The Financial Times: Hermitage in Russia fraud claim

April 4, 2008

By Neil Buckley and Catherine Belton in Moscow

Hermitage Capital, whose manager William Browder has been barred from Russia for more than two years, alleged yesterday that it and HSBC bank had been victims of an elaborate attempt in Russia to defraud them of hundreds of millions of dollars.

A legal complaint to Russian prosecutors sent by lawyers representing Hermitage and HSBC Management Ltd in Guernsey, which is trustee and manager of the Hermitage fund, said the company’s Russian assets had been the target of a “large-scale criminal conspiracy”.

According to the complaint, the attempted fraud began with an investigation by an interior ministry unit into alleged tax evasion by Hermitage last year.

The complaint, filed in January and seen by the Financial Times, alleged that as a result of the investigations, “assets of companies were stolen through a series of frauds consisting of the falsification of evidence in court proceedings and manipulation of data”.

“These frauds occurred with the possible assistance and participation of officers of the . . . interior ministry and some judges of the arbitration court of St Petersburg,” it continued.

A criminal probe has been opened into HSBC’s claims, according to a copy of a Russian legal decree.

Mr Browder, whose firm once managed Russia’s largest foreign portfolio investment fund, has been denied entry into Russia since November 2005. His fund had fought to improve corporate governance in Russia.

The Moscow interior ministry launched a criminal tax probe last June into a company linked to Hermitage, which Mr Browder said was groundless.

News of Hermitage and HSBC’s allegations surfaced yesterday when Kommersant, the Russian newspaper, cited unnamed interior ministry sources as saying Mr Browder had been charged in absentia with tax evasion. But the interior ministry said yesterday it had not brought any charges against Mr Browder. It declined to comment on Hermitage and HSBC’s claims.

Hermitage said last year’s tax claim was bogus and had been used as cover for an attempt to steal assets from its associated companies. It said that investigators seized files and other materials, including corporate seals, from its offices and those of its Moscow lawyers.

Hermitage alleged that the documents and company seals were later used fraudulently and secretly to transfer control of three entities managed by HSBC that had contained Hermitage assets to a company called Pluton.

These companies were later sued, allegedly without Hermitage’s knowledge, by another company, Logos Plus, for breaching what Hermitage says were forged agreements to sell Gazprom shares to it. A St Petersburg court awarded Logos $376m damages without the knowledge of HSBC or Hermitage, according to Hermitage and to HSBC’s legal complaint.

The court awards were later overturned.

Article was published in The Financial Times.

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