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.”

Dis­crep­an­cies
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.

Comments

• Link