In the December 2005 issue of the Romanian Digest, we summarized preliminary information then available about the Property Fund – Romania’s attempt to provide restitution to the victims of the wrongful and abusive confiscations of their homes and properties by the Communist authorities after 1945.

We expressed the hope that the Fund would not be another slap in the face to those victims as had been so much of Romania’s prior efforts at restitution.

We viewed the Property Fund as a golden opportunity for the Romanian authorities to finally right the wrongs imposed upon owners of pre-communist era properties where those properties could no longer be returned in-kind under the restitution law regime outlined under Laws Nr. 10/2001, as modified under Law 247/2005. Under these circumstances, Government Decision Nr.

1481/2005 was enacted to set up the Fund and provide for the possibility of compensation to such "former owners" through grants of shares in the Fund in proportion to the value of their successful claims. Since our last article, it appears that Romania may, indeed, be serious about providing real restitution to the victims of the past through a Fund whose shares have been legitimately valued.

Although the law is fair and the Property Fund appears to be genuine, the regulations that will bring about the reality of restitution to so many victims has several major flaws that if uncorrected could produce the ludicrous result that major claimants such as the heirs of Nicolae Malaxa and Max Ausnit – the John D. Rockefeller and Andrew Carnegie of Romania – would receive nothing.

This is because, in the case of the former industrial properties, the evidence of shareholding must be submitted as of June 11, 1948, the actual date of the confiscations. But in most cases, it is impossible to obtain such evidence, as the documents were either destroyed or lost by the Romanian government.

It is curious that proof of large claims that total hundreds of millions of Euros cannot be found by the Romanian government, while documentation for small claims seem to abound.

Consequently, the existing regulations that apply the law must be changed to expressly provide that evidence of shareholding can be made with any documents such as decisions of the general assembly, older excerpts of the shareholding registry, Official Gazettes of Romania, or other credible alternative corroborating documentation, etc., irrespective of their date.

We are dealing with properties that no one else has claimed, that were openly and indisputably owned by the family of the claimants, and where the best evidence of ownership was stolen by the then Romanian government and either cannot now by found or was destroyed. Failure to deal with these matters on an administrative basis now will not end the claims.

No one walks away from hundreds of millions of Euros. Sadly, Romania’s failure to remedy this injustice would result in protracted multiple international litigations based upon what will be described as a new act of expropriation by Romania against the victims of its past expropriations. We hope that this can be avoided.

Quick Facts

The purpose of the Fund is to create something of value that will constitute "just and equitable" compensation to claimants whose successful property restitution claims under Laws Nos. 10 or 247 cannot be satisfied with an in-kind return of that property. The Fund has been set up as a "closed-end" financial investment company which issues shares in settlement of these claims.

Claimants seeking compensation under the restitution regime must file claims with the Authority for State Assets Recovery ("AVAS") (or other institutions depending on the nature of the claim). AVAS assesses the validity of the claims and then issues compensation awards to be converted into shares in the Property Fund. The value of the compensation is assessed by an evaluation commission.

While this system has allowed the authorities to begin the process of awarding successful claimants, the Funds shares, once awarded, cannot legally be resold to third parties without listing the Fund on the Bucharest Stock Exchange (BSE) or an international stock exchange or without specific legal provisions allowing transfer of the shares prior to the listing of the Fund.

Upon receiving the shares , the recipient becomes a shareholder in one of Eastern Europe's largest funds.

The Fund currently has a portfolio of shares in 114 entities, including some of Romania’s best-known institutions, such as Transelectrica, the National Lottery, Transgaz, Romtelecom, Posta Romania, Petrom, Romtelecom, the National Printing House, the various "Electrica" and "Distrigaz" utilities, the Metrorex transportation utility, as well as the Henri Coanda, Baneasa, Constanta and

Timisoara airports and the Galati and Giurgiu maritime ports. In most cases, the portion of these entities transferred to the Fund is between 10% to 20% of their total equity. With shares of these larger entities already transferred, the total assets currently held by the Fund have been estimated at almost €4 billion.

In addition, the Fund is due to receive future contributions in the form of: (i) controlling equity interests in some smaller State-owned entities; (ii) 9.9% and 4% of the sale proceeds from the privatization sale of the CEC and BCR banks, respectively, as well as; (iii) some of Romania's communist-era debt receivables from numerous African, Middle Eastern and Asian countries.

When these assets are either received, paid-in or transferred to the Fund, the increased value to its portfolio will be effected through additional increases to its social capital, so the Fund is expected to hold assets whose total value will be worth several additional billions of Euros.

The Fund is currently run by a "Supervisory Council" which responds to the Ministry of Finance. The Council is made up of one Chairman and six directors. Currently, the Chairman is Nicolae Ivan. The Council will run the day-to-day affairs of the Fund until a Fund Manager is selected by the Romanian authorities.

Originally formed as of December 29, 2005, the Fund is currently scheduled to expire on December 28, 2015.

Recent Events

In a move designed to increase confidence both abroad and at home, the Council has spent the past several months nominating well-known international firms and key individuals to leading roles in the formation and running of the Fund.

An international law firm has been selected to assist in the issuance of the bid documents and will assist in holding a future tender for the appointment of the Fund Manager, which is scheduled to take place no later than the end of June.

It will also have a leading role in devising the rules for the selection of the manager, which will, in turn, trigger the transfer of day-to-day management of the Fund from the Council to the manager.

Expressions of interests from prospective managers were due in mid-March, and the Romanian authorities have disclosed the receipt of official notifications from 3I plc, Cheynne Capital, Deutsche Bank, Salomon Brothers, Nomura Securities, Merrill Lynch, Morgan Stanley, Dresdner Bank, Dexia Kommunalkredit and YFM.

Once selected, the Manager will administer the Fund according to the rules established by Government Decision and other internal rules subsequently adopted by the Romanian authorities.

In addition to the selection of international law firm, the authorities also selected various Romanian firms to act as local counsel, mostly to perform the due diligence over companies whose shares are being contributed to the Fund. Also nominated were Raiffeisen Capital and Investment, as financial advisors for the Fund's imminent listing with the BSE, and KPMG, to serve as its Auditor.

A number of independent directors were also placed on the Council for the purpose of increasing transparency and institutional confidence in the Fund. All Council members were appointed for a one-year mandate.

Early Success in Awarding Shares

Initially, the Romanian State, acting through the Ministry of Finance, managed the formation and preliminary set-up of the Fund as its sole shareholder. However, on March 6, the first round of awards in shares in the Fund took place amongst successful claimants. At a televised inauguration of the Fund held at the Victoria Palace, Mr.

Ivan, along with Prime Minister Calin Popescu Tariceanu, awarded nearly $3 million worth of shares to seven selected recipients. Amongst the seven, were clients of Rubin Meyer Doru & Trandafir, as well as a police officer, a factory worker, a gypsy leader and a former business owner.

Since the initial ceremony, the Romanian authorities have moved quickly to address an impressive list of over 180,000 restitution claims which will likely be settled by shares in the Fund. As of early April, the Romanian authorities have approved almost 14,000 claims, with a total nominal value of almost €400 million, or 10% of the total equity in the Fund.

Lingering Doubts about BSE Listing

While the transfer of shares in the Fund has proceeded at a brisk pace, members of the financial community are questioning several key parameters of the Fund and its ability to function under the current Romanian legal regime.

The first and most immediate concern is the Fund's listing on the BSE, without which the Fund's shares will not be freely transferable. Based on an interpretation of the existing laws – which we do not share but is apparently shared by a number of decision-makers -- an entity may not become listed with the BSE before the companies in its portfolio are all listed.

Currently only 60 of the 114 companies which make up the portfolio of the Fund are listed. In fact, some of the largest companies in the Fund's portfolio, such as the National Lottery, the National Printing House, Transelectrica and Transgaz are not currently listed.

Even before going public, a company must secure a valid decision of the shareholders to go public, change its by-laws, audit its financial statements, and undergo the time-consuming and expensive process of preparing a company for a public offer. Even under optimum circumstances, it will take anywhere between 6 months to 12 months to list a single company on the BSE.

Under less than optimum circumstances, the process will be time-consuming and will lead to conflict. In recent press reports, Mr. Ivan of the Fund has indicated that the Fund is currently involved in litigation with at least 10 of the 114 companies in the Fund's portfolio.

Given these portentous early signs, there is some justifiable concerns that it is unlikely that the Fund's listing will take place prior to mid-2007.

Under the current circumstances, Senator Varujan Vosganian, the president of the Finance-Budget Commission of the Senate, recently declared that "the Property Fund has been established, but without the proper legal basis for operations; and, as such, the Fund will remain an object of curiosity….either we change the law and we adapt it to the Fund in its current form, or we resign ourselves to a

dysfunctional institution." Specifically, Senator Vosganian has indicated that his Commission will soon propose that the Romanian authorities adopt a series of measures to reduce the burden placed on the Fund in order to be listed with the BSE, or impose a temporary and official market for the sale of the Fund's shares until such time as the Fund is listed on the BSE.

According to Senator Vosganian, the Romanian authorities should also adopt reduced listing requirements for the shares of companies in the Fund's portfolio. If these measures can be adopted by the Government, with the agreement of the Romanian Securities Commission, Romanian officials believe that the Fund could be listed on the BSE by the middle of 2006.

Another problem mentioned in our December Romanian Digest was one of evaluating the winning claims of Fund recipients. While Law No. 247 attempts to eliminate any subjectivity from the process of evaluating property restitution claims, the same legal regime also indicates that the evaluators will have to be retained and paid by the Romanian authorities.

Accordingly, the apparent conflict of interest of government-retained evaluators has not been lost upon interested parties. On the flip side, the evaluation of the assets to be held by the Fund also presents substantial problems.

While there is a basis for judging the market price for many of the shares of these entities, many entities which make up the Fund's portfolio may not benefit from adequate market measures of value.

Conclusion: Will the Fund get off the Ground?

Currently, almost 70 claimants have received shares in the Fund, and another 14,000 thousand claimants are well on their way to the same. More importantly, some of the Fund's advisors have been named, and the all-important Fund Manager will be named by the end of June.

The measurable progress achieved since the beginning of this year has done much to boost confidence in the Property Fund's short-term prospects.

On other fronts, however, the Fund is still an open question. The lack of a favorable legal regime to assist it with its BSE listing serves to confirm lingering doubts about its long-term viability. Without any near-term BSE listing, Fund recipients will not have a clear market for their shares.

Public confidence will suffer, and increased doubts about the long-term prospects of holding shares in the Fund will merely encourage shareholders, many of whom are now retired and who lack in-depth knowledge of the capital markets, to sell their shares on a nascent black market for less than their nominal value.

Something similar occurred in the mid-1990's during Romania's previous mass-privatization scheme with respect to the Private Ownership Funds.

If the government is to avoid the mistakes of the past, it must present viable alternatives (namely the real prospect of long-term capital gains and dividend payments) over the understandable desire to sell one's shares in the Fund immediately and at any price.

If the Fund fails to deliver "value" to its shareholders, it will have failed in its central objective of resolving the very real and moral dilemma of property restitution.

If Romania credibly dispenses shares of genuine value to the claimants, timely resolves the BSE listing issue, and fairly compensates the former owners of its industrial properties by amending its regulations to reflect reality, Romania will deserve to be held up to Europe as the archetype for just restitution.

The article " The Property Fund Revisited" was published based upon approval of:

Rubin Meyer Doru & Trandafir