04.04.2008

Hermitage Capital cries fraud in Russia

Carl Mortished International Business Editor The Times

Hermitage Capital, the leading foreign portfolio investor in Russia, claims it has been the victim of an attempted fraud and theft of hundreds of millions of dollars by individuals connected to the Russian Interior Ministry.

 

Documents and company seals that were seized by Artem Kuznetsov, a lieutenant colonel in the Russian Interior Ministry, during a tax investigation were later allegedly used to engineer a complex fraud intended to extort $367million (Pounds 184million) from three subsidiaries of Hermitage Fund.

HSBC, the trustee of the Hermitage Fund, which, at its peak, had assets of $4billion, has filed criminal complaints in Russia. The bank has asked the police and Financial Intelligence Service in Guernsey, where the fund is based, to conduct investigations.

According to Hermitage and Firestone Duncan, its Moscow-based law firm, the attempted theft involved raids on offices, fishing expeditions for assets held at foreign banks, including HSBC, Citigroup and Credit Suisse, and a fabricated lawsuit set up to secure a court judgment against the Hermitage subsidiaries, enabling the criminals to loot the companies.

In the course of the raid on Firestone Duncan's Moscow office on June 4 last year, during which the key documents were taken, a lawyer, Victor Paryugin, was beaten up by the Interior Ministry after voicing a protest. He was arrested, fined and spent two weeks in hospital.

Jamison Firestone, a partner in the firm, said: "You have an attempted theft of corporate assets in which it appears branches of the authorities are involved. It would seem to me the police had a client. It would appear that the police actively aided and co-ordinated."

A spokesman for Hermitage said: "Under the guise of a tax investigation, they searched for assets, grabbed corporate documents and then they were used to attempt to steal Hermitage assets." The theft failed because the assets held by the companies, mainly Gazprom stock, had previously been sold and the funds moved offshore.

The attack on the Hermitage Fund follows a campaign of harassment against Hermitage Capital and its chief executive, William Browder, who in 2005 was refused renewal of his Russian visa. An activist fund manager, Mr Browder conducted a lengthy campaign that exposed widespread theft and corruption at Gazprom. He has been unable to renew his visa despite interventions on his behalf by Jack Straw, the former Foreign Secretary, and the European Commission.

Mr Browder met Dmitry Medvedev, now the Russian President-elect, at the World Economic Forum in Davos in January 2007 and requested his assistance in renewing his visa. A month later, Hermitage received a call from Lieutenant Colonel Kuznetsov, indicating that he was aware of Mr Browder's visa difficulty. According to Hermitage, the Interior Ministry officer sought a meeting at Hermitage offices. He said: "My answer will depend upon how you behave, what you provide ... the sooner we meet and you provide what is necessary, the sooner your problems will disappear."

The Interior Ministry's justification for the raid on Hermitage and its lawyers was a claim that a Hermitage client, Kameya, owed $44million in taxes, although the client had paid $135million in taxes in 2006, more than many leading companies, including Baltika and Aeroflot. The Russian Ministry of Finance and the Federal Tax Service confirmed that no tax was owed, Hermitage said. While the Kameya investigation continued, and unbeknown to Hermitage, nine lawsuits were begun in St Petersburg against Hermitage Fund subsidiaries based on claims by Logos Plus, an unknown company. The claims were accepted by lawyers claiming to act for the Hermitage companies and the court awarded Logos Plus $376million.

According to Hermitage, the name of HSBC as trustee for the Hermitage companies was wiped off the share register and new directors were installed - three individuals who, Hermitage says, have criminal records. "The only way to change ownership is to obtain the corporate seal, two original certificates of registration and original charter," the Hermitage spokesman said. These documents remain in the possession of the Interior Ministry. "We want them back," he said.

THE DIARY OF DODGY DEALINGS

November 2005 William Browder's Russian visa revoked

January 2007 Mr Browder requests help from Dmitry Medvedev in Davos

February 2007 Lieutenant- Colonel Artem Kuznetsov, of the Interior Ministry, calls Hermitage: "The sooner we meet and you provide what is necessary, the sooner your problems disappear."

June 2007 Colonel Kuznetsov begins tax inquiry and raids offices of Hermitage and the law firm Firestone Duncan, seizes documents and company seals

June 2007 Colonel Kuznetsov begins wide-ranging search of Hermitage fund assets in international banks

July 2007 Lawsuits issued by Logos Plus against three Hermitage companies

September 2007 Ownership of Hermitage companies changed fraudulently

St Petersburg Arbitration Court awards Logos Plus $376 million

April 2008 Russian press reports that Mr Browder has been charged with tax evasion, later denied by Interior Ministry