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Major Investor in Russia Sees Wide Fraud Scheme

William F. Browder, once the largest foreign investor in the Russian stock market, filed court documents in New York this week contending that other Western investors in Russia had colluded with the authorities to steal hundreds of millions of dollars through tax refunds and then laundered the money through New York banks.

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AP
Russian Flag

Mr. Browder has hired the law firm of John D. Ashcroft, the former United States attorney general, to represent him in New York in a request for a subpoena for bank wire transfer and other records that Mr. Ashcroft contends will prove Mr. Browder’s allegations.

The filing is a new twist on Mr. Browder’s case, which began almost four years ago. His lawyers say the wire transfers will show a fraud larger than previously disclosed — remarkable even by the standards of Russia.

In its sweep and scale, the case has echoes of the Bank of New York money-laundering scandal in the late 1990s, though this time there are no allegations that American banks other than the subsidiary of a Russian investment company were involved.

Mr. Browder was expelled from Russia in a politically tinged visa refusal in 2005, and relocated his business, Hermitage CapitalManagement, to London. Later, he said subsidiary companies he had formed in Russia to invest in Gazprom, the Russian gas monopoly, were used by others to acquire a fraudulent tax refund of $230 million.

Now, the filing by Mr. Ashcroft, whose law firm is based in Kansas City, Mo., suggests that companies other than his own were also used in a similar fraud. The court papers contend that at least another $100 million that foreign investors in Gazprom had paid to Russian authorities in taxes up to 2006 were later stolen in schemes involving fraudulent refunds.

Mr. Ashcroft’s filing says that Hermitage was subjected to “a series of events that might seem unlikely to befall an influential global investment firm.”

“Certain Russian officials and private citizens entered into a conspiracy to reregister to themselves three investment companies owned by the Hermitage Fund,” the filing says, with the goal to “apply for and receive fraudulent tax refunds of over $230 million from the Russian Treasury, and finally, to funnel these proceeds through bank accounts in Russia and the United States.”

The filing outlines a familiar story of brazen corruption in Russia. Even Russia’s president, Dmitri A. Medvedev, speaks often on the topic. Last Sunday, for instance, Mr. Medvedev told a television interviewer that foreigners perceive corruption in Russia to be “without limits.”

The evidence sought in Mr. Ashcroft’s filing, though, is intended to resolve another dimension to Russian corruption. If the subpoena is granted, the wire transfer evidence would be used, Mr. Ashcroft said, to vindicate Mr. Browder’s lawyers in Russia, who they contend have been unjustly jailed and threatened with fabricated criminal cases.

Mr. Browder is not seeking compensation or financial benefit, because he says his investors lost no money in the scheme.

Mr. Browder has made big gambits before as an activist investor in Russia, and has often sought to attract media attention to his causes. The request for a subpoena, provided to journalists by Mr. Browder’s lawyers, is not required to prove the allegations, but rather to raise the possibility as a basis for the court to subpoena evidence.

Evidence is being sought from Citibank and JPMorgan Chase , but only in their role as processors of overseas wire transfers, as well as from the New York office of the Russian investment company Renaissance.

The lawyers argue that these records will show the ties between those who took over the Hermitage companies after Mr. Browder was forced out in 2005; officers of the Federal Security Service, the successor agency to the K.G.B. known as the F.S.B.; and executives at a Renaissance group company, Renaissance Capital.

The records will show, the filings say, that “Renaissance Capital was in some way connected to the F.S.B. and others who were involved in orchestrating the fraud.”

In a statement and in comments by a senior executive, Renaissance denied any involvement in a fraud. “Any suggestion that Renaissance was involved in a 2006 tax fraud is wholly false,” the company said in the statement. “Neither Renaissance nor its investors were the victim of, nor had any knowledge of, such alleged tax fraud.”

The news offices of the Russian tax agency and the Federal Security Service did not respond to queries about the allegations.

Mr. Ashcroft’s filing describes in detail Mr. Browder’s contentions of how the fraud was organized. It describes how a skein of cooperating bankers, lawyers and security agents used companies that had formerly paid large sums in taxes, like the Hermitage and Renaissance investment vehicles, to request fraudulent tax refunds of hundreds of millions of dollars.

The victims

Earlier this decade, direct foreign ownership of stock in Gazprom was prohibited, but ownership was legal if shares were owned through a Russian-registered company. Not surprisingly, such companies proliferated as demand soared for Gazprom in the energy boom. At one point, about 25 percent of Gazprom was owned through such companies. Both Hermitage and Renaissance, along with many others, operated these special-purpose vehicles.

The law, however, changed in 2006 to allow direct foreign ownership of Gazprom. The billions of dollars in Gazprom shares held by foreign investors in these special-purpose vehicles quickly flowed out into overseas accounts.

The companies seemingly became superfluous, but in fact were coveted for their potential for fraud, according to the filings.

As described in the subpoena request, the people who took over the Hermitage vehicles fabricated lawsuits to create backdated losses in the years when real profits had previously been reported. They then filed amended tax documents requesting refunds.

Audited financial statements distributed to Western investors by Renaissance showed that the Renaissance special-purpose vehicles had paid $108 million in taxes in 2006. But the investment vehicles later reported to the Russian state statistics agency that they paid only $1.1 million. The discrepancy, according to Mr. Browder’s subpoena request, was received as a tax refund.

Hans Jochum Horn, a deputy chief executive of the Renaissance Group, said in an interview that Renaissance sold the investment vehicles after it paid the $108 million in taxes and that the new owners requested the refund. Any fraud, he said, involved later owners of the companies who altered the audits of Renaissance and KPMG.

Mr. Ashcroft’s filing is a subpoena to gather evidence for a foreign court. It will, he argued, help vindicate Hermitage lawyers who have been persecuted in Russia for working for Mr. Browder.

Sergei L. Magnitsky, a 35-year-old father of two and the head of the tax practice at the Moscow law firm Firestone Duncan, who had acted as an outside counsel for Hermitage, investigated what he swore in a court statement was official involvement in the theft of Hermitage’s special-purpose vehicles. He was arrested a month later on what the New York filings suggest were trumped-up charges — an echo of the arrests of lawyers in other politically charged cases in Russia, including the bankruptcy of the Yukos oil company. Mr. Magnitsky has been in pretrial detention since November.

Mr. Ashcroft’s filing said the New York wire transfer evidence would prove that “Hermitage and its executives and counsel are the victims, not the perpetrators, of a fraud that cost the Russian Treasury $230 million.”

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