Tab 309; Ex. 142/Tab 316; and Ex. 117 Tab 317

[510]The Defendants suggested the object of the transfers was to provide cash for the

payment of a bribe to the police. Vinogradov said 1703-1709 Leonov was paid not a bribe but a recovery fee for services, of $518,545.53; Ex. 141/Tab 311. It was not sent back to Midland. July 13, 2006 email Ex. 186/Tab 249. Shnaider 266-267. See Ex. 117/Tab 317.

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[511]Vinogradov said Shtaif had promised Shnaider he would personally pay the recovery fee. Shnaider emailed Shtaif, telling him to make the payment following instructions provided by Vinogradov Ex. 119/Tab 325. Ex. 186/Tab 299 is an email from Vinogradov dated July 13, 2006 providing Shtaif with details needed to pay Leonov's fee of $518,545.53.

[512]Roberts Sues Magellan on June 23 Promissory Note. On July 13, 2006, Roberts issued Ex. 605/Tab 758, a Statement of Claim against Magellan. At paragraph 5, he pleaded that on June 24, 2006, he had demanded payment from Magellan. At trial he admitted that was untrue. Roberts gave evidence that shortly after he issued the claim, he phoned Howard and told him he wanted to serve Magellan by serving John Sparrow. Roberts said 7617 he had thought Howard would consent to service on Sparrow. Before service was attempted, he had filled out an affidavit of service Ex. 682/Tab 818 and signed it on Sparrow's behalf. However, Howard did not consent. He advised that Sparrow lived in the British Virgin Islands. Since Roberts could not claim he had served the Statement of Claim on Sparrow, the lawsuit languished until November of 2006.

[513]Closing of Reef. Shtaif said 3770 that the purchase of Reef closed on July 13, 2006.

[514]By July 13, 2006, Roberts, Groag, Shtaif had agreed to attempt to unwind the "nasty arrangements" to which they had agreed earlier in the month. On July 13, 2006, Shtaif emailed Roberts: "… Now we know what needs to be done. Let's get them." By July 13, 2006, Roberts was already taking steps to collect on a Magellan promissory note that I have found had not been properly authorized and about which the Plaintiffs knew nothing.

July 14-21, 2006

[515]On or about July 14, 2006, the Russian police charged Bekker and Poltoranin with

fraud.

[516]On July 15, 2006, Shnaider wrote Ex. 137/Tab 307 to Groag, advising he and Shyfrin had decided to stay with Koll.

[517]Shtaif said because Shnaider and Shyfrin refused to be bought out at that time, he had no choice but to continue in business with them. When Midland did not have anybody there to operate Koll 3525, it would have been unethical for him to just abandon everything.

[518]Reef. On July 17, 2006, Shtaif retained Miller and Lents to provide a report on Reef, including on its reserves.

[519]On July 17, 2006, Shnaider sent an SMS to Shtaif: "We've received no money from you. What's going on?" Shtaif replied: "I sent instructions on Thursday last week. It should be there by Wednesday.…" Shnaider wrote: "Did you send $525,000 or $200,000 only?" Shtaif responded on July 18 (Ex. 188/Tab 309): "I sent the entire amount, $525,000." However, Shtaif said 4819 he later learned the wire transfer had not gone through because the instructions Midland had provided to him had been incorrect.

[520]Euro Gas. Ex. 188/Tab 309 contains an email dated July 18, 2006 from Vinogradov

to Shtaif, Shnaider and Shyfrin reflecting that although Shtaif had agreed to transfer Euro Gas to Koll, he still had not provided the documents necessary to effect the transfer.

[521]Collection on Magellan Note. Roberts said he intended to collect whatever remained in Fasken's account after Fasken's bill for work done for Magellan had been paid, using his June 23 Magellan promissory note. On Roberts' instructions, on July 20, 2006, Beach sent

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him two invoices, one for $7,408 and one for $3,021, Ex. 546/Tab 741, for Fasken's services to Magellan.

[522]Further to Shnaider's instructions to implement the agreement on July 12, Marechal circulated a Koll draft shareholders agreement [Ex. 63/Tab 313] providing, among other things, for the appointment and remuneration of directors and the distribution of shares in accordance with the June 20 minutes (Shnaider 270-272.) However, Shnaider said 272-274 that shortly after he received that draft, he learned that Shtaif had not reimbursed Midland for Leonov's fee [Ex. 142/Tab 316] or transferred Euro Gas to Koll as promised. Therefore he instructed Marechal by Ex. 64/Tab 314 to put the draft shareholders agreement on hold. Shyfrin gave evidence that formally issuing shares as per the June 20 minute was contingent on Shtaif fulfilling his obligations, including transferring ownership of Euro Gas. They did not finalize the Shareholder Agreement at that time because Shtaif had not done what he had promised to do.

July 22-26, 2006

[523]Roberts alleged that after the police recovered approximately US$5.4 million in SibinTek Treasury Notes in July of 2006, the Plaintiffs unilaterally, without any consultation, notice to or agreement of Koll's management or Board of Directors, caused the funds to be transferred from Koll to Midland.

[524]Shtaif gave evidence 3764-3767 that on July 22 or 23, Shyfrin asked him and Keloglu to collect the Treasury Notes worth $5.4 million from Lt. Col. Kusakin. On July 24, 2006, he said Shyfrin and Vinogradov met at Midland's offices with "the same policeman" who had been at the Hyatt Ararat Hotel on July 8, 2006. Vinogradov told Shtaif the policeman was there to collect cash. Vinogradov and the policeman had agreed that once Shtaif had collected the notes, Vinogradov would release the cash to the policeman. Keloglu and Shtaif went to the police station. When Kusakin was transferring the notes, Shtaif called Shyfrin and said he had them and cash was handed over to the police. Shtaif then delivered the notes to Vinogradov. The notes were cashed, the proceeds were paid to Euro Gas, then Trovalion and then on Midland's instructions, Midland.

[525]Vinogradov denied Shtaif's allegations set out above and said no cash or bribes were paid to the police.

[526]On July 24, 2006, Shnaider emailed Ex. 68/Tab 320 to Shtaif:

Hope you have given the bank the correct instruction and the funds are by now in our Accounts. … I

am still waiting to hear what happened to the $200,000 you advised me you wired on … July 13 … you told me you have signed the pledge agreement but … I am informed by Valentin … you did not… We are not hiding our disappointment at how things have been handled …

[527]Shnaider also emailed Groag: "…. We still did not get the $525,000."

[528]On July 25, Marechal emailed Ex. 70/Tab 322 to Groag c.c. Shnaider et al., advising that the shareholding recorded in Koll's records was 80/20 and advising that the three recorded beneficial owners needed to agree to any changes. Shtaif gave evidence that Shnaider asserted that Midland held 80% in Koll Resources Limited in furtherance of the Plaintiffs' breach of contract. Shnaider gave evidence 273-275 that he and Shyfrin never disputed that they held 67.21% of the shares. However, in Ex. 138/Tab 321, he wrote Groag: "Midland today holds 80% in KRL" because he wanted Shtaif in effect to stop complaining and fulfill his promises so Koll could move forward.

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[529]On July 25, 2006, Shtaif wrote Groag, with a copy to Roberts and Shnaider, "I am

extremely disappointed and appalled at what is happening in our company." Shnaider replied:

I don't understand what you are disappointed and appalled about. We wish to be reimbursed $525,000 you have promised … we wish to have full control of Euro Gas Russia…. We would like

an agreement describing how you will reimburse us. … Once all obligations are met, Midland will start funding all of Koll's operating expenses from June 20 … and will continue funding all acquisitions… we will issue shares as per June 20.

[530]Shtaif's Alleged Non-Performance. On July 25, 2006, Groag sent an email Ex. 69/Tab 323 to Roberts and Shtaif: "I spoke to Alex… His message is simple… If Mike does not meet his obligations in the next few days there is no need to meet with investment bankers, investors, etc. …"

[531]Shtaif gave evidence that said he did pay the $525,000 by forwarding $400,000 to Euro Gas for Koll operating expenses and $125,000 to Miller and Lents on account of the report he had requested on Reef.

[532]Changes to Contract and Alleged Non Performance. In an email dated July 26, 2006, Ex. 119/Tab 325, Shnaider continued to press Shtaif to pay the $518,545.53 "recovery fee" - "We would like to have an agreement in place describing in detail how you will reimburse us for all our losses due to the SibinTek affair. " Shtaif said he was "simply amazed" at this "unethical" request. Koll should have borne the losses on the notes.

[533]I have found none of the Plaintiffs' four requests in late July 2006 were new. Shtaif had promised to transfer Euro Gas from the outset of the joint venture. He had falsely represented that he had already forwarded the $525,000 and that he had already signed the pledge agreement. He had not done either. As of July 26, Shtaif had no basis to be "amazed" or "appalled." I find in all the circumstances Shyfrin and Shnaider were acting reasonably.

July 27- 31, 2006

[534]Changes to the Contract. In submitting that the Plaintiffs have breached the contract, the Defendants rely heavily on the Plaintiffs' agreement on July 27, 2006 on a convertible loan. Ex. 71/Tab 326 contains a minute of a meeting in Moscow on July 27, apparently prepared by Shtaif. Shyfrin and Shtaif attended the whole meeting, Groag part of it, Shnaider by telephone for part of it.

[535]Roberts and counsel for the other Defendants submitted that at a meeting in Moscow on July 27, 2006 [that Roberts did not attend], Shyfrin agreed on behalf of the Plaintiffs to

amend the loan agreement into a convertible loan agreement, convertible into 67.21% shares of Koll, as agreed previously (Ex. 71; Shtaif 3774).

[536]Shyfrin agreed that on July 27, 2006, they discussed changing the loan agreement to a convertible loan agreement. His evidence on January 29, 2013 at 79-80 includes the following:

Q.On the second page there's some reference to a proposal that Midland and Shtaif execute convertible loan documents. Was that agreeable to you?

A.Yes, I can explain this. After Shtaif signed the loan agreement they started, all of them, Shtaif,

Roberts and Groag, started to try immediately to renegotiate somehow, saying it 's not appropriate for the company to go public with loan and so on and so on. So I told them okay, loan could be convertible but in our - my and Mr. Shnaider's - discretion. It didn't harm our interest. That's it.

Q. Item 2 -- let me ask you this: Did you ever convert your loan to shares?

A.Never. [Emphasis added.]

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[537]Shyfrin said he tried to act in good faith. Shtaif had already failed twice, in International Energy and "strongly" in SibinTek. However, since they were still going to continue with Reef, he wanted to encourage Shtaif. That is why he proposed a good deal for him.

[538]I accept Shyfrin's evidence that on July 27, 2006, Shtaif did not accept any of his proposals, including his offer of a convertible loan in his and Shnaider's discretion. [I note that on August 5, Roberts wrote Ex. 613/Tab 334: "Alex has ignored my suggestion that his interest be protected in a convertible instrument. "]

[539]Euro Gas. Shtaif advised he had commenced the transfer of ownership of Euro Gas to Koll. Voskoboinikov had signed all the necessary documents and given them to Vinogradov.

[540]Meetings with Investment Bankers. Shtaif said 5111 they met with several investors between July 28 and 31, 2006, including Jack Hazout of Duration Management who was putting together a syndicate of investors in London. Hazout and Excelsior Energy made an offer of $65 million for equity in Koll. Shtaif said he could not pursue discussions with them because Midland refused to be bought out at that stage.

[541]I reject Shtaif's evidence that had Shyfrin and Shnaider been prepared to sell their interest in Koll in July 2006, $65 million would have been available from Duration Management. I do not accept Shtaif's assertion that he could not pursue discussions with potential investors because Midland had refused to be bought out. At that time, Roberts and Shtaif had been representing to Shnaider and Shyfrin that they had other investors to replace International's $70 million and to supplement their $50 million. Had $65 million been available, Shnaider and Shyfrin would have welcomed it.

[542]In reaching the conclusion that funding was not available on July 12 or at the end of July and in rejecting Shtaif's evidence that it was, I have considered the nature and dates and other content of the financing documents that were entered into evidence. I have also drawn an adverse inference from the fact that counsel for the Defendants did not call anyone representing the alleged $65 million "offeror."

[543]On July 27 and 28, 2006, Shtaif and Groag met in London with Nick Clayton, the UK managing director of Canaccord. Roberts was not at the meeting, but he asked this Court to find that Canaccord's opinion at the time was that Koll could get $7-$8 per barrel for its 2P reserves (reserves classified as proved or probable). Roberts gave evidence that originally, Canaccord proposed to raise $50 million pre-IPO, and $150 million on the IPO in September 2007.

[544]Bokserman said 5730 at the meetings with Canaccord in July of 2006, they were all still waiting for the Miller & Lents report. Bokserman agreed in cross-examination 5792 that "maybe" Canaccord did not agree at that time to raise any particular amount of money.

[545]Maybank, the only representative of Canaccord who gave evidence at trial, had not attended the July 2006 meetings.

August 2006

[546]Recovery of SibinTek Treasury Notes – Transfer of Criminal File. Shtaif gave evidence that once the $5.4 million worth of Treasury Notes had been collected, the police in Basmanny Precinct lost interest in pursuing Poltoranin and Bekker. In August of 2006, the criminal file was transferred to the Central District. Shtaif said he requested that they

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investigate the whereabouts of the six notes that had not been recovered and he assisted them with their investigation.

[547] On August 1, 2006, Groag emailed Ex. 448/Tab 685 to Shtaif: "Larry [Nusbaum] and I are of the same opinion that David Watson and John Howard are one and the same person…"

[548]On August 5, 2006, Roberts emailed Ex. 613/Tab 334 to Shtaif, which included the following:

Unless Alex can point to something more than negligent handling of this matter or the criminal behavior of the vendor it was his decision to breach and he and not Mike or Koll should take responsibility for that loss. … It is unfortunate that I do not have enough information to comment about what happened in Russia with SibinTek but Alex's reasons for trying to cancel the deal have never made sense to me …

…We do not need a fight with Midland. What we have to do is tell them quite clearly that we are not interested in the structure that they have pushed on us , and that we must start running this company properly, based on a structure that Alex's own lawyer, Avi accepts -no debt. Alex has ignored my suggestion that his interest be protected in a convertible instrument that converts into preference shares or into preference shares on the terms that Avi seems to agree with. … He may have reasons, but he simply can't ignore our interests as minority shareholders and the agreements that we have made …

[Emphasis added.]

[549]As of August 5, 2006, Roberts was advising Shtaif to tell Midland that they were not interested in the deal Shtaif, Groag, Shnaider and Shyfrin had already made. Roberts was the one ignoring agreements already made. He was also taking the position, incorrectly in my view, even though he acknowledged he did not have enough information to comment on what happened in Russia, that the SibinTek deal could have closed but for Shnaider's interference.

[550]On August 6, 2006, Groag emailed Ex. 72 and 72A/Tab 335 to Roberts, Shtaif, Shnaider and Shyfrin. He said: "We must commit to the future of Koll or liquidate it … " He proposed calling "an urgent meeting … to decide an urgent course of action" and proposed three alternatives: 1. A purchase by Shtaif at a price equal to Midland's loans [Shnaider said at that time that did not seem to be a viable option because he understood (correctly, I have found) that Shtaif would not pay $518,545.53, and could not raise the amounts needed to repay Midland's loan]; 2. Midland fully invest $50 million with a further $65 million

[551]Shnaider said it was clear in August of 2006 what needed to be done. Euro Gas needed to be transferred to Koll. Shtaif needed to reimburse Koll for the recovery fee. Had that been done, everything would have gone forward on the basis agreed earlier.

[552]On August 8, 2006, Ganus wrote Ex. 189/Tab 336 to Shtaif, again seeking the transfer of Euro Gas to Koll.

[553]Ex. 535/Tab 338 dated August 8, 2006 and Ex. 534/Tab 339 dated August 10, 2006 contain correspondence between Canaccord and Shtaif, following up on their July 28, 2006 meeting. Canaccord forwarded a draft letter re proposed pre IPO funding and AIM [Alternative Investment Market] Admission. I note on Schedule 8 – Pre-IPO Term Sheet – the amount to be raised has been left blank. A pre-IPO timetable was included, showing due

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diligence in August and September of 2006, marketing in October 2006 and funding by the end of October 2006.

[554]Ex. 614/Tab 343 is a confidential email from Shtaif to Roberts, Groag, Shyfrin and Shnaider dated August 25, 2006, about meetings with CIBC and GMP: "CIBC … assured me that they could raise all the necessary funds we will require for the pre-IPO and post-IPO funding requirements…"

September 2006

September 1-12, 2006

[555]On September 1, 2006, when commenting on a draft Midland Energy Resources/Koll presentation prepared for September 2006 meetings with investment bankers that valued Reef at $620 million, Hazout (who listed himself as a strategic advisor to Koll ) wrote in Ex. 494/Tab 708: "I think $620 million is too high regarding the amount of 2P reserves that we hold today. We maybe should maybe consider only the 2P as they are now 88.4 million at average BBL 3.5 TEV (Total Enterprise Value) plus cash in hand about 30 million = 339M$ …" (I note in January 2007 Miller and Lents estimated Reef had 2P reserves of 33,578 MBBLs, not 88.4 MBBLs.)

[556]Ex. 391/Tab 351, the draft presentation, referred at page 11 to a continuous program in acquisition of fields that will increase recoverable reserves by 120 MBOE of 2P reserves in less than a year. At p. 14: Total 2P reserves estimated 1/2007 of 392.7 MBOE (Million Barrels Or Equivalent).

[557]On September 6, 2006, Groag emailed Ex. 615/Tab 344 to all Board members [plus Bokserman], confirming they were planning a private placement, pre-IPO funding. He listed items to be discussed at a meeting to be held in Toronto on September 11, 2006, that had been scheduled to coincide with meetings on September 13 and 14 with Canaccord, CIBC World Markets, Wellington West Capital Markets and Haywood Securities and others.

[558]Maybank of Canaccord gave evidence that little had happened between the July 2006 meetings and the meetings with Canaccord [and others] in September 2006. In other words, neither pre-IPO financing nor a listing on AIM or the TSX Venture Exchange had been pursued.

September 13, 2006

[559]Investment Banker Meetings. Roberts gave evidence that by September of 2006, the investment bankers already understood Shtaif's business plan, reserve quantities, etc. [At that point, the Miller and Lents report on Reef reserves was not yet available.]

[560]By September 2006, Shtaif could refer to Koll's ownership of Reef and could provide the investment bankers with the Ryder Scott report, Ex. 319/Tab 11 dated November 1, 2004 that had been prepared for Reef's previous owner. Roberts had prepared Ex. 391 for presentation at the September meetings. It mentioned that eight field acquisitions had been approved. One had closed.

[561]Shnaider attended some of the investment banking meetings with Groag, Shtaif and Roberts. In his written submissions Roberts quoted the following excerpts from Shnaider's evidence 801-802; 1138; 1146 about those meetings:

A.They [the investment bankers] were all very keen on the bus iness plan. Although they said that everything needs to -- they have to do due diligence. They said that it sounds very appealing …

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So from the meeting I understood that yes, Russian oil assets are attractive. … They did like the management team, they did like the investors, which is myself and Mr. Shyfrin. Because we had a very good reputation, still have a good reputation. And they were selling themselves to us, their ability to raise money for the company.

….All I know is that we were all met by these in vestment banks, and they all said that they will be

very excited and will be willing to participate in raising money for this oil company.

…The investment banks were excited by the prospect of bringing these undervalued companies to -- that have oil in Russia to the public markets. They were excited. All of them were excited. All of them wanted to participate in the IPO. But they all said that it's also all subject to due diligence. If what you are telling us is correct, it sounds like it's a wonderful, wonderful opportunity. Exactly what myself and Mr. Shyfrin were thinking when we started this venture with you gentlemen.

[Emphasis added.]

[562]Shnaider also said 10, 14 at the meetings he attended with the investment bankers, there was little discussion about what Koll was doing. "It was way too early to do an IPO. We only had one field."

[563]Haywood Securities. Ex. 393/Tab 346 is the Haywood Securities presentation [about a proposed IPO of about $50 million – see p. 14].

[564]Roberts gave evidence Shnaider/Shyfrin's/Midland's $50 million participation was clearly a positive factor for Haywood. Shtaif disagreed, saying that while assets were important, management was more important. The most important factor for any investment banker was management's ability to perform on its business plan.

[565]Wellington West. Ex. 394/Tab 349 is the presentation of Wellington West dated September 15, 2006. Its chief executive officer, Thompson, attended, as did Jason Squires, its oil expert. Roberts gave evidence that Squires was pretty impressed with what Shtaif had done with Reef.

[566]Canaccord Adams. I note that despite the discussion in late July, Koll had done nothing with Canaccord before September respecting pre-IPO financing. Ex. 392/Tab 347 is the September 2006 Canaccord Adams presentation. Maybank gave evidence that in September 2006, Canaccord was presenting its credentials and trying to convince Koll to choose it to lead the underwriting. Maybank and its Chief Executive Officer, Reynolds Clayton, global head of Oil and Gas, and Porter, his second-in-command attended.

[567]Maybank said Canaccord had uncertainty at that time about Koll's corporate structure and other details, including Koll's asset acquisitions. He said Canaccord had not performed any valuation of Koll at that time. However, they walked through the methodology that Canaccord would typically use. Maybank said they value based on flowing barrels of oil. Roberts gave evidence that investment banks typically value using two parameters: 2P reserves based on a value per barrel (at p. 14 set out EV/2P reserves – up to $5/boe); and the number of barrels per day of oil production multiplied by a factor of 100,000 (EV/production

– up to $100,000/bopd).

[568]I note that in the Canaccord presentation, Ex. 392, at Page 10, under Appetite for Magellan IPO, there were question marks under the following headings: Equity; Market Conditions; Corporate Structure and Valuation. Canaccord was questioning how Koll's Board was constituted and its corporate governance. Roberts made notes on his copy. At Page 10. Appetite for Magellan IPO. Equity market conditions? Corp. structure? Valuation? Beside all three, Roberts wrote "uncertainties." Beside management he put a question mark. Beside ability to close he put a question mark. Beside ability to pull deals into portfolio, he wrote:

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"need to get management team better known in investment community. " At p. 18, under Influence on Timing he wrote: "Is Magellan still considering a pre IPO funding round to be followed by an IPO next year? Unless we are desperate, wait … What progress has been made securing the four assets outlined in the August meeting? Status of Miller and Lents reserve evaluation?"

[569]Shtaif gave evidence 3840 that he concluded at the Canaccord meeting that Canaccord had no issues about raising $100-$150 million.

[570]Roberts said his understanding from Canaccord at the time was that the debt that Shnaider had forced upon them was unacceptable.

[571]Maybank 6634 could not remember debt being an issue at the September meeting. He was unaware of the terms of the July 7 loan agreement, including its three year term commencing in July 2006. He said 6625 the existence of this loan would not in and of itself have been fatal to the IPO. Many companies go public with debt on their books. Such debt may not be a negative so long as the cash flow of the company can maintain it.

[572]Maybank said 6637 the enthusiasm Canaccord representatives felt about this business proposal was based on what Shtaif, Groag and Roberts told them. He took what they said at face value. They never progressed to the due diligence phase. Had a commitment letter been signed, Shtaif's track record and the business plan would have been closely scrutinized.

[573]CIBC. Ex. 159/Tab 350, the CIBC presentation contains at p. 7 an assumption that Koll would acquire further assets in October and November of 2006 so that by the IPO Koll would have 2P reserves of 150 MMBL.

[574] Shtaif said 3849 that none of the investment bankers expressed any reservations about a private raise of $100-150 million on a pre-IPO basis. They were planning to list in the first quarter of 2007. Shtaif said 3860 that based on presentations of Canaccord and CIBC, looking at the reserves at that stage multiplied by the multiples that had been suggested, they calculated Koll's value post-money [i.e., after a successful IPO] at about $600 million.

[575]Roberts gave evidence that they decided after the meetings in September 2006 that the lead investment banker would be Canaccord Adams and the lead banker would be the Canadian Imperial Bank of Commerce.

[576]I find that as of September 2006, although possible comparables and valuation parameters had been discussed, the investment bankers had not done any valuation of Koll. Everyone was waiting for the Miller and Lents report. While Shtaif and Roberts were telling the Plaintiffs that Koll's post-IPO value was $600 million, that was not a valuation that had been prepared or provided by any investment banker or oil economist.

September 19-30, 2006

[577]On September 19, 2006, Shtaif emailed Ex. 449/Tab 686 to Herskovits, a lawyer in Nusbaum's office: " … It is … our belief … that Howard is using Watson's identity. … All negotiations and execution of documents was performed by Howard. Even in letters from Watson, the signature was computer-generated. This is what led us to believe that Watson is a myth and it is all Howard …"

[578]SibinTek. On September 20, 2006, Shnaider emailed Ex. 169/Tab 352 to Shtaif, Roberts et al. "The man that stole our funds has been arrested today."

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[579]Roberts said that sometime before the September 30 Board meeting when he met Howard at YYZ Travel, Howard threatened to expose Shnaider's involvement in the illegal distribution of Magellan securities if Shtaif's lawsuit continued.

[580]On September 29, 2006, Roberts emailed Ex. 160/Tab 356, a PowerPoint presentation re Investment Banking Summary, to be made at the September 30, 2006 Koll Board meeting. Under Comparable Companies, Roberts wrote "EV/2P reserves up to five dollars per barrel of oil." Under Capital Structure: "Debt is a non-starter. Need an agreement with Midland to convert debt to equity as a condition of moving forward with the IPO. 14 weeks to conclude IPO. Need perfect audits before clock can run. Need Miller and Lents reserve evaluation …"

[581]SibinTek. Shtaif gave evidence 3974 that on September 30, 2006, Poltoranin was released without being charged.

[582]Koll September 30, 2006 Board Meeting. Ex. 73/Tab 360, the minutes of the Koll Board meeting in Moscow held on September 30, 2006, contain the following:

(a)At the first bullet: "M. Shtaif advised his private suit against … Howard and De Freitas … was continuing."

(b)At the second bullet: Shtaif advised … Koll needed to invest 6M in seismic and drilling 5 new wells before the end of 2006 and he expected this would have the effect of converting the 62M P3 reservers into P1/P2 reserves giving the field a value of 500 M based on the Miller and Lents findings. The $6 million investment was approved.

(c)At the seventh bullet: "Koll capital structure - debt is not acceptable." [Emphasis added.]

[583]Re Debt. Roberts said everyone at the meeting [and Greenspoon] agreed that debt was not acceptable. Shnaider said 10 that it was not discussed in the manner described in the Minutes. Shnaider had never heard directly from Canaccord that debt would not be acceptable

to the investment bankers. He agreed to attend a meeting at Canaccord and committed to find a solution if Canaccord advised that debt was unacceptable. [Roberts gave evidence 6452 he understood from that, that Shnaider would agree to convert.]

[584]Euro Gas. Shnaider said on September 30, 2006 he was continuing to insist that Shtaif transfer Euro Gas. #7. Mr. Shtaif confirmed Euro Gas will be transferred to KRL ownership on Monday October 2 after Voskoboinikov [had]… paid the $100,000 owed.

[585]Date of IPO. The IPO was to take place in September 2007.

[586]Suing White & Case. At Item 8 under "Other Matters" the Minutes referred to legal action against White & Case for their gross negligence with respect to SibinTek. Shnaider said that neither he nor Shyfrin thought White & Case had done anything wrong; they would have nothing to do with any action against White & Case.

[587]Although the minutes referred to legal action against White & Case for gross negligence, I accept Shnaider's evidence that he and Shyfrin refused to participate in litigation against White & Case. No action was commenced.

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October 2006

[588]Ex. 502/Tab 661, a letter from SberBank to Zhukov (the investigator) setting out the names of the two individuals and two corporations that had negotiated four of the six missing SibinTek Treasury Notes, numbers 1837670, 1837671, 1837672, 1837675, leaving two notes unaccounted for, 1837673 and 1837674.

[589]Shtaif gave evidence 3974-3975 that he was the one who had directed SberBank to stop payment on the two notes that had not been cashed as of September 30, 2006. He said 3974 that on or about October 5, SberBank security stopped Poltoranin from cashing one of the notes [note 1837674] and advised him immediately. Ex. 25/Tab 8 at page 13 contains an SMS from Shtaif dated October 5, 2006 to Shnaider and Shyfrin containing the following: "Eduard, we stopped a person from cashing one of our notes. Police are going to get all the information. P will be charged soon. 7 million rubles have been seized. Other notes are probably locked in different safety deposit boxes. Will get access to them shortly."

[590]Shtaif said after note 1837674 worth approximately $1 million or 30 million rubles had been recovered, Shyfrin and Shnaider wanted it cashed in the same manner as the notes worth $5.4 million recovered from Box 0159 in July had been cashed. As it was in the name of Euro Gas, Shtaif's cooperation was needed.

[591]Collection on Shtaif's June 23, 2006 Promissory Note from Magellan. Roberts gave evidence 7609-7612, 7621 that in October 2006, he was surprised to learn from someone at the TD Bank that there were roughly $110,000 in the Magellan TD account.

[592]In October of 2006, neither Shtaif nor Roberts told Shnaider or Shyfrin either that there were approximately $110,000 belonging to Magellan in the TD bank account or that Roberts was taking steps to recover it for Shtaif using his June 23 Magellan promissory note.

[593]Euro Gas. On October 10, 2006, Shnaider emailed Ex. 474/Tab 365 to Groag, c.c. to

Shtaif:

…Euro Gas be transferred to Koll... Mike assured us that it would be done on Monday, October 2 … A few days later I was advised … the transfer of Euro Gas will take some more time. In order to expedite the whole matter, I have agreed with Mike that it will be better for us to set up a new Russian company [Petroleum Management] that will take over all obligations of Euro Gas. [Emphasis added.]

[594]Shtaif gave evidence 5119 that Shnaider "sprang " the transfer to Petroleum Management on him. It was all "a ploy, a ruse by Shnaider." He needed to think about transferring the management of Reef to Petroleum Management. He wanted to check regulatory aspects in Russia and to check with the taxing authority.

[595]On October 11, 2006, at the request of Investigator Zhukov, Ex. 197/Tab 367, a judicial injunction, was issued by Judge Alexandrova obliging SberBank not to negotiate SibinTek Treasury Notes 1837673 and 1837674.

[596]In the fall of 2006, Groag was diagnosed with cancer and began chemotherapy in London, England.

[597]On October 30, 2006, Groag tendered Ex. 399/Tab 374, his resignation as acting CFO,

employees had not been cooperating with him. Shyfrin's sister would not provide him with details he considered necessary to complete Koll Resources Limited's financial statements in

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accordance with GAAP and the International Financial Reporting System. Shtaif 3901-3902 gave similar evidence.

November 2006

[598]Euro Gas. Initially, Ganus, not Shtaif, had been the General Director of Petroleum Management [the company that was to replace Euro Gas]. On November 1, 2006, Shtaif had written Ex. 190/Tab 377 to Shnaider and Bokserman, insisting that he be appointed General Director: "I understand one of your lawyers was appointed General Director... In order to ensure proper performance … I must be fully responsible for operational decisions…" [Emphasis added.]

[599]Ex. 190 also contains the following from Shnaider to Shtaif dated November 1, 2006:

Dear Mike,

I have asked Valentin to appoint you as General Director of Petroleum Management. We will need to discuss the extent of your powers in regard to the management of Reef. We would obviously like to have a very defined role of what you are able and not able to do within Reef.

[600]Groag Salary Dispute with Koll. Roberts gave evidence 7846 and submitted in argument that in October 2006, after Groag was diagnosed with life-threatening cancer, Shnaider demanded that Groag be terminated as Executive Chairman and CFO of Koll. Shtaif and Roberts vehemently objected. Ultimately Shnaider, without any notice to Groag or the Board of Koll, unilaterally reduced Groag's remuneration and the Plaintiffs' attempted to squeeze Groag out of Koll while he was undergoing chemotherapy in a London hospital in flagrant breach of contract and against all standards of human decency.

[601]I accept Shnaider's evidence that while on October 30 he had not understood that Groag was ill, on November 2, 2006, Shtaif did tell him that Groag was resigning for health reasons. It was Shtaif's idea to reduce Groag's CFO salary, but to continue his salary for acting as Chairman of Koll. Shtaif set out his proposal in Ex. 74/Tab 379, an email sent

added for the CFO position. Do you agree?" Shnaider 316-317 said he thought Shtaif's suggestion was fair and he agreed.

[602]SibinTek Treasury Notes. On November 3, 2006, Shtaif emailed Ex. 410/Tab 380 to

Groag:

I am preparing for a very unpleasant meeting with the "Boys"…. Just for your knowledge - we have

collected back from P[oltoranin], and it is now in the hands of Sergei $1.5 million. I did not tell this to the boys . I will keep this confidential until I fully understand their intentions. This is a good amount to keep operations going. This time I will not let them "steal" the funds from the company … [Emphasis added.]

[603]In cross-examination on Ex. 410, Shtaif asserted 5140 that the $1.5 million note was really in the hands of Inspector Zhukov, not in Sergei's hands. He said 5138-5139 he referred to Sergei in Ex. 410/Tab 380 because Groag did not know Zhukov. [On discovery at question 7333, he had said that Sergei had the note, not Zhukov.]

[604]Shtaif denied 3979 that in Ex. 410 he was referring to another $1.5 million in addition to the note he had advised Shnaider and Shyfrin about on October 5. Shtaif said 3982 he had forgotten he had sent an SMS to them on October 5, 2006.

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[605]I find by November 3, the police had seized the remaining two notes, 1837673 and 1837674, and Shtaif knew it. [He gave evidence 3996 that in 2009, he applied to cash both notes, 1837673 and 1837674.] I find based on Ex. 410, in 2006 Shtaif intended to cash note 1837673 without advising "the boys" [Shnaider and Shyfrin]. However, SberBank had been enjoined from cashing it by Judge Alexandrova in Ex. 197. Shtaif waited until 2009 to take further steps to cash note 1837673.

[606]Transfer of Euro Gas. On November 3, 2006, Roberts wrote to Shtaif in Ex. 621/Tab

381:

We will canvass all issues with Allan [Beach] on Monday. Although the loan agreement is pretty clear, we will be in for a fight to say they do not have any shares.

In reality as long as you control Perm and the rest of the opcos in Russia you will always have ultimate control no matter what the Shareholder Agreement says.

[Emphasis added.]

[607]I find as Roberts had earlier noted, the transfer of management to Petroleum Management was a good idea, in the best interests of Koll. However, as of November 6, 2006, Shtaif was still delaying the transfer of Euro Gas.

[608]By November 3, 2006, Roberts was advising Shtaif and Groag that his interpretation of the July 7, 2006 loan agreement was that Shnaider & Shyfrin were not shareholders in Koll and that they had no right to convert. On November 3, 2006, Shtaif emailed Ex. 621/Tab 381 to Roberts:

…Can you please discuss this issue with him [Shnaider] and try to dissociate my appointment [as General Director] from proper issuance of shares and directors' appointment. I am already a General Director and there is NOTHING that can be done with our production company in Russia without my approval, so I am in no hurry to change anything. … Can you please advise me if you have had a chance to talk to Allan about the loan agreement that I was forced to sign? I would really like his interpretation before I meet with Alex and Eduard. I am sure he will agree with your views that they are now just creditors and their agreement did not give the right to convert.

[Emphasis added.]

[609]Shtaif wrote Groag: [also in Ex. 410/Tab 380]:

I would like for Greg and Allan [Beach] to come up with a legal opinion as to Alex and Eduard status as shareholders.

…

Greg already gave his expert opinion that. … this agreement confirms my status as shareholder, but does not qualify Alex and Eduard as shareholders. On the contrary they deliberately positioned themselves as creditors without any mention of ownership, or the right to convert to equity at any time… If this accurate … this gives us total control of Koll since we are the only legitimate shareholders. I propose we immediately FIRE Marechal. … I think if we decide to keep Alex and Eduard in the company and allow them to convert at different valuations than what they perceive we will not have them in control… If you agree … I will meet with the boys … and face them with these facts … my proposal is to present them with several choices. 1. Convert at valuation that was agreed when they invested in Magellan 32% = $50 MM. 2. Call in their loan. … 3. … enforce our position

…and remove them from business interference 4 clean house ….

[610]In my view Ex. 410 and Ex. 621 are significant. Shtaif and Groag were discussing hiding significant funds from "the boys." Roberts was advising Shtaif to take the position that Shnaider and Shyfrin were not shareholders in Koll and they had no right to convert. Shtaif was suggesting removing Shyfrin and Shnaider from "business interference."

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[611]On November 6, 2006, when Roberts emailed Ex. 541/Tab 745 to Beach, he did not ask for his opinion about whether Shnaider and Shyfrin were shareholders in Koll or suggest they had no equity. He wrote:

The original deal Alex and Ed got in Magellan was 32% for $50 million. When we agreed to give the money back on June 20, the shares were supposed to be allocated pursuant to the resolution (see Inaugural Meeting). Then Alex had some issues with one of the properties that Mike bought and that deal was rescinded by Alex. Following which Alex forced Mike to sign a debt agreement for the $50 million but he still wants 67% of the equity – and repayment of the $50 million which Mike agreed to under duress in Russia without the rest of the … Board knowing what was going on. I told Alex the $50 million debt would never fly if we intended to go public – besides the terms are way too generous. Mike could not buy the first property unless he signed, which is now worth about $80 million (on Alex's investment of $25 to date and it will be worth a lot more in a few months as Mike completes work on the site) The real issue is how to sort out the equity. Mike say they own 32% because that's all they've paid for, but clearly that will not be Alex's view. I believe the only way to resolve this is for Alex to agree to all equity (no debt) … put the money in (all $50 M) and get control via the shareholders ' agreement until we raise more money (thereby diluting his position and control)… Otherwise we will have to ask Alex for a shotgun … (or a wind -up).

[Emphasis added.]

[612]On November 6, 2006, Roberts emailed Ex. 410/Tab 380 Shtaif: "I suggested that we all meet with Allan Beach in Toronto on Monday, November 6, but to no surprise Alex again dodged the meeting. He doesn't want to get pinned down next to lawyers. He understands that once he is facing us in the presence of our 'independent lawyer' …his game will be over."

[613]By November 2006, I find Shtaif, Groag and Roberts were not only scheming "to unwind the nasty arrangements" to which they had agreed in July, but going further, seeking to prevent Koll's majority shareholders from participating/interfering in Koll's business. Roberts was advising Shtaif that Shyfrin and Shnaider were not Koll shareholders. They were discussing whether to keep them in Koll and "allow" them to convert. Roberts also wrote that so long as Shtaif controlled the opcos, he would have ultimate control "no matter what the Shareholders Agreement says." Shtaif was "in no hurry" to change anything because NOTHING could be done with the production company in Russia without his approval.

[614]As mentioned earlier, Shtaif was opposed to the transfer of the proceeds of note 1837674 to Midland. Ex. 140/Tab 383 contains an email dated November 8, 2006 from Regional Alliance to Shtaif and Ganus:

In relation to getting the promissory note from the police-the first option - documents will be printed out on letterhead of Euro Gas Consulting. We will stamp it and it will be signed by one of Mike 's deputies. Second option - the documents will be printed out on Euro Gas letterhead. … stamped and handed to Midland.

[615]Shtaif wrote to Vinogradov and Ganus:

Can you please explain to me who decided that the Treasury Note needs to be picked up at 3 PM today? … Who authorized you to have any dealings with the legal and criminal process that concerns Euro Gas Consulting Inc.? I believe that I never authorized, nor will I EVER authorize you or anyone from Midland to represent my or Euro Gas ' interests in this investigation; especially I WILL definitely not sign a power of attorney for you to represent my interests or to collect any evidence, in this case, a Treasury Note from the police. This evidence will be used in a criminal investigation against Artur Poltoranin and his accomplices. What you are proposing is to remove the most important piece of evidence against these people which proves that a crime has been committed. This is obstruction of justice. If anything happens to this Treasury Note, Euro Gas and I are liable and can be charged in Russia for obstruction of justice and other criminal violations."

[Emphasis added.]

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[616]Vinogradov replied Ex. 140/Tab 383: "Are you okay? We have obtained the opportunity to keep the Treasury Note in our hands and I see no reason why we shouldn't do it. Let me remind you this is Midland's money and Midland will protect its interests… "

[617]Shtaif gave evidence 3987 that this was not Midland's money. It was Koll's money. He said, "Vinogradov didn't care about the proper procedure." Shtaif said if the note were cashed, evidence would be unavailable and that would affect the prosecution of Poltoranin.

[618]I find Shtaif knew that he had agreed to transfer to Midland the proceeds of the notes that had been recovered in July. That is why Vinogradov wrote "This is Midland's money."

[619]Vinogradov gave evidence that Midland had been doing everything it could to

decrease the losses that it had already suffered arising out of SibinTek. Neither the police nor the prosecutors had objected to the release of the note or to it being cashed.

[620]I find Shtaif knew SberBank had been enjoined on October 11, 2006 from cashing the notes. For SberBank to agree to cash note 1837673 or 1837674, further steps would have been necessary. At the same time, Midland had not yet taken steps to contest Shtaif's status as victim. Shtaif might have thought if Euro Gas applied to cash the note, upon proving ownership, he would be allowed to cash it.

[621]Roberts Collection on his Magellan Promissory Note dated June 23. Roberts said when the TD bank manager had advised him in October that there were about $110,000 in Magellan's account, he also had advised Roberts that John Sparrow was trying to access those funds. When Roberts asked the bank manager how he had left it with Sparrow, he provided Sparrow's telephone number. When Roberts called the number to speak to Sparrow, Howard answered. Roberts said he asked Howard if he was John Sparrow. Howard laughed. Roberts said, "I want to serve you with the Statement of Claim. I would like you to cooperate. If you touch the money in the [TD] account I'm calling the police."

[622]I note that Ex. 607/Tab 382 contains an email from Roberts to Howard dated November 8, 2006: "… We should meet at the usual spot at Indigo later today …" Roberts said on November 8, 2006, he had arranged to meet Boock intending to serve him with his Statement of Claim. Boock didn't show up.

[623]However, on November 9, 2006, Robert's law clerk went to Boock's home to serve his Statement of Claim on "Sparrow," "Sparrow"/Boock accepted service and signed a consent to judgment on behalf of Magellan. Ex. 606/Tab 758 contains a simplified procedure motion form dated November 9, 2006, containing the law clerk's affidavit, referring to Roberts' June 23, 2006 Promissory Note in the amount of US$44,796, the making of a demand on June 24, 2006 for payment and Sparrow's consent to judgment, and deposing that Sparrow was the Corporate Secretary of Magellan, known to "our law firm."

November 11,2006 – Koll Meeting

[624]Defendants' Discontent with Changes in Contract. Ex. 75/Tab 387 is minutes of a meeting held on November 11, 2006 in Moscow at which Shyfrin, Shnaider and Shtaif tried to resolve the dispute about custody and cashing of note 1837674 and also the $50 million debt/conversion of debt or loan into equity issue, so they could proceed toward the IPO.

[625]The November 11 Minute referred to one SberBank Treasury Note [1837674] for 30 million rubles (approximately $1 million). Note 1837673 was not mentioned [because Shtaif had not advised the Plaintiffs it had been recovered.]

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[626]At that meeting, Shyfrin, Shnaider and Shtaif agreed that Ganus would use Shtaif's power of attorney, pick up note 1837674 and keep it uncashed at Midland's offices. They agreed that the shareholdings in the percentages confirmed at the June 20 meeting would be implemented as soon as management was transferred from Euro Gas to Petroleum Management. On the $50 million debt issue, Shnaider and Shyfrin agreed to review their position regarding debt and equity after they had received and reviewed the Miller & Lents report. Shnaider 320-321.

[627]I accept both Shnaider's and Shyfrin's evidence they did not want to stand in the way of a successful IPO. Shnaider's evidence 335 includes the following:

My position has been the same, that we will find a solution because it is also our interest to have a successful IPO. And we will find a solution in order to satisfy the investment banks and the other shareholders... You know, the only thing that … we insisted for him to do is transfer the management from Euro Gas … to Petroleum Management. … We also insisted on him reimbursing us for the $525,000 for the recovery fee.

[628]Given his November 3, 2006 email to Roberts, Ex. 410, I do not accept Shtaif's evidence 3955 that as of November 11, 2006, he was prepared to transfer management from Euro Gas to Petroleum Management.

[629]Shtaif said at the November meeting he advised there were other interested parties who were willing to acquire the shares of Midland. However, Shnaider and Shyfrin wanted to remain majority shareholders and proceed to the IPO. I find that as of November 11, 2006, his advice to Shnaider and Shyfrin that he had other parties willing to acquire Midland's shares was false.

November 12-30, 2006

[630]Shtaif's Action Against Howard. On November 12, 2006, three days after "Sparrow"/Boock/Howard had admitted service and consented to judgment in Roberts' action against Magellan, Roberts emailed Ex. 622/Tab 388 to Nusbaum, advising he did not think Shtaif's action against Howard in Texas should have been commenced because Shtaif had not suffered any damages as a result of Howard's actions.

[631]Defendants' Discontent with Changes in Contract. Shtaif said on November 13, 2006, in breach of their agreement Shnaider and Shyfrin were imposing a "new condition" that had nothing to do with issuance of shares (i.e., that the operations of Reef be transferred from Euro Gas to Petroleum Management).

[632]I reject Shtaif's evidence that as of November 13, 2006, the transfer of operations from Euro Gas was a "new condition," a breach of contract. That condition had existed from the outset.

[633]On November 14, 2006, Euro Gas and Midland, as agreed on November 12, formally entered into a safekeeping agreement Ex. 76/Tab 390 with respect to note 1837674.

[634]Roberts' Collection on Magellan Note. On November 16, 2006, Roberts obtained judgment against Magellan on his promissory note from Magellan. Ex. 605/Tab 758 for $44,796 plus $1605.29 for a total of US$46,401.29 and then took steps to collect the Judgment against funds in the Fasken's trust account. He advised Faskens that the funds in its trust account could be used to pay Magellan's outstanding balance [leaving $39,570.66]. Ex. 547/Tab 742 is an email from Ms Walker at Faskens dated November 29, 2006 to Ms. Chu, another Faskens employee: "I received a call from Greg Roberts regarding the outstanding

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A/R and he advised we can use the funds to pay the outstanding balance for the client 266215 [Euro Gas Consulting]. Please note he has indicated the company name should be Midland Energy Limited, not Euro Gas Consulting. " Roberts denied that he gave those instructions.

[635]Faskens withdrew funds to cover its accounts on November 30, 2006.

December 2006

[636]Euro Gas. Ganus said that in December of 2006, the Midland lawyers completed registration of Petroleum Management. However, they still had been unable to work out the terms of Shtaif's appointment as its General Director. It is general practice to limit the powers of the General Director of Russian companies and to require consent of the other shareholders in certain situations. They could not understand why Shtaif insisted there be no limitations on his authority. Shtaif said 3965 he objected to any limitation on his authority because 5124 that was his right.

[637]Groag Salary Dispute. Shtaif said that as of December 2006, Groag was still acting as both executive chairman and CFO of Koll. He had accompanied Shtaif to meetings with investment bankers and they had had many discussions about how to focus the company and move it forward. On December 7, 2006, Shtaif emailed Ex. 122/Tab 393 to Shnaider, saying Koll had no basis to reduce Groag's salary. On December 9, 2006, in Ex. 400/Tab 394 to Groag, Shnaider reiterated that Groag had resigned.

[638]Re Euro Gas. On December 10, 2006, in Ex. 123/Tab 395, Shtaif emailed Groag and Shnaider, mentioning that Euro Gas would have to remain as managing company of Reef, because it had applied for licenses and he had not been appointed yet as General Director even though he "requested Peter Ganus to do this 1½ months ago…" Shtaif wrote Ex. 143/Tab 395 to Shnaider: "Alex, this is what is really happening. It is not a Euro Gas issue but a PM [Petroleum Management] issue and the problem lies with MRH [Midland] personnel, in either not being interested in complying with our direct requests, not being able to complete the tasks, not being competent in their duties or plain and simple stalling… " [Emphasis added.]

[639]Vinogradov 1729-1731 and Ganus 2471 gave evidence they were still waiting for Shtaif to respond about the limitations to be placed on his powers as General Director; Vinogradov said, "When Shtaif had unlimited power, we all saw what happened." On December 11, Smyslov, a Midland lawyer wrote to Shnaider in Ex. 191/Tab 396, advising that while all the papers to be filed in relation to the appointment of Michael as the new General Director were ready, Shtaif still needed to propose clauses providing for a limitation of his authority as General Director.

[640]Shtaif advised Shnaider that Smyslov's update was "totally inaccurate." He had told the Midland lawyers to adopt "EXACTLY SAME PROVISIONS as they have for Ganus, nothing more and nothing less." Shtaif gave evidence 3962 as soon as he insisted upon having the identical [unlimited] powers as Ganus had had, the Petroleum Management issue died.

[641]Groag Salary Dispute. On December 12, 2006, Groag advised Shnaider in Ex. 401/Tab 574 that he was considering legal action against Midland for constructive dismissal.

[642]In Ex. 401/Tab 574, Shtaif wrote to Groag that he and Shyfrin had agreed on Friday on all outstanding matters. Groag's reinstatement as acting CFO was to be on a gratuitous basis.

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[643]Shtaif Lawsuit v. Howard. On December 21, 2006, Roberts emailed Ex. 286/Tab 399 to Greenspoon advising he had convinced Mike to settle. I make no finding on whether Roberts and Howard agreed that Howard would assist in the Magellan actions if Shtaif would abandon his action against Howard.

2007

January 2007

[644]Roberts said 6453, 6504 at the end of January 2007 Shnaider had "again changed his position." By then Shnaider wanted all his money back on the IPO or beforehand, and to maintain 67.21% of the company. He was no longer agreeing to the convertible loan to which he had agreed on July 27, 2006.

[645]Roberts gave evidence 6514 that in January 2007, Koll's plan had been to raise $150 million on an IPO in September of 2007. However, because Shnaider was insisting on repayment of Midland's $50 million loan, they increased the amount to be raised to $200 million. Bokserman said 5730 the plan was to raise $50 million pre-IPO and $200 million on the IPO in September 2007. He thought Shnaider wanted to be repaid out of the IPO. However, that is not something that Shnaider had personally told him.

[646]On January 23, 2007, Roberts emailed Ex. 623/Tab 401 to Maybank and Webb, including the following proposed agenda: "discuss the path forward with a new company without Midland-raising private money through our connections and Canaccord… "

[647]Action On Shtaif's Magellan Promissory Note. Roberts issued a Statement of Claim dated January 23, 2006 on Shtaif's behalf against Magellan on Shtaif's June 23 promissory note. He served Shtaif's Statement of Claim (Ex. 608/Tab 759) on January 24, 2007 by leaving a copy with "Sparrow" at Boock's address. "Sparrow" again consented on behalf of Magellan to the Judgment. Again it was falsely alleged that a demand for payment had been made on Magellan on June 24, 2006 and that Magellan had failed or neglected to pay the amount owed.

[648]Defendants' Discontent with Changes in Contract Terms. On January 25, 2007, Roberts emailed Ex. 624/Tab 402 to Shtaif and Groag, including the following: "… I do not think it is fair for us to take a haircut given what was agreed to last June, and how things changed in that Moscow police station-AND how well Mike has done to leverage Koll's investment."

[649]I find Roberts' January 25, 2006 complaints to Shtaif and Groag in Ex. 624 ignored the July Agreement reached after the SibinTek fiasco had come to light. As of January 27, 2007, the July Agreement had not been amended.

[650]The Miller and Lents Report. On January 26, 2007, when Miller & Lents finally issued its long-awaited report re Reef (Ex. 77A/Tab 403), Shnaider gave evidence 837-839 that while he did not understand the report, he was pleased because Shtaif, Groag and Roberts seemed pleased with it. Shnaider wrote Ex. 77/Tab 405 to all of the directors: "Mazal Tov."

[651]The table on page 1 of the Report summarizes Miller and Lents' estimates of reserves at Reef made in accordance with the Society of Petroleum Engineers' definitions of reserves in three categories: proved, probable and possible.

[652]Miller and Lents estimated 2P (proved and probable) Reef reserves at 10,809 MBbls (proved) and 22,769 MBbls (probable) = 33,578,000 Bbls.

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[653]Miller and Lents estimated future net revenue for total "proved reserves" of 10,809 MBbls [discounted at 10% and unadjusted for risk] at $52,176,000, future net revenues for the "probable" reserves of 22,769 MBbls [discounted at 10%, unadjusted for risk] at $67,494,000 future net revenues for total possible reserves 50,266 MBbls [discounted at 10%, unadjusted for risk] at $36,870,000.

[654]Miller and Lents reported that the estimated reserves were mainly undeveloped and their development would require significant capital expenditures.

[655]Schaeffer, Senior Vice President of Miller and Lents, gave evidence that because each of the reserve categories had a different risk level, the estimated cash flows from each could not simply be added together arithmetically. The discount rate of 10% used by Miller and

Estimates of future net revenues … are not intended and should not be interpreted to represent fair market value for the estimated reserves. … The probable and possible reserves volumes and the estimated future net revenues therefrom have not been adjusted for uncertainty. None of the proved probable and possible reserves volumes … should be combined with either of the other without adjustment for uncertainty.

[Emphasis added.]

[656]Schaeffer gave evidence that Miller and Lents did a standard evaluation of Reef on a deterministic basis. Miller and Lents provided an oil in place calculation based on a development work plan by Seidlitz Services and other information provided by Shtaif/Euro Gas [Ex. 397/Tab 677 and Ex. 398/Tab 678], including information about its intentions and its financial and technical wherewithal to extract the oil from the ground. Miller and Lents put together an economic model based on information provided by Shtaif, applied prices, operating expenses, capital investment programs, taxes, and arrived at net cash flow, projected over the life of the field, discounted at 10% to present value as of November 1, 2006. Miller and Lents did not verify the data Shtaif had provided. The accuracy of its report was entirely dependent upon the accuracy of the information that had been provided by Euro Gas.

[657]Roberts submitted that once the Miller and Lents report was received, Shnaider and Shyfrin realized the potential value of Reef and increased their demands.

February 2007

[658]Roberts gave evidence and submitted in argument that by February 2007, Koll was positioned to go public. A syndicate of investment banks had been put in place to raise significant funds.

[659]On February 2, 2007 Roberts emailed Ex. 648/Tab 771 to Maybank, asking him to comment on the effect on the valuation if Shnaider took back his $50 million, the IPO were for $600 million and $200 million were raised. Maybank categorized Roberts' inquiry as "an

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[660]On February 7, 2007, Roberts wrote Ex. 627/Tab 408 to Shtaif and Shnaider: "I feel that if he wants his money back, the equity should be adjusted (up for us, down for Midland) to give them what they want and leave us where we agreed."

[661]On February 14, 2007, Roberts sent Ex. 628/Tab 409, a Powerpoint presentation for Koll to Groag and Shtaif. Under Milestones: "Two field acquisitions to date. First field was purchased for US$19 million. Miller and Lents Report … values this field at DCF US 156M as of November 1, 2006. Aim to have 3-5 like field acquisitions closed by time of IPO. IPO - $200 million. Q3 on TSX and AIM."

[662]Shtaif's Motion for Judgment on Magellan Promissory Note. On February 15, 2007, Roberts submitted a Simplified Procedure Motion Form seeking judgment in Shtaif's action on the Magellan June 23 promissory note. In support, his law clerk filed an affidavit attaching a consent to judgment signed by John Sparrow. Again, she deposed that a demand for payment had been made on Magellan on June 24, 2006, and that Magellan had failed to pay the amount owed.

[663]Collection on Judgment on Roberts' Alleged June 23 Magellan Note. On February 15, 2007, Roberts sent a Requisition to Fasken's for Garnishment of $46,901.29 plus $500 for costs.

[664]Defendants' Discontent with Changes in Contractual Terms. On February 16, Roberts circulated a memo to all shareholders, Ex. 78A/Tab 410. He wrote:

The Issue

The issue in a nutshell is that Midland wants to be repaid its debt out of the closing proceeds of the

plus a $25 million penalty: … Midland's position would be neutral. I've spoken to Canaccord. Although they would clearly prefer that Midland's investment remain in the company as paid up equity, the IPO could still proceed, as long as the money raised covers the use of funds, as outlined in our prospectus, and pays back Midland. The issue is what happens if we fall somewhat short of our target (IE do not raise all of the money we need to execute and pay back Midland)? At that point the IPO will have to be repriced and the reduction in valuation would certainly exceed 1 to 1 if not more, given that all of our capital would be removed.

…: Unless there's something I'm not aware of, issues surrounding SibinTek, whether real or apparent, are now behind us and the reason for Midland's sudden change should no longer be a factor.

The Legal Issue

…The debt instrument that Midland's lawyers prepared is very clear – it creates only debt without equity considering … Midland's lawyers, perhaps inadvertently have moved Midland's position from shareholder to creditor …

The Resolution

I do not think any of us want to see this matter resolved in the courts – … and Midland's shareholders do not want to see Midland get only their $ back plus interest because of some "imprecise" legal work but that would likely be the result if this matter were settled in the courts.

I have prepared a valuation based on the assumption that our company will have at net worth of 600,000,000 at the IPO and we will raise $200 million. Mike is of the view the assumptions are valid

…

[Emphasis added.]

[665]He suggested 3 steps to resolve the impasse.

(1)Midland consent to straight equity as was agreed in June 2006 and rescind the debt instrument.

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(2)Given the remarkable results at Perm, we should consider whether to wait longer to take the company public. It seems that we can raise more private equity at higher levels and can leverage some institutional debt … we will get a bigger return if we wait in my view.

(3)A shareholder agreement limiting the powers of directors except with written conse nt of 80% of shareholders, acting reasonably.

…

[666]Shnaider gave evidence he thought Ex. 78/Tab 410, Roberts' memo, was based on a false premise. He told Roberts that he and Shyfrin did not expect the $50 million loan to be repaid out of the IPO. Article 1 of the loan agreement dated July 7, 2006 provided that repayment was not required until July 7, 2009.

[667]Shtaif gave evidence in his view Midland could have called the loan at any time. He would not concede that if Koll kept the loan in good standing, Koll would not need to repay it until July 7, 2009.

[668]Roberts said Shnaider never told him he got the issue wrong in his February 16, 2007 memo and that the $50 million loan was not repayable before July 7, 2009.

[669]Shtaif conceded 5165 there are no documents in writing from Shnaider confirming that Shnaider was insisting that Midland's $50 million loan be paid out of pre-IPO funding.

[670]Groag Salary Dispute. Exhibits 124, 124A and 124B/Tab 412 are a February 17, 2007 email from Groag to Shnaider and Shyfrin enclosing calculations of the salary and expenses he said Koll owed him, and a memo from Groag to Shnaider about his claims.

[671]Shtaif said 3920 he told Shyfrin that Koll should continue paying Groag for both his CFO and Chairman positions until June 20, 2007, at which time he would resign as CFO and just stay on as a non-executive chairman.

[672]Value of Reef. On February 17, 2007, Shtaif emailed Ex. 478/Tab 413 to Groag, with attachment. This document, similar to Ex. 528/Tab 409 but not identical, contained on the third page, under the heading "Milestones": "Two field acquisitions to date. First field was purchased for US$19 million. Miller and Lents Report values this field at DCF US $156 million as of November 1, 2006." Shtaif denied 5155 that in Ex. 478, he was representing that the fair value of Reef was $156 million.

[673]Shtaif February 18, 2007 Valuation of Koll. On February 18, 2007, Shtaif prepared Ex. 411/Tab 415 estimating Reef's value; based on DCF multiplied by 2 = $386,820,000; by 2.5 = $483,525,000; by 3 = $580,230,000, based on Russian averages value of reserves - $356,462,000; based on Heritage oil equivalents - $502,734,000. He said 4021 if Reef had been in Canada, its value would have been $905,202,000.

[674]In late February, meetings were being arranged in London with Canaccord, JP Morgan Cazenove and Haywood Securities.

[675]Motion for Judgment on Shtaif's Magellan Note. On February 21, 2007, the judge who reviewed the motion for judgment in Shtaif's action against Magellan required proof that Sparrow had authority to bind Magellan. Roberts called the process server and instructed him to add the words "I have authority to bind the Corporation" to "Sparrow's" consent.

[676]Postponement of March 1 Meeting. Shyfrin said he understood that a shareholders meeting had been scheduled to take place in London on March 1, 2007. However, Shnaider was unable to attend on March 1. He and Shyfrin felt that they should both be present at the meeting.

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[677]On February 21, 2007, Shnaider emailed Ex. 79/Tab 419 to Groag confirming that he and Shtaif had agreed to postpone the meetings to the end of March. Roberts said 6525 he was "somewhat outraged" that Shnaider would postpone the March Board meeting because he knew how important it was to resolve everything and go forward with Canaccord and JP Morgan Cazanove in the UK. The Board meeting could not be delayed, because even if a deal were signed in March 2007, the timing would be tight for a September 2007 IPO.

[678]On February 21, 2006, Groag emailed Ex. 631/Tab 422 to Shyfrin and Shnaider:

Koll cannot afford to have further damage done to its operations by you, Eduard and Midland and its value as a result of your now unwillingness to meet on March 1, 2007 and confirm the plans for 2007. Therefore the Koll shareholder meeting will take place in London as planned…

[679]Shnaider asked Greenspoon to draft a response to various emails Groag had sent to Shnaider. Greenspoon gave evidence that when he drafted Ex. 127/Tab 422 on February 22, 2007, he understood that Shnaider and Shyfrin were not prepared to rescind the debt instrument. However, he said Shnaider had an open mind and wanted to find a solution to the impasse among the Koll shareholders. Shnaider gave evidence Ex. 127 was not sent to Shtaif and Groag because he had already scheduled a meeting with Shtaif on February 25, 2007.

[680]On February 23, 2007, Groag wrote Ex. 126A/Tab 423 to Shnaider, listing some of Shyfrin and Shnaider's breaches of contract including failing to pay $50,000,000 back into Koll, to issue shares, to pay executive directors' salaries, etc.

February 25-26, 2007

[681]Shnaider 344 and Shtaif 4038 agreed they met on February 25, 2007 in Moscow. Shnaider said he suggested to Shtaif that since there had been so much controversy about the loan standing in the way of a successful IPO, in order that they not dwell on that subject anymore, he would agree that if Shtaif promised to pay Shnaider and Shyfrin $15 million out of future options or warrants after the IPO had been successful, they would agree to forgive Midland's $50 million loan immediately. [If the $50 million loan were forgiven, the 32.79% shareholders would gain by 32.79 x 50 = $16.4 million. The loan outstanding as of March 1 was $41.9 million x 32.79 = $13.7 million]. Shnaider said Shtaif agreed. They called Greenspoon together on Shnaider's phone.

[682]Greenspoon gave evidence 3035 that on Sunday, February 25, 2007, he received Shnaider's and Shtaif's telephone call from Russia. The phone was on speaker and Shnaider did most of the talking. He told Greenspoon that he and Shtaif had reached an agreement with respect to Koll's capital structure. In the context of going public, Midland would agree to forgive its loan, provided that Shtaif pledged to pay Midland $15 million after the IPO. The $15 million secured by Shtaif's pledge of shares/options/warrants. Shnaider asked Greenspoon to draft a pledge agreement.

[683]Shtaif had a very different version. He gave evidence 4033 that at the meeting on February 25, 2007, Shnaider insisted that Midland's loan be repaid out of pre-IPO funding or the proceeds of the IPO and that Shtaif compensate Midland $15 million and that Shyfrin and Shnaider's shares not be diluted on the IPO. Shnaider asked Shtaif to assign options and warrants to cover his additional $15 million demand, to pledge options and warrants some of which were to be allocated among members of Shtaif's team. Shtaif said 4039 he and Shnaider did not reach an agreement: Greenspoon's and Shnaider's evidence about Midland's willingness to forgive the loan in exchange for future compensation of $15 million was false.

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[684]In argument, Roberts pointed to Shnaider's statement at discovery [read in at trial] that he wanted his US$50 million back and 67.21% of the equity (Ex. 709/Tab 833) at 4373-4376:

BY MR. ROBERTS: 4373.

Q. …. Isn't that true, sir … you wanted Mr. Shtaif to give up a big hunk of his equity so that you could be whole on a post money valuation basis?

A. No … I wanted to get my $50 million loan that was agreed, and I wanted to have 67 percent of the equity in the company.

4374

A. Whatever I would be losing, if... by cancelling my loan … I wanted to get from Mr. Shtaif.

4376.

Q. So what you wanted was, you wanted your money back and you wanted to still have 67 percent...

A. Exactly. I wanted exactly what was agreed and what was signed by Mr. Shtaif and agreed by all shareholders of Koll.

[Emphasis added]

[685]I do not accept that Shnaider's evidence read in by Roberts corroborated Shtaif's versions of the February 25 discussions. When Shnaider said "whatever I would be losing by cancelling my loan, I wanted from Shtaif," I find he was confirming that he was agreeing to forgive the $50 million loan in exchange for "whatever would be lost by cancelling the loan. Shtaif agreed in cross-examination 5178 that 32% of 50 million is approximately $15 million [32.79% x $50 million = $16.4 million]. (At that point in time, 32.79% of $41.9 million already advanced was $13.7 million and was expected to increase before the IPO.)

[686]I accept Shnaider's and Greenspoon's evidence about the telephone call on February 25, 2007. Greenspoon's evidence 3033-3036 at trial about the telephone conversation with Shtaif and Shnaider was consistent with Shnaider's evidence and inconsistent with Shtaif's.

[687]Shnaider gave evidence 345-346 that on February 26, 2007, Shtaif reneged on their agreement made the night before. Shtaif's email dated February 26, 2007 to Shnaider, Ex. 412/Tab 428, read in part as follows: "So pledging warrants or shares is not going to work. Please advise Avi not to bother with preparation of the pledge. If $15MM is such a critical issue, then we have no other alternative but to move to option 4 or 5, dissolve the company and compensate ALL parties equitably. "

[688]Shnaider wrote Ex. 80/Tab 431: "Last night we agreed to move forward and this was communicated to Avi in your presence … I called Avi and instructed him to draft a loan agreement between you and MRH. Now you have changed your mind again."

[689]In Ex. 287/Tab 432, Greenspoon wrote on February 26 to Shnaider: "Looks to me like Shtaif's hiding behind … suspect legal advice he says he received to back out of what he agreed with you yesterday."

[690]Shtaif said he met with Shyfrin on the evening of February 27, 2007 and discussed the options he had set out in Ex. 412/Tab 428, his February 25, 2007 letter. Shyfrin denied meeting with Shtaif.

[691]End of February 2007: Meetings With Investment Bankers. Voskoboinikov gave evidence that when he attended with Shtaif at a meeting with Canaccord Adams in late February 2007, Koll was being valued between $400 and $600 million. Canaccord believed it could do a pre-IPO raise of $50 million.

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[692]I reject the evidence of Voskoboinikov in light of Koll's failure to make the acquisitions assumed in Magellan's May and September 2006 presentations, to follow- up on the August 2006 discussions with Canaccord on pre-IPO financing, and Roberts' note taken at Canaccord discussions in September that they should not seek pre-IPO financing unless they were desperate, and Roberts' advice to the Koll shareholders who attended the March 1, 2007 meeting that Roberts had advised the meeting that Canaccord had advised going public on AIM with a very small public float to simply get public.

February 28, 2007

[693]On February 28, 2007, Shnaider emailed Roberts asking him to call. Roberts gave evidence 6539 that during that conversation, Shnaider said the Plaintiffs would not proceed unless Midland was repaid its loan plus accrued interest out of the proceeds of the IPO and Shnaider and Shyfrin retained 67.21% of the shares of Koll and Shtaif agreed on behalf of all of the minority shareholders to pay an additional US$15 million.

[694]Roberts 7806-7807 was "flabbergasted." In his view it was another "police station stick up." Shnaider was trying to put a gun to their heads again. He, Shtaif and Groag were not going to give into an extortive attempt to take another $15 million. He said he told Shnaider: "Tomorrow we've got investment banker meetings, a shareholder meeting and you are demanding another $15 million. This is going to sink our IPO. This is going to sink our business."

[695]Roberts said he told Shnaider that his side considered the Plaintiffs' demands as a final repudiation. Shnaider said the Plaintiiffs' position would not change and improperly refused to attend the March 2007 meeting in person or by teleconference. Roberts told Shnaider he would be hearing from their lawyer.

March 2007

[696]Prior to the March 1, 2007 meeting, Shyfrin went to the London hotel where Groag and Shtaif were and met with them.

[697]Shtaif gave evidence 4058 that he and Shyfrin discussed the debt issue. Shyfrin said he would look after it and he would give instructions to Zolty to properly structure Koll so they could proceed with the IPO. Groag complained about underpayment of his salary. Shtaif said 4057-4058 Shyfrin apologized to Groag. Their discussion ended on good terms.

[698]Shyfrin January 29, 2013 91-93 agreed that he met with Groag and Shtaif on the morning of March 1, 2007. Although he remembered Groag complaining about his salary, Shyfrin couldn't remember the other details. He said he has respect for older people. He knew Groag was terminally ill, so he tried to be nice to him. While Groag might have considered Shyfrin's words to have constituted an apology, Shyfrin said he did not apologize to Groag.

[699]The Shareholders' Meeting March 1, 2007. After Shtaif and Groag met with Shyfrin, Shtaif, Groag, Roberts and Bokserman purported to hold a Koll shareholders' meeting. Shnaider and Shyfrin did not attend. Shtaif gave evidence 4059 about that meeting as follows:

A.Well unfortunately we wanted to discuss the move forward, but we realized that in our view this was another and final breach by Midland of the agreement. We understood they did not want to comply with any requests unless they get what they want. So we figured out there's just no way we're going to be able to proceed with the company. …

Q.What was your collective conclusion at that meeting about next steps?

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A. Our conclusion was that this was the final – repudiation of our agreement. We saw it as a breach, a final breach.

[Emphasis added.]

[700]Roberts was at the March 1 meeting. Paragraph 165 of his final argument includes the following: "The March 1, 2007 meeting proceeded, at which time the shareholders and directors present voted to accept Shnaider's and Shyfrin's repudiation."

[701]Two versions of the March 1 Minutes were entered into evidence: Ex. 405/Tab 444, a draft version of the Minutes and Ex. 406/Tab 445, the final version. Ex. 405 includes the following (which was omitted from Ex. 406):

LOAN AGREEM ENT BETWEEN THE CORPORATION AND MIDLAND RESOURCE HOLDINGS LIMITED, AND ALEX SHNAIDER'S AND EDUARD SCHIFRIN STATUS AS SHAREHOLDERS OF THE CORPORATION

The Chairman noted that Mr. Shnaider and Mr. Schifrin had neit her subscribed for nor paid for the shares that were allotted to them in accordance with the agreement to do so made and minuted at the inaugural meeting of the shareholders of the Corporation on June 20, 2006. Mr. Shtaif advised the meeting that Mr. Shnaider demanded verbally and in writing that he execute the loan agreement between the Corporation and Midland Resource Holdings Limited ("Midland") dated July 7, 2006, a copy of which was provide[d] to the shareholders of the Corporation.

The loan agreement obligates Midland to loan the Corporation up to USD50 million, which is repayable with interest at LIBOR plus 2 per cent per annum at any time before July 7, 2009. The shareholders having reviewed the loan agreement, and having confirmed that Mr. Shnaider and Mr. Schifrin had neither subscribed for nor paid for the shares that were allotted to them, the shareholders agreed to accept the breach of Mr. Shnaider's and Mr. Schifrin's agreement to purchase shares and to rescind that offer, and to accept the terms of the loan agreement. On motion, duly made, seconded and unanimously carried:

RESOLVED THAT the breach of the agreement of Mr. Shnaider and Mr. Schifrin to subscribe for and purchase shares in the capital of the Corporation is hereby accepted and that the Corporation is under no obligation to issue shares to neither Mr. Shnaider nor Mr. Schifrin.

RESOLVED THAT the loan agreement between Koll Resources Limited and Midland Resources Holdings Limited dated July 7, 2007 is hereby confirmed and adopted as a binding obligation of the Corporation.

Shareholders

Given the acceptance of the breach of both Mr. Shnaider and Mr. Shyfrin to subscribe for shares, and the execution and adoption of the Midland loan agreement by the Corporation, the shareholders of the Corporation are as follows:

[Emphasis added.]

[702]Also omitted from Ex. 406 but included in Ex. 405 was the following: "Mr. Groag tendered his resignation as the acting Chief Financial Officer, effective forthwith. "

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[703]Shtaif gave evidence 5210, 5213 that Beach had given a legal opinion that the Plaintiffs were subject to forfeiture. [No legal opinion from Beach to that effect was produced. Beach was not asked about it and in argument Mr. Stevenson said he was not relying on such an opinion.]

[704]In detailing the Plaintiffs' conduct constituting the repudiation, the draft Minutes made no mention of the grounds now relied upon [a demand for payment of the $50 million loan out of the IPO plus 67.21% equity plus $15 million dollars] or of Roberts' earlier argument that the wording of the loan agreement was clear, the Plaintiffs were creditors, not shareholders, of Koll.

[705]Shtaif said they decided that Shnaider and Shyfrin were out of the company.

[706]I have already found that Shtaif wanted to control Reef and that he had refused to transfer management of Koll from Euro Gas to an entity answerable to all the shareholders, despite repeated promises to do so.

[707]Roberts and Shtaif took the position as of March 1, they and Groag "were in control of their company" and that Shnaider and Shyfrin owned no shares in Koll. Roberts' evidence includes the following at 7849-7850

Q.All right. Your Honour, can I take you to the transcript. It's Question No. 2535. I asked you these questions and did you give these answers? Starting at Question 2535:

All right. You guys are in control it's your company now, right? It's your company you are now in control you have all the shares you've got some debt but it's your company.

ANSWER: There was a subscription agreement that was not executed.

QUESTION: It is your company, right? Is it your company?

ANSWER: That is -- that is the position we took, yes, our company. [Emphasis added.]

[708]Approval of Employment Agreements. At the March 1 meeting, Roberts, Shtaif, Groag [and Bokserman] purported to approve employment agreements with Koll for Shtaif (Ex. 407/Tab 234), Roberts (Ex. 641/Tab 439) and Groag (Ex. 642/Tab 749). Roberts said 6537 his terms of employment had been agreed upon by everyone. Shtaif executed them on behalf of Koll. Ex. 643/Tab 440 is what Roberts described 6558 as "the boilerplate employee stock option plan" Beach had prepared for IPICO; Ex. 644/Tab 441 is the stock option agreement Roberts prepared 7913. No one declared a conflict of interest or refrained from voting on his own contract.

[709]The March 1 Letter. At the March 1 meeting, the shareholders present directed Beach to write Ex. 81/Tab 446, a letter to Greenspoon, including the following:

We are further advised that Midland has now demanded both a controlling equity stake and the alleged debt. This is unacceptable. In order to proceed, the principals of Koll are prepared to cons ider on a without prejudice basis either of the following alternatives:

interst at LIBOR plus 2% together with an equity sweetener of 5 million warrants exercisable at $1.00 for two years or until a going public transaction.

Failing completion of definitive documentation in furtherance of one o f these alternatives … the principals of Koll intend to act upon one of a further number of further alternatives available to them…

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[710]I note that the March 1 letter makes no mention of an additional demand for $15

million.

[711]The Plaintiffs React to the Defendants' March 1 Letter. Shnaider said when he read Ex. 81, it was clear to him that Shtaif, Groag and Roberts were breaking all their earlier agreements. They were offering Shnaider and Shyfrin only 32% of the Koll shares, not 67.21%. [What Shnaider and Shyfrin did not know was that at the March 1, 2007 meeting, Shtaif, Groag, Roberts and Bokserman had taken the position they owned no shares whatsoever.]

[712]Shnaider and Shyfrin decided the appropriate action would be to liquidate Koll, an option Groag had suggested on August 6, 2006 in Ex. 72A/Tab 335, and Shtaif had proposed as recently as February 25 in Ex. 412/Tab 428.

[713]Shyfrin said he confronted Groag and Shtaif separately. He told Groag that Shtaif, Groag and Roberts had not been authorized to act as they had at the March 1, 2006 meeting. Groag told him he had no choice but to accept their actions. Shyfrin told Groag that that would never happen. He had a similar discussion with Shtaif about their unacceptable breaches of trust and contract. Shtaif tried to calm him down and said, "We'll talk in Moscow." Shyfrin said, "We're not going to talk in Moscow unless you withdraw your decisions."

[714]Vinogradov gave evidence that given the existing situation, the Plaintiffs suspected that Shtaif and his team would try and take away Koll's only major asset, Reef, from Koll. Shtaif was General Director of Reef and Euro Gas and had broad powers over Reef – he could buy and sell assets, appoint or remove the General Director and approve amendments to Reef's charter. Vinogradov recommended cancelling Shtaif's powers of attorney, executing new powers of attorney and entering into a new management agreement replacing Euro Gas as the operating company of Reef with Midland Capital Management. Shnaider and Shyfrin decided to protect Reef by changing its management and instructed Vinogradov to take the steps necessary to effect those changes (Shnaider, 352-353; Vinogradov, 1756-1757, 1761- 1762, 1765-1766).

[715]Re Groag Salary Dispute. On March 2, 2007 Groag emailed Ex. 403/Tab 447 to Shyfrin, purporting to confirm Shyfrin's statements on March 1, 2007 that the non-payment of Groag's full agreed salary had been wrong and his apology. Ex. 402/Tab 450 sets out Groag's calculation of amounts Koll owed him: $195,653 [$109,165 + $86,488 signing bonus].

[716]Bokserman gave evidence that a few days after the March 1 meeting, he called Shnaider to say he was "screwing up" the IPO. He had invested $45 million. After an IPO valuation, his 67% would be worth more than $400,000,000. He was doing himself "the biggest disservice and screwing it up for Bokserman and everybody else."

[717]On March 3, 2007, Shtaif emailed Ex. 414/Tab 451 to Groag and Roberts:

This latest blatant breach does not leave us any options but to take ac tion now… I propose that we proceed with our planned action to take the company away. … I sent Greg an email asking Allan to advise me if it is legal to transfer the ownership of our Russian properties to a new company. I do not want to do anything illegal unlike those guys … I would like to start the process immediately if it is approved by Allan …"

[Emphasis added.]

[718]Shtaif said on March 3, he, Groag, Shtaif, Roberts, Bokserman and Entin retained Kevin MacDonald ("MacDonald"), a litigation lawyer in Ontario. [When Roberts closed his

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law practice in 2005, he had transferred his files to MacDonald. After he ceased working at Koll, Roberts worked out of MacDonald's office.]

[719]Defendants' Plan to Take Over Reef. On March 5, 2007, Roberts emailed Ex. 481/Tab 456 to Beach setting out Roberts' and Shtaif's strategy:

As far as strategy going forward, we're going to move the shares of the [Koll] subsidiary [Koaplama] [the owner of Reef] to a company that is currently controlled by Mike. Once the shares are out of the reach of Alex and Eduard, we will put into place a structure using new Cyprus companies to own the shares of the Russian companies . The shares of the Cyprus companies will be owned by a new BVI company. The shares of the new BVI company will be distributed in accordance with prior agreement that we have made. We will assign the Midland debt to this new company . We're not going to leave the Midland debt in an empty shell. We just want to control the holding company. I confirm that you did not give this advice, and that we will not in any way involve you or your firm at about if this strategy backfires and Midland seek damages against us. Once this is complete, we need to raise operating funds for the two properties that we currently own. Clearly, we cannot issue any shares that Alex and Eduard might have a claim over. Therefore, we will likely have to arrange for a secured loan that would take priority over any claim that they may have

[Emphasis added.]

[720]Roberts gave evidence that in writing this letter he was "just trying to maintain the status quo and gain control of what was rightfully ours."

[721]Beach gave evidence 5896 he did not discuss that plan with Shtaif and/or Roberts. He did not approve it. He would not have wanted to be involved.

[722]I accept Beach's evidence that he did not approve Roberts' and Shtaif's illegal plan. Before acting on their plan, Roberts and Shtaif did not seek confirmation from Beach that the transfer of ownership to a new company was legal.

[723]Roberts' Collection on Magellan Promissory Note. As of March 5, 2007, the balance in the Faskens trust account was $39,570.66. Beach emailed Ex. 540/Tab 705 to Roberts on March 5, 2007:

Greg, we received the garnishment and would be happy to comply but our trust department has noted that the file was initially opened under the client name Euro Gas Consulting Inc. and then subsequently changed at your request to Midland Energy Limited. Even tho ugh the original retainer money was received from Magellan, there is an academic concern that we are holding in trust for the client and not the initial payor.

The simple answer would be to have both Euro Gas and Midland consent to our compliance with garnishment order requiring us to pay over the current balance of the initial $50,000 retainer to the Sheriff.

[724]Roberts said he signed consent to compliance with the garnishment on behalf of Midland Energy [he was the sole officer of a numbered company that he assumed had become Midland Energy]. Shtaif 7659 signed on behalf of Euro Gas. Roberts wrote Beach: "Is this good enough? The money you have in trust is Magellan's which we are going to garnish. Please make sure your accounts say Magellan on them and that trust funds are in Magellan's name."

[725]Termination of Shtaif's/Euro Gas' Powers over Reef. On or about March 5, 2007, the sole director of Koaploma, Eleni Kinani, terminated Shtaif's powers of attorney over Koaploma and transferred them to Vinogradov and Andrei Zavrazhnov of Midland Capital Management Ex. 196/Tab 453; Ex. 82/Tab 455. Vinogradov, acting under that power of attorney, terminated the Management Agreement between Euro Gas and Reef by Resolution

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No. 2/07, Ex. 83/Tab 455 and entered into a new Management Agreement between Kaoploma and Midland Capital Management Ex. 129/Tab 452. See also Ex. 193/Tab 591, Ex. 194/Tab 592, Ex. 195/Tab 593, Ex. 132/Tab 461. Vinogradov gave evidence 1760-1761 that all of these documents were validly and legally executed. Under a February 14, 2006 Supreme Court Arbitration Decision, Ex. 214/Tab 612, Shtaif's approval/consent was not necessary to effect the transfer of management.

[726]Shtaif said in directing those changes, Shnaider and Shyfrin acted inappropriately and illegally.

[727]I find Shnaider and Shyfrin had very good reason to be concerned that the Defendants would seek to take Koll/Reef away from Koll, and they acted in Koll's best interests.

[728]Defendants' Financing Efforts Post March 1, 2007. On March 6, 2007, Shtaif emailed Ex. 533/Tab 457 to a Jack Kachkar re Bridge Financing for Russia:

…The funds that we require are for the development of our existing company-Reef … I intend to record them in the books of the company as a loan …. secured by the property. I propose to invest the funds into the new entity that will own Reef Energy. It is a BVI company … The new entity is Euro

Gas Consulting Inc… I am currently 100% shareholder and intend to amend the register of the company to assign shares to all of the shareholders of Koll …This vehicle is necessary to secure our ownership of the company so there is no dispute between current shareholders and Midland . … monthly, operating budget, not including capital infusion for future growth is around $200,000USD

[Emphasis added.]

[729]As Ex. 533/Tab 457 and Ex. 481/Tab 456 disclose, Shtaif and Roberts did not wait for an opinion from Beach that it would be legal to transfer Reef to Euro Gas Consulting Inc. He proceeded to attempt to put a loan in place that would have priority over Midland's. He represented that Euro Gas Consulting Inc. would own Reef. As Shtaif was taking the position that Shnaider and Shyfrin were not shareholders of Koll (as the draft March 1 Minutes reflect), he did not intend to assign them shares of Euro Gas Consulting Inc.

[730]On March 8, 2007 MacDonald wrote Ex. 131/Tab 459 to Greenspoon, advising that

he was preparing a Statement of Claim that would be served on the Plaintiffs during the week of March 26, 2007: "I understand that your client is taking steps to have Mr. Shtaif removed as the General Director of certain Russian companies, who are connected to our clients' interest in Koll. We trust that your clients will take no further action while these issues are pending."

[731]On the same day Shtaif wrote Ex. 694/Tab 799 to Roberts and Groag: "Let's hit them hard from all angles."

[732]Canaccord Letter. Ex. 413/Tab 460 is an engagement letter Canaccord sent to Shtaif dated March 8, 2007 that did not commit Canaccord to raise any particular level of funding and was never signed.

[733]Takeover Of Reef March 18, 2007. Shtaif originally alleged in his Statement of Claim served January 24, 2007 that on March 12, 2007, Midland sent armed men, stormed and forcibly took control of Reef. The only evidence at trial about the physical transfer of Reef management was a will-say statement of Zavrazhnov, director of Midland Capital, filed on consent as Ex. 3/Tab 665 and admitted into evidence without cross-examination. Zavrazhnov deposed that he travelled to Reef with a number of Midland employees on March 18, 2007 to implement the change of management. He met with Samsonov, the day-to-day

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manager of Reef and explained the situation. There were no threats, violence or coercion. Samsonov accepted the change in management voluntarily. After March 18, 2007, there was no change in the on-site management. Samsonov continued to run Reef on a day-to-day basis. Koll continued to own the shares of Reef through Koaploma. Shnaider said 359-360 nothing changed. No one was fired. However, after March 18, Koll, not Euro Gas, controlled Reef.

[734]Roberts' Collection on Magellan Promissory Note in His Favour. On March 20, 2007, Faskens sent a cheque for $39,570.66 to the sheriff. The funds were received into Roberts' trust account some time thereafter. Roberts said he and Shtaif felt entitled to those funds.

[735]By March 23, 2007, Shnaider had retained John Keefe ("Keefe"), a litigation lawyer at Goodmans. Keefe gave evidence it was obvious from the correspondence he had reviewed that there was a lot of strife among the Koll shareholders. He wrote a long and detailed letter to Beach dated March 23, 2007 (Ex. 133/Tab 464) including the following:

…shortly following the June 20 2006 inaugural meeting, all of the relevant parties agreed t hat the arrangements were modified to reflect that Midland would provide up to $50 million by way of a loan to Koll, and, in addition, Shnaider and Shyfrin would collectively beneficially own 67% of the shares of Koll. Funds were advanced on the basis of t he modified agreement …, no further variations have been agreed between the parties. The modified agreement stands. These are the facts. The current concern is the future. Recent events, including a letter from MacDonald Associates filed March 8, 2006, demonstrates that there has been a significant breakdown in the relationship between the parties such that it is no longer possible for them to work together in the best interests of Koll …

[736]Suggested Liquidation Of Koll. On March 23, 2007 Shnaider wrote Ex. 86A/Tab 463 to Zolty, informing him of the breakdown in the relationship between the parties and requesting him to apply to the BVI court for a winding- up of Koll. [Groag had suggested liquidating Koll as early as August 2006 Ex. 72A/Tab 335. Shtaif had made the same suggestion on February 25, 2007.] Shnaider gave evidence 367-368, 1398-1399 Zolty could not proceed with a winding-up because Shtaif withheld his consent.

[737]Beach gave evidence he was not aware at that time that Shnaider had suggested a winding up. He was cross-examined 5901-5902 on the Plaintiffs' position on liquidation:

A.Well -- I think -- from Mike and Greg's perspective, settling with Mr. Shnaider … removed the risk that they might not end up with the property. If you just turn it over to a liquidator … you don't know you're going to be the high bidder, and frankly a lot of those liquidation scenarios you have to qualify yourself with immediately available funds before you can even go into the bid. … [Emphasis added.]

[738]Roberts said winding up of Koll was a "ridiculous" idea. He would never have agreed

to it.

April 2007

[739]On April 12, 2007, Roberts wrote Ex. 649/Tab 466 to Shtaif: "I have got a lot of … feedback from Allan [Beach], Kevin [MacDonald] … The one thing we can't do is blame them, that is Alex and John, because the fact is we had control…" (Emphasis added.)

[740]Collection on Shtaif June 23 Promissory Note from Magellan. On April 16, 2007, Ex. 608/Tab 759, judgment, was signed against Magellan in Shtaif's action on the June 23 Promissory Note.

[741]Criminal Proceedings Against Shtaif in Russia. The Defendants took the position in their counterclaim that the Plaintiffs initiated and instigated spurious criminal proceedings

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against Shtaif in Moscow to gain an advantage in these proceedings in Ontario (Ex. 92/Tab 467; Shtaif 4130). They relentlessly sought to have Shtaif wrongfully convicted and incarcerated in Russia. Roberts submitted in closing argument that their conduct in this regard was "simply heinous." On April 17, 2007, Vinogradov filed a complaint Ex. 92/Tab 467 against Shtaif with the Moscow police, accusing him of the theft of Treasury Notes acquired at the expense of Trovalion and intended to pay for SibinTek shares.

[742]Vinogradov explained that in Russia, civil and criminal actions are heard together. Because Euro Gas' name was on the SibinTek Treasury Notes, Euro Gas had initially been named as victim in the action against Poltoranin and Bekker. So long as Euro Gas was victim, only Euro Gas would have the right to information on the ongoing investigation and would be able to recover damages in any civil proceeding. Vinogradov said because the police

explained to him that Midland [Trovalion] needed to be named as victim, Trovalion applied in April 2007 to be named as victim to ensure Midland's right to participate in the criminal process. Vinogradov said 1807 he had an honest belief that Shtaif was part of the fraud. Shtaif brought Poltoranin to the deal and gave him Midland's money. Without Shtaif, he did not believe Poltoranin would have been smart enough to carry out this scheme. Ex. 199/Tab 468 is a statement by Vinogradov dated May 15, 2007 requesting the police to recognize Midland as the victim.

[743]Collection on Shtaif Magellan Note. On April 24, 2007, a requisition for issuance of notice of garnishment was signed for $1,397,122.70 and on May 1, 2007, a notice of garnishment was issued in Shtaif v. Magellan.

May 2007

[744]Defendants' Attempts to Finance. In the spring of 2007, Shtaif and the other

Defendants incorporated a new company, Noven. On May 14, 2007, Roberts 6514 and Shtaif made a presentation on behalf of Noven to J.P. Morgan Cazenove.

[745]Issuance of First Ontario Statement of Claim by Defendants. On May 16, 2007, Shtaif, Groag, Roberts, Bokserman and Entin commenced an action Ex. 87/Tab 470, in Ontario against Shnaider, Midland and Koll. In the Statement of Claim they alleged forgery, kidnapping, conspiracy, bribery and fraud. Roberts said 7904 at about that time Shnaider was very high profile because he was considering buying the Toronto Maple Leafs. While he understood this would impact on Shnaider's reputation, he said everything in the Statement of Claim was true.

[746]Shnaider gave evidence 369-370 that before Ex. 87 was issued, Bokserman visited him and threatened that the Defendants would make embarrassing allegations that would be reported in the media, and tried to convince him to settle. Bokserman denied 5747-5748 making any threats.

[747]Defendants' Discussion re Use of Media. Before the relationship had broken down, Groag had written Ex. 410/Tab 380 to Shtaif and Roberts on November 3, 2006, suggesting they "use the international media" in dealing with Shnaider and Shyfrin.

[748]On May 16, 2007, the day Ex. 87 was issued but before Shnaider had been served (Keefe 2521-2522), Roberts forwarded it to Maybank, Webb and Janikowski at Canaccord by email Ex. 650/Tab 469. In his covering email, Roberts wrote:

…I did not want you guys to be caught off guard if this makes its way to the press. … I am enclosing the Statement of Claim issued today which describes the events leading up to our action with respect

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to Alex. We did our best to try and settle before it was issued and … but Alex was not interested. As you can see from the allegations in the Statement of Claim his conduct throughout was high -handed and illegal.

Everything in this claim can be proven and we have retained who I believe is the best litigation lawyer in Toronto to take this matter to trial… It is our hope however that Alex comes to his senses and tries to settle with us before the media gets a hold of this, but I am not holding my breath, even though the claims are extremely serious and will have a very dramatic impact on how the business community in the West sees Alex and his way of doing business. …

[749]Shnaider gave evidence 373-374 that around the same time, Paul Waldie, a Globe & Mail reporter, contacted Ron Fine, the head of Midland's public relations department, about the lawsuit, saying he had received a Statement of Claim in a brown envelope. Roberts denied sending the Statement of Claim to the Globe & Mail or to any other media outlet.

[750]Criminal Investigation of Shtaif. Ex. 200/Tab 471 dated May 21, 2007 is a record of Inspector Zhukov's interrogation of Vinogradov taken at the request of the police. Shtaif gave evidence 4119 that on May 22, 2007, Inspector Zhukov asked him to come to an interrogation. He said between May and September of 2007 he participated in 20 to 30.

June 2007

[751]Settlement Discussions - Plaintiffs' With Prejudice Offer to Settle. On June 13, 2007, Keefe made a with-prejudice settlement offer, Ex. 88/Tab 510, on the Plaintiffs' behalf, offering to forgo Shnaider and Shyfrin's equity interest in Koll in exchange for repayment of Midland's loan plus interest. The offer was open for 45 days to arrange funding. If funding could not be arranged, Keefe suggested an orderly disposition of Koll's assets.

[752]Shyfrin gave evidence the Defendants had earlier purported to make the same offer to the Plaintiffs. They had represented that Koll was worth hundreds of millions of dollars. Had Reef been as valuable as they had claimed, and had they had other investors as they had claimed, they should have eagerly accepted the offer. Shnaider said 375-376 if Reef were as valuable as the Defendants claimed, the Plaintiffs' offer presented a good opportunity for them to buy it inexpensively.

July 2007

[753]Criminal Proceedings Against Shtaif. In July 2007, Shtaif said the Moscow police escalated their investigation of Shtaif, causing him to send his family home to Canada and to retain a Russian lawyer.

[754]Defendants' Financing Efforts. As noted earlier, the Defendants had been telling the Plaintiffs they already had funding to pay off Midland's loan. Shtaif gave evidence 5238 that by the summer of 2007, Credit Suisse had already committed to provide $35 million for Reef [and financing to buy Urals Energy for $42 million. ] Duration had also agreed to provide funding. He did not produce signed commitments for either. Roberts gave evidence 6722 the $35 million was to take out the Plaintiffs' position. Credit Suisse was also eager to fund a $100 million credit facility.

[755]Greenspoon said while settlement discussions were occurring, he never saw an offer [in the sense a commercial lawyer would understand] that would allow for resolution of the dispute.

[756]Significantly, in my view, on July 5, 2007 Beach emailed Ex. 486/Tab 481 to Shtaif:

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We all agreed that Jack's [Duration's] latest proposal is a nonstarter. He was not prepared to commit any significant equity upfront … We also agreed that the Credit Suisse term sheet, although encouraging, is early stage and presumes there will be an existing asset base and material equity in the company prior to the first loan. That loan is not likely available in order to fund the first acquisition.

[Shtaif said in cross-examination that Beach was making an incorrect assumption.]

[757]Beach's memo continued:

We understand that Bank Zenit is eager to participate with both debt and equity. We have not seen a

term sheet… But I can only guess this equity may be expensive.

[Shtaif said in cross-examination that again Beach was wrong.]

[758]Beach continued:

The alternative to settlement is not nearly as pretty. In return for what is likely a long s hot at big damages, and a pound of flesh, we are facing a long and expensive lawsuit, we are left struggling and absolute ground zero withNoven, with no equity(without which we can have no real debt facility) no real equity prospects, and no producing property.

[Emphasis added.]

[Shtaif said in cross-examination that Beach was "totally wrong."]

[759]Use of Funds Collected on Magellan Promissory Notes. On July 5, 2007 Roberts received the $100,482.02 recovered on Shtaif's note after garnishment of Magellan's TD bank account. He said 4751-4761 he used it to pay Ernst and Young, Faskens (Beach) and MacDonald. He used the $39,570.66 recovered on his own note largely to pay Faskens' legal fees for Noven. Ex. 609/Tab 693 tracked receipt and payments made from the Magellan funds.

[760]Noven's Efforts Summer 2007 to Buy Out Midland. Shtaif did not produce a signed commitment from Credit Suisse. A Noven revised term sheet dated July 11, 2007 from Credit Suisse/Le Goff Yves (Ex. 422/Tab 483) to Shtaif "Up to $100 million Senior Revolving Facility in Favour of Noven Resources" with attachments, contained a number of blanks. It did not constitute an agreement, offer of a commitment to underwrite or lend. I note the funding was to be limited to the NPV of the expected net cash flow for 5 years from the date of the advance. Since Reef was projected to incur net losses in its early years, the availability of financing under this possible facility was unlikely. I also note it specified Reef would be included in the Initial Borrowing Base Assets. I interpret that to mean the proposed facility could only be used to finance acquisitions of new borrowing base assets, not to buy Reef/pay off Midland's $50 million loan.

[761]I find Beach's assessment of the Credit Suisse and Bank Zenit early stage preliminary offers was accurate. As of July 5, 2007, Noven had no viable refinancing offer. The Credit Suisse negotiations were at an early stage. The up to $100 million facility presumed that Noven would have an existing asset base and material equity. As of July 5, 2007, Noven had no equity, without which it could have no real debt facility, no real equity prospects and no producing property.

[762]Keefe gave evidence that as of July 12, 2007, Midland was owed at least $40 million under its loan to Koll.

[763]Further Settlement Overtures. The Defendants' July 13, 2007 counteroffer, Ex. 256/Tab 484, did not provide for cash repayment of the amounts outstanding on the loan.

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Rather, it referred to issuance of preferred shares to Midland, redeemable within six months for $30 million cash and after six months for $30 million +1%, etc. Midland was also being asked to turn the Reef property over to Shtaif and to contribute $250,000 to the Defendants' costs. The Plaintiffs were not prepared to turn Reef and Invenskoye over to Shtaif and to have repayment of Midland's loan dependent on Shtaif's/Noven's success. In short, Ex. 256 was "not even close to being reasonable."

[764]Criminal Investigation Continued. Ex. 201/Tab 482 is a Statement dated July 13, 2007 that Vinogradov directed to the then Head of the Department of Internal Affairs of the Ministry of Foreign Affairs.

August 2007

[765]Availability of Funding to Noven. In August of 2007, the Defendants continued to seek funding for Noven. Hazout introduced Shtaif to a number of potential investors. Bokserman was also trying to assist.

[766]Continuing With-Pre judice Settlement Negotiations. On August 2, 2007, Macdonald wrote Keefe Ex. 89/Tab 510: "… the terms of your client's original with-prejudice offer to settle dated June 13 are not commercially reasonable or feasible…. Our clients simply cannot raise funds in 45 days." Macdonald asked for six months.

[767]Shyfrin gave evidence he didn't believe the 45 day timeframe that Keefe had included in his June 13 letter had been unreasonable. For over a year the Defendants had been telling Shyfrin and Shnaider that they already had many investors and that Reef was a fantastic property. On that basis, it should not have been difficult to arrange financing to repay Midland's loan.

[768]Defendants' Attempts to Raise Financing. Roberts gave evidence 6696 he, Hazout, Shtaif and Bokserman did successfully raise substantial funds for Noven through Alogics.

[769]Alogics signed Ex. 503/Tab 709, an MOU, on August 8, 2007. However, Ex. 503 assumed Noven would own Reef within 6 months. On page 17 it included the following: "Noven will acquire an option (exercisable within 6 months) to acquire Reef including Invenskoye for US$240 million." Alogics would buy 70% of the Noven shares for $100 million. The MOU mentioned acquisition of six oil and gas fields, summarized at p. 13. At p. 15 under (b) valuation (i) actual Miller and Lents Report - NPV at 10% discount $156 million U.S. (ii) … the updated Miller and Lents valuation report for Reef Energy should be in the range of $300M U.S. with NPV at 10% discount. The draft summary of reserves of the consolidated company is 84,855 million BBL.

[770]I find Ex. 503 contained promises that were never fulfilled, assumptions about acquisitions that never occurred, and Miller and Lents projections re reserves and valuation that never materialized.

[771]There was disagreement among the parties about the date of the beginning of the worldwide financial crisis that all acknowledge was underway in 2008 and the effect it would likely have had on the Koll IPO. Shnaider, Roberts, Maybank, Soriano and Lazar gave conflicting evidence. Maybank said the financial crisis started in Europe in mid-July 2007. On August 13, 2007, the commercial paper markets of Canada froze, starting to send the monetary fora in the market into a state of disarray. On August 15, 2007, Roberts wrote Ex. 699/Tab 809 to Derek Webb, Adam Janikowski and Mark Maybank at Canaccord:

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Given all the turbulence in the equity markets now can you guys crystal ball the chances of raising equity to take Alex out for about $45-$50 million as part of a larger raise within the next 6-12 months based on Miller and Lents report valuing the two properties we are acquiring for between $250 m and $300 million. We bought the license extension in the first property in Perm. Alex has funded the operations of the property since he "took them over" which is why the amount owing has increased.

…I would appreciate your view on this. I don't see any real difficulty in proceeding with the original plan but I'm unsure given the turmoil I read about in the papers.

[Emphasis added.]

[772]Timing of the IPO. On August 17, 2007, Adam Janikowski of Canaccord replied to Roberts' August 15 email: "…Obviously you have seen some of the turmoil that the markets are in and it is somewhat difficult to predict the appetites of institutions in the near and long terms until things settle out about..."

[773]Maybank said while the Canadian market continued to rally into 2008, this hypothetical IPO would have come at a time when risk appetite was waning.

[774]Defendants' Attempts to Obtain Financing. Ex. 423/Tab 487 is an email to Noven from Alogics dated August 16, 2007. Ex. 424/Tab 630 includes an email from Hudson of Credit Suisse, expressing an interest in arranging a loan of $35 million for Koll subject to due diligence 6718. The letter made it clear it was not a commitment to arrange or underwrite financing Shtaif 4219-4224. On August 17, 2007, Roberts wrote Ex. 263/Tab 631 to Greenspoon and Keefe: "I am enclosing a letter we received from Credit Suisse: "This letter does not constitute an obligation to fund but it does show an expression of interest. We are pursuing other avenues of funding as well."

[775]Greenspoon said 3041, 3043 that Ex. 263 was contingent on more than the usual factors. It was unusual for it to be made subject to due diligence even before a commitment was made.

[776]Ex. 531/Tab 734 is an SMS from Bokserman to Shnaider and Shtaif sent August 27,

2007: "Let's get together in London." Shnaider responded: "Please confirm you have the funds first." Since the Defendants could not do so [i.e., confirm they had the needed funds], there was no meeting.

[777]I accept Keefe's evidence 2908 that all of the Defendants' offers involved payment over time of less than the principal amount of the Midland loan and sought in effect to tie repayment to the success of the venture. The Defendants wanted to benefit from the upside from any success of the venture but not to repay even the amount outstanding on the loan. The Plaintiffs did not want to be in business with the Defendants. The Defendants never provided proof that they had "anywhere near the amount needed to pay the loan plus interest."

September 2007

[778]On September 6, 2007, MacDonald wrote Ex. 147/Tab 510 to Greenspoon and Keefe: "… Our clients are very close to arranging financing with two financial institutions but need a completed agreement in hand to make it happen…and reasonable access to the property and the books and records of Koll…for the purposes of due diligence… "

[779]On September 11, 2007, Roberts wrote Ex. 735/Tab 777 to Hudson at Credit Suisse, seeking a draft term sheet: "We plan to take Noven public in 12-18 months¸ … as I advised you we are looking down the road for a $100 million plus IPO … It is our plan to acquire a nucleus of … core properties … before we go public …" [Emphasis added.]

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[780]Criminal Proceedings in Russia Against Shtaif. On September 13, 2007, the Vice Consul of the Canadian Embassy and Shtaif's criminal lawyer Martynov attended with Shtaif for an interrogation. Shtaif said 4123, 4142 that after the Canadian Embassy issued a formal statement to the police indicating representatives of the Canadian Embassy would accompany him whenever he was being questioned, the Russian police never called him in for questioning again.

[781]Criminal Proceedings Against Poltoranin. In September 2007, Martynov was advised that Midland had been named victim/injured party as a civil claimant with respect to the SibinTek Treasury Notes. Shtaif 4123.

[782]Defendants' Attempts to Obtain Financing. On September 17, 2007, Alogics emailed Ex. 435/Tab 681 to Shtaif and Roberts 6701. Roberts said 6703 he told Keefe that Alogics had deposited $20 million. See/Tab 750 Escrow Agreement.

[783]Settlement Negotiations. On September 17, MacDonald wrote Ex. 148/Tab 510 [Shtaif 4224] including the following:

... I can confirm our clients are in the last stages of finalizing a firm credit facility(subject to legal review,confirmation of certain matters set out below and reasonable due diligence)

As part of due diligence we require…the amount Midland is seeking to recover…reasonable access to the property…reasonable access to the books and records…

[784]Criminal Proceedings in Russia Against Shtaif. On September 25, 2007, Shtaif received a notice of convocation from which he concluded that the police were planning to charge him. His counsel told the police he was terminating the interrogations, challenging the prosecution, and going to court.

[785]Defendants' Discussions re Use of Media. On September 27, 2007, Shtaif emailed Roberts:

Did you talk to Kevin about turning on the heat? …

...We need to expose them. I think it is time to let the media get a hold of this …We will not win by sitting and waiting. It is time to go on the offensive…

[Emphasis added.]

[786]Settlement Negotiations. Ex. 265/Tab 633 contains emails dated September 28, 2007

from Roberts to Greenspoon, copied to MacDonald, Beach, Shtaif and Keefe.

I confirm we have executed a memorandum of understanding with a major financial institution for funds to refinance the property…I confirm we have been negotiating with an equity partner for a $30 million investment…we require an agreement that is without prejudice to our rights in the lawsuit… [Emphasis added.]

[787]Roberts gave evidence 6717 that with the $30 million from Alogics and the $35 million from Credit Suisse, they could have purchased Reef from the Plaintiffs. Shtaif said the potential lenders wanted to see a form of agreement between Midland and Noven under which Midland agreed to transfer its interest in Reef to Noven.

October 2007

[788]On October 1, 2007 Roberts emailed Ex. 269/Tab 651 to Greenspoon:

… I believe the last suggestion from John [Keefe] was that for a $5 million payment of Midland 's debt they would consider a six month ballooned term in first position as long as we had sufficient funds to operate…Alan and I have been trying to negotiate a Subscription Agreement with an equity player for weeks now.We are trying to shoehorn a deal that requires the purchaser of equity to put all

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of their money up before we negotiate with Midland…I am happy to share the redacted draft share subscription agreement as it stands now…

[789]Bokserman gave evidence that Voskoboinikov had arranged a meeting with Bank Zenit to discuss a $50 million investment. On October 10, 2007, Mr. Payin of Bank Zenit emailed Ex. 426/Tab 492 to Shtaif in Russian. Shtaif 4235 replied in English: "I was expecting a term sheet… I received just a memorandum of services for due diligence. Can you please advise when we can expect a term sheet? …" That memorandum did not specify the amount of funds Bank Zenit was considering lending, although it specified an expected purchase price of Reef of $50-60 million. At p. 1 it contained the following: "Notwithstanding anything to the contrary herein, this memorandum does not constitute and will not give rise to any legally binding obligation for any of the parties."

[790]Shtaif gave evidence that Bank Zenit later sent a binding commitment letter [Ex. 482/Tab 702]. However, his group could not finalize a financing deal because Midland would not grant access to the property so Bank Zenit, Credit Suisse and other potential investors could conduct their due diligence.

[791]Keefe gave evidence that the Plaintiffs were open to making a deal. When Roberts was cross-examining him, Keefe said 2908:

Throughout there was an expectation or an understanding that if there was going to be a deal, your clients would want, need, and get whatever financial information they needed. That wasn't the impediment, although you were trying to raise that in order to reserve your right, so you could argue that we were the ones that were unreasonable.

[Emphasis added.]

[792]Keefe gave evidence 2682 that by October 2007, the Defendants had already had over 45 days to arrange the needed funding. They seemed to have no prospect of being able to raise the funds they needed to buy Reef within a reasonable timeframe. Therefore he urged them to consider orderly disposition of Reef on a cooperative basis.

[793]Criminal Investigation in Russia of Shtaif. On October 15, 2007, Shtaif was successful in his application Ex. 222/Tab 494 to require Inspector Zhukov to produce documentation that had been filed in support of the application to cancel Euro Gas' status as civil claimant and victim.

[794]Criminal Proceedings in Russia Against Poltoranin. On October 17, 2007, the Russian police formally charged Poltoranin and Bekker with fraud and embezzlement. Ex. 223/Tab 495.

[795]Use of Media. On October 19, 2007, Greenspoon emailed Ex. 259/Tab 626 to Keefe, forwarding a request from Paul Waldie of the Globe & Mail to Fine asking for comment on Shtaif's lawsuit.

[796]Defendants' Attempts to Raise Financing – Alogics. On October 19, 2007, Beach emailed Ex. 425/Tab 496 to Shtaif 4226, enclosing a copy of a Noven Resources/Alogics Subscription Agreement [that had been executed on October 18, 2007 to be effective on October 24, 2007] under which Alogics conditionally agreed to purchase 30 million common shares of Noven for $30 million if Noven owned all of the shares of Reef Energy.

[797]Paragraph 13 of the Alogics Subscription Agreement provided as follows:

The purchase price estimates that the net asset value of Noven upon closing will be approximately $100 Million based upon estimated Reef … P2 reserves of 33,578,000 bbl valued at $2.50 per bbl

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and estimated P3 reserves of 146766000bbl valued at.45 per bbl and the assumption that Noven will have directly or indirectly incurred or assumed approximately 50 million of debt in connection with

Reef…if the updated Miller and Lents report is different then the number of p urchased shares shall be adjusted…

[Emphasis added.]

[798]Noven was to use all reasonable efforts to obtain a listing on AIM and/or the TSE within 18-24 months of closing (by April 24, 2009-October 24, 2009). The agreement was subject to due diligence.

[799]Beach gave evidence the Alogics funding of $30 million would have been used to pay Midland's loan. He thought it was enough. However, by October 2007, Midland was owed about $42 million without interest. [Shtaif said an additional $30 million was available on standby. He did not provide proof. Counsel for the Defendants did not call Alogics or any other lender to say it was prepared to put up an additional $30 million.]

[800]Use of Media. On October 22, 2007, Shtaif wrote Ex. 696/Tab 807 to Roberts: "Were you able to contact Forbes? We need to start applying pressure on these people from all sides." [Emphasis added.]

[801]On the same day Roberts emailed Ex. 609/Tab 693 to Mintz and Co., accusing Shnaider of acting illegally despite the fact that the Defendants had increased his $30 million investment to $300,000,000.

[802]On October 25, 2007, Polonsky emailed Ex. 205/Tab 499 to Vinogradov refusing to answer questions Vinogradov had posed as "it would not be consistent with White & Case's attorney-client relationship with Euro Gas and Michael Shtaif. "

November 2007

[803]On about November 1, 2007, Shtaif left Russia, he said out of fear for his safety and on the recommendation of officials at the Canadian Embassy. Shyfrin remarked in his evidence on January 29 at p. 479 that he did not know what "scary fairy tales" Shtaif had told the Canadian Embassy officials. Keefe gave evidence he did not believe Shtaif's allegations he had to leave Russia. In Ex. 225/Tab536 Ryumshin Prosecutor wrote to Koslov, Senior Counsellor of Justice: "Shtaif had left for the place of his permanent residence in November 2007 after his visa had expired."

[804]After November 12, 2007, when MacDonald 4238 sent a letter Ex. 149/Tab 510 to Keefe referring to the criminal complaint that had been lodged against Shtaif in Russia, the Defendants insisted that a term of any settlement would be withdrawal of the criminal proceedings against Shtaif in Russia. Ex. 149 included the following:

…Martynov was informed by several witnesses that the Russian criminal charges were orchestrated by "Canadian lawyers"to gain an advantage in the Ontario action… Your clients are thugs…who in the context of a commercial transaction think it is permissible to engage in fraudulent sc hemes, perjury, bribes, kickbacks, intimidation and coercion to achieve their ends… your client 's misconduct has caused Shtaif to leave Russia for his safety, at the urging of the Canadian Embassy. His livelihood has been significantly impacted by your client's misconduct. These events are on the brink of becoming an international incident in Russia and in Canada…

[805]Keefe said 2927 he viewed the letter as inflammatory, hyperbolic and ridiculous.

[806]Although Martynov gave evidence at trial, he did not say he had been informed that the Russian criminal charges were being orchestrated to gain an advantage in the Ontario action.

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[807]On November 19, 2007 Ex. 150/Tab 510 Keefe replied to MacDonald:

…You suggest we or our client have acted inappropriately by linking a criminal investigation in Russia to a civil dispute. You then reference the fact that your client has lodged criminal proceedings against our client and others in Russia. The fact is that a fraud was committed in connection with the acquisition of SibinTek that has cost our client several million dollars. That is why the transaction did not close. That is why our client has a direct interest in recovering the lost money, including to the extent possible with the assistance of the Russian autho rities…

[Emphasis added.]

[808]Attempts to Sell Reef. Shyfrin said Reef was cash flow negative, a financial burden. In Ex. 3/Tab 665, Zavraznov, director of the company that managed Reef after mid-March 2007, deposed that Reef produced 900 tons of oil per month from drilling and testing sites. 24,000 tons of oil monthly had to be drilled to break even. The cost of drilling each hole was $2 million.

[809]In late 2007 Midland decided that it was no longer willing to continue funding Reef and Invenskoye. See Exhibits 97, 97A, 98, 99/Tab 501. It approached a number of potential purchasers between 2007 and 2010. They advised all their contacts in Russia that Reef was being sold and offered to provide information. Only a handful showed any interest. Ganus said they approached a lot of companies. They sent a lot of proposals. Nobody wanted to buy Reef.

[810]Shyfrin gave evidence that Midland tried to sell Reef for several years commencing in 2007. He approached the oil and gas division of one of the best Russian investment banks, Troika Dialog and offered to pay it a commission to market Reef worldwide. Midland provided documents, including copies of licenses, financial information, the Miller and Lents report, etc. It was not interested because in its opinion it would not be possible to sell Reef. Its value was zero. [Shyfrin asked Ganus to provide a copy of the letter received from Troika Dialog. Ganus could not find it. Troika Dialog had not saved its earlier letter or the documents Midland had sent to it. On July 9, 2010 it provided Ex. 172/Tab 560, a new letter having the same or similar content to its earlier letter.]

[811]Voskiboinikov gave evidence that he was not aware of any Midland marketing efforts for Reef between 2007 and 2010. His company, Tafnet, has a huge marketing department. He receives monthly reports but never received notice that the Reef property was for sale.

[812]Criminal Proceedings in Russia re Shtaif. Ex. 93/Tab 502 is a statement that Shnaider gave to the police on November 20, 2007.

[813]With Prejudice Settlement Discussions November 2007. On November 21, 2007, Macdonald wrote Ex. 157/Tab 510 to Keefe: "...The fact that our clients have been unable to conclude a settlement which would see them take control of the property has nothing to do with your continued assertion that the property lacks value…"

[814]Defendants' Use of Media. The Plaintiffs alleged that on November 30, 2007, in order to stimulate media interest, Shtaif commenced another action against Shnaider and Shyfrin, Ex. 94/Tab 503 in Ontario, alleging wrongdoing on the part of the Plaintiffs for using criminal proceedings in Russia. At the same time, MacDonald was making any settlement of this civil action conditional on withdrawal of that criminal proceeding. Keefe gave the following evidence 2727:

A.… You have to understand the context. This was viewed in part as a set up. You've got to remember in November 2007, December 2007 we received two new statements of claim, one for Mr.

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Shtaif and one for Mr. Roberts. In both those statements of claim, they alleged wrongdoing on the part of our client for using the criminal proceeding in Russia as a form of improper conduct. Now we're seeing in a letter coming to us that as a condition of moving forward with negotiations, we have to withdraw those criminal proceedings. So having sued our client for involving criminal proceedings, they then want to tie the resolution of the whole thing to our dealing with the criminal proceeding. So the moment our client started to engage in any dialogue about this, then your clie nt then would claim that there was some impropriety again, there's no doubt about it.

[Emphasis added.]

[815]Keefe said the Plaintiffs' position was consistent throughout. The resolution of any criminal proceedings against Shtaif could and would play no part in any civil settlement in Ontario.

December 2007

[816]Criminal Proceedings in Russia Against Shtaif. Shnaider gave evidence that on December 29, 2007, Poltoranin told the police that he had given Shtaif two of the promissory notes worth about two million dollars. Shtaif had been his partner in the SibinTek promissory note theft. Documents that refer to Poltoranin's statement include Ex. 225/Tab 536 and Ex. 420/Tab 555.

[817]On December 17, 2007, Mr. Andrew Nikiforuk ("Nikiforuk"), a reporter from Canadian Business Magazine, emailed Ex. 260/Tab 627 to Keefe: "I'm a reporter with Canadian Business Magazine, based in Calgary and the Shtaif lawsuit has been brought to my attention." Shnaider 397 suggested the fact that Shtaif and Nikiforuk were both from Calgary was no coincidence. Keefe said he concluded at the time that the Defendants were using the article to put pressure on the Plaintiffs to settle.

[818]On December 21, 2007, Roberts issued Ex. 95/Tab 507, a Statement of Claim against Shnaider and Shyfrin.

[819]Settlement Negotiations. On December 23, 2007, Keefe wrote Ex. 151/Tab 510 to MacDonald, making it clear that the Plaintiffs' offer to settle for the amount of Midland's loan plus interest remained open for acceptance.

[820]On December 29, 2007, Shtaif was formally accused in Russia of commiting a crime.

2008 to 2013

2008

[821]2008 Negotiations with Poltaranin to buy SibinTek. The Defendants have alleged that the Plaintiffs secretly entered into an agreement with Poltoranin to acquire SibinTek. On March 26, 2008, April 21, 2008, July 14, 2008 and November 24, 2008, Regional Alliance was attempting to persuade Midland to purchase shares of Reagent and through Reagent, shares of Sibintek.

[822]Vinogradov gave evidence that a representative of Regional Alliance contacted him in 2008 suggesting it had cleared up Reagent's title and Midland could yet buy the Reagent shares in SibinTek. Vinogradov said he asked Regional Alliance to provide proof that Reagent now owned the shares. Regional Alliance provided Ex. 206/Tab 513, a draft Letter of Intent naming Midland Resources Holdings as purchaser of 100% of the shares of Reagent. Vinogradov said 1826-1830 he smelled a rat. He was suspicious that Regional Alliance was trying to get him or Midland to sign documents containing Midland's name, in order to complicate the criminal investigation against Shtaif. Had Midland been trying to buy

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Poltoranin's shares, that could suggest that Poltoranin actually had title to the shares. After he supplied the name of Duffex [a company that had nothing to do with Midland] as the buyer and refused to confirm that Duffex was a Midland company, Midland heard nothing further from Reagent.

[823]Vinogradov said at the same time Regional Alliance had sent Ex. 206 to Midland, it had copied Shtaif. Vinogradov suspected that Shtaif was behind Regional Alliance's actions and that Poltoranin and Shtaif were acting together.

[824]Shtaif gave evidence 4249 that when he left Russia. Regional Alliance was using Euro Gas' email server. The General Director of Euro Gas, a Mr Fazlyev, was monitoring Regional Alliance's emails to see if Midland was dealing with Poltoranin behind Shtaif's back.

[825]Settlement Discussions. On January 8, 2008, Macdonald wrote Ex. 152/Tab 510 to Keefe 4243, referring to the Alogics Subscription Agreement and a credit facility Noven had entered into. [Keefe said MacDonald provided no copy of the Subscription Agreement or proof that any credit facility had been firmly offered.] The Defendants continued to insist the criminal charges against Shtaif be withdrawn. Keefe 2726 continued to maintain that any criminal investigation was entirely in the hands of the authorities. It would be inappropriate to negotiate criminal charges, as part of any civil settlement.

[826]Keefe gave evidence that fulfilling Macdonald 's two demands for full financial disclosure, a commercially reasonable settlement agreement conditional on funding and subject to reasonable due diligence would have been fairly easy, However, his third demand, withdrawal of criminal proceedings, was inappropriate. On January 11, 2008 Keefe 4245 wrote Ex. 153/Tab 510 to MacDonald:

…If your clients are able to pay the full amount outstanding on the loan,we will provide your clients with access to whatever is required for them to do their due diligence with an early closing…As to the criminal investigation in Russia our clients position has been consistent.We are not prepared to negotiate or discuss any criminal proceeding as a term of a commercial deal or a settlement of civil proceedings…What is clear is the allegations contained in all three claims are false, and are being asserted in order to pressure our client to forego his equity interest and a significant portion of the amounts advanced by way of loan to avoid these frivolous, false and scandalous allegations from being made public by your clients . We know that the first Statement of Claim was delivered to a Globe and Mail reporter in a brown envelope. We would not be surprised if the two new claims are being delivered to the same reporter and other members of the media in the same way.

[Emphasis added.]

[827]Keefe's evidence contained the following at 2893:

A.We were very open. Our client would have wanted nothing more than to receive the amount that he had advanced with a meaningful proposal with meaningful commercial terms that were reasonable, commercial, and was open to those proposals throughout. There was no attempt on our client's part to impede those negotiations. …

[Emphasis added.]

[828]On January 15, 2008, Macdonald 4246 wrote Ex. 154/Tab 510 to Keefe:

... Our clients do not have the funds at their disposal to comply with your request… If we do settle, the baseless and perjured criminal proceedings against Mr Shtaif that were inflicted by Mr Shnaider in order to justify his actions in taking control of the properties, and to effect a result in the civil action in Ontario must be withdrawn…Given your client's conduct we have no alternative but to connect the criminal charges to a civil resolution ….

[Emphasis added.]

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[829]Roberts said on January 17, 2008 he emailed Ex. 271/Tab 653 to Keefe, telling him the Defendants were about to lose the $30 million from Alogics: "Had Alex agreed to back off against Mike in Russia and entered into a conditional settlement then he would have immediately come up with a plan to raise the balance of the funds, to see Alex get paid and all of this litigation resolved…"

[830]Keefe said there was lots of noise from the Defendants but they made no written proposal to the Plaintiffs at that time. He wrote: "My only suggestion is that you put your proposal in writing setting out all your conditions, timing etc…. All I can tell you is that we will consider it and get back to you."

[831]On January 18, 2008, Keefe wrote Ex. 155/Tab 510 to Macdonald, again indicating he wanted nothing to do with an inappropriate condition of settlement that the criminal complaint against Shtaif be withdrawn in Russia. Keefe commented 2945 that the Plaintiffs were not willing to give control of Reef to Shtaif in the interim.

[832]On January 18, 2008, Macdonald replied by Ex. 156/Tab 510: "…This is the last letter that I shall write regarding settlement. The time is now."

[833]On January 19, 2008, Nikiforuk of Canadian Business Magazine contacted the Plaintiffs again. Keefe said 2584 it was apparent from his discussion with Nikiforuk that he had in hand all three of the Defendants' Statements of Claim.

[834]On January 19, 2008, Roberts wrote Ex. 654/Tab 272 to Keefe [Greenspoon and McDonald], telling Keefe they needed to act quickly.

[835]Keefe gave evidence that on January 21, 2008, Midland's communications director, Ron Fine, advised him that Nikiforuk was pressing him for information. Keefe decided to travel to Russia to interview witnesses.

[836]Keefe Interviews White & Case. On January 23, 2008, Keefe interviewed two White & Case lawyers, Mr. Tokovinin and Mr. Tarabrin, in Moscow.

[837]In part because the pleadings put Keefe's state of mind and the good faith of the Plaintiffs into issue, I permitted counsel for the Plaintiffs to elicit information from Keefe about information White & Case provided to him on January 23, 2008. I did not consider Keefe's evidence about what the White & Case lawyers told him for its truth.

[838]Ex. 261/Tab 628 is Keefe's handwritten notes prepared in Moscow during that interview. Ex. 262/Tab 629 is a memo to the file dated February 14 he prepared after returning to Canada.

[839]Information Given to Keefe About Events on May 29. Keefe said that on January 23, 2008, Tarabrin, the most senior lawyer involved on a day-to-day basis in the SibinTek transaction, provided information about the SibinTek transaction and the May 29 meeting at SberBank. He said on May 29, 2006 he was in a cab on his way to the airport to go on vacation when he received a call from Polonsky, a senior White & Case partner. Polonsky told him that Shtaif was in their office saying that the SibinTek transaction must close on that day. Tarabrin said he was not present when Polonsky and two other White & Case lawyers, Kuznetsova and Tokovinin, met with Shtaif in their offices or with Tokovinin and Kuznetsova when they accompanied Shtaif to SberBank.

[840]Partway through the meeting with Keefe, Tarabrin asked Tokovinin to join them and recount his recollections about the events of May 29, 2006. Tokovinin described the situation

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as a huge mess. He said the transaction was nowhere near ready to close. He was shocked that Shtaif was expecting to close that day. Polonsky told Shtaif they could not close that day but Shtaif was insistent.

[841]Tokovinin and Kuznetsova accompanied Shtaif and Keloglu to the bank. Reagent was represented by Poltoranin and his lawyer Tsygankov. Geros was represented by Bekker.

[842]Tokovinin said Poltoranin was unpleasant looking, wearing black jeans and a black T- shirt. He appeared to be on drugs. Tokovinin described how Poltoranin personally offended him. When Shtaif told Tokovinin that the transfer of the notes would happen that day, Tokovinin commented he did not believe that the notes should be endorsed that day and suggested they should reconvene later when the deal was ready to close. Poltoranin became angry and said to Shtaif: "Tell that boy to shut up…" There was a long discussion about the adequacy or inadequacy of the corporate records that had been produced and whether they were ready to close. Poltoranin or Tsygankov said they needed control of the notes in order to demonstrate to Poltoranin's creditors that he could pay the amounts he owed them so they would remove their liens on Poltoranin's shares so they could be transferred to Geros and then to Trovalion. Shtaif or his representative endorsed the notes to Poltoranin. Shtaif said he would keep control over them. Tsyangkov said Poltoranin would only do business if the Safety Deposit Box Agreement were changed so that Poltoranin became client number one and Euro Gas client number two. The safety deposit boxes were in another portion of the bank. Tokovinin did not accompany Poltoranin and Keloglu to the vault where they were located. After they came back to the White & Case office, Kutnetsova handed Tokovinin a list "like a big Bible" of due diligence that still needed to be done.

[843]Canaccord. On January 25, 2008, Roberts emailed Maybank and others at Canaccord:

…Alex has asked for his money back.He says he is owed 47.8 million…We have signed a deal with Alogics…for $30 million…Alex will not give us a conditional deal…We need a deal in hand to firm up with Bank Zenit…

…I did not think you would want to do a conditional raise. We need to close quickly and require another $40 million.

[Emphasis added.]

[844]Canaccord replied it did not want to do a conditional raise.

[845]Keefe Returns From Russia. After returning from Russia, Keefe said he met with investigators at the Ontario Securities Commission ("OSC") and reviewed the file relevant to Boock, De Freitas, Magellan and International. He 2966 questioned Roberts' knowledge about Magellan and International at the time they were incorporated. He examined Roberts' possible role in creating Magellan, his nomination as International's representative and his possible non-disclosures. He met with Roberts on a without prejudice basis. Keefe said he told Roberts what he had learned from White & Case. Keefe said, given what he had learned from Tarabrin and Tokovinin, he could not understand why Roberts, who held only a 1% interest in Koll, would participate in litigation and expose himself to costs exceeding the value of his interest in Koll. Keefe said 2810 he believed Shtaif was culpable and suggested they go to Russia and meet White & Case together. They discussed participating in a video- conference. Instead of following up and participating in a videoconference with White & Case, Roberts emailed Keefe, defending Shtaif and criticizing White & Case. Keefe concluded Roberts had not genuinely tried to determine what had really happened but had

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jumped on the Shtaif bandwagon. Keefe's evidence under cross-examination by Roberts at trial included the following at 02970-02971:

A. I mean, you [Roberts] went off on all kinds of wild email exchanges with White & Case saying … that I was lying that I met with two lawyers from the bank because one of them was on maternity leave. … the kind of mischief that you engaged in after that … could only be mischief of someone who was involved in it from the outset.

[846]Sometime in early February, Fine and Keefe met with Nikoforuk.

[847]Whether or not the Defendants had a strategy to use the media to cast themselves in a favourable light and the Plaintiffs in an unfavourable light, the Canadian Business article was obviously not to Roberts' liking. He had access to it before it was published on March 3, 2008 because he emailed Ex. 274/Tab 656 to Keefe on February 3, 2008, complaining that Fine had called him an "extortionist and shakedown artist," and said that the Defendants' version of events was stranger than fiction, "implying that I am a liar and cannot be trusted." Roberts demanded that Keefe contact Canadian Business and retract Fine's allegations, threatening to exponentially increase the damages claimed against if they were not withdrawn.

[848]On February 6, 2008, Roberts wrote Ex. 661/Tab 511 to a number of individuals at Canaccord:

I am trying to give most of my business associates a heads up regarding a Canadian Business Magazine article that is coming out in the next few weeks . The article describes our relationship with Alex Shnaider in the oil company we started in Russia with my friends Mike Shtaif and Tony Groag. The article is going to quote Ron Fine, Alex's PR guy here in Toronto. Basically Fine says Mike and I are extortionists and shakedown artists -and says Mike was criminally responsible for the theft of about $6 million in Russia.

All of this is absolutely BS…I can send you a very d etailed summary of the facts the RCMP has requested… Alex illegally took over our company by force (after we had increased his $30 million investment to $300 plus plus million) and only said Mike was involved in the loss one year after it happened and only after we sued him in Canada. After we sued him, Alex bribed some cops in Moscow to put Mike in jail on BS charges - following which the Canadian Embassy instructed Mike to leave Russia after they became aware what Alex was trying to do and the RCMP are likely going to charge him for bribing foreign officials and extortion….

[Emphasis added.]

[849]On February 10, 2008, Maybank emailed Ex. 662/Tab 512 to Roberts: "… It looks like an unfortunate end will come to a very promising opportunity."

[850]Defendants' Efforts to Raise Funds - Alogics. On February 12, 2008, Noven and Alogics signed a Subscription Amending Agreement, extending the Alogics Subscription Agreement to April 30, 2008.

[851]On February 28, 2008, Roberts emailed Ex. 276/Tab 658 to Keefe. Roberts said he had spoken to Nikiforuk "to level the score." He had also provided information to the Financial Post because he said it had previously been given information accusing Roberts of fraud. He warned Keefe and his client to stop seeding the press with false and misleading perjured information.

[852]On March 2, 2008, after telephoning White & Case, Roberts wrote it Ex. 700/Tab 514, including the following:

I understand your firm's retainer was with Euro Gas …

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As we discussed the purpose of our call was not to debate whether White & Case and specifically … Kuznetsova owed Euro Gas a … duty of care … I thought it would be a good idea to clearly set out what happened… Shnaider ignored the advice he was getting from you and litigation counsel … Shnaider made a unilateral decision to terminate the transaction … It is now obvious that Shnaider and Shyfrin … set out to frame Poltoranin to get their $12 million back … I am of the opinion once Alina endorsed the notes she was under a duty of care to ensure they were protected … she should not have allowed the notes to be returned to the box in negotiable form … In our court action you advised me that Alina was on maternity leave when Keefe came to your office … you also told me that as Alexander was not present on May 28th at SberBank, he could not have offered anything at all to Keefe on the issue … Keefe's statement to me that he spoke to both lawyers who were present on May 29th was not true …

[853]Keefe said he told Roberts he had spoken to two White & Case lawyers who had been involved in the deal, not two White & Case lawyers who were at the Bank on May 29, 2006.

[854]Use of Media. On March 3, 2008 Canadian Business published Ex. 96/Tab 567, "A Nasty Russian Tale" that referred to Shtaif's, Roberts' and Groag's Statements of Claim, including their allegations against the Plaintiffs of harassment, threats, kidnapping, abduction, coercion and bribery.

[855]Commencement of Plaintiffs' Action. On March 20, 2008, the Plaintiffs commenced this action.

[856]On April 7, 2008, Mr. Schaeffer [of White & Case] responded to Roberts' letters Exhibis 700 and 701 by Ex. 576/Tab 519.

[857]Use of Media. Roberts gave evidence 6065 he believed that after the Plaintiffs issued their Statement of Claim in March 2008, and before they served it on the Defendants, Shnaider had directed it to be delivered to Toronto Life [for (Ex. 166,/Tab 524) for use in a feature article on Shnaider, "How to Piss Off a Billionaire" published in June 2008. Roberts gave evidence 6762-6766 the Toronto Life article horrified him, as it quoted Shnaider as saying that Roberts and Shtaif were fraudsters and extortionists. Roberts suggested it was fatal to his and Shtaif's reputations and careers.

[858]Criminal Investigation of Shtaif. On July 10, 2008, Chief Investigator Zhukov accused Shtaif of theft and collusion with Poltoranin and Bekker. On July 17, 2008, Judge Ivanova rejected Zhukov's request to imprison Shtaif.

[859]Sale of Reef. On September 17, 2008, G Quest entered into Ex. 101/Tab 529, a preliminary agreement to buy Reef for $58.5 million and paid a $500,000 deposit, Ex. 207/Tab 530. G Quest later renegotiated the terms and ultimately walked away from its $500,000 deposit (Vinogradov 1844).

[860]On November 17, 2008, by Ex. 418/Tab 531, Judge Rolglizer declared illegal Zhukov's resolution refusing to allow Shtaif's lawyer access to documents.

[861]Ex. 417/Tab 533 is a Resolution requiring Zhukov to correct alleged violations, dated December 16, 2008 (Evidence on 4162).

2009

[862]Sale of Reef. On February 11, 2009, Zenol made Koll a conditional offer, Ex. 102/Tab 535, to buy Reef for $2.1 million cash and 6 million ZAAB Energy shares. The offer was not accepted.

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[863]Criminal Investigation Against Shtaif in Russia. Ex. 225/Tab 536 March 12, 2009

SI Ryumshin, Deputy District Prosecutor wrote to Koslov, Sr. Counsellor of Justice:

I consider that the reasons provided by the investigation group to charge Shtaif are unfounded. They do not correspond with the evidence obtained during the investigation and they contravene the requirements of law. … If we assume that funds were stolen from Midland … the owners of which were deceived by Mr. Shtaif, then we have to conclude that theft of funds was completed in … Canada … The issue of his prosecution is in the jurisdiciton of law enforcement agencies in Canada

…Shtaif had left for the place of his permanent residence in November of 2007 after his visa had expired.

[864]Sale Of Reef. On March 25, 2009, Zenol submitted Ex. 103/Tab 539, a revised conditional offer to Koll for $3 million cash and 4.7 million in Zaab Energy Shares. Shnaider said 407-418 had it been an all-cash offer, it would have been accepted.

[865]In Ex. 226/Tab 540, Judge Alexandrova resolved that Shtaif's placement on the wanted list was illegal.

[866]Recovery Of Treasury Notes Not Recovered. Ex. 198/Tab 541 is a Resolution dated April 2009 of Euro Gas complaint asking the Court to return seized Treasury Notes 1837673 and 1837674 to Euro Gas.

[867]Sale Of Reef. Shnaider gave evidence 413-418 that on May 8, 2009, G Quest submitted Ex. 100/Tab 547, a revised offer to buy Reef from Koll for $12 million subject to due diligence. That offer was accepted. However, after a second round of due diligence, the deal still did not close. G Quest forfeited a $500,000 non-refundable deposit. Vinogradov 1844.

[868]Criminal Investigation Against Shtaif. Counsel for Shtaif relied heavily on Ex. 212/Tab 548, an Order by Investigator A.V. Solovjev, suspending the pre-trial criminal investigation due to the Absence of Real Possibility of Defendant to Participate in the Criminal Proceeding. (I note the suspension was said to be due to the absence of a real possibility of Shtaif to participate.)

[869]On August 11, 2009, Ex. 192/Tab 551 the Moscow Arbitration Court, ordered Midland to return Note 1837674 to Euro Gas, as the Agreement on Safe Custody dated November 14, 2006 had expired. Shtaif gave evidence at 3994-3995 that "there was still time even … until December 2009 … [to] successfully reinstate the expired limitation period …"

[870]Midland appealed.

[871]On September 2, 2009, Prosecutor Kozlov made a request to invalidate the unlawful resolution including Shtaif in the criminal proceeding.

[872]On October 30, 2009, Weir Foulds & Stevenson agreed that note 1837674 would be cashed and deposited in the Defendants' counsel's trust account pending the outcome of this action.

[873]On December 12, 2009, the Court ordered release and return of Treasury Notes 1837673 and 1837674 to Euro Gas. The Court noted that Euro Gas' right of ownership had not been disputed by any party. An Order was made to return the notes to Euro Gas. [Vinogradov said Euro Gas had applied without notice to Midland. [That is why Euro Gas' right of ownership was not disputed.]

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[874]Shtaif 3996 then commenced proceedings to have SberBank reinstate and cash both Treasury Notes. Again, Shtaif applied unilaterally. He was unsuccessful. Shtaif said Midland had somehow managed to become a civil claimant, which required it to be a co-plaintiff with Euro Gas.

[875]Vinogradov gave evidence that Euro Gas had unilaterally applied to SberBank to reinstate the note and was refused because Midland should also have been a party to the application. Vinogradov's cross-examination contains the following:

02036-02037

Q. That left Mr. Shtaif, as you testified in chief, or Euro Gas to be more precise, in a legal fight in Moscow with SberBank trying to get the note restored, notwithstanding the expiry of the limitation period. Right?

A. Not exactly. First of all, we told Michael, let us -- let us do this. … He refused. He said no, I will do it. We explained him that our litigation department checked, it's not so easy to do it. We still had a chance. We could do it. But that was not so easy. But he said no, I'm going to do it. And when he went and failed again, that's all.

[876]Vinogradov referred to one note. I find he only knew that 1837674 had been seized. Shtaif did not tell Vinogradov that two notes had been seized. He applied without Midland to have both notes 1837673 and 1837674 reinstated. I do not accept Shtaif's evidence that he intended to deposit the proceeds of both notes in the Defendants' counsel's trust account in accordance with counsel's agreement of October 30, 2009. I find he did not intend to deposit the proceeds of 1837673. I find the reason Shtaif refused Vinogradov's offer of assistance and proceeded unilaterally was he did not want the Plaintiffs to know that note 1837673 had been seized. He intended to deposit its proceeds in Euro Gas' account and to benefit personally as sole shareholder of Euro Gas.

2010-2012

[877]Sale Of Reef. Shyfrin said that he had asked his son Igor, who was based in London and Moscow and experienced in international transactions, to help find a buyer for Reef. Igor spoke to Andre Osipov, who was in the business of selling businesses on commission. Osipov found SK Join, a buyer that was willing to pay $US5 million for Reef.

[878]Sale Of Reef. On June 9, 2010, after SK Join had offered to buy Reef and Invenskoye for $5 million, the Plaintiffs offered by Ex. 105/Tab 557 to sell the shares of Trovalion and Koaplama, the owners of Reef and Invenskoye, to the Defendants for $5 million, i.e., on the same terms as SK Join had offered.

[879]The Defendants declined to buy Invenskoye and Reef for $5 million. Ex. 106/Tab 558. Roberts submitted the Plaintiffs knew when they made the offer Ex. 105 to the Defendants, the Defendants could not accept it because they were continuing to try to have Shtaif incarcerated in Russia.

[880]On June 24, 2010, the Defendants having declined an identical offer, Koll agreed to sell 100% of the stock of Trovalion and Koaploma [the owners of Reef and Invenskoye] to SK Join for $5 million. Ex. 104/Tab 559.

[881]The Defendants allege that the sale to SK Join was not at arm's length. Roberts gave evidence 6252, 6749, 6751, 6752 that his research had shown that the vendor, purchaser and the purchaser's agent all had the same address in the BVI; Mossack FonSeca, the resident agent that Zolty had used to incorporate BVI companies for the Plaintiffs, had the same address. Ex. 658/Tab 755; Ex. 596/Tab 216.

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[882]I accept Vinogradov's 1853, Shnaider's 424 and Shyfrin's evidence that Midland was at arm's length with SK Join.

[883]Reef Resale Documents. Ex. 505/Tab 603 is documents dated September 2011, wherein SK Join is offering 100% of Reef without Invenskoye for sale for $45 million.

[884]Criminal Investigation. Counsel for Shtaif submitted the Russian prosecutors and courts have consistently refuted Midland's allegations. Roberts submitted that after the Russian Courts threw out all of the unlawful charges against Shtaif in April 2009, the Plaintiffs covertly renewed their request to have the charges reinstituted in February 2012. The Russian prosecutor did not accede to the Plaintiffs' 2012 demands and refused to re- instate the bogus criminal charges against Shtaif (Ex. 203/Tab 563; Shtaif 4183).

[885]On February 3, 2012, by Ex. 202/Tab 562, Vinogradov attempted to convince the Russian police to continue the investigation.

[886] I do not accept the submission that the criminal investigation against Shtaif has ended. I have noted that on May 24, 2009, the investigation was suspended on procedural grounds by Ex. 212/Tab 548, due to the absence of a real possibility of Shtaif to participate.

[887]On March 6, 2012, Ex. 203/Tab 563, S.U. Yukubou, the first deputy prosecutor, wrote Vinogradov: " As was demonstrated by study of case, the investigation has not been conducted in full. Due to non-fulfillment of all investigative actions possible in the absence of M. Shtaif, the decision was made to forward criminal case to the Investigation Department of the Department of Internal Affairs Police Dept. for reopening the investigation. "

[888]The investigation is still ongoing. The criminal case against Shtaif is still open.

[889]Whether it will ultimately result in charges against Shtaif is not for me to decide.

CREDIBILITY OF THE WITNESSES

[890]Shtaif. I did not find Shtaif to be a credible witness. I have earlier given specific reasons for rejecting much of his evidence. I note more generally that he often failed to answer questions directly. His oral evidence was often inconsistent with the contemporaneous documents, including many that he himself had authored. He was effectively cross-examined on numerous inconsistencies between answers he gave at trial and at discovery. He repeatedly promised to produce documents to corroborate his oral evidence, then failed to do so.

[891]Groag. Since Groag is deceased, obviously he was unavailable to give evidence at trial. The record included numerous documents authored and received by Groag. From the documents and evidence I have concluded that Shtaif was not honest with Groag. For example,on March 31, 2006, Shtaif misrepresented to Groag that BDW had funded. Just before the April 28, 2006, Board meeting, Shtaif told Groag BDW had paid Magellan $10 million. Overall, I have concluded that Shtaif did not share much of what he knew and was doing with Groag. He used Groag to lend credibility to his venture and to relay information to the Plaintiffs that Shtaif knew was false. For that reason, one has to be wary when considering the truth of the contents of documents Shtaif sent to Groag or that Groag sent to others at Shtaif's request.

[892]Roberts. I found much of Roberts' evidence to be unreliable. To use the witness Keefe's words, it appears that Roberts jumped on Shtaif's bandwagon. In his evidence, Roberts frequently parroted information Shtaif had provided to him. He did not hesitate to give evidence about occurrences at meetings that he had not attended. He supported Shtaif,

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seemingly without reservation and without having scrutinized the information Shtaif had provided, adequately or at all. In documents he prepared, in oral evidence he gave and in argument, Roberts tended to misstate, overstate and/or rationalize what he characterized as "mistakes." For example, when challenged about what he did to collect the $39,570.66 and $100.482.02 for himself and Shtaif on their June 23, 2006 Magellan notes, he admitted he had been sloppy in preparing the motions for judgment. He conceded he had prepared two affidavits in which he had had his law clerk depose that Roberts and Shtaif had made demand for payment on June 24, 2006 on Magellan when he knew no demands had been made. He admitted signing "John Sparrow's" name on two admissions of service for his and Shtaif's Statements of Claim, filing John Sparrow's consents to judgment, knowing Boock had signed them. He had his law clerk depose that Sparrow was known to his law firm. After the judge reviewing the materials filed in support of Shtaif's motion for judgment asked for proof of Sparrow's authority to consent to judgment on behalf of Magellan, Roberts simply instructed his process server to type the words "I have authority to bind the Corporation" under Sparrow's purported signature. If these were "mistakes," they were serious, significant mistakes. Roberts made excuses for the content of his March 5, 2007 letter setting out a plan to appropriate Koll's assets. If it was a mistake, it was a significant, serious mistake.

[893]Just as I have concluded that no later than January of 2006, Shtaif cannot excuse his own conduct by blaming Boock, I have concluded that by May 2006, Roberts cannot excuse his own conduct by blaming Shtaif. I have concluded that by May 2006 at the latest, Roberts knew that much of the information he was providing to others was untrue.

[894]At the same time, I have found that Boock and De Freitas did not share all of what they were doing with Shtaif, and Shtaif did not share all of his knowledge and plans with Roberts. However, I have found that after the dates specified, they did share in the plan that targeted Midland and acted unlawfully in a manner that they knew would likely cause damage to Midland.

[895]Boock did not appear or give evidence at trial. He has been noted in default. My findings regarding Boock are based on the documents filed in evidence [including numerous documents sent and received by De Freitas and others issued and filed by the OSC and the (SEC) and the viva voce evidence of Beach, Roberts, Shtaif and De Freitas.

[896]De Freitas's evidence was brief. I did not find him to be a credible witness. My findings are based primarily on the viva voce evidence of DeFreitas, Shtaif and Roberts and in part on the SEC and OSC documents relating specifically to DeFreitas. [I have not considered the Agreed Statement of Facts or other documents said to be not for use in future litigation.] Overall, I concluded De Freitas did not tell the Court much of what he knew and did to assist Boock in unlawfully using BDW and Magellan to target Midland.

[897]Shyfrin. The evidence of Shyfrin was generally consistent with the contemporaneous documents. He gave his evidence in a forthright and direct manner. Generally speaking, I have preferred his evidence over Shtaif's, Robert's and De Freitas' where they have differed. Where I have preferred Roberts' or Shtaif's or De Freitas' evidence, I have so specified.

[898]Shnaider. I found Shnaider to be a straightforward and reliable witness. He did not overstate or rationalize. His evidence was lengthy and generally consistent with the contemporaneous documentation. I have accepted most of it. Again, where I have preferred other evidence I have generally so specified.

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ANALYSIS

General Observations

[899]At trial it was conceded that Midland loaned $50 million to Koll and that Koll presently owes Midland $46,105,879.43 plus interest.

[900]In the Main Action, the real liability issue to be decided is whether any or all of the Plaintiffs are entitled to judgment against any or all of the Defendants in their personal capacities. The essential damages issue is the quantum of damages, if any, owed to the individual Plaintiffs by individual Defendants in their personal capacities.

[901]The major issue to be decided in the Counterclaim is whether the Plaintiffs breached their contract with the Defendants and if so, the consequences of that breach.

[902]In my view, the resolution of the legal issues in this case is largely dependent on the facts. I have already set out my findings in detail. I shall not repeat them all here. When considering each liability and damages issue, I have referred back to the chronology by date or Exhibit/Tab number and have considered my earlier factual findings, then applied the applicable legal tests.

[903]I have borne in mind the need to separately consider the liability and damages evidence pertinent to each Plaintiff and each Defendant and to determine liability and assess damages individually.

[904]Throughout, I have borne in mind the need for clear cogent proof of civil fraud as articulated in F.H. v. McDougall, 2008 SCC 53, [2008] 3 S.C.R. 41. In that case Justice

Rothstein set out the standard for burden of proof in all civil actions at para. 40:

I think it is time to say, once and for all in Canada, that there is only one civil standard of proof at common law and that is proof on a balance of probabilities. Of course, context is all important and a judge should not be unmindful, where appropriate, of inherent probabilities or improbabilities or the seriousness of the allegations or consequences. However, these considerations do not change the standard of proof.

The Main Action

[905]In the portion of this Analysis section pertaining to the Main Action, I have not dealt

with all the instances of each alleged cause of action in one piece, as the facts in each time frame could be pertinent to more than one cause of action. In other words, all the allegations of deceit have not been considered with all the other allegations of deceit, but rather have been interspersed among breach of fiduciary duty and unlawful conspiracy allegations. The analysis has been done chronologically, to make it more understandable and less repetitive. I have first set out the legal tests to be applied to all three primary causes of action, (deceit/fraudulent misrepresentation, breach of fiduciary duty and unlawful conspiracy) and then considered each instance of alleged liability as it occurred chronologically. With respect to each alleged instance of liability under each cause of action, I have applied to it the law set out at the beginning of the section.

The Law - Primary Cause of Action 1: The torts of Deceit, Fraudulent Misrepresentation

[906]I have used the terms interchangeably in these Reasons: Bozzo (Re) (2005), 10 C.B.R. (5th) 1 (Ont. S.C.), at para. 23; and Lewis N. Klar, Q.C., Tort Law, 5th ed. (Toronto: Thomson Reuters Canada Ltd., 2012) ("Klar"), at p. 696.

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[907]The test for establishing fraudulent misrepresentation has five elements: Amertek Inc. v. Canadian Commercial Corp. (2005), 76 O.R. (3d) 241 (C.A.), at para. 63.

[908]Element 1: the defendant made a false representation of fact to the plaintiff.

[909]Element 2: the defendant knew the representation was false OR had no belief in its truth OR was reckless as to its truth.

[910]Silence and Half-Truths. Generally, to establish liability for a fraudulent misrepresentation, the defendant must have made a positive fraudulent statement. However, silence and half truths can amount to a fraudulent misrepresentation, if the silence renders an earlier express representation false or materially misleading. Canada Mortgage and Housing Corporation v Gray, [2013] O.J. No. 1969, a decision of Wilton-Siegel J. at para 34. A party must speak out after learning that a prior statement has been rendered false by a change in circumstances or that it was never true: Toronto-Dominion Bank v. Leigh Instruments Ltd. (Trustee of) (1991), 51 O.A.C. 321 (Div. Ct.) at p. 339, and Klar, at pp. 699, 700 n. 29.

[911]In 1880, Lord Blackburn wrote in Brownlie v. Campbell, (1880) 5 App. Cas. 925 (H.L.) at p. 950,:

[W]hen a statement or representation has been made in the bona fide belief that it is true, and the party who has made it afterwards comes to find out that it is untrue, and discovers what he should have said, he can no longer honestly keep up the silence on the subject after that has come to his knowledge, thereby allowing the other party to go on, and still more, inducing him to go on, upon a statement which was honestly made at the time when it was made, but which he has not now retracted when he has become aware that it can be no longer hones tly persevered in. That would be fraud.

[912]A defendant's duty to correct the record derives from his decision to speak in the first place. The Alberta Court of Appeal wrote in Xerex Exploration Ltd. v. Petro-Canada, 2005 ABCA 224, 47 Alta. L.R. (4th) 6, at para. 56:

Ordinarily in contractual negotiations between sophisticated parties, operating at arm's length, there is no general duty of disclosure. When a representation is made during the course of negotiations, however, the party making it must ensure that it is accurate so that it does not amount to a misrepresentation. This gives rise to a further duty to speak when silence effectively renders a representation, already made, inaccurate. Having brought a particular subject up in negotiations, a party assumes a duty to ensure that the other party is aware of all the material facts relevant to that assertion

[913]See also Alevizos v. Nirula, 2003 MBCA 148, 234 D.L.R. (4th) 352, at para. 21.

[914]Element 3: the defendant intended the plaintiff to act in reliance on the false representation/the defendant had an intention to deceive the plaintiff: Fiorillo v. Krispy Kreme Doughnuts, Inc. (2009), 98 O.R. (3d) 103 (S.C. Comm. List.), at para. 75; and Klar, at p. 703.

[915]Evidence of intent can be found in the defendant's knowledge of the purpose to which the plaintiff would put the statement. For example:

1.In Fiorillo, Newbould J. found, at para. 80, that it was enough that the defendant knew that the plaintiff would use the defendant's statements when making the decision whether to invest additional funds:

2.In Transamerica Life Insurance Co. of Canada v. Hutton (2000), 33 R.P.R. (3d) 1 (Ont. S.C.), at para. 46, Cullity J. held that a defendant's false statements when

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seeking a loan "were for the purpose of obtaining the loan and that, together with [the defendant's] knowledge of their falsity, was sufficient to establish the existence of the requisite intention."

3.In Clark (c.o.b. Intelligent Workbench Corp.) v. Coopers & Lybrand Consulting Group, [1999] O.J. No. 4284 (S.C.), aff'd (2002), 163 O.A.C. 1 (C.A.), at paras. 35- 36, 47, Chadwick J. indicated that knowing that a prospective employer would rely on a false resume in deciding whether to hire the defendant was sufficient proof of intent.

[916]In Fiorillo, Newbould J. explained, at paras. 75-77:

A plaintiff must establish that the false statement was made with the intention of deceiving the plaintiff. It is not necessary however for a plaintiff to establish that the defendant intended to cause loss to the plaintiff and a defendant's motive is irrelevant. It is immaterial that the false statement was made without any intention of damaging the plaintiff or of benefiting some third -party. In Spencer Bower & Turner on Actionable Misrepresentation 4th ed, (London: Butterworths, 2000) it is stated at 61:

Although fraud involves an intention on the part of the representor that the representee should act in the way he did, there is no need to prove any further intention, and the representor's motive is irrelevant. It is immaterial that the representation was made without any intention of damaging the representee, or of benefiting the representor or some third person, or even with the intention of benefiting the representee. A false representation made without honest belief in its truth will be fraudulent if made with the intention that the representee act upon it, even if there is no apparent motive.

In Derry v. Peek , (1889) 14 A.C. 337 at 374, Lord Herschell stated, "if fraud be proved, the motive of the person guilty of it is immaterial. It matters not that there was no intention to cheat or injure the person to whom the statement was made."

In Smith v. Chadwick , (1884) 9 A.C. 187 at 201, Lord Blackburn stated, "the motive of the person saying that which he knows not to be true to another with the intention to lead him to act on the faith of the statement is immaterial."

[917]The plaintiffs need not have relied only on that misrepresentation. So long as it contributed to their decision, and was one of the factors that induced them to act, that is sufficient: Fiorello paras 91-92.

[918]Element 4: the plaintiff did act on the statement.

[919]Element 5: the plaintiff suffered a loss by so doing. Mariani v. Lemstra (2004), 246 D.L.R. (4th) 489 (Ont. C.A.), at para. 12; and Fiorillo supra at para. 67.

Primary Cause of Action 2: Breach of Fiduciary Duty

[920]The primary basis for fiduciary duty alleged against the Defendants is the duty of Board members to the company, here Magellan, then Koll.: Curry v. CPI Plastics, 2001 CarswellOnt 4344 S.C.J. at para 13; BCE v. 1976 Debentureholders, 2008 SCC 69, [2008] 3 SCR 560, [2008] SCJ No. 37, at paras 37-38. Here, breaches of fiduciary duty are alleged against various Board members in relation to their failure to disclose material information at Magellan's Board meetings on January 20, 2006, February 19, 2006, April 28, 2006, and June

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20, 2006, and at Koll meetings on June 20, 2006. The fiduciary duty of the directors to the corporation originated in the common law. It is a duty to act in the best interests of the corporation. Often the interests of shareholders and stakeholders coincide with the interests of the corporation. If they conflict, the directors' duty is clear — it is to the corporation.

[921]In 484887 Alberta Inc. v. Faraci, 2002 ABQB 406, 311 A.R. 355, a director hired a friend to act as the company's bookkeeper without telling the rest of the Board that the friend had been imprisoned for fraud in the past. The friend subsequently defrauded the company, and the corporation filed suit against the director for breach of fiduciary duty. The Court concluded that the director's failure to disclose the friend's history to the rest of the Board violated her duties of disclosure to the company.

Primary Cause of Action 3: Conspiracy

[922]The tort of conspiracy involves an agreement between two or more persons to do an unlawful act, or to do a lawful act by unlawful means, followed by the execution of that agreement. Conspiracy may be proven by direct evidence or inferred from the facts of the case. Klar at 731.

[923]Conspiracy to Injure. To prove conspiracy to injure, a plaintiff must demonstrate that the defendants acted in combination, that is, in concert, by agreement or with a common design; whether the means chosen by the defendants are lawful or unlawful, the predominant purpose of the defendants' conduct is to cause injury; and the defendants' conduct caused injury to the plaintiff. Canada Cement LaFarge Ltd v British Columbia Lightweight Aggregate Ltd., [1983] 1 SCR 452, [1983] SCJ No 33 at 16.

[924]Unlawful Conduct Conspiracy. Unlawful conduct conspiracy has five elements:

[925]Element 1. The defendants acted in concert by agreement or with a common design.

[926]Element 2: The defendants' conduct was unlawful; In Agribrands Purina Canada Inc. v. Kasamekas (2011), 106 OR (3d) 427, [2011] OJ No 2786 (CA), Goudge J.A. for the Court wrote at para 28:

[28]What, then, are the requirements for unlawful conduct for the purposes of this tort? Most obviously, it must be unlawful conduct by each conspirator: see Bank of Montreal v. Tortora, [2010] B.C.J. No. 466, 3 B.C.L.R. (5th) 39 (C.A.). There is no basis for finding an individual liable for unlawful conduct conspiracy if his or her conduct is lawful or, alternatively, if he or she is the only one of those acting in concert to act unlawfully. The tort is designed to catch unlawful conduct done in concert, not to turn lawful conduct into tortious conduct. The trial judge applied this requirement and found that each of the appellants had committed an unlawful act.

[Emphasis added.]

[927]He wrote at para 33:

[33]What is clear from this jurisprudence is that, to constitute unlawful conduct for the purposes of the tort of intentional interference, the conduct must be actionable. It must be wrong in law. … [Emphasis added.]

[928]At paragraphs 36-38:

[36]… However, rather than automatically adopting the meaning of unlawful conduct given in the intentional interference tort cases, I think the better course is to use those cases as a guide, but also consider the kind of conduct that the jurisprudence has found to be unlawful conduct for the purposes of the conspiracy tort.

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[37]It is clear from that jurisprudence that quasi-criminal conduct, when undertaken in concert, is sufficient to constitute unlawful conduct for the purposes of the conspiracy tort, even though that conduct is not actionable in a private law sense by a third party. The seminal case of Canada Cement LaFarge is an example. So too is conduct that is in breach of the Criminal Code, R.S.C. 1985, c. C- 46. These examples of "unlawful conduct" are not actionable in themselves, but they have been held to constitute conduct that is wrongful in law and therefore sufficient to be considered "unlawful conduct" within the meaning of civil conspiracy. There are also many examples of conduct found to be unlawful for the purposes of this tort simply because the conduct is actionable as a matter of private law. In Peter T. Burns and Joost Blom, Economic Interests in Canadian Tort Law (Markham, Ont.: LexisNexis, 2009), the authors say this, at pp. 167-68:

There are two distinct categories of conduct that can be described as comprising "unlawful means": conduct amounting to an independent tort or other actionab le wrong, and conduct not actionable in itself…

Examples of conspiracies involving tortious conduct include inducing breach of contract, wrongful interference with contractual rights, nuisance, intimidation, [page438] and defamation. Of course, a breach of contract itself will support an action in civil conspiracy and, as one Australian court has held, the categories of "unlawful means" are not closed.

The second category of unlawful means is conduct comprising unlawful means not actionable in itself.. …

The first class of unlawful means not actionable in themselves , but which nevertheless supports a conspiracy action, is breach of a statute which does not grant a private right of action , the very instance rejected in Lonrho (1981) by the House of Lords. A common case is a breach of labour relations legislation, and another is the breach of a criminal statute such as the Canadian Criminal Code.

[Emphasis added.]

[38]What is required, therefore, to meet the "unlawful conduct" element of the conspiracy tort is that the defendants engage, in concert, in acts that are wrong in law, whether actionable at private law or not. In the commercial world, even highly competitive activity, provided it is otherwise lawful, does not qualify as "unlawful conduct" for the purposes of this tort.

[Emphasis added.]

[929]Element 3: The defendants' conduct was directed toward the plaintiff.

[930]Element 4. The defendants should have known that injury to the plaintiff was likely to

result.

[931]Element 5. The defendants' conduct caused injury to the plaintiff. Canada Cement, supra at 16; Agribrands, supra at para 26.

The Main Action: Specific Allegations

Nov. 2005 Boock and De Freitas: Unlawful Conspiracy- The Creation of Magellan and the Plan to Use it Unlawfully

[932]At trial, counsel did not press allegations in their Statement of Claim that Roberts and Shtaif conspired with Boock in the creation of Magellan. They did allege that De Freitas was involved.

[933]Boock- the Unlawful Creation and Use of Magellan. I have found Boock fraudulently created Magellan. I have relied particularly on the viva voce evidence, especially the evidence of Beach and the letters he wrote about Magellan in May 2006 quoted earlier. I have also referred to certain public documents in Ex. 560/Tab 9 including an official SEC litigation release mentioning judgments obtained against Boock for hijacking 23 defunct or inactive

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publicly traded companies and making unregistered offers and sales of shares on the Pink Sheets and a formal order of the OSC permanently banning Boock from trading in securities, acquiring securities or acting as a director or officer of any issuer. I have not relied on Boock's Agreed Statement of Fact. I have considered documents including Ex. 356, Ex. 297, Ex. 298, Ex. 299, Ex. 447, Ex. 300, Ex. 305, and all of Boock's November-December 2005 correspondence. The timing of the incorporation of Magellan, the private company, the evidence of Shtaif and the content of the documents taken together have caused me to conclude that Boock created Magellan in early November 2005, specifically to be used in connection with Shtaif 's proposed joint venture. Boock intended initially to target Shtaif's potential investors, then later, specifically Midland and to use Midland's participation in Magellan in part to lend credibility to Magellan so he could sell at high prices the free trading shares he intended to unlawfully issue.

[934]De Freitas – November 2005. I have found on De Freitas' evidence that by November 2005, De Freitas and Boock were working together. De Frietas was part of Boock's fraudulent plan from the outset. In reaching this conclusion, although they do not speak directly to Magellan, the public documents in Ex. 560 [apart from documents not to be used in subsequent litigation to which I have not referred] refer to De Freitas' involvement with Boock in hijacking 23 defunct or inactive publicly traded companies and making unregistered offers and sales on the Pink Sheets. I have found De Freitas knew Boock was negotiating with Shtaif about using Magellan as the vehicle for the joint venture. He knew Boock and Shtaif were talking about structuring Magellan and the deal to make it attractive to investors like Midland. See Ex. 354/Tab 130. De Freitas to Shtaif: "John has claimed… Magellan was important to you so you could attract financing from sources like Midland."

[935]I have found by November 2005, De Freitas and Boock were unlawfully conspiring to use BDW and Magellan to defraud potential investors including the Plaintiffs. While De Freitas did not admit to any involvement in the formation of Magellan, he did admit that on Boock's urging, he and Jason Wong had formed a transfer agency, Select American Transfer, and that International Energy/BDW was its client. De Freitas admitted he was involved in hijacking International/BDW. Therefore, I have found De Freitas knew from the outset that BDW was a sham company. By late 2006, he knew Boock was holding out BDW as an investor in Magellan. De Freitas was at a meeting on December 6, 2005 with Boock and Shtaif where there were discussions about BDW investing in Magellan and where Boock was introduced to De Freitas as Howard. By early December 2005, Midland had specifically been identified as a target. Boock and Shtaif were discussing using Magellan's public status, and an investment by BDW to attract potential investors in Magellan.

[936]Element 1. De Freitas and Shtaif acted unlawfully in concert. Boock created

Magellan for Shtaif's venture. De Freitas and Boock planned to use Magellan and BDW, another sham company, to target Shtaif's potential investors, to induce them to invest, to implement a free trading scheme and profit therefrom. In my view there is insufficient evidence upon which to conclude that Shtaif was involved in the initial planning. In October 2005 Shtaif had been trying to raise $30 million see Ex. 292/ Tab 15. He started having discussions with Howard. He opted to use Magellan during this timeframe. He wanted to know if BDW was legit and really had $8 million to pay to Magellan. In my view at that point in time there is insufficient evidence upon which to conclude that Shtaif was part of Boock's and DeFreitas' conspiracy.

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[937]Element 2. Boock's and De Freitas' conduct was unlawful for numerous reasons including violation of s. 126.1 of the Securities Act, which provides as follows:

126.1Fraud and market manipulation—A person or company shall not, directly or indirectly, engage or participate in any act, practice or course of conduct relating to securities, derivatives or the underlying interest of a derivative that the person or company knows or reasonably ought to know,

(a) results in or contributes to a misleading appearance of trading activity in, or an artificial price for, a security, derivative or underlying interest of a derivative; or

(b)perpetrates a fraud on any person or company. RSO 1990, c S.5, s 126.1

[938]De Freitas was the BDW transfer agent and knew it was a sham. Boock unlawfully created Magellan, a private company, and held it out to be a public company. Both De Freitas and Boock knew Magellan and BDW were sham companies. They made promises about Magellan and BDW to induce potential investors to invest in Magellan that they knew would never be fulfilled. Their conduct was unlawful.

[939]Element 3. In November their conduct was directed towards all potential investors including the Plaintiffs. In Can Training & Dev.Group v Air Canada (1986), 39 C.C.L.T. 72 (Div Ct.), air traffic controllers entered into an illegal strike to put pressure on their employer. Since the defendant should have known that injuries were likely to result to passengers from the strike, the conduct was held to have been directed at the plaintiffs who were passengers, even though the defendant did not know the identity of the passengers specifically and damages were suffered, the action for conspiracy was complete. By December, Boock and De Freitas knew Shtaif was having discussions with Midland and they started to specifically target Midland.

[940]Element 4. Boock and De Freitas should have known Midland was likely to suffer damages from investment in a bogus company based in part on promises of additional investment by another bogus company.

[941]Element 5. While Midland did not immediately suffer damages, the steps taken by Boock and De Freitas in November and December laid the foundation upon which Boock, De Freites and Shtaif were able to consummate what became their joint plan as of January 2006. Their actions materially contributed to the losses that Midland had suffered by June 20, 2006.

[942]The quantum will be discussed in the Damages section of these Reasons.

[943]I have found the tort of unlawful conspiracy has been made out against Boock and De Freitas in November-December 2005.

Dec. 2005 Breach of Fiduciary Duty First Meeting.

[944]At the first meeting between Shnaider and Shtaif, the Plaintiffs alleged Bokserman owed a fiduciary duty to Shnaider as his investment advisor. However, I have held Shnaider understood that Bokserman was assisting Shtaif to source investors for his venture and was not relying on Bokserman to volunteer investment advice.

Dec. 2005 Shtaif + Bokserman - Deceit/False Representations

[945]Misrepresentation. In December 2005, I have found that Shtaif and Bokserman represented to Shnaider, Shyfrin and Midland that BDW was a sophisticated Bay Street investor committed to investing $US70 million in the joint venture.

[946]Element 1: The statement was false. It was untrue. Element 1 has been proven.

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[947]Element 2: Shtaif and Bokserman knew the statement was false. Shtaif. I have found that after November 11, 2005, when Shtaif had received an unaudited balance sheet of BDW from Howard, he knew that, at the most, BDW had around $8 million of cash and marketable securities that had purportedly been raised on a private placement. He questioned 4331 whether BDW was "legit" and possessed the $8 million. What wealthy sophisticated Bay Street investor would have offered Shtaif 12 million BDW shares, 6 million options and an executive position, sight-unseen? Shtaif 4342, 4345-4348. I have found that when Shtaif made the statement to Shnaider and Shyfrin in December 2005, he had no belief in its truth.

[948]Bokserman. Bokserman was in the business of giving investment advice. He knew BDW was a Pink Sheet company. He knew his own employer, Octagon, would not accept share certificates from Pink Sheet companies such as BDW. He knew that investment bankers

and banks were wary of companies trading on the Pink Sheets. I find he knew BDW was not a sophisticated Bay Street investor. Although I have found Bokserman did not owe a duty to Shnaider in his capacity as investment advisor to volunteer this information, Bokserman could not volunteer as he did that BDW was what Shtaif had represented it to be, could not affirm Shtaif's statement that BDW was a sophisticated Bay Street investor committed to invest $70 million without becoming liable for a false knowing statement.

[949]Element 3: Intent to Deceive. Shtaif. Although he knew that BDW had at the most $8 million in assets, he dropped the names of wealthy people and institutions, including Poju Zabludowicz, whom Shyfrin knew and who fit the description of sophisticated investors, and then he mentioned BDW in the same breath, as if it were of the same ilk. I have found Shtaif had an intention to convince the Plaintiffs that BDW was wealthier and better funded than he knew it to be, in order to induce them to invest their $50 million in Magellan. He knew that the Plaintiffs would rely on his false representations.

[950]Bokserman. I have found Bokserman wanted to earn a commission. He intended the Plaintiffs to invest in the venture based on his representation that BDW was what he knew it not to be.

[951]Element 4: The false statement was material and the Plaintiffs acted on it. I have accepted the evidence of both Shyfrin and Shnaider that they did rely on Shtaif's statement that BDW was a sophisticated, committed investor, in agreeing to invest initially. I have accepted Shnaider's evidence that he relied on Bokserman's representation. I have accepted Shnaider's and Shyfrin's evidence that these representations contributed to their decision to invest $50 million.

[952]Element 5: The Plaintiffs suffered damages. Midland suffered damages as a result of its agreement to invest.

[953]The quantum of the damages Midland suffered arising out of this misrepresentation will be dealt with separately in the damages section of these Reasons.

Dec. 20, 2005 - Shtaif and Groag – Misrepresentation re Transfer of $8 million

[954]Alleged Misrepresentation: In Ex. 4 dated December 20, 2005, Shtaif and Groag represented to potential investors, specifically to Shnaider, Shyfrin and Midland, that BDW had already transferred US$8 million to Magellan.

[955]Element 1. I have found that the statement was false.

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[956]Element 2. Shtaif. I have found Shtaif knew, at the latest by December 27, 2005 Ex. 453, that BDW had not yet paid anything. After December 27, 2005, Shtaif could not credibly maintain Howard had duped him on that point. Once he knew it to be false, having positively informed the Plaintiffs that the money had been sent, Shtaif had a positive duty to correct the false information he had earlier chosen to convey to the Plaintiffs. He never did so. Shtaif 4428.

[957]Groag. I am of the view that Groag may not have seen the December 27, 2005 letter from Howard to Shtaif, Ex. 453. There is insufficient evidence upon which to conclude that Groag knew on December 20 or subsequently, that the statement was false. The test is not met with respect to Groag.

[958]Element 3. I have found Shtaif intended the Plaintiffs to act in reliance upon the representation and to invest in Magellan. I find he deliberately did not correct his earlier misstatement.

[959]Element 4. I have accepted Shnaider's evidence that the statement that $8 million had already been paid to Magellan was a basis for Shnaider and Shyfrin's decision that Midland would invest $50 million in Magellan.

[960]Element 5. The Plaintifs suffered damages as a result of their decision to invest. Again, the quantum is addressed in the damages section of these Reasons.

Jan. 2006: Boock, De Freitas, Shtaif, Roberts - Unlawful Conspiracy

[961]The Plaintiffs alleged Boock, De Freitas, Roberts and Shtaif acted in concert to further their plan to use Magellan and BDW to lure the Plaintiffs to invest. Together they unlawfully targeted Midland as an investor. Boock and De Freitas targeted Midland, in part to lend credibility to Magellan and to make it easier to pump the value of the shares it was intending to unlawfully issue and sell. Shtaif targeted Midland because he wanted its $50 million to build his venture.

[962]In his October 2005 business plan, Shtaif had been seeking to raise less than $50 million initially. By December 2005 he had learned that Shnaider and Shyfrin did not believe $50 million was sufficient to build an oil company and would not invest unless at least $120 million had been raised. Midland did not want to be the only investor and was not prepared to invest more than $50 million. It was important to Shnaider and Shyfrin that there be another committed investor willing to invest $70 million. Shtaif presented BDW as that investor. By January Shtaif understood Midland would invest $50 million, more than he had originally been seeking. In addition, Shtaif understood he would benefit personally from the illegal issuance and sale of the free trading shares. He was not counting on BDW to pay its $70 million subscription. In January at the latest, Shtaif became part of Boock's and De Freitas' unlawful conspiracy, targeting Midland, and knowing their joint actions would likely cause Midland damages.

[963]Boock and De Freitas wanted to lure Midland, in part to give Magellan respectability,

in part to make it easier for Magellan to sell the illegally issued Magellan free trading shares at the highest possible price.

[964]Boock. By January 2006, Boock was specificly targeting Midland. In December 2006 he had promised BDW would pay $70,000,000 + $8,000,000, knowing Shtaif would use BDW's commitment to induce Midland to invest. In January 2006 he asked De Freitas to become a member of the Board of Magellan as BDW's representative. Boock transferred 3

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million Magellan shares to De Freitas and 2 million Magellan shares to Roberts. Boock and Shtaif arranged to have 4 million Magellan free trading shares issued without current Magellan Board approval and intended to personally profit from the sale of shares

[965]De Freitas. De Freitas gave evidence he knew Boock/Howard had located a public vehicle for Magellan, a NASDAQ Pink Sheet shell company. I have found De Freitas knew from the outset that Magellan was not a legitimate public company. He knew Boock had incorporated it specifically to provide a vehicle for the oil venture. By January he knew BDW was promising to pay Magellan US$70 million and that promise had been used to lure Midland to invest in Magellan. De Freitas had been involved in the incorporation of BDW. He knew it was a sham. He knew from the outset it did not have $8 million to pay to Magellan and it could not and would not pay $70 million for Magellan shares. De Freitas admitted knowing about Boock's scheme to illegally issue and sell four million Magellan free trading shares that were illegally issued in January 2006. He admitted to manipulating the price of the Magellan shares. On January 12, 2006, the very day De Freitas was appointed to the Board and received 3 million shares of Magellan, Howard wrote to Shtaif: "The stock should start moving up." I have found De Freitas agreed to sell the trading shares as directed by Howard and Shtaif through his online brokerage, Aberdeen. On January 28 Howard mentioned the creation of 4 million free trading shares to Shtaif and wrote in Ex. 455: "Stanton will be part of it but will not discuss unless we say it is okay."

[966]Shtaif. Shtaif knew Midland did not want to make a $50 million investment as the only investor in his venture because Shnaider and Shyfin did not think $50 million was enough to create an oil company. If there were another investor willing to invest $70 million, Shtaif knew Midland would be interested. BDW was presented as that investor. Shtaif used Magellan's purported public company status, BDW's promises to pay $8 million and $70 million to Magellan to induce Midland to invest, knowing BDW was not what he was representing it to be. His company would get Midland’s $50 million whether or not BDW paid. He had no honest belief BDW would pay the $70 million. He also intended to profit on the side from the free trading scheme. He knew the Magellan share price was being manipulated.

[967]Element 1. I have found that Boock, De Freitas and Shtaif acted in concert with a common plan to induce Midland to invest in Magellan.

[968]Roberts. There is an issue whether Roberts was part of the unlawful conspiracy at that point in January 2006.When Boock asked him and he agreed to become a member of the Magellan Board, Roberts knew Boock had already received 8 million Magellan shares [even before the first Magellan meeting]. Roberts would have known as a commercial lawyer that Magellan shares should not have been issued before their issuance was authorized by the Magellan Board. Before the Board meeting he knew Boock had already transferred two million Magellan shares to him and three million to De Freitas. He would have known that this was irregular. I have rejected his evidence that he thought he had received those shares because he had later agreed to raise funds for Magellan. He knew his shares had not come from Magellan, he had not provided any services for Magellan, and that he had not yet been confirmed as a member of the Magellan Board. I infer he knew those shares were being issued to him so that he would assist Boock with his activities in connection with BDW. He knew Howard was really Boock and that he had been convicted of defrauding his own parents. He knew BDW and Magellan were Pink Sheet companies. However, he said he did not know BDW and Magellan were not public companies. He did not know they were

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planning to personally profit from the sale of unauthorized free trading shares. I have found he was not part of the Magellan free trading scheme. There is insufficient evidence in my view, upon which to conclude that Roberts knew at that point that Magellan and BDW were shams or that he took part with Boock, De Freitas and Shtaif in the overall planning to target Midland and induce it to invest.

[969]Element 2. This conduct was unlawful for numerous reasons including violation of s. 126.1 of the Securities Act. De Freitas and Boock knew that BDW and Magellan were shams. While Shtaif might not have known they were shams in January, he knew Pink Sheet companies were associated with fraudulent activity, that BDW was not what he was representing it to be, that the Magellan stock price was being manipulated, that free trading shares were being unlawfully issued. Shtaif had made fraudulent misrepresentations to Midland and breached his fiduciary duty to the Magellan Board at the January 20, 2006 Board meeting. All three were engaged in unlawful conduct under the Securities Act. The conduct of all three was unlawful under the Agribrands test.

[970]Element 3. By January, Shtaif, Boock and De Freitas had targeted Midland.

[971]Element 4. Boock and De Freitas should have known it was likely that Midland would suffer damages from investment in a bogus company in reliance on an investment by another bogus company. While Shtaif might not have known they were shams in January, he knew Pink Sheet companies were associated with fraudulent activity, that BDW was not what he was representing it to be, that the Magellan stock price was being manipulated, that free trading shares were being unlawfully issued.

[972]Element 5. Midland did suffer damages. The quantum will be discussed in the Damages section of these Reasons.

[973]I have found the tort of unlawful conspiracy has been made out against Boock, De Freitas and Shtaif in January of 2006.

Jan. 2006 Shtaif: Breach of Fiduciary Duty to Magellan

[974]Shtaif knew that before the first Magellan Board meeting on January 20, 2006, Howard had already received 8 million Magellan shares. Shtaif knew he had already received 12 million BDW shares from Howard. He did not disclose those facts at the first Magellan Board meeting.

[975]Shtaif conceded as a Board member he had a duty to disclose material information to the Magellan Board. However, he said he had no obligation to disclose to the Magellan Board that he owned 12 million BDW shares because his share ownership in BDW was immaterial and because the shares were "worthless."

[976]I have found Shtaif did have a duty to disclose his ownership of 12 million BDW shares to Magellan/the Magellan Board on January 20, 2006. BDW was purporting to deal with Magellan. Magellan was relying on BDW's oral promise, made by Howard that BDW would be investing $70 million in Magellan As a Board member, Shtaif had a fiduciary duty to act in the best interests of Magellan. (a) Section 120(1) of the CBCA provides that when a director has an applicable interest in a corporation's transaction, the director must disclose

Corporations Act, s. 120(1); (b) Section 132(1) of the Ontario Business Corporations Act, R.S.O. 1990, c. B.16, requires a director with a material interest in a proposed or actual

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contract or transaction with the corporation to disclose that interest at the first available Board meeting. While neither BDW nor Magellan were Ontario or Canadian corporations and those provisions did not directly apply, the rationale obviously behind those sections did apply. I find in the circumstances here that Shtaif had a duty, as a Board member of Magellan involved in a transaction with BDW, to disclose his interest. : BCE Inc. v. 1976 Debentureholders, supra, at paras. 37-38.

[977]As to Shtaif's assertion that his ownership was not material because the shares were worthless, he had already in fact advised Shnaider and Shyfrin that BDW was a substantial entity [a sophisticated Bay Street investor committed to invest $70 million in Magellan]. If 12 million BDW shares were worthless, he would have been obligated to correct his earlier statement and to reveal that BDW was not what Shtaif had earlier represented it to be. On the other hand, if Shtaif believed his BDW shares had substantial value, his 12 million shares in BDW needed to be divulged.

[978]Shtaif did not fulfill his fiduciary duty to Magellan to disclose his interest in BDW at the January 20 Board meeting.

Feb. 19, 2006 De Freitas: Breach of Fiduciary Duty to Magellan

[979]De Freitas first attended the Magellan Board meeting as a director in February 2006. He admitted he knew Howard's real name was Boock. While he admitted "suspecting" the reason for his use of the name Howard was to keep quiet his past infractions and trading ban by the SEC, I find he knew Boock was hiding his criminal past and was actively involved with Boock in further securities violations. De Freitas did not disclose to the Board that "Howard" was really Boock. By February of 2006, De Freitas knew 4 million Magellan free trading shares had been issued with the authorization of the current Board. He knew Shtaif and Boock were planning to sell as many of those shares as they could without provoking a stop trading order from the SEC and they were planning to profit personally therefrom. He knew his own company Aberdeen would be the vehicle for selling those shares. He did not advise the Board about the issuance of the 4 million free trading shares or that he had been and would be manipulating the Magellan share price or that BDW, the company he was representing on the Board, was an unauditable sham without legitimate public company status and that it was not capable of raising $70 million to invest in Magellan. I find all of the information listed above was material and should have been disclosed to Magellan.

[980]I have accepted Shtaif's, Shnaider's and Shyfrin's January 29 at 21-22 evidence that had information about Howard's true identity and his checkered past been disclosed to the Magellan Board, Magellan would not have dealt further with Howard, used a sham shell as its corporate vehicle or been required to rescind its subscription agreement with Midland, thereby causing Midland net losses of $8,270,000.

Feb. 19 2006 Roberts: Breach of Fiduciary Duty to Magellan

[981]Roberts first attended the Magellan Board meeting as a director in February 2006.

[982]Like De Freitas, Roberts knew Howard was really Boock, had a criminal record and was using a false name to hide his criminal past. He also knew BDW and Magellan were Pink Sheet companies. He had already received 2 million Magellan shares from Howard on January 12. He did not advise the other Board members what he knew. I find he did not warn the Board that Canadian institutions would not invest in the equity of U.S. companies listed

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on the Pink Sheets. I have found all of this information was material and he improperly rationalized his non-disclosures.

[983]Shtaif, Shnaider and Shyfrin January 29 at 21-22 all gave evidence that I have accepted that had information been disclosed to the Magellan Board, the Board would not have proceeded with Magellan.

Shtaif Breach of Fiduciary Duty to Magellan

[984]By late January 2006, Shtaif knew that 4 million free trading shares had been issued without current Magellan Board approval and that Shtaif and Howard, not Magellan, were going to benefit from the sale of shares. Howard had told him that the Magellan shares would be going up in price. They did. I have inferred from Howard's communications with Shtaif and from the increases in the Magellan share price that Shtaif knew that Magellan's share price was being manipulated. These were material matters that Shtaif should have disclosed to the Magellan Board. Failure to do so was a breach of his fiduciary duty to Magellan. Shtaif was not acting in the best interests of the Board. Had Magellan been aware of Howard's true identity and past, and that it was about to become a victim of free trading scheme, I find it would not have proceeded with the transaction. Had Magellan not proceeded, the Plaintiffs' losses would have been avoided. As of June 20, 2006, although Midland did not know it at the time, it would not have been facing losses of $8,270,000 net.

Mar. 28-Apr. 4 Boock, De Freitas, Shtaif, Roberts, Groag – Unlawful Conspiracy

[985]The Plaintiffs alleged that between March 28, 2006 and April 4, 2006, Boock/Howard, De Freitas, Shtaif, Roberts and Groag unlawfully conspired and acted in concert to induce Midland to immediately pay its $50 million subscription to Magellan. The Defendants knew the Plaintiffs would not pay until BDW had first paid its $70 million. In late March 2006, the Plaintiffs were continuing to withhold payment. Boock, Groag, Shtaif and Roberts sent four communications, all of which were directed at the Plaintiffs. The first, Ex. 330, was from Boock/Watson, a letter written on behalf of BDW dated March 28, in effect offering that BDW would pay $2.75 per share for the 25 million shares for which Midland had subscribed at $2 per share. I have found Boock's letter of March 28 was bogus. Boock knew BDW was an unauditable sham without $70 million to invest, let alone an additional $68.5 million to pay for an additional 25 million shares.

[986]The second communication was an email to the Plaintiffs threatening to cancel Midland's subscription if it did not pay the full subscription amount by April 3, 2006. I have inferred from all the circumstances that Shtaif asked Groag to write the letter, not only threatening to terminate Midland's subscription for non payment, but also mentioning both the recent rise in the price of the Magellan shares and the receipt of a higher offer for its shares. [I have inferred that De Freitas had been manipulating the price of the Magellan shares at that time to further their joint plan to induce Midland to pay immediately.]

[987]The third communication in Ex. 10 was sent to the Plaintiffs on the same day after Shtaif falsely told Groag that BDW had paid. I have inferred he asked Groag to advise the Plaintiffs that BDW had met its obligation to fund.

[988]The fourth communication, Ex. 673 from Roberts to the Plaintiffs, was sent on April 1, 2006: "… John has asked me to determine the interest of my group of investment bankers

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[989]On April 4, Midland paid $50 million.

[990]Element 1. I have inferred from the evidence, including the timing and content of Exhibits 330, 10 and 673 and the sharp increase in the share price over the few days preceding March 31, that Howard, Shtaif and De Freitas were unlawfully acting together between May 28 and April 1, furthering a plan made in advance with the common design to induce Midland to immediately pay $50 million.

[991]Although Roberts and Groag were also involved, on the evidence I am not satisfied that they understood exactly what was being planned. I have found that Shtaif lied to Groag on March 31, 2006, about receipt of funds from BDW. I have insufficient evidence to conclude that Roberts was involved in the planning. I have noted that after the $50 million was paid on April 5, only Howard, Shtaif and De Freitas participated in the congratulatory emails, "we're in business" and "good job." Therefore, the test of acting in concert is not met here with respect to either Roberts or Groag.

[992]Element 2. Shtaif's statements [directed at the Plaintiffs through Groag], were all misleading to say the least. I find Shtaif's conduct was unlawful on the Agribrands test. Boock's March 28 letter constituted unlawful activity when the test set out above is applied. De Freitas's manipulation of the Magellan stock to make a purchase of Magellan shares seem attractive contravened s. 126.1 of the Securities Act.

[993]Element 3. The unlawful conduct of Boock, De Freitas and Howard was clearly all directed towards inducing Midland to pay $50 million immediately

[994]Element 4: Defendants Should have Known Injury to the Plaintiffs likely to result. Boock and De Freitas knew Magellan was a sham, BDW's promise to pay $70 million a hoax. Even if he did not know Magellan and BDW were shams, Shtaif knew the Magellan stock price was being manipulated, that BDW had not met its obligation to fund and that it was unlikely to fund. Under these known circumstances it was likely that Midland's investment of $50 million would result in losses to Midland.

[995]Element 5. The quantum will be dealt with in the Damages section of these Reasons.

[996]I find De Freitas, Boock/Howard and Shtaif unlawfully conspired between March 28 and April 4, 2006 to induce Midland to pay $50 million to Magellan on April 4.

Mar. 31-Apr. 4, 2006 Boock, Shtaif and Groag - Deceit in misrepresenting BDW had met obligation to fund

[997]The events between March 28 and April 4, 2006 causing Midland to advance $50 million to Magellan on April 4, 2006 provide a basis for free standing claims of deceit against each of Boock, Shtaif and Groag.

Mar. 28, 2006 Boock: Deceit: BDW's higher offer for Magellan shares

statement was made in order to deceive that person. Cherewick v. Moore [1955] 2 D.L.R. 492 at 494 (B.C.S.C.); Smith v Porter (1979), 27 N.B.R. (2d) 439 (C.A.)

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[999]Element 1. Here Boock's statement that BDW would buy the shares Midland had subscribed to buy for $2.75 per share, was a hoax.

March 31, 2006 that there had been a sharp increase in the Magellan share price in the last few days, that another investor was willing to pay Magellan more for its shares than Midland had agreed to pay, and that BDW had met its obligation to fund. I have found that Groag did not know that Howard's letter was a hoax or that BDW had not met its obligation to fund. The claim of deceit against Groag has not been proven.

[1003] Shtaif. The deceit claims against Shtaif are based on false information he provided to Groag, targeted at the Plaintiffs and the letter Groag wrote to the Plaintiffs at Shtaif's request. Shtaif knew the contents of the letter were false and intended the Plaintiffs to rely on them.

They did.

April 1, 2006 Roberts - Deceit – Other Investors Ready to Invest $200-300 million in Magellan

[1004] On April 1, 2006, I have found Howard asked Roberts to write the letter he wrote on April 1 to the effect that his investment bankers were interested in raising $300 to $500 million for Magellan.

[1005] Element 1: I have found the content of Roberts' letter was misleading.

[1006] Element 2: I have found that on April 1, Roberts knew the statements in the letter were misleading. However, he mentioned the bankers had not yet reviewed the business plan. I have found that while Roberts may have intended to assist Howard by writing the letter, it did not amount to a fraudulent misrepresentation.

April 5, 2006 Shtaif - Deceit - BDW's funds have arrived

[1007] Shtaif misrepresented to Shnaider by Ex. 11/Tab 81 "We currently have over $60 million in the bank."

[1008] On April 4, the $50 million was intact. Between April 4 and June 20, when Midland's subscription agreement was rescinded, approximately US$13,750,000 was paid out of the

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[1010] Element 2: The Defendant knew the statement was false. Shtaif knew the statement was false.

[1011] Elements 3, 4. Even if I had accepted Shtaif's evidence that he thought BDW had sent the money on April 5, Shtaif admitted that on April 7, 2006, he knew no money had been received from BDW. Since Shtaif had positively represented to Shnaider that there were $60

Apr. 6-May 16, 2006 Shtaif: Deceit/Continuing Misrepresentation that BDW had paid

[1013] Shtaif represented to Shnaider and Shyfrin, several times, that BDW had deposited money into Magellan's bank account. Each representation was false.

[1015] On Friday April 28, 2006, at the Board meeting,I have found Shtaif knew Howard/ BDW had not advanced any funds. Because he had received Ex. 343/Tab 101, he knew De Freitas was lying and he did not advise Shyfin and Shnaider.

[1016] On April 29, 2006, Shtaif asked Groag to write Howard/BDW, specifying a deadline for paying the remaining $60,000,000 balance on its $70 million subscription. Groag copied the Plaintiffs. Shtaif was present when Groag sent the email. Shtaif did not correct the reference to the $60 million balance.

[1017] I have found Shtaif was deliberately withholding information from the Plaintiffs that BDW had not paid anything. Shtaif knew that the Plaintiffs were relying on his statement that there were $60 million in the Magellan account, i.e., BDW had already paid at least $10 million and was about to pay the balance. I infer Shtaif knew there was a real risk that had he revealed the truth, Midland would have pulled out of the venture based on his earlier false representations.

[1018] Between April 29 and May 16, 2006, Shtaif did not correct his earlier advice and advise the Plaintiffs of the truth: that BDW had paid nothing.

[1019] On May 16, 2006, he finally advised Shnaider that BDW had made no payments.

[1020] Elements 1 and 2: I have found Shtaif deliberately made false representations about BDW payments between April 4, 2006 and May 16, 2006.

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[1021] The Defendants' submission that during this timeframe, Shtaif genuinely believed that BDW would pay and pressed it to do so, ignored that he had repeatedly advised the Plaintiffs that $60 million had arrived, acknowledged knowing that they had not arrived, and yet he did not advise the Plaintiffs of the non-payment until May 16, 2006. I have found he did not believe BDW would pay. Groag did not know what was happening and continued to make requests for BDW to pay.

[1022] Elements 3, 4, 5: The Plaintiffs suffered damages. Shtaif intended the Plaintiffs to act on his failure to correct his earlier statements to the effect BDW had paid $10 million, and they did. The Plaintiffs, thinking that BDW had committed funds to Magellan, did nothing to rescind Midland's subscription agreement with Magellan based on fraudulent misrepresentations. They did not seek a return of Midland's money or fetter Shtaif's discretion by tightening financial controls over the funds in the Magellan account. As a result of its failure to act earlier than it did, Midland suffered damages. Money was paid out of Magellan during that timeframe that would not subsequently be recovered.

April 28 De Freitas – Deceit and Breach of Fiduciary Duty

[1023] I have found that at the Magellan Board meeting on April 28, 2006, De Freitas still did not tell the Board that Magellan and BDW were shams, that BDW could not pay its $70 million subscription, that he was manipulating the Magellan stock price, or that he was taking steps to implement the illegal free trading scheme. In addition, he made a positive misrepresentation 6005-6006 that BDW had paid an unspecified amount [which Shnaider initially assumed was $70 million but soon understood was $10 million].

[1024] Breach of Fiduciary Duty. All of this information was material and his failure to disclose it to the Magellan Board was a breach of fiduciary duty to Magellan.

[1025] Deceit. Element 1. The statement was false.

[1026] Element 2. He knew it was false.

[1027] Elements 3, 4, 5. De Freitas's positive misrepresentation on April 28 constituted deceit and caused damages to the Plaintiffs.

May 16, 2006. Roberts & Shtaif – Deceit

[1028] Shnaider Learns BDW has invested nothing. On the evening of May 16, 2006,

Shtaif finally disclosed to Shnaider that International had not paid anything. When Shnaider questioned how this was possible, given what De Freitas had said at the April 28, 2006 Board meeting, Shtaif said DeFreitas had lied, and he himself had been misled. Magellan needed to get rid of International and find other investors. I have accepted Shnaider's evidence 82-84 that Shtaif told him that Magellan would have no problem finding other investors. They were lined up to replace International. Shtaif 3372.

[1029] Shtaif's Deceit. Immediately after May 16, Shyfrin and Shnaider considered pulling out. Shyfrin wanted Midland to withdraw. Shnaider convinced him to stay in the deal (Shnaider 86-88). By May 16, 2006, Magellan had contracted to buy both Reef and Sibintek In making that decision, they relied on Shtaif's representation to Shyfrin that Reef was worth $250 million and that SibinTek was worth far more than they had paid for it. Those representations were clearly made to induce the Plaintiffs to continue in the joint venture. I have accepted their evidence they did induce them to do so. Shnaider said they had had a rough start but going forward he thought everything would be better.

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[1030] Roberts' Deceit. They also relied on Roberts' May 16 representations. Roberts knew immediately after May 16 that Shnaider and Shyfrin were again considering pulling out. On May 16, 2006, when Shtaif finally advised Shnaider that BDW had paid nothing, Shtaif's bad news was tempered by Roberts' good news. Roberts wrote Ex. 18/Tab 120 to Shnaider, Shyfrin, Shtaif, De Freitas, and Groag, opining that as a result of his meetings with the investment bankers, Magellan would have no difficulty raising $300-$500 million from tier one and two investment banks.

[1031] Elements 1 and 2: By then, I have found that Roberts knew his statement was false. He knew that the investment bankers all understood and assumed that to raise $300-$500 million, Magellan would have had to acquire far more assets/2P reserves than it had at that time. I am also basing my conclusions on the representations in the Magellan presentation to the investment bankers, Ex. 493, reporting to continuous acquisition program at p. 15 and at p. 18, 2006 total company estimated reserves 2P 573 MBOE. He knew that Magellan would have to secure other financing before the IPO to make further acquisitions. He was deliberately ignoring that fact. I do not accept that the bankers would have simply loaned $200 to $300 million to a company with $50 million in assets. He was representing that Bay St. would commit to invest before Magellan actually owned any properties, solely on Shtaif's perceived ability to execute on his business plan. I have not accepted Roberts' evidence about "blue sky." I have accepted Soriano's evidence that investors look at projected cash flow over time as well as the risk that the projected cash flows will not be realized within the time

without belief in its truth or explaining that that could happen only if Magellan was not Magellan, if Magellan was replaced by a company trading not on the Pink Sheets but on a higher exchange and only if further acquisitions had been made before the IPO took place.

[1034] Element 3: I am satisfied Roberts made these statements with an intent to induce the Plaintiffs to stay in the venture.

[1035] Element 4: The Plaintiffs relied on his statements. Evidence of reliance – see Shnaider's evidence at 86-88:

THE WITNESS: … And on the other hand, Mr. Shtaif is telling me that we will raise from other investors this money very, very quickly. That morning they went to investment bankers, and Mr. Roberts writes this email that, you know, that the companies -- that this business plan is great, I mean, the company is -- the investment bankers are very excited. They want to work with us. They will raise us all kinds of money. And that we will have a successful IPO. So I guess unfortunately I decided that, you know, that Mr. Shtaif has been fooled and, you know, that there are going to be a lot of positive things. That it's a rough start but, you know, things are going to get better going forward.

[1036] Element 5. The Plaintiffs decided to stay in the joint venture based in part on Roberts' letter and Shtaif's statements. Because they stayed in, they suffered damages.

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[1037] Shtaif's Deceit. On May 17, 2006, Shtaif unsuccessfully attempted to pay $15 million out of Magellan to Euro Gas BVI: Ex. 489/Tab 70.Ex. 490/Tab 127. On May 23 a subsequent direction to have $12 million paid out of Magellan to Euro Gas Russia was implemented.

Shtaif knew that once the $12 million was paid out of the Magellan account, it would not be going back.

May 17-June 20, 2006. Shtaif: Deceit/Continuing Misrepresentation

[1038] Misrepresentation: All was well with Sibintek. Between May 23 and June 20, 2006, Shtaif repeatedly represented that all was well with SibinTek. I have found he knew that White & Case was not satisfied that Reagent owned 40% of the shares that Trovalion had contracted to purchase. After June 8, 2006, at the latest, he knew that if the deal did not close, the $12 million that had been used to buy Treasury Notes would be at serious risk.

[1039] Between May 29, 2006 and June 14, 2006 Shtaif wrote a series of emails and text messages re SibinTek to Shnaider.

[1040] On June 1, 2006, Shtaif sent Shnaider an SMS message Ex. 25/Tab 8 telling him that White & Case had sent recommendations that everything was clear and would help register in Tyumen.

[1041] On June 5, 2006, Shtaif emailed Shnaider to say that White & Case were either on their way to Tyumen or already there. They would make sure the register was changed to show Trovalion as owner Ex. 35/Tab 192.

[1042] I have rejected Shtaif's evidence that on July 6, 2006, White & Case advised that Reagent had title to 40% of the SibinTek shares based on the Unified State Register. I have rejected Shtaif's evidence that he involved Vinigradov after he learned on June 8, 2006 about the negative implications of the switch of clients 1 and 2 in the May 29, 2006 lease agreements.

[1043] It is clear from the White & Case memos in evidence that White & Case had not given the all clear on May 29, June 1, June 5, June 13 or June 14. I have found that on June 13, 2006, White & Case did not tell Shtaif it was safe to pay.

[1044] Shtaif's June 14, 2006 message to Shnaider, Ex. 25 page 4, saying "All is arranged through W&C and we will own legitimately majority with no issues. People are on the way to Tyumen to change register of company," was false. On June 14, 2006, Shtaif knew the SibinTek deal had not closed. He knew all was not arranged with White & Case. People were not on the way to change the register.

[1045] I have found his statements on June 14, 2006, when Shtaif emailed Ex. 40/Tab 217 to Shnaider saying "I have secured that all due diligence by White & Case has been completed and procedure approved and that the sellers had confirmed without a doubt they owned SibinTek" were false. I have found Shtaif did not follow the protocol White & Case had negotiated and that on June 14 he worsenened Koll's position.

[1046] I find on June 14, 2006 [as he had said on June 13 he was in a position to do], he released by transferring six of the 12 notes worth US$6.6 million to a box in Poltoranin's name alone and gave him the key. He did not advise the Plaintiffs what he had done. I have found that when Shtaif advised on June 14 that half the funds were in a safety deposit box he was telling the truth. He gave evidence 5064 that "now locked one-half" meant "this is committed and there's no way back. I don't have the key to the safety deposit box. Mr.

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Poltoranin does." The balance of the statement: "half would be opened by the sellers when they came back from Tyumen and half after they completed the removal of the general director," was false. Ex. 386/Tab 217.

[1047] On June 20 the statement that $12 million was on deposit in Russian bank pending minor regulatory conditions, was false.

[1048] Element 1. I have found that all Shtaif's statements on June 1 specified above were false.

[1049] Element 2. Shtaif knew there were problems with SibinTek. After June 8 he knew the notes were at risk. Although he said he thought the deal would close, it is evident he knew White & Case was not satisfied that Reagent had title to 40% of the SibinTek shares. He knew Bekker had been asked for documentation proving ownership and White & Case had not received it. Shtaif understood on June 13 and June 20 the deal was not ready to close, yet on June 13 he wrote emails to Shnaider suggesting that the sellers were entitled to payment. On June 20 he advised the Magellan Board that $12 million was on deposit in Russian bank pending minor regulatory conditions.

[1050] Elements 3, 4, 5. I have found Shtaif deliberately intended to mislead Shnaider and Shyfrin about the status of the SibinTek transaction, to assure them that all was well with SibinTek. This was important because Magellan had gone so badly. The Magellan transaction was being rescinded. He knew they would have no legal obligation to continue in Koll. He made these representations with the intent to induce the Plaintiffs to act on them and continue in the joint venture. Had the Plaintiffs known the truth about what was happening on SibinTek before June 20, I find they would not have made the deal they did on June 20. They either would not have agreed to continue or if they did continue, they would have insisted on more stringent terms. They only agreed to continue on the terms they did because Shtaif had misrepresented the facts. Because they agreed to continue and because Shtaif made further misrepresentations after June 20, they suffered further losses.

May 23, 2006 Shtaif - Conspiracy with Poltoranin

[1051] The Plaintiffs allege that Shtaif and Poltoranin unlawfully conspired to steal the SibinTek Treasury Notes or the proceeds therefrom.

[1052] Although I have held the Plaintiffs have not proved by clear and cogent evidence that Shtaif stole the Treasury Notes, there were a number of suspicious circumstances suggestive of Shtaif's involvement. They include the following: There was nothing in the SibinTek Share Purchase Agreement requiring Shtaif to direct Magellan to transfer the funds to purchase the Treasury Notes when he did. There was nothing requiring Euro Gas to enter into a Safety Deposit Box Agreement when it did. Shtaif could have directed that the notes be deposited in a Safety Deposit Box in the name of Euro Gas alone and held in that box until closing. I have found that Shtaif attempted to expedite the SibinTek closing on May 29, 2006 at a time when White & Case was clearly not ready to close. I have rejected Shtaif's evidence that the closing had been scheduled for May 29, 2006. The White & Case memos make it clear that the transaction was not ready to close on that date. Clients 1 and 2 were switched on May 29, 2006 without a satisfactory explanation as to why that was reasonable or necessary. On June 13, 2006, Shtaif asserted that the sellers were entitled to payment as if the deal had already closed. On June 14, 2006, Shtaif failed to follow the protocol that his lawyers had negotiated earlier in the day in an attempt to reduce the risks to the notes. He met with Poltaranin and put

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six notes worth $6.6 million in a box in Poltoranin's name alone and gave him the key: Poltoranin made a statement or statements to the police [mentioned in the police documentation] saying he had given two notes to Shtaif. While not evidence of its truth, it is evidence that Poltoranin made that statement. After the Russian police conducted an investigation they laid charges against Shtaif. They were subsequently put into abeyance due to his absence from Russia, then reinstated. It is not clear whether the investigation is ongoing.

June 20, 2006 – Shtaif Deceit to Shnaider and Shyfrin & Breach of Fiduciary Duty to Magellan Board

[1053] At the June 20, 2006 meetings, Shtaif did not adequately advise Shnaider and Shyfrin or the Board of the risk to the notes of which he was aware.

[1054] On June 20, 2006, I have found Shtaif told the Board only what Beach recorded in his contemporaneous note: Magellan sent $12 million to Euro Gas for Trovalion (subsidiary of Magellan) now on deposit in Russian bank pending minor regulatory conditions.

[1055] Deceit/Positive Statement: Element 1. Given his earlier representations to Shnaider and Shyfrin, Shtaif owed them a positive duty to correct his earlier statements and to advise the truth about the risks as of June 20 to the notes.This statement was a half truth, insufficient in the circumstances to convey the risks to the notes.

[1056] Element 2. Shtaif knew there were significant title problems and there was a real risk the deal would not close. He also knew if Poltoranin simply chose not to close, the notes had already been endorsed and Poltoranin could access them, whether or not the deal closed.

Shtaif knew the statement was false.

[1057] Element 3. Shtaif made the statement intending that the Plaintiffs would rely upon it and keep Midland's money in the deal.

[1058] Element 4. The Plaintiffs relied on it.

[1059] Element 5. The Plaintiffs suffered damages.

Breach of Fiduciary Duty

[1060] Apart from his positive duty to the Plaintiffs to correct his earlier misstatements, Shtaif owed a fiduciary duty as a member of the Magellan Board to act in Magellan's best interest and to disclose material information to it. He did not do so. Magellan suffered damage as a result.

June 21-July 2006. Roberts, Shtaif – Conspiracy re Magellan June 23 Notes

[1061] The Plaintiffs allege that starting on June 21 or June 23, 2006, Roberts and Shtaif unlawfully formed and carried out an agreement to use secured demand promissory notes from Magellan, to appropriate to themselves money belonging to Magellan held at Faskens and at the TD Bank. Those funds should have been paid to Midland by virtue of Midland's promissory note and the terms of the Settlement Agreement dated June 20, 2006.

[1062] I have already outlined the pertinent evidence including that on June 20, 2006 Shtaif and Roberts had approved the Settlement Agreement that provided that Magellan was to pay to Midland all immediately available funds. I have accepted Greenspoon's uncontradicted evidence 3017-3018 that upon rescission of Midland's Subscription Agreement with Magellan, Midland was to receive all cash available on June 20. Roberts acknowledged on

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cross-examination 7738-7740 that had the interest that had accrued on the Magellan funds in the TD account been paid on June 20, 2006, Midland would have received that interest.

[1063] The evidence is clear that in 2007, Roberts and Shtaif recovered money from Magellan using the secured demand promissory notes dated June 23, 2006 they had given themselves on June 21, 2006. They did not tell Shnaider and Shyfrin that they knew there were funds to Magellan's credit at Fasken's and the TD Bank, that they had given themselves the notes, that they were suing Magellan on those notes and taking other steps to collect on them.

[1064] Element 1: Acted in Concert. While Shtaif may have been unaware of the exact details of the procedures and allegations Roberts would use in the enforcement of the notes, I am satisfied that they agreed in advance to use the notes. The first element of the unlawful conspiracy test has been met.

[1065] Element 2: The Defendants' conduct was unlawful. I have rejected the evidence of Roberts and Shtaif that Magellan notes formed part of the documentation prepared on June 20, 2006 and that Shnaider approved of them. I have accepted Beach's evidence that at the Magellan Board meeting on June 20, there was no agreement that Magellan would pay directors' fees or expenses. They knew the Magellan Board had in effect refused to authorize them when it had decided to table the issue of payment of expenses and fees.

[1066] There is nothing in the Magellan June 20 minutes mentioning that Magellan was giving promissory notes to Roberts, Shtaif and/or Groag.

[1067] In my view, Shtaif's and Roberts' use of the promissory notes from Magellan for their personal benefit and the means Roberts used to collect on them were unlawful on the Agribrands test.

[1068] Element 3: The Defendants' conduct was directed toward the Plaintiffs. Shtaif and Roberts both knew that under the Settlement Agreement and Midland's promissory note, Midland was entitled to any money that became available to Magellan on June 20, 2006.

[1069] Element 4: Injury Likely. It was likely that the Defendants' conduct would cause injury to the Plaintiffs, and it did. The amounts, in the Fasken's trust account of $39,570.66 and in the Magellan TD bank account of $100,482.02, paid to Roberts and to Shtaif respectively, should have been payable to Midland. Midland suffered damages in those amounts.

2006, or June 20, 2006 or July 8, 2006, or at the latest by mid July 2006, the Plaintiffs knew that what Shtaif and Groag and Roberts had told them earlier about BDW, Magellan and SibinTek was false. They chose to continue in the joint venture despite that knowledge. Their choice to continue after they knew the truth proves that all of the misrepresentations were inconsequential. Had they been relying on those misrepresentations, once the true facts were known, they would not have agreed to proceed with the joint venture. The Plaintiffs should not be able to look to the Defendants for any damages suffered after July 15.

[1072] Counsel for the Plaintiffs submitted this Court must have regard to the fact that by the time the Plaintiffs had learned the truth about BDW and Magellan and SibinTek, Shtaif had

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already put the $12 million out of the reach of Midland/Koll by wiring it to Russia and entering into a Safety Deposit Box Agreement giving a third party rights over the notes. Although it did not know it on June 20, Midland stood to lose $12 million on SibinTek if it rescinded its contract with Koll. By July it was facing losses of $13,750,000. There were other considerations affecting the Plaintiffs' decision to continue. By July 13, the purchase of the Reef oil field had been completed. Staif had represented to the Plaintiffs that Reef alone was worth far more than the $18.5 million Koll had paid for it. By July 13, they were being told that if they stayed in, Midland would be able to recoup its past losses and profit greatly from Reef. In concluding they should continue in the joint venture, the Plaintiffs relied on Shtaif's and Roberts' continuing representations that Reef was very valuable, that the investment bankers were saying there was a huge demand for oil assets in Russia, that they would have a successful IPO, and that post-IPO Koll would have a value in excess of $600 million.

3840 that in September 2006 he concluded at the Canaccord meeting that Canaccord had no issues about raising $100-$150 million. At the time of the meetings with investment bankers in September, Roberts and Shtaif estimated Koll's post-IPO value at $600-$620 million. I have noted that the CIBC presentation, Ex. 159/Tab 350, assumed at the IPO Koll would have 2P reserves of 150 million barrels. [In January 2007, Miller and Lents estimated Reef had 2P reserves of approximately 33,578,000 barrels.]

[1075] After January 26, 2007,after the receipt of the Miller and Lents Report, Shtaif advised the Plaintiffs it had indicated that Reef alone had a value of at least $156 million.

[1076] Shtaif's valuation of February 18, 2007 Ex. 411/Tab 415 is also telling. It shows Reef's value based on DCF times 2 = $386,820,000 or DCF times 3 = $580,230,000; its reserves at $356,462,000 based on Russian averages and $502,734,000 based on Heritage Oil levels. I have found Roberts and Shtaif were telling Shnaider and Shyfrin that Reef was worth at least $156 million, the bankers were saying Koll would be able to raise $200 million in an IPO in September 2007 and that post IPO Koll would be worth at least 600 million dollars.

[1077] Element 1: The statements of Shtaif and Roberts about what the bankers had said about Magellan's fund raising capability in May and July and September, 2006 before the Miller and Lents report was received, and after the end of January 2007 when the Miller and Lents report was received, were false. Later in these Reasons I have set out the basis for my conclusion that in March of 2007 Reef was worth approximately $30-$40 million dollars.

[1078] Element 2: I have found Shtaif and Roberts knew their representations as to value were false. They knew their representations about what the investment bankers were saying were false, because they knew they were based on assumptions that Koll owned levels of 2P reserves that it did not own. I find Roberts and Shtaif used values based on already acquired reserves, knowing that acquisitions had not yet been made and knowing that existing 2P reserves fell well below the reserves being assumed at IPO by the investment bankers. Their own presentation to the investment bankers assumed much larger 2P reserves than were

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known to be present at Reef and Inveskoye. They knew further acquisitions would be necessary before the IPO. They knew without greater reserves and production, the numbers they were using were false and unsupportable. They knew further acquisition purchases could not be made unless they had investors to fund them.

[1079] They had not acted on discussions with Canaccord in July about pre-IPO financing, nor had they done so after September 2006. They knew exploration and development were needed before Miller and Lents' cash flow projections could be realized.

[1080] Elements 3, 4, 5: While by July 2006 the Plaintiffs had concerns about Shtaif's abilities to run a company, they were still relying on his oil expertise. He was still insisting on that. Shnaider said after the Miller and Lents report was received, he didn't know what it meant, but since Shtaif and Roberts seemed happy, he congratulated them. I find that but for the ongoing assurances about the value of Reef, the excitement of the investment bankers and the likely success of the IPO, the Plaintiffs would not have exercised their discretion and continued to fund Reef as they did up to the aggregate of $50 million.

Unlawful Conduct Conspiracy: Roberts & Shtaif re Koll and Koll's Assets

[1081] The Plaintiffs have alleged that Roberts and Shtaif formed and attempted to carry out an agreement to squeeze the Plaintiffs out of Koll, to transfer Koll's assets to a company controlled by Shtaif and plotted to control Koll and exclude the other Koll shareholders from interference in its business and exclusion as shareholders.

upset with Shtaif, questioned whether they would continue and he would understand if they did not. Yet as time passed, Roberts and Shtaif tried to change the deal they had made in July. After July 15, 2006, Shtaif plotted with Roberts to unwind the "nasty arrangements" to which he had freely agreed. After November 2006 at the latest, they schemed to exclude its majority shareholders and ultimatelyto take away Koll's assets. I have found when on November 3, 2006, Roberts wrote Shtaif: "As long as you control Perm [Reef] and the rest of the opcos in Russia, you will always have control no matter what the shareholder's agreement says," he was inducing breach of contract/acting unlawfully under the Agribrands test. When Shtaif wrote Roberts suggesting "allowing" them to convert at 32% for $50 million, he was urging a breach of contract. The terms agreed in July 2006 had not been amended prior to March 2, 2007. Yet Shtaif and Roberts took the position the Plaintiffs were the ones breaching the contract by changing its terms. On March 1, 2007, Shtaif and Roberts took the position that the Plaintiffs owned no shares in Koll, and that they had total control of Koll. They planned to take away the Reef asset from Koll. I have found they did not limit their plans or activities to legal measures [as is evident from Exhibits 481 and 533]. I have accepted Beach's evidence that he did not give his approval to Roberts and Shtaif's plan or suggest it was legal.

[1084] Element 1: Acted in Concert. I have found that from shortly after July 7, 2006, Roberts, Shtaif and initially Groag planned to reverse the arrangements to which they had agreed. Groag became ill in October and did not participate thereafter.

[1085] Element 2: The conduct was unlawful. Initially, Shtaif, Groag and Roberts were simply trying to renegotiate as they were entitled to do. However, by November 3, 2006,

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[1087] Element 5. The Defendants' conduct caused injury to the Plaintiffs. Although injury was likely, it appears that the Plaintiffs were able to avoid injury. The Defendants were ultimately unsuccessful in keeping control of Koll and removing the Reef and Inveskoye assets from Koll. The Plaintiffs' proactive steps immediately after March 1, 2007 prevented the Defendants from removing Reef and Inveskoye from Koll as planned.

November 2006 Conspiracy.

[1088] The Plaintiffs alleged that Shtaif, Groag and Roberts formed and carried out an agreement to unlawfully keep $1.5 million that was recovered from Poltoranin in November 2006.

[1089] While I am satisfied on the evidence that the police seized a second note, 1837673, that Shtaif did not advise Midland that that had happened, and that Shtaif 3996 applied unilaterally in the name of EuroGas to recover both notes, and if successful would have appropriated note 1837673 for Euro Gas, he was unsuccessful in so doing. Vinogradov 1582 suggested a joint application would have been appropriate. It is not clear whether such a joint application would have been successful.

application, I would have awarded Midland the value of the note and reduced the amounts otherwise owing.

Conspiracy to Use Bad Faith Litigation/Extortion

[1091] The Plaintiffs also alleged that Bokserman, Shtaif and Roberts are liable for issuing Statements of Claim in bad faith in 2007 in the Ontario Superior Court of Justice in Newmarket, Ontario, against Shnaider, Midland and Koll, making sensational, scandalous and ultimately unproven allegations against the Plaintiffs, including that the Plaintiffs had paid illegal bribes to police, threatened and attempted to kidnap Shtaif, arranged for armed men to storm the offices of Reef (May 17, 2007 Statement of Claim, Ex. 87/Tab 470). They made allegations they knew to be false. The Plaintiffs allege that Bokserman approached Shnaider, threatened to deliver the Statements of Claim to the media and embarrass him unless he paid the Defendants to settle this dispute. They allege Roberts and Shtaif delivered them to the media and used them to pressure the Plaintiffs to settle. I have already mentioned documents in evidence in which they urged each other to use the media to put pressure on the Plaintiffs. While I find they had a joint plan to do so, on the evidence I am unable to determine, which, if either of Shtaif or Roberts, provided them to the media. Unlawful conduct must be proven against all of the co-conspirators. While there are numerous

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suspicious circumstances I am unable to conclude that unlawful conspiracy has been made out in this regard

Punitive Damages

[1092] The Plaintiffs submit that they are entitled to punitive damages against Shtaif, Groag and Roberts. Punitive damages are available in situations where the conduct of the defendants is so oppressive and heavy-handed that it offends the court's sense of decency: Hill v Church of Scientology of Toronto, [1995] 2 SCR 1130 at para 196, [1995] SCJ No 64.

Counterclaim

[1095] Although Roberts and the other Defendants made sensational allegations in their Statement of Defense and Counterclaim including extortion, conspiracy, conversion, intimidation, forgery, coercion, attempted kidnapping, violent seizure of corporate assets, bribery of the Russian police, groundless and malicious criminal prosecutions, breach of contract and inducing breach of contract, and punitive damages, by final argument, they were most strongly pressing their allegations of breach of contract, inducing breach of contract and malicious criminal prosecution of Shtaif.

[1096] Since the facts upon which those causes of action are based are less complex and overlapping, I have not found it necessary here to skip choronologically from one cause of action to another. In this section, I have dealt with all the Breach of Contract and Inducing Breach of Contract allegations, then Malicious Prosecution, then conversion.

Breach of Contract and Inducing Breach of Contract

[1097] In their Amended Statement of Defence and Counterclaim, Staif, Bokserman and Entin sought $750 million against the Plaintiffs for Breach of Contract [claiming that after March 1, 2007, the Plaintiffs effectively terminated the Koll joint venture agreement, misappropriated Koll's corporate opportunities, failed to implement Koll's business plan and took no steps to pursue the IPO or identify other undervalued oil assets in Russia].

[1098] Mr. Stevenson's final written argument contained a submission that on June 20, 2006, Ex. 32/Tab 230, the parties agreed the Plaintiffs would invest US$50 million/would own 67.21% of Koll and the Defendants would own 32.79% of Koll. However, immediately after entering into that agreement, Shnaider and Shyfrin became upset with Shtaif because of issues in the SibinTek transaction. "The Plaintiffs saw an opportunity to dramatically increase their interest in Koll and to unilaterally rewrite the terms of the underlying joint venture to their own advantage, using the excuse that the $12 million that had been used to buy the Treasury Notes was at great risk." At the end of June 2006, they refused to advance monies as previously agreed, until their financial demands had been met. The Plaintiffs unilaterally insisted that Midland would be owed $50 million, Shnaider and Shyfrin would own 67.21% of the equity in Koll, Midland's $50 million would be advanced only incrementally, Shtaif would reimburse the Plaintiffs for any losses on the $12 million of Treasury Notes and would repay recovery costs. Since Shtaif and the others were in a vulnerable position, they had no

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choice but to capitulate. He referred to Shtaif signing the loan agreement in the Moscow police station with a gun on the table.

[1099] However, in his final oral submissions, Mr. Stevenson said he wanted to make it crystal clear that he agreed the June 20 agreement was validly amended, and that the July agreement had/has force and effect. Under its terms, Midland was lending a total of US$50 million to Magellan. Shnaider and Shyfrin together held 67.21% of the Koll shares.

[1100] Mr. Stevenson urged this Court to find the following facts relevant to the allegations of breach of contract and inducing breach of contract. On July 27, 2006, the Plaintiffs agreed to a convertible loan. The July agreement was further amended on September 30, 2006 to provide that in the context of an IPO, if Koll's debt were unacceptable, Shnaider and Shyfrin would find an acceptable solution. By December 2006, after Koll had added the Invenskoye oil field to its inventory, the Plaintiffs decided they did not need the Defendants in the joint venture. They repudiated the agreement by failing to appoint officers and directors of Koll, refused to cooperate in taking Koll public and insisted that when the company went public (a) Midland be repaid its $50 million loan and (b) at the same time Shnaider and Shyfrin would retain 67.21% of the Koll equity. After Koll obtained a final report from Miller and Lents on January 26, 2007 [valuing Koll's net present cash flows on Reef P1 oil at $52 million, P2 oil at $67,500,000 and P3 oil at $36,900,000], Shtaif integrated this information into his February 18, 2007 valuation, Ex. 411/Tab 415 of $386,820,000 to $580,230,000 based on DCF multiples and based on Russian averages $356,462,000 and Heritage oil equivalents of $502,734,000. In early 2007, they firmed up a plan to raise $50 million pre-IPO and $200 million on the IPO in September 2007. The company was being valued at $400,000,000 to $600,000,000 post IPO. However, in February 2007, the Plaintiffs demanded that their debt be repaid at the IPO and that they retain 67.21% in equity without dilution, and that the Defendants pledge to pay the Plaintiffs an additional $15 million. The Defendants did not agree. At the end of February, they were still negotiating. The March 1 letter was not an ultimatum but a proposal subject to further negotiation. There was nothing in the March 1, 2007 letter ending the contract [even if the Defendants were internally discussing doing so, that was not communicated to Shnaider and Shyfrin]. Shtaif proposed a meeting in Moscow to discuss the continuation of the relationship. However, in March 2007, when Shnaider and Shyfrin took control of the Koll subsidiaries [Koaploma and Trovalion], seized its assets, changed the management of Reef, excluded its minority shareholders, unlawfully removed Shtaif as managing director and maliciously accused Staif of criminal fraud, they were not just changing the management, but were effectively terminating the joint venture [failing to implement Koll's business plan and IPO and misappropriating Koll's business opportunities].

[1101] Roberts 7806 took a different legal position, submitting that the Plaintiffs repudiated the contract at the end of February 2007 by insisting that Midland's loan be paid out of the closing proceeds of the IPO and that they retain 67.21% of Koll's equity and that they be compensated by an additional $15 million. Roberts submitted the demand for the additional $15 million was another police house stick up, another attempt to put a gun to their heads. Shtaif, Groag and Roberts refused to agree 6548. They would not give in again to another extortive attempt to take another $15 million from their side 7807. Roberts gave evidence 7858-7859 that the Defendants accepted the Plaintiffs' repudiation. They instructed Beach to write the letter of March 1, 2007. Roberts submitted in closing that Beach's March 1 letter did clearly set out that the Defendants were no longer prepared to continue in the original agreement and were effectively accepting the Plaintiffs' repudiation. "I don't know how you

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can interpret Mr. Beach's words on the face of the letter as anything but we are no longer prepared to continue in this relationship as it currently sits. That's the position we took at the meeting."

Summary Of My Factual Findings Relevant To The Breach of Contract

[1102] Once the Plaintiffs learned the full details about SibinTek fiasco [misrepresented by Shtaif before and at the June 20 meetings], the Plaintiffs would have arguably been entitled to rescind the June 20, 2006 agreement. They reasonably requested to renegotiate, given Shtaif's fraudulent misrepresentations about SibinTek prior to June 20, 2006, and given that they had only discovered the truth after the June 20 meeting. In early July, Roberts and Groag sympathized with the Plaintiffs' position.

[1103] I have rejected Shtaif's evidence about being forced to sign the loan agreement in the police station. I have rejected Roberts' submission that the Plaintiffs "unilaterally" amended the agreement. Ex. 50/Tab 277 is Shtaif's confirmation of revised terms, loan and share interest. Groag agreed to them: Ex. 51/Tab 283. On July 10, 2006 in Ex. 52A/Tab 290, Roberts did not take the position then the new terms were invalid, although he knew about them. He wrote to Groag that Alex's and Eduard's money was coming in as debt with a large equity sweetener (about two thirds of the issued shares, a loan and plus equity sweetener).

[1104] That is not to say that Shtaif, Groag and Roberts were happy with the revised terms. They soon sought to unwind the "nasty arrangements." Roberts email sent July 11, 2006: Ex. 366/Tab 294.

[1105] As noted above, counsel for the Defendants submitted that the joint venture agreement was amended on July 27, 2006 when the Plaintiffs agreed to a convertible loan and further amended on September 30, 2006 when they agreed if Koll's debt was not acceptable in the context of an IPO, they would find an acceptable solution.

[1106] I have found that the July Agreement was not amended on July 27, 2006. Although Shyfrin proposed a convertible loan Ex. 71/Tab 326, it was to be in Shnaider's/Shyfrin's/ Midland's discretion. In any event, I have accepted Shyfrin's evidence that Shtaif did not accept that proposal.

[1107] The July Agreement included a term that Shtaif would transfer Koll operations from Euro Gas to an entity responsible to all of the Koll shareholders, and would personally pay the $518,545.53 recovery fee Midland had paid to Leonov to assist in recovering the SibinTek Treasury Notes. I have accepted Shnaider's evidence that he had given instructions to Marechal to prepare a shareholders' agreement. I have accepted Shnaider and Shyfrin's evidence that once Shtaif kept his promises, 32.79% of the Koll shares would have been formally issued to the Defendants. Shtaif did not transfer Euro Gas to Koll or pay the recovery fee as he promised. The formal transfer of shares was reasonably deferred pending Shtaif's fulfillment of his promises. In any event, the Plaintiffs are not taking the position that the Defendants do not own 32.79% of the Koll shares.

[1108] The Defendants became increasingly strident. They claimed that the Plaintiffs were acting unfairly in refusing to amend the July Agreement and refusing to accede to a shareholders agreement containing provisions to their liking.

[1109] By November of 2006, I have found Roberts and Shtaif were conspiring unlawfully to gain control of Koll and exclude Shnaider and Shyfrin. Roberts was advising Shtaif it did not matter what the shareholders agreement said, so long as Shtaif controlled the opcos. Shtaif

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was telling Roberts Ex. 621/Tab 381: "Nothing can be done with our production company in Russia without my approval so I am in no hurry to change anything…" [e.g., transferring Euro Gas' control over the operation of Reef]. Roberts was already suggesting that Shnaider and Shyfrin did not own any equity in Koll.

[1110] After Shtaif made excuses and dragged his feet in making that transfer, and Midland proposed to incorporate a new company, Petroleum Management, to take over management of Koll's assets. Shtaif refused to cooperate. In November of 2006 Shnaider, Shyfrin and Shtaif again agreed to formally implement the June 20, 2006 decisions once management had been transferred to Petroleum Management. Shnaider and Shyfrin reasonably requested that limits be placed on Shtaif's powers as General Manager of Petroleum Management. Shtaif insisted that unlimited powers were his right.

[1112] There was no evidence from any investment banker that a $50 million loan would necessarily have been a problem for Koll on the IPO. I have already referred to Maybank's evidence that he could not recall having had a discussion with Shtaif and Roberts at the September meeting about debt being a problem. Maybank told Roberts companies often go public with debt on their books.

[1113] In any event, I have found the Plaintiffs were not insisting that Midland's debt be paid before or out of the IPO. I have accepted Shnaider's and Shyfrin's evidence that they did not take that position. As Shnaider pointed out, the loan agreement contained a three-year term. Koll was not required to repay Midland's loan until July 7, 2009.

[1114] I have rejected Roberts' and Shtaif's evidence that the Plaintiffs were insisting upon keeping 67.21% of the shares and repayment of the loan out of the IPO and a pledge to pay an additional $15 million.

[1116] I have found Shtaif accepted Shnaider's February 25, 2007 offer, then reneged the next day. Given the tenor of the communications immediately preceding March 1, it was reasonable in my view for both Shyfrin and Shnaider to insist upon being personally present at the March 1, 2007 shareholders' meeting. Nothing they did constituted a repudiation of the contract.

[1117] On March 1, 2007, as I have already found, the Defendants purported to accept Shnaider's and Shyfrin's repudiation of the contract and claimed to own 100% of Koll.

[1118] I have found based on the draft minutes, Ex. 405, that Shtaif, Roberts, Groag and Bokserman did purport to accept what they characterized as Shnaider's and Shyfrin's repudiation of the contract. They took the position that Shyfrin and Shnaider owned no shares in Koll, owed Midland the amount it had advanced to Koll and they were in total control of Koll.

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[1119] On March 1, 2007, the Defendants forwarded a letter to the Plaintiffs purporting to give them a choice between two alternatives, neither of which remotely resembled the terms of the ongoing contract.

damages for past or future breaches. That is not what they purported to do. Roberts said that they "accepted the repudiation." As the draft March 1 minutes demonstrate, they purported to own all the Koll shares and to be totally in control of Koll and Koll's assets. [When an innocent party elects to accept the repudiation of a contract, the contract is terminated. Each party is discharged from future obligations. Place Concorde East Limited Partnership v Shelter Corp of Canada Ltd (2006), 270 DLR (4th) 181 at paras 49-50, [2006] OJ No 1964 (CA).]

[1121] Mr. Stevenson submitted the Defendants did not repudiate the contract by writing the March 1 letter.

[1122] I do not have to decide whether the Defendants repudiated the contract by writing the letter. After receiving it, although they might have been entitled to do so based on its contents, the Plaintiffs did not take the position that the Defendants had repudiated the contract. The contract continued in force.

[1123] Did the Plaintiffs repudiate the contract by taking control of the Koll subsidiaries, seizing its assets, excluding its minority shareholders, unlawfully removing Shtaif as its managing director, maliciously accusing Shtaif of criminal fraud, effectively terminating the joint venture?

all the shareholders of Koll, just as Shtaif had promised to do from the outset.] The Plaintiffs implemented the change in management that had always been intended. The contract continued.

[1125] The Plaintiffs did not deprive the Defendants of their interests in Reef or in Koll: Reef continued to be owned by Koaploma, which in turn was owned by Koll. The shareholding of Koll did not change. The Defendants continued to own 32.79% of the Koll shares.

[1126] Although the Plaintiffs were not aware of the content of Shtaif's and Roberts' correspondence at the time (Ex. 481 and Ex. 414), it is now clear Shtaif and Roberts did plot to take the Reef assets away from Koll. I recognize that in Ex. 414, after he wrote "I propose we proceed with our planned action to take the company away," Shtaif suggested he would not do anything illegal. However, Ex. 433/Tab 547, his March 6, 2007 letter to Kachkar reflects that he was actively attempting to move the Reef asset to Euro Gas and to give subsequent lenders priority over Midland's loan. I have found he had not obtained an opinion from Beach, the outside lawyer who had been providing advice. Roberts wrote Beach on March 5, Ex. 481/Tab 456, informing him they were going to move the Koll subsidiary that owned Reef to a company controlled by Shtaif, to move its shares out of reach of Shnaider and Shyfrin. He confirmed Beach did not advise him to do so.

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have been turned over to a liquidator for sale under the court's auspices. The Defendants refused to cooperate. They submitted liquidation would have been inappropriate.

[1128] As to Mr. Stevenson's submission that in early 2007, the Miller and Lents information was integrated into Shtaif's February 18, 2007 valuation, Ex. 411/Tab 15, I have found Shtaif's "valuation" was far from "accurate." Miller and Lents had not valued Reef. In their report, Miller and Lents had warned that it would be incorrect to do what Shtaif did: add 1P, 2P and 3P reserves to arrive at a "valuation" of $156.4 million. Moreover, Shtaif compounded the error by applying multiples to that total. My conclusions are based on the evidence of Schaeffer, Soriano and Cline, and are set out in the Damages section of these Reasons.

[1129] Maybank's evidence was that Canaccord had not valued Koll before March 8, 2007 (and it did not do so thereafter.) While Roberts kept referring to a post money/post-IPO valuation of $600 million, there was no evidence to support such a valuation.

[1130] Similarly, I have concluded that in February 2007, an IPO in which Koll could have raised $200 million was not imminent. It would not have occurred in September 2007 or at any time before the onset of the worldwide financial downturn in 2008.

[1131] The September 2006 Canaccord presentation reflected uncertainty about the timing of Koll's IPO. I do not accept Roberts' and Shtaif's assertions that the investment bankers could and would have proceeded to raise at least $200 million based only on Koll's ownership of Reef and Inverskoye, the Miller and Lents Report or their faith in Koll management's ability to execute, or a combination of the three.

[1132] As the documents presented to the investment bankers showed, acquisitions were anticipated before an IPO to bring 2P reserves and production levels well above the level of 2P reserves and production possible from Reef and Invenskoye alone. Soriano 8522. After acquisition, additional capital would have been needed to explore and develop the acquired properties into producing oil wells. Without working capital in excess of $50 million, Koll could not make more acquisitions, do exploration to expand its production or even to meet the requirements of maintaining its licenses for Reef.

[1133] Without a pre-IPO or further private investment, Koll would not have had the funds to pursue the further acquisitions needed before a September 2007 IPO could occur. If it had not had funding, the IPO would either have been delayed or the target amounts to be raised would have necessarily been revised downwards. I reject the Defendants' submission that acquisition funds would have been readily raised to acquire and develop additional properties.

[1134] [The March 1 2007 minute contains the following: "Mr Roberts advised the meeting that Cannaccord…had advised going public on AIM with a very small public float to simply get public."]

[1135] Shnaider did not believe that Koll would have been ready to go public in September 2007. Koll had only acquired Reef and Invenskoye. Shnaider had understood that they would have needed a valuation of $ 600 million dollars in order to raise $200 million. They were very far away from that sort of valuation.

[1136] I have accepted Soriano's analysis 8308 about the timing of Koll's IPO.

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[1137] Nor would Koll have raised $50 million on a pre-IPO in early 2007. In the summer of 2006, Koll had not pursued a pre-IPO. In September, Canaccord had cautioned Koll not to do a pre-IPO unless it was desperate. No pre-IPO raise had been pursued between September 2006 and March 2007.

[1138] I note that the Defendants were unable to raise enough funding to pay the Midland loan [advanced largely for actual acquisition and operating expenses], let alone raise financing for further acquisitions that would have been necessary before any IPO raising the amounts Roberts and Shtaif were projecting to be raised ($150-$200 million) could occur. Fulfilling the Koll business plan required funding that Koll did not have and I have found was unlikely to raise.

[1140] I have found Koll did not breach Roberts' and Shtaif's employment contracts. The details of the contracts relied upon are set out below in the section of these Reasons on Breach of Contract & Inducing Breach of Contract.

[1141] In summary, on the facts as found, the Defendants' counterclaim based on breach of contract must fail.