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The Hermitage File: Russia as a Criminal State

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Many readers have been following the legal saga of William Browder, Hermitage, and HSBC against Renaissance Capital and certain members of the Russian government alleging a $230 million fraud scheme.  Now we’ve got our hands on a public filing from the case.  As far as I am aware, this blog is the first to track down this declaration by the lawyer Neil Micklethwaite filed in the Southern District Court of New York supporting a foreign discovery claim on behalf of the plaintiffs.  This is a public legal filing containing allegations which have not yet been ruled on in a court of law, which of course bear no relationship whatsoever to this blog or its authors.  Click here to download the document, while below I are some excerpts.

From the Neil Micklethwaite filing:

7.  The criminal conspiracy unfolded in multiple steps. The first overt act in the conspiracy was the seizure of corporate records from Hermitage’s Moscow office and the office of Hermitage’s local law firm. The seizure occurred in June 2007 during a raid by officers of the Russian Interior Ministry. It appears likely that thereafter, during the latter part of 2007, the seized original records were used to fraudulently re-register three of the Hermitage Fund’s Russian investment companies (together, the “Hermitage Companies”) from HSBC, as the Fund’s trustee, to members of the Criminal Enterprise. Subsequently, three members of the Criminal Enterprise – each with previous criminal convictions – fraudulently replaced HSBC executives as the directors of the Hermitage Companies.

8.  The Criminal Enterprise then forged contracts, dating from 2005, in order to create approximately U.S. $1 billion worth of fictitious financial liabilities against the stolen Hermitage Companies. These documents would have been impossible to prepare without access to the corporate records and financial documentation seized from Hermitage and its lawyers during the June 2007 raids by the Russian Interior Ministry. These liabilities were subsequently officially recognized by Russian courts in a number of judgments handed down between July 2007 and December 2007.

9. Even before all three judgments came into force, the CriminalEnterprise applied, on December 24, 2007, to the Russian taxauthorities for a fraudulent refund of U.S. $230 million in taxes thathad been paid by the Hermitage Companies to the Russian government in2006. This refund request was granted immediately. Two days later, theequivalent of U.S. $230 million was paid by the Russian Treasury intobank accounts at two small Russian banks, including USB in Moscow, thathad been opened by the Criminal Enterprise. The funds were subsequentlyconverted into U.S. dollars. The funds were ultimately routed throughtwo banks located in New York, Citibank, N.A. and J.P. Morgan ChaseBank (together, the “New York Banks”), to accounts that uponinformation and belief are controlled by members of the CriminalEnterprise.

10.  The fraudulent rebate of U.S. $230 million was authorized by Russiantax officials despite the fact that HSBC and Hermitage had filedcomprehensive criminal complaints with Russian law enforcementauthorities alerting them to the misappropriation of the HermitageCompanies, fabrication of fictitious liabilities against them, and thesham court judgments three weeks before the fraudulent tax refundrequest was filed by the Criminal Enterprise.

11. Following the fraudulent tax refund, in June and July 2008, theCriminal Enterprise (in apparent collusion with members of the Russiantax authorities) filed petitions with Russian courts to liquidate andbankrupt the stolen Hermitage Companies. If these steps are fullyimplemented, essential evidence relating to the transfer of funds andthe ultimate beneficiaries of the fraud will be destroyed. As discussedin greater detail below, HSBC and Hermitage are now challenging thesepetitions in Russia.