Hermitage Claims Russian Bankers May Have Helped With Fraud

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.

Business Exchange

Track and share business topics across the Web.