The Daily Telegraph: Hermitage points to RenCap in fraud case

July 31, 2009

By Philip Aldrick

Hermitage Capital Management, the hedge fund battling state corruption in Russia, has accused Renaissance Capital, one of Russia’s leading investment banks, of possible involvement in two alleged frauds costing the Russian taxpayer $337m (£204m).

In a testimony filed by Hermitage’s lawyer in a New York court, the hedge fund claims there is sufficient circumstantial evidence to suggest that RenCap and its former directors, including Stephen Jennings, the “Kiwi oligarch” who founded and is chief executive of parent company Renaissance Group, may be “implicated in the tax rebate fraud”.

Hermitage has been fighting the Russian authorities for two years to get them to acknowledge “a sophisticated conspiracy” involving “senior officers in the Russian Interior Ministry, the Russian Federal Security Service, senior officers of the Russian tax bureaux and certain senior Russian court judges”.

The hedge fund, once Russia’s largest foreign investor, led by US national Bill Browder, first uncovered the alleged fraud in 2007 after three of its subsidiaries were stolen in a complicated scam following a police raid on its Moscow offices, when legal documents and seals were confiscated.

In its subsequent investigation, Hermitage discovered that the false owners of the three companies had fraudulently reclaimed $230m of capital gains tax paid the previous year. However, after raising its concerns with the authorities, Hermitage was subjected to what the International Bar Association has described as “state-sponsored intimidation”.

Further probing by Hermitage lawyers revealed that another alleged fraud with uncanny similarities had been perpetrated a year earlier on RenCap subsidiaries. After RenCap had sold the companies, the new owners used false and backdated claims in court to create a loss in the companies that allowed them to recover $107m of previously-paid capital gains tax.

In his US testimony, Hermitage’s external lawyer Neil Micklethwaite, of the firm Brown Rudnick, points out 12 similarities between the two alleged frauds – from the regional courts, tax authorities and banks used, to the fake documentation and individuals involved.

However, while Hermitage’s companies were stolen, RenCap’s were willingly sold to a group that had connections with both Mr Jennings and Richard Olphert, former head of merchant banking at RenCap.

The RenCap subsidiaries were owned by Jets Ventures, a British Virgin Isles-registered company, when “the fraudulently-obtained court judgments were issued against them”, Mr Micklethwaite says. Both Mr Jennings and Mr Olphert have been directors of a number of Jets’ subsidiaries. Renaissance confirmed that “over the years some of our employees have been asked to serve as independent directors by clients, as was the case with Jets”.

“If evidence becomes available showing that Renaissance or its executives were owners or directors of Jets, given that the tax rebate occurred after Renaissance transferred the subsidiaries to Jets, a logical conclusion is that those individuals would be implicated in the tax rebate fraud,” Mr Micklethwaite contends.

In addition, he raises questions about an unsolicited telephone call Mr Browder allegedly received from Igor Sagiryan, then president of RenCap, in November 2007 – the day after Hermitage told the Russian Interior Ministry it would be filing a criminal complaint about the alleged fraud.

The call “appears unusual for a number of reasons”, Mr Micklethwaite claims. “During the course of the conversation, Mr Sagiryan explained he was aware of all of Hermitage’s problems in Russia.” During a subsequent meeting with Hermitage’s legal counsel in Moscow, “he urged Jamison Firestone to persuade Mr Browder to allow Mr Sagiryan to facilitate the liquidation of the stolen Hermitage companies”.

Mr Browder agreed to meet Mr Sagiryan at the Dorchester Hotel in London the following month. The day before the meeting, he allegedly received a call from Mr Jennings, who “encouraged Mr Browder to keep an open mind at the forthcoming meeting with Mr Sagiryan”, Mr Micklethwaite says. Mr Sagiryan then allegedly proposed to “arrange for the stolen Hermitage companies to be liquidated [as] doing so gets rid of problems”, according to Mr Micklethwaite.

“The apparent links between the [suspect Russian authorities] and RenCap suggests that RenCap was in some way connected to those who were involved in orchestrating the fraud,” he adds.

Hermitage is making its “Application for Judicial Assistance to Conduct Discovery for Use in a Foreign Proceeding” in the US to force RenCap’s New York-based operation, RenCap Securities, to disclose information that may help its case. “There is a reasonable probability that RenCap will be able to provide substantial evidence that may illuminate the scope of the fraud and the role of Renaissance’s current and former executives in its conception and execution,” Mr Micklethwaite alleges.

Hermitage is requesting documents that show any communication between Mr Jennings and Mr Sagiryan mentioning Hermitage, any visa applications made by RenCap for individuals at the Russian authorities allegedly involved in the conspiracy, as well as a plethora of financial information regarding the former RenCap subsidiaries at the centre of the alleged fraud.

“By assisting Hermitage in identifying the parties which perpetrated the tax fraud and establishing that Hermitage has been a victim – not a perpetrator – of a sophisticated conspiracy, it will aid Hermitage defend itself,” Mr Micklethwaite says.

Hermitage is also seeking information from Citigroup and JP Morgan Chase, with whom the implicated Russian banks had New York correspondent accounts. They are alleged to have unknowingly received “the laundered proceeds of the frauds”.

Renaissance said: “We have conducted a meticulously thorough internal investigation into this matter, the conclusion of which is that Renaissance had zero involvement in the alleged 2006 tax fraud. Any suggestions that Renaissance was involved in a 2006 tax fraud are wholly false.”

Hermitage is being represented by John Ashcroft, the former US attorney general, and US law firm Graves Bartle Marcus & Garrett.

Article was published in The Daily Telegraph.

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