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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