Univ. Oil Suit Heats Up

A Russian oil company that Harvard has accused of illegal accounting practices will raise its dividends nearly four-fold, but the University claims the increase still falls short of the full amount owed to shareholders.

The firm, Surgutneftegaz (Surgut), and the University are embroiled in legal wrangling—initiated this summer—over dividend payouts for Harvard’s American Depository Receipts (ADRs), certificates representing shares in foreign companies. In June the University reported it held over three million ADRs in Surgut, worth about $130 million altogether.

On March 25, Surgut’s board approved a dividend of 2.19 cents per preferred share; last year’s payout was roughly a half-cent, according to Bloomberg.

But Sowood Capital Management, which manages Harvard’s investment in Surgut, said the increased payout will be “only a portion” of the full amount.

“Although this dividend is larger than that paid in the past, Surgut continues to avoid its full contractual obligations,” Managing Director Jeff Larson said in a statement. “We demand that Surgut pay the full dividend due preferred shareholders and compensate them immediately for past dividends owed to them.”

Surgut did not respond to requests for comment.

In June 2004, Harvard filed a demand for arbitration with the American Arbitration Association (AAA), alleging that Surgut set its dividends below amounts directed by its prospectus and charter.

The University accuses Surgut of reporting lower net profit figures to shareholders than it submitted to the government for taxation. Since net profits are used to calculate shareholder dividends, Harvard alleges that the lower figures produced smaller payouts.

Harvard’s claim stated that Surgut owed at least $3.7 million to the University.

According to the claim, Surgut reached its lower net profit by subtracting the firm’s capital investment from its revenues. Last summer, Surgut said that such a deduction is legal in Russia.

But the Russian government modified its securities laws to outlaw this method of reducing dividends, prompting Surgut’s recent increase in payouts, the Boston Business Journal reported.

In June, Harvard asked to have its claim arbitrated as a class action on behalf of all holders of ADRs for preferred Surgut stock.

But Robert A. Skinner of Ropes & Gray, a lawyer representing Harvard in the dispute with Surgut, said last week that the University is the only shareholder involved at the moment.

Skinner said that Surgut is challenging Harvard’s right to demand arbitration from the AAA and is asking a federal court in New York to stay the arbitration. Harvard claims that the terms of the ADRs allow arbitration through the AAA, according to a statement from Sowood.

Sowood is overseeing the dispute in addition to handling the University’s investment in Surgut. Larson managed the University’s foreign equity for the Harvard Management Company, which invests Harvard’s $22.6 billion endowment, before his team spun off to form Sowood.

—Staff writer Nicholas M. Ciarelli can be reached at ciarelli@fas.harvard.edu.