BusinessWeek: Hermitage Claims Russian Bankers May Have Helped With Fraud

July 31, 2009

In a New York court filing, Hermitage alleges that executives of Moscow investment bank Renaissance Capital Holdings had prior knowledge of theft and tax fraud

By Paul Barrett and Brian Grow
The saga of Hermitage Capital Management, once a major force in Moscow financial circles, has taken a new twist in the form of a potentially explosive court filing in New York.

Hermitage, now located in London, has alleged that it was the victim of Russian corporate raiders and corrupt government officials who cooperated to steal its assets, file bogus law suits, and reclaim $230 million in taxes previously paid by Hermitage to the Russian government. In its filing on July 28 in U.S. District Court in Manhattan, Hermitage alleges publicly for the first time that executives of another prominent Moscow financial institution, investment bank Renaissance Capital Holdings, may have helped defraud Hermitage.

The July 28 filing is an application for a court order permitting Hermitage’s lawyers to seek documents from Renaissance’s New York unit. In particular, Hermitage alleges that “certain current and former executives of Renaissance and its affiliates” had relationships with a Russian bank involved in the fraud. Hermitage also suggests in its filing that certain top Renaissance executives had “knowledge of the fraud before it became public knowledge.” Renaissance, the largest Russian investment bank, is one of the most active sellers of Russian securities to Western investors.

U.S. Assistance Needed
“Hermitage is the victim of a fraud that damaged it profoundly and that cost the Russian Treasury $230 million,” Hermitage’s lead outside lawyer, John Ashcroft, the former U.S. Attorney General, said in a written statement. “As evidenced by my personal involvement in this Application for Judicial Assistance, I take this situation with great seriousness.” Ashcroft added that the information sought with the assistance of the American court is needed to help Hermitage pursue pending civil lawsuits in Russia and to defend against the anticipated criminal prosecution in Russia of senior Hermitage executives.

In Moscow, Renaissance issued a statement in response to inquiries about the Hermitage filing and the allegations that Renaissance officials may have had some involvement with or knowledge of the purported fraud against Hermitage. “Renaissance first learned of the alleged tax fraud from news organizations last fall,” the statement said. “As we stated for the record at the time, neither Renaissance nor its investors were the victim of, nor had any knowledge of, such alleged tax fraud prior to this time…. Renaissance has no opinion on [investigations related to Hermitage] nor the affairs of Hermitage Capital.” In an interview last year, Renaissance spokesman Simon Moyse told BusinessWeek that the firm’s conduct had been entirely proper.

According to the July 28 court filing, a group of Russian fraud artists and crooked government officials conspired in 2006 and 2007 to illegally wrest control of units of both Renaissance and Hermitage. The raiders allegedly then arranged to use sham lawsuits to create huge losses at the stolen companies. Those losses became the basis for hundreds of millions of dollars in false tax refunds paid out by the Russian government, according to the Hermitage filing.

Managed by British bank HSBC (HBC), Hermitage was once a leading administrator of funds investing in Russian stock on behalf of Western investors. It reported $4 billion under management as of 2006. Its chief executive, William Browder, enjoyed a high profile in international investing and received copious media coverage.

Further Digging Required
But Browder’s public allegations of alleged mismanagement at Gazprom (GAZP.RTS), the Russian energy giant, in which Hermitage funds owned shares, eventually put him at odds with the Russian government.

In 2007, Russian authorities raided Hermitage’s Moscow offices and those of its local attorneys, confiscating reams of documents. Subsequently, according to the Hermitage court filing, the firm discovered that ownership of three of its Russian subsidiaries had been transferred to other parties. The sham litigation and tax-refund activity followed, Hermitage alleges.

The reason Hermitage’s U.S. and British lawyers want to dig into the records of Renaissance, according to the filing, is that a year earlier, in 2006, two of the investment bank’s Russian units were victimized in a roughly similar fashion with the involvement of some of the same Russian officials, private figures, and an obscure bank. Further, Hermitage suggests in its filing that people affiliated with Renaissance knew about the two frauds and may have participated in some unspecified way.

In the single most intriguing allegation in the July 28 filing, Hermitage says that in late 2007, before the purported fraud against Hermitage became public, Renaissance executives contacted Browder by telephone, “offering to help Hermitage solve its ‘problems.'”

Neil Micklethwaite, a Hermitage lawyer based in London, asserts in a supporting “declaration” filed with the court in New York that one of these calls came from Igor Sagiryan, then president of Renaissance Capital, an affiliate of Renaissance Capital Holdings. “During the course of the conversation, Mr. Sagiryan explained that he was aware of all of Hermitage’s problems in Russia,” the declaration states. “It is not clear how he would be aware of this information, as the only people who could have known about the problems during this time period were senior executives of Hermitage, its lawyers, and the members of the criminal enterprise who had orchestrated the fraud.”

At Sagiryan’s suggestion, he later met with Browder in London and offered to help Hermitage resolve its troubles, the declaration alleges. Browder declined.

In its statement issued from Moscow, Renaissance Capital Holdings said of this account: “We are not aware of any discussion that Igor Sagiryan has had on behalf of Renaissance with William Browder or Hermitage. We are not in a position to comment on discussions of a private nature.”

Sagiryan’s account differs from that in the Hermitage filing. In an interview, Sagiryan says: “The lawyers of Bill Browder contacted me and asked me to meet. They came to my office [in Moscow], and we had a meeting. And they asked for help. I didn’t contact them.” Sagiryan, who has left Renaissance, wouldn’t identify his current employer. He says that after his meeting with Browder in 2007, he signed a confidentiality agreement with Browder’s lawyers. He would not disclose why a confidentiality agreement was necessary, nor what type of help Browder’s attorneys allegedly sought. “I don’t understand anything what’s going on,” he says. “It’s complete nonsense.”

Article is published in the BusinessWeek magazine.


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