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Suspect Lawsuits Target Russian Financial Firms


The suits appear to be an attempt to claim millions of dollars in taxes paid by companies linked to Hermitage Capital and Renaissance Capital

Mysterious lawsuits targeting prominent financial institutions could become the latest worry for foreign investors in Russia.

Earlier this year, Hermitage Capital Management, an investment fund managed by British bank HSBC (HBC), claimed that three of its subsidiaries had been besieged by Russian fraud artists. Hermitage alleged in public statements that a series of bogus suits, based on fake contracts to sell shares, had been filed against the units as part of a scheme to seize ownership of the subsidiaries and reclaim $230 million in taxes previously paid by Hermitage to the Russian government. Russian authorities are investigating these allegations.

Now, an apparently similar round of suits has come to light. These concern two units created by another financial giant: Renaissance Capital, the largest Russian investment bank and one of the most active sellers of Russian securities to Western investors.

The units in question, Financial Investments and Selen Securities, were formerly subsidiaries of Rengaz Holdings, a fund created by Renaissance Capital in 2004 to enable foreign investors to buy shares in Gazprom, the country's largest company. At the time, Russia prevented foreign investors from directly purchasing Gazprom shares traded in Russia. But funds such as Rengaz enabled investors to own shares in the energy company indirectly. Rengaz, via holding companies, owned Financial Investments and Selen Securities, which traded Gazprom shares.

RULE CHANGE

In January 2006 the Russian government lifted restrictions on foreign ownership of Gazprom shares, making vehicles such as Rengaz superfluous. The same month, Rengaz's Russian subsidiaries sold their shares in Gazprom, and Renaissance sold the subsidiaries. Simon Moyse, Renaissance's spokesman, says the companies "were sold as shell companies to individuals for purposes of liquidation."

But before they were liquidated, the two subsidiaries were involved in some perplexing activities. Russian court documents show that within weeks of being sold by Renaissance, the two units became the targets of a series of lawsuits. Filed in March and April 2006, the suits alleged that the two Renaissance-linked units had violated contracts to sell shares worth hundreds of millions of dollars. Renaissance's Moyse says the investment bank had no knowledge of these suits until BusinessWeek brought them to its attention—nor of any allegedly broken contracts.

In April 2006, just a month after the suits were filed, Selen Securities was ordered by the Moscow Higher Arbitration Court to pay $94 million in damages in a suit brought by a little-known company called Prior. (The court ordered the remedy to be paid to Prior's "legal successor," Megasel.) The same month the Arbitration Court of the Republic of Tatarstan, in the city of Kazan, some 500 miles east of Moscow, ordered Financial Investments to pay $372 million to yet another obscure company called Poleta.

Despite the substantial size of the claims, the two ex-Renaissance units made no attempt to contest the suits, instead conceding without a fight, court records indicate. And that, according to lawyers in Moscow uninvolved in the litigation, is astonishing by itself and could suggest collusion among the parties. "To not contest an amount like that seems unusual to me. That's a lot of cash," says Scott Antel, a partner in the Moscow office of international law firm DLA Piper.

A further mystery concerns the contracts that were the subject of the suits. According to Renaissance, the only purpose of the two subsidiaries was to buy and sell shares in Gazprom. But according to court documents, the units admitted breaching contracts to sell shares in companies unrelated to Gazprom: the Russian bank Sberbank and electricity company UES.

The court cases may be linked to yet another puzzle. The consolidated financial accounts for Rengaz Holdings, the former parent company of the two units, show that the subsidiaries owed $108.1 million in taxes on profits in 2006. This is the figure provided to investors, representing what was paid in taxes on their behalf. Renaissance's Moyse says this amount was paid in full before Renaissance sold the companies for liquidation.

Yet according to the financial accounts of the two subsidiaries themselves, provided to BusinessWeek by Rosstat, the Russian government's statistical arm, Financial Investments and Selen reported a total of just $1.2 million in taxes in 2006. So what happened to the other $106.9 million, the difference between the taxes Renaissance says it paid on behalf of investors and the taxes that the two units reported to the government? Renaissance's spokesman says he doesn't know the reason for the discrepancy.

Outside lawyers uninvolved in the situation say a possible explanation is that Selen Securities and Financial Investments subsequently claimed a refund from the tax authorities, using the questionable court judgments to lower their profit numbers—and their final tax bill. BusinessWeek couldn't corroborate this theory because the units no longer exist; public records led to dead ends.

A CURIOUS CASE

What's clear is that in 2006 the two units reported to the Russian government that they had $430 million in unspecified "other expenses." That amount is close in size to the legal damages awarded by the two courts. It also nearly matches the total profits that the two companies made from selling Gazprom shares.

Investors in Rengaz expressed bafflement over the situation. Stephen Barber, head of global marketing for Pictet Asset Management, says the firm's Eastern European Trust invested in Rengaz. "But if an investment bank were to approach us with a similar scheme in the future, I think we might say: 'No, thank you.' " He adds that any potential risks stemming from the curious litigation wouldn't affect Pictet's investors.

The companies that filed suit against the former Rengaz units are elusive. According to Russian records, Poleta was founded in October 2005, just five months before it filed for damages against Financial Investments. Accounts provided by Rosstat show that Poleta reported unspecified "other income" of $330 million in 2006—and almost identical costs. As a result, it paid a total of just 1,000 rubles, or $37, in taxes.

When BusinessWeek attempted to contact Poleta, using a Moscow phone number provided in the company's registration records, the person who answered said the number belonged to a private apartment. She denied any knowledge of Poleta.

Another head-scratcher: State documents show that the last owner of Selen has the same name as the owner of Prior, the company that originally filed suit against Selen.

Business Exchange: Read, save, and add content on BW's new Web 2.0 topic network

Russian Cyberfraud

The Washington Post's Security Fix blog reported last month on Russian Business Network, which the newspaper described as based in St. Petersburg and providing Web-hosting services for "cybercriminals." Groups operating by means of Russian Business Network's computers are thought to be responsible for ID-theft scams in which cybercrooks use e-mail to lure people into entering personal and financial data at fake commerce and banking sites, the Post reported.

To read the Security Fix item, go to http://bx.businessweek.com/russian-business


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