Persecution of Hermitage in Russia in order to steal US$ 230 million from the Russian people

July 2008

1

Visa withdrawal
On 13 November 2005, Hermitage’s founder and CEO, William Browder was refused entry into Russia. His visa denial was based on Mr. Browder being declared a threat to “national security, public order or public health”

Persona non grata

“The decision to deny entry into the Russian Federation for Mr. William Felix Browder has been made by the competent authorities in accordance with Article 27, Item 1 of the Federal Law No 114FZ”
- Letter from the Ministry of Foreign Affairs to the UK Embassy in Moscow, 25 November 2005

Article 27, Item 1 says: “Entry into the Russian Federation can be denied to a foreign national or stateless person if it is in the interest of ensuring the security of the state, public order or public health.”
2

Visa withdrawal: New application
At the World Economic Forum in Davos on 28 January 2007, Mr. Browder appealed directly to Dmitry Medvedev (the current President of Russia) to issue him a new visa

?
3

Visa Withdrawal – Visit from the Interior Ministry
No visa was issued. Instead, on 17 February 2007, Artem Kuznetsov, a Lieutenant Colonel of the Interior Ministry, called Hermitage:

Transcript of telephone conversation between Vadim Kleiner and Artem Kuznetsov February 17, 2007

Lieutenant Colonel Artem Kuznetsov Moscow Interior Ministry Department of Tax Crime

“We were notified by the Immigration Service that the CEO of your company wishes to visit our country and asked if we had any response. Before I reply, I wanted to come by your office and talk, show you some papers, ask a few questions. I can’t tell you my questions over the phone – unfortunately it’s not so simple as that. My answer will depend upon how you behave, what you provide, et cetera. If you are interested in meeting, that’s fine. If not, no problem. It’s up to you. The sooner we meet and you provide what is necessary, the sooner your problems will disappear.”
4

Raid on Hermitage Office
On 4 June 2007, the same lieutenant colonel Kuznetsov lead a team of 25 officers in a raid at Hermitage’s office, allegedly in order to gather information on the tax payments of a Russian company named Kameya
Interior Ministry of Moscow Hermitage Offices in Moscow Items Taken during Search
1 Server

Allegations against Kameya

7 computers 25 officers, led by Lieutenant Colonel Kuznetsov 5 boxes of documents

$44 million of underpayment in dividend withholding tax; criminal investigation

5

Raid on Firestone Duncan Office
Also on 4 June 2007, the same division of Interior Ministry raided the offices of Firestone Duncan, a law and audit firm used by Hermitage. Lieutenant Colonel Kuznetsov showed up to supervise the search
Interior Ministry of Moscow Firestone Duncan Moscow Office Items Taken during Search
All servers & computers

25 officers, reporting to Lieutenant Colonel Kuznetzov A.K.

2 vans full of client documents were taken away

6

Raid on Firestone Duncan Office
During the search of Firestone Duncan, Lawyer Victor Poryugin, who tried to stop the seizure of unrelated documents, was taken into a conference room, punched repeatedly in the throat and face, then arrested and fined 15,000 rubles
Lawyer Victor Paryugin, from Firestone Duncan tried to stop the confiscation of unrelated documents belonging to other clients

Was beaten up

Was arrested

Was fined 15,000 Rubles

Hospitalized for 2 weeks

7

Targeting Hermitage Lawyers
All the lawyers involved with Hermitage were burglarized or had documents stolen in the two-week timeframe before and after the office raids

Hermitage's long-time civil lawyer His house burglarized Some money was taken with essential valuable items left intact

Hermitage Office Raid

In the week of his appointment his briefcase was stolen from his car; it was found in the police station 5 hours later

Hermitage's criminal lawyer

Hermitage's tax lawyer In the same week the apartment of tax lawyer of Hermitage was broken into, nothing was taken

Two weeks before raid

June 4, 2007

Week of June 11, 2007 8

What was the basis for these raids?
The offices were raided because the investigators alleged that a client company of Hermitage – Kameya – had underpaid $44 million of dividend withholding tax
Interior Ministry Decree of 8 May 2007 Interior Ministry Chief Lieutenant Malofeeva: • The company Kameya underpaid 1.15 bln Rubles (US$44 mln) in dividend withholding tax; • General Director of Kameya illegally applied The Cyprus-Russia Double Tax Treaty; • The shareholder of Kameya didn’t have a Certificate of Cyprus Tax Residency; • The Dividend Withholding Tax Rate should be 15% not 5%
9

Were the Dividend Withholding Taxes paid correctly?
The Russian Ministry of Finance confirmed the correctness of the tax rate applied
Official Confirmation of Tax Rate from the Russian Ministry of Finance ... given that the sole shareholder

Request for Clarification from Kameya’s Russian Tax Counsel

of our company is Cyprus tax resident who invested more than US$100,000 in our charter capital, please confirm what dividend withholding tax should be applied

… in the situation described in your request, the dividends paid in April 2006 should have been taxed at a 5% dividend withholding tax rate
10

Were the Dividend Withholding Taxes paid correctly?
The Federal Tax Service also confirmed the correctness of the tax rate applied
Official Confirmation of Tax Rate from the Federal Tax Service ... given that the sole shareholder

Request for Clarification from Kameya’s Russian Tax Counsel

of our company is Cyprus tax resident who invested more than US$100,000 in our charter capital, please confirm what dividend withholding tax should be applied

… according to Russia –Cyprus Double Taxation Treaty companies should be taxed at a 5% dividend withholding tax rate
11

Did Kameya owe any money to the Federal Tax Service?
No, on 13 September 2007 Kameya received confirmation from The Federal Tax Service that there was no tax indebtedness in existence and the company had overpaid taxes by 4.0 million Russian rubles
1,000

500

4.0
0 mln Rubles -500

-1,000

-1,500

-1,145
Interior Ministry Tax Assessment Allegation Actual Tax status per Federal Tax Services

12

Did Kameya owe any money to the Federal Tax Service?
Even more so, Tax Authority No. 7, the federal tax body that supervises Kameya, conducted an official tax audit and found no violations

An audit verified that Kameya paid its dividend withholding taxes in full and on time; no violations found

13

Was Kameya a good taxpayer?
In contrast to what the investigators were alleging, Kameya was one of the largest tax payers in Russia
$250 $232

Taxes paid by some of the leading Russian companies (2006, US$ million)
$190 $158

$200

USD mln

$150

$135

$131

$130 $103 $97 $71 $57 $42

$100

$50

$0
rg rof es lo tA t (L irl on R in g- o e) di s t sta e nc lec eM o on m op (2 n ol d y) La rg es G tA A ut Z om ak er (L ) ar A ge v st to Au v to az m ak er ) (L W arges X tR 5 im et a (L m ile ar Bi r) ge l st l D Da a iry n M n ak er )

V ge T st B G ba az nk pr om ) (T op b -fi an ve k

t P TM ip eM K ak e

k)

r)

ey a

r g Ba es lt t B ik re a we r) (L a

Ba n

K am

(2 n d lar

(L a

rg es

(L a

A

e

Source: Companies’ financial statements, and St Petersburg newspaper “ Versia v Pitere” 25 June 2007

14

How should the process really work?
If there had been a legitimate tax claim, there is a normal procedure for this to be dealt with Step 1 Company files Tax Returns Step 2 Tax Authority Audit Step 3 Company has a chance to address concerns Step 4 Tax Authority comes up with claim Step 5 Interior Ministry Officials get involved if claim is unpaid

Excerpts from Russia’s Tax Code: • • •

If underpayment is found, the demand for payment must be presented to a taxpayer within at least three months Where there are tax violations detected in the course of a tax authority audit, the officials shall draw up the established tax claim within 10 days after the completion of the tax authority audit If the taxpayer does not pay a tax within two months of receiving a tax claim, the tax authorities shall, within 10 days of learning of such non-payment, forward the relevant documents to the appropriate internal affairs body for the purpose of deciding on the initiation of criminal proceedings to recover the tax arrears 15

How should the process really work?
The Interior Ministry launched an investigation completely leapfrogging the normal process of investigation concerning tax payments

Step 1 Company files Tax Returns

Step 2 Tax Authority Audit

Step 3 Company has a chance to address concerns

Step 4 Tax Authority comes up with claim

Step 5 Interior Ministry Officials get involved if tax is unpaid

16

If taxes weren’t the real target, what was?
Instead of investigating taxes, the real purpose of the “Kameya Case” was to justify a wide-ranging search for all of the Hermitage Fund assets

Colonel lieutenant Artem Kuznetsov

Subpoena of all bank accounts and documents related to Hermitage fund assets

14, 27 June 2007

17 July 2007

26 July 2007

28 August 2007

17

What was the real aim of the investigation?
Interestingly, the investigators were searching for assets well beyond the scope of their investigation into Kameya. Instead, they focused on Hermitage Fund entities

Target of Tax Investigation
International Investor Advising Client

Target of Asset Search
Advising Client HSBC PRIVATE BANK (Guernsey) LIMITED Trustee to Hermitage Fund
100% 100%

Hermitage Capital

100%

Cyprus Holding Company

Corporate Director

HSBC MANAGEMENT (Guernsey) LIMITED Corporate Director

Corporate Director

GLENDORA HOLDINGS LTD Cyprus

KONE HOLDINGS LTD Cyprus 100%

100%

100%

100%

General Director

General Director

OOO Kameya, Moscow

General Director

OOO RILEND, Moscow

OOO PARFENION, Moscow

OOO MAKHAON, Moscow

18

Next, mysterious lawsuits started appearing
In October 2007, Hermitage and HSBC learned that on 27 July 2007, an unknown company called Logos Plus filed six lawsuits against the three Hermitage Fund companies (Rilend, Makhaon, Parfenion) in the St. Petersburg Arbitration Court

HSBC PRIVATE BANK (Guernsey) LIMITED Trustee to Hermitage Fund
100% 100%

Corporate Director

HSBC MANAGEMENT (Guernsey) LIMIT ED Corporate Direc tor

Corporate Director

GLENDORA HOLDINGS LTD Cyprus

KONE HOLDINGS LTD Cyprus 100%

100%

100%

Lawsuit
General Director General Director General Director

Lawsuit
OOO MAKHAON, Moscow

OOO RILEND, Moscow

OOO PARFENION, Moscow

Lawsuit

US$500 mln claims in total!
19

What did these lawsuits allege?
The sham lawsuits alleged that three Hermitage Fund companies agreed to sell Gazprom shares to a shell company called Logos Plus, and then later cancelled the agreements but didn’t pay the supposed foregone profit

Fake agreements

General Director

12 May 2005

OOO RILEND, OOO RILEND, Moscow Moscow

Power of Attorney

Logos Plus

Regional representative Kozlov M.V.

$$$

General Director

21 December 2005

OOO RILEND, OOO RILEND, Moscow Moscow

Power of Attorney

Foregone profit $$$

Logos Plus

Regional representative Kozlov M.V.

Fake liabilities

20

Was there any basis to these lawsuits?
No, the agreements that the lawsuits were based on never existed. The Hermitage Fund never did business with any company named Logos Plus

21

The people who forged the agreements made numerous mistakes
1. The Power of Attorney “authorizing” unknown Mr. Kozlov was issued four months before the actual formation of the company issuing the alleged Power of Attorney

Parfenion "issued" Power of Attorney to Mr. Kozlov 17 Jan 2005
Four months before!

Parfenion was formed
12 Apr 2005

2. The corporate seal used to validate one of the agreements was only produced for the first time 6 days after the alleged agreement “was stamped” with the same corporate seal
Agreement signed and "stamped" by Rilend's corporate seal
12 May 2005

Rilend's Corporate seal was produced
Six days before!
18 May 2005
22

The person suing the Hermitage Companies did not exist
“Mr. Strazhev,” the director of Logos Plus who filed the lawsuits against HSBC and Hermitage appeared before the court using a stolen passport

Federal Migration Service Letter
“Passport 7804#368347 is fake it was issued not to Mr. Strazhev but to a different person. According to this person his passport was lost on 25 July 2005 in St. Petersburg.”

23

Unknown lawyers showed up on the scene
Even though Hermitage was unaware of these lawsuits, the three investment companies were represented before the St. Petersburg court by unknown lawyers not appointed by Hermitage
HSBC PRIVATE BANK (Guernsey) LIMITED Trustee to Hermitage Fund
100% 100%

Not aware
Corporate Director

Advocate A.A.Pavlov rep. of OOO Rilend

Corporate Director

HSBC MANAGEMENT (Guernsey) LIMIT ED Corporate Director

GLENDORA HOLDINGS LTD Cyprus

KONE HOLDINGS LTD Cyprus 100%

E.A.Maltzeva rep of OOO Parfenion

100%

100%

General Director

General Director

General Director

OOO RILEND, Moscow

OOO PARFENION, Moscow

OOO MAKHAON, Moscow

Advocate Y.M Mayorova rep. of OOO Mahaon

24

Unknown lawyers showed up on the scene
These three lawyers fully acknowledged and accepted all the claims
“Hereby, the defendant confirms that he understands the charges, doesn’t have any objections and fully accepts the claims”
Advocate Pavlov, attorney for the defendant
Fake POAs to lawyer from Rilend, Parfenion and Mahaon

Advocate A.A.Pavlov rep. of OOO Rilend

Judge Orlova

“According to p.3 art. 70 of APC the acceptance of the claim by the defendant releases the plaintiff from the requirement to prove the case”
Judge Orlova
25

Since all claims were accepted by the lawyer, the judge ruled in favor of Logos Plus
The St. Petersburg Court awarded Logos Plus with US$376 million

St.Peterburgs Court Awards against Hermitage Fund companies on fake allegations
OOO RILEND, Moscow
350

$308
300 250 200 150 100 50 0

OOO PARFENION, Moscow

mln US$

Logos Plus
$68 $0.1 Award against Parfenion Award against Makhaon Award against Mahaon Award against Rilend

OOO MAKHAON, Moscow

US$376 million

26

How did these lawyers end up representing Hermitage Fund companies without being instructed by HSBC - the Hermitage Fund Trustee? Because HSBC’s name had been fraudulently wiped off the companies’ share registrar and replaced by a new company called OOO Pluton
HSBC PRIVATE BANK (Guernsey) LIMITED Trustee to Hermitage Fund
100% 100%

OOO Pluton,
(Kazan, Tatarstan)

Corporate Director

HSBC MANAGEMENT (Guernsey) LIMIT ED Corporate Direc tor

Corporate Director

GLENDORA HOLDINGS LTD Cyprus

KONE HOLDINGS LTD Cyprus 100%

100%

100%

100%

100%

100%

General Director

General Director

General Director

General Director

General Director

General Director

OOO RILEND, Moscow

OOO PARFENION, Moscow

OOO MAKHAON, Moscow

OOO RILEND, Moscow

OOO PARFENION, Moscow

OOO MAKHAON, Moscow

27

Who owned Pluton?
Pluton was owned by a man named Victor Markelov

V. Markelov
100%

OOO Pluton,
(Kazan, Tatarstan)

100%

100%

100%

V.Kurochkin OOO RILEND, Moscow

V.Markelov OOO PARFENION, Moscow

V.Khlebnikov OOO MAKHAON, Moscow

28

Who is Victor Markelov?
It turns out that Victor Markelov is a 41 year old Saratov resident convicted of murder in 2001

29

Once the ownership was fraudulently transferred, Pluton replaced HSBC’s directors with a new set of directors
…who issued Powers of Attorney to the unknown lawyers

Real Directors

New Directors

V. Kurochkin
General Director
OOO RILEND, Moscow

V. Markelov
OOO PARFENION, Moscow

V.Khlebnikov
OOO MAKHAON, Moscow

General Director
OOO PARFENION, Moscow

General Director
OOO MAKHAON, Moscow OOO RILEND, Moscow

30

Who were the other two directors?
They were individuals with criminal records

31

How could ownership be transferred?
The only way to change ownership of a Russian company is to obtain the corporate seal, two original certificates of registration and the original charter …

Documents needed to change the ownership

Corporate Seal

Original Certificate of Registration with the State Registrar

Original Certificate of Registration with Tax Authorities

Original Charter

32

Who had all of these documents?
All of these documents were in the exclusive custody of the Moscow Interior Ministry (since the 4 June raid of Hermitage’s law firm’s office)
Russian Interior Ministry Letter On 4 June 2007 during the raid in Firestone Duncan office in Moscow were seized the documents and electronic copies of documents of Mahaon, Parfenion and Rilend … These documents and seals of these companies were not given to anybody.

Major Pavel Karpov

Colonel lieutenant Artem Kuznetsov
Interior Ministry takes documents during the raid Fraudulent change of ownership and directors September 2007 Documents still held by the Interior Ministry

4 June 2007

Today 2008

33

What was the real aim of the whole tax investigation?
The real aim of the investigation appears to be to fraudulently obtain court judgments and then to use them to seize Hermitage Fund assets
Fake Criminal case
Major Pavel Karpov
Examination and questioning of employees of
F&D and Hermitage

Court decision on documents withdrawal from the banks

Examination and questioning of outsource contractors to justify enhancement of the case

Fishing expedition
Lieutenant Colonel Artem Kuznetsov

About 50 Interior
Ministry officers led by A.Kuznetzov raided offices of Hermitage Moscow and its account adviser Firestone & Duncan tree trucks of documents confiscated

Information requests on cash accounts and securities balances of Russian and foreign Hermitage advised entities

Filed groundless report requesting the criminal case to be opened

May 2007

4 Jun
2007

Fraud execution Advocate Pavlov & Co

Forgery of real of legitimate directors shareholders 2005 agreements with criminal with the fake
fake ones one

Substitution Substitution

9 fake lawsuits filed

US$1.26 bln

Fake lawsuits awarded worth

Execution orders issued by the court

34

Did their plan succeed?
No, there were no assets or cash in the stolen Hermitage Fund companies in Russia

OOO Pluton,
(Kazan, Tatarstan)

100%

100%

100%

V.Kurochkin OOO RILEND, Moscow

V.Markelov OOO PARFENION, Moscow

V.Khlebnikov OOO MAKHAON, Moscow

35

However the perpetrators did not stop their activities…
… we learned in late March 2008 that the perpetrators had continued filing bogus cases even after they did not find assets
19 Oct 2007 14 Nov 2007

Moscow: Early Sep 2007 Search for Hermitage’s assets ended with no result, but… Kazan:
Grand Active files $575m lawsuit against Parfenion New Parfenion director Mr. Markelov (convicted of murder in 2001) “admits liability” and judge awards Grand Active $575m 36 Instar files $312m lawsuit against Rilend Rilend lawyer Ms. Mayorova appointed by criminals “admits liability” and judge awards Instar $312m

22 Oct 2007

13 Nov 2007

What was the Moscow lawsuit about?
The same as St. Petersburg. It was alleged that one Hermitage Fund company agreed to sell Gazprom shares to a company called Instar, and then later cancelled the agreements and was subject to pay the foregone profit to Instar

Fake agreements
16 Nov 2005
General Director

OOO RILEND, Moscow

Instar

Deputy Director Kurochkin V.

$$$

General Director Plaksin G.

5 May 2006

General Director

OOO RILEND, Moscow

Foregone profit
Deputy Director Kurochkin.V.

Instar

$$$

General Director Plaksin G.

Fake liabilities for $ 312 m

37

This lawsuit was flawed as well
1. Rilend has never had a Deputy Director

Deputy Director Kurochkin V.

2. Rilend’s corporate seal did not match the company’s location, despite being registered in Moscow for nearly 7 months
Rilend was registered in Moscow Fake agreement was sealed with an invalid address

5 May 2005

7 months

16 Nov 2005
38

What was the Kazan lawsuit about?
The same as St. Petesburg. It was alleged that one Hermitage Fund company agreed to sell Gazprom shares to a company called Grand Active, and then later cancelled the agreements and was subject to pay the foregone profit to Grant Active

Fake agreements
19 Sep 2005
General Director

OOO Parfenion, Moscow

Power of Attorney

Grand Active

Regional representative Kozlov M.V.

$$$

General Director Sheshenia

14 Aug 2006

General Director

OOO Parfenion, Moscow

Power of Attorney

Foregone profit $$$
General Director Sheshenia

Grand Active

Regional representative Kozlov M.V.

Fake liabilities for $ 575 m

39

This lawsuit was flawed as well
1. Parfenion never had any regional representative

Regional representative Kozlov M.V.

2. Mr. Sheshenia, a convicted murderer, became General Director of Grand Active only 2 years after he signed the alleged agreement in the capacity of the General Director
Agreement signed by Mr Sheshenia in capacity of the General Director of Grand Active
19 Sep 2005
2 Years after!

Appointment of Mr. Sheshenia as a General Director
3 July 2007
40

Total fake court orders
In total, fake judgments were issued in 3 courts of US$ 1.26 billion

St.Petersburg

Moscow

Kazan

In total 15 claims were files in St.Petersburg, Kazan and Moscow that resulted in US$1.26 billion of awards issued for the benefit of fraudsters

In addition to the perpetrators filing lawsuits, we learned that they also set up bank accounts for the stolen companies
On June 5, 2008 we requested the extracts of our stolen companies from the state registrar and learned that 3 new bank accounts were opened in December 2007
V.Kurochkin OOO RILEND, Novocherkassk

New account 17 December 2007

V.Khlebnikov OOO MAKHAON, Novocherkassk

New account 17 December 2007

Universal Savings Bank

Bank formed: 28.02.2002 Region: Moscow Equity: $1.5 mln Total Assets: $25.6m* Ranked No. 920 **

V.Markelov OOO PARFENION, Novocherkassk

New account 13 December 2007

Intercommerz Bank

Bank formed: 10.12.1991 Region: Moscow Equity: $11.8m Total Assets: $571m* Ranked No. 432**
42

Source: EGRUL statements * Central Bank of Russia (www.cbr.ru) ** 2006 Total Assets Ranking, RBC.Rating (http://rating.rbc.ru/articles/2007/03/01/31383191_tbl.shtml?2007/02/28/31382412)

We looked at the banks and found unusual activity
It appeared that large amounts of money were flowing through these banks at the same time that the new accounts were opened
Size of Corporate Accounts held at the UBS Bank
US$ mln.

+$97 mln

Universal Savings Bank

Account Opened US$ mln.

Size of Corporate Accounts held at the Intercommerz Bank

+$143 mln

Intercommerz Bank

Source: Central Bank of Russia (www.cbr.ru)

Account Opened

43

Deposits equal to taxes paid
The spike in corporate deposits was roughly equal to the capital gain taxes that were paid by Hermitage Fund companies back in 2006 (stolen in 2007)

Source: Central Bank of Russia (www.cbr.ru), Hermitage Fund’s companies tax reporting

44

Fake claims equal to Hermitage Fund profits
We looked back at the fake lawsuits and realized that the awards were exactly equal to Hermitage Fund profits in 2006
Profits vs. Fake Claims (US$ Mln.) Parfenion

Rilend US$ mln = Makhaon = =
Profit of 2006 Fake Claims awarded to the Company (RUB 13.88 Bln.) Profit of 2006 Fake Claims awarded to the Company (RUB 7.57 Bln.) Profit of 2006 Fake Claims awarded to the Company (RUB 1.67 Bln.)

Source: Fake lawsuits, Hermitage Fund’s companies financials 2006

45

Fake losses adjusted the profits to Zero
The perpetrators seemed to be intend on eliminating any historic profits from the Hermitage Fund companies retroactively Profit “Adjustment” via Fake Losses

2006
Source: Fake lawsuits, Hermitage Fund’s companies financials 2006

46

Why would they want to eliminate historic profits?
To steal the tax money paid by Hermitage by applying for a $230m tax refund
Taxes Paid vs. Tax Refund

Source: Fake lawsuits, Hermitage Fund’s companies financials 2006

47

Central Bank Confirmation – USB Bank
USB reports to the Central Bank showed Rilend and Makhaon as the two biggest depositors at USB Bank with deposits equal to taxes paid by Rilend and Makhaon in 2006

USB Bank
V.Kurochkin OOO RILEND, Moscow open account

Universal Savings Bank

Top 10 Depositors
1. Rilend 2. Makhaon 3. ... 4. ... 5. ... 6. ... 7. ... 10. ....... $75m $16m ... ... ... ... ... ...

V.Khlebnikov OOO MAKHAON, Moscow

open account

17 December 2007
Source: Reporting 0409157

01 January 2008
48

Central Bank Confirmation – Intercommerz Bank
Intercommerz Bank reports to the Central Bank showed Parfenion as the biggest depositor at Intercommerz Bank with deposits equal to taxes paid by Parfeion in 2006

Intercommerz Bank
Top 10 Depositors
V.Khlebnikov OOO PARFENION, Moscow open account

1. Parfenion $139m ... 2. ... $139m ... 3. ... ... ... 4. ... ... 5. ... 6. ... ... 7. ... ... ... ... 10. ...

13 December 2007
Source: Reporting 0409157

01 January 2008
49

The overall strategy of the perpetrators was to steal tax money
The plan achieved the result of stealing $230m of taxes from the Russian government that had been paid by Hermitage in 2006
Legal owners
HSBC PRIVATE BANK (Guernsey) LIMITED Trustee to Hermitage Fund
100% 100%

Companies stolen
HSBC PRIVATE BANK (Guernsey) LIMITED Trustee to Hermitage Fund
100% 100%

Fraudulent owners
OOO Pluton,
(Kazan, Tatarstan)

Corporate Director

HSBC MANAGEMENT (Guernsey) LIMITED Corporate Director

Corporate Director

Corporate Director

HSBC MANAGEMENT (Guernsey) LIMITED Corporate Director

Corporate Director

GLENDORA HOLDINGS LTD Cyprus 100% 100%

KONE HOLDINGS LTD Cyprus 100%

GLENDORA HOLDINGS LTD Cyprus 100% 100%

KONE HOLDINGS LTD Cyprus 100% V.Kurochkin
General Director

100%

100%

100%

General Director

General Director

General Director

General Director

General Director

V.Markelov OOO PARFENION, Novocherkassk

V.Khlebnikov OOO MAKHAON, Novocherkassk

OOO RILEND, Moscow

OOO PARFENION, Moscow

OOO MAKHAON, Moscow

OOO RILEND, Moscow

OOO PARFENION, Moscow

OOO MAKHAON, Moscow

OOO RILEND, Novocherkassk

Universal Savings Bank

Intercommerz Bank

Universal Savings Bank

Hermitage companies paid

$230 m
February 2006
in capital gain taxes to the Russian budget

Budget of Russian Federation

Perpetrators stole

$230 m
in capital gain taxes from the Russian budget

December 2007

50

Destroying the evidence of the crime – Company Liquidation
On June 5, 2008 Boily Systems Ltd filed for liquidation of the three stolen companies

OOO Pluton,
(Kazan, Tatarstan)

Boily Systems Ltd, (BVI)

Boily Systems Ltd, (BVI)

100%

100%

100%

100%

100%

100%

100%

100%

100%

V.Kurochkin OOO RILEND, Novocherkassk

V.Markelov OOO PARFENION, Novocherkassk

V.Khlebnikov OOO MAKHAON, Novocherkassk

R.Starova OOO RILEND, Khimki

R.Starova OOO PARFENION, Khimki

R.Starova OOO MAKHAON, Khimki

R.Starova OOO RILEND, Khimki

R.Starova OOO PARFENION, Khimki

R.Starova OOO MAKHAON, Khimki

Tax Authorities

Pluton stole three companies from Hermitage Fund Sep, 2007

Boily purchase three stolen companies for $750 on February 8, 2008

Boily filed for liquidation of three stolen companies on June 10th, 2008

Source: EGRUL statements

51

It is now obvious why we were a target
Because our companies paid more taxes than almost anyone else in Russia
Taxes paid by some of the leading Russian companies (2006, US$ million)

52

Interior Ministry Role in Hermitage Fraud
The interior ministry played an active role in supporting and executing the fraud against Hermitage
Moscow Interior Ministry Moscow Interior Ministry Federal Interior Ministry

Who approved and supervised the spurious cases and asset searches?

Major General A. Mihalkin Colonel A. Klevtsov
Lt. Colonel A. Kuznetzov
Raided Hermitage offices under false pretenses Supervised search where lawyer was assaulted by officers Confiscated documents later used in fraud Conducted wide ranging asset search beyond the scope of investigation

Major General I. Glukhov Colonel A. Stepantsov
Major P. Karpov
Kept custody of documents used in a fraud Threatened witnesses

Colonel of Justice A. Anichin

Active participants in the cases

Major N. Budilo
Opened new spurious cases against Hermitage companies Accepted forged documents from perpetrators to assist with fraud

Major R. Ahmedzhanov
Continued spurious cases long after it was clear that there were no tax claims

Active Participants' Role

53

The FSB also played a role
From the court documents presented by investigator Major Karpov, we learned that the opening of the Kameya case was also sanctioned by FSB Department “K” (Economic espionage department)

V. Voronin General major Head of Department "K" Federal Security Service "FSB"

A. Kuvaldin Capitan FSB

D. Vasiliev Capitan FSB

- Wrote a report requesting to open tax criminal case against Kameya, based on non-existence of Cyprus tax certificate, which they should have known existed and was in the possession of the Russian tax ministry

- Invited representative of Firestone Duncan for questioning to verify position in relation to stolen companies; - Supervised opening of spurious tax cases on behalf of FSB
54

Involvement of Russian Courts
Judges from three courts committed numerous violations of Russian judicial procedure and law in permitting their courts to issue $1.26 billion of sham judgements

Judge E. Orlova

Judge S. Alekseev

Judge M. Kuznetzov

Judge I.Salimzianov
Sham award for $575 million was issued after the following violations of Russia judicial procedure and law
• The court did not notice that the person who filed the claim was not an officer of the company he was representing (which was clearly stated in the documents filed with the court Relied on fake documents of a non-existent commercial court to award the 3 Hermitage Fund companies to Pluton

Judge E. Kim
Sham award for $312 million was issued after the following violation of Russia judicial procedure and law
• The court accepted forged agreements (with the wrong company addresses) as decisive evidence, despite the fact that the mistakes were clearly outlined in court filings

Sham awards for $372 million were issued after the following violations of Russia judicial procedure and law
• • • The court relied on photocopies of documents as opposed to the originals, as required by law; The claims were increased by 214,125% during the court hearings without arising any suspicion; The court did not take any steps to verify the authority of the lawyers appearing fraudulently on behalf of the Hermitage companies on the basis of fake powers of attorney; The court hearing lasted 5 minutes and resulted in a $372 million award

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Involvement of Lawyers
St. Petersburg
Claimant's Advocates
Advocate A. Turukhin Logos Plus Advocate K. Yakovlev Logos Plus Advocate A. Pavlov Grand Active

Kazan

Moscow
No one attended from Instar

Defendant's Advocates
E. Maltzeva

Parfenion

Advocate A. Pavlov Rilend

Advocate Y. Mayorova Mahaon

Director Director Sheshenia Parfenion Parfenion V. Markelov

Advocate Y. Mayorova

Rilend

Husband

&

Wife

All cases were conceded by so-called advocates

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Hermitage Attempts to Stop Fraud
Since 3 December 2007, we have filed 35 complaints in Russia and 7 overseas to try to stop and reverse these frauds

Hermitage activities to stop fraud
la mp Co in t Co mp la

Li

nt

Co m

Appeals

ints

tig

pl ai

at n io

Russian law enforcement agencies

Russian tax authorities

Russian government officials

Arbitration court to overturn fake judgement

International law enforcement agencies
57

We gave the Russian law enforcement agencies every chance to stop these frauds starting a month in advance in 35 different complaints
But they prevented nothing
HSBC/Hermit
lawyer complaint to Head of Internal Affairs of Interior Minist ry Y. Draguntsov

HSBC /Hermit
HSBC/Hermit
telegram to Head of Moscow Investigative Committee V. Spasennyh

Selection of complaints filed by HSBC/ Hermitage

HSBC/Hermit. complaint to Head of Investigative Committee A. Bystrykin HSBC/Hermit HSBC /Hermit complaint to Complaint to Head of Internal General Affairs of Interior Prosecutor Ministry Y. Chaika Y. Draguntsov

HSBC/Hermit HSBC/Hermit HSBC/Hermit HSBC/Hermit HSBC/Hermit secondary HSBC complaint to lawyer complaint to acomplaint to telegram to /Hermitage Head of Head of complaint to Invetigator Head of St.Petersburg letter to R.Rassohov of Investigative General Investigative Investigative Federal Tax Prosecutor Investigative Committee Committee A. Committee Service Committee A. Bystrykin Y. Chaika A. Bystrykin Lavrenko

HSBC/Hermit lawyer complaint to Head of Investigative Committee A. Bystrykin

complaint to Head of HSBC/ Hermitage Central District St.Petersburg letter to Moscow Tax Investigative Committee Service P. Vymetsu

HSBC/Hermit complaint to Head of Investigative Committee of Interior Ministry A. Anichin

Hermitage

complaint to third 19 members of complaint on Anticorruption inaction to Committee set Head of up by Investigative President Committee Medvedev

HSBC/Hermit

A. Bystrykin

3 Dec 2007

3 Dec 2007

11 Dec 2007

30 Jan 2008

13 Feb 2008

14 Feb 2008

19 Feb 2008

26 Feb 2008

3 Apr 2007

25 May 2008

7 Jun 2008

$240m $113m $36m $41m

Execution of tax fraud

3 Dec 2007

3 Dec 2007

11 Dec 2007

30 Jan 2008

13 Feb 2008

14 Feb 2008

19 Feb 2008

26 Feb 2008

3 Apr 2007

25 May 2008

7 Jun 2008

58

What happened to the complaints?
Six criminal complaints were filed December 3 – 11, 2007 by HBSC and Hermitage with the major Russian authorities
1
255-page Complaint

Yuri Chaika
2
Hermitage

255-page Complaint

Russian General Prosecutor

3

255-page Complaint

Lawyers
4

Yuri Draguntsov
255-page Complaint

Internal Affairs of Russian Interior Ministry

5

255-page Complaint

6

255-page Complaint

AlexanderBastrykin
Russian State Investigative Committee

59

What happened to the complaints?
Two of the criminal complaints filed with the Internal Affairs Department of Interior Ministry and General Prosecutor did not result in any activity at all
255-page Complaint

1

255-page Complaint

Yuri Chaika
Russian General Prosecutor
Hermitage

255-page Complaint

3

255-page Complaint

Yuri Draguntsov
Internal Affairs of Russian Interior Ministry

Russian Interior Ministry Letter (Office of Draguntsov): “We are unable to open an inquiry into an investigator when such inquiry is requested by the target of the investigator’s current work.”

60

What happened to the complaints?
The General Prosecutor’s Office and Internal Affairs Department of the Interior Ministry transferred two other complaints to the Moscow Prosecutor’s Office, who then passed the complaints to the individual in the Moscow Interior Ministry who was the target of the complaints
Investigative Department of Moscow Interior Ministry

2
Hermitage

255-page Complaint

Yuri Chaika
Russian General Prosecutor
255-page Complaint 255-page Complaint 255-page Complaint

Lawyers
4 Yuri Draguntsov
255-page Complaint 255-page Complaint

Prosecutor of Moscow
Major Pavel Karpov

Internal Affairs of Russian Interior Ministry

61

What happened to the complaints?
It turned out that authorities thought the best person to investigate the fraud was the person accused of it

Investigative Department of Moscow Interior Ministry

Investigative Department of Moscow Interior Ministry

Major Pavel Karpov

Major Pavel Karpov

Person who confiscated the documents needed for the fraud

Person investigating the fraud
62

What happened to the complaints?
The St. Petersburg branch of the Russian State Investigative Committee was unable to find any crime at all in their review of the complaint
Response to Complaint 5

• Nothing wrong happened in St. Petersburg court • Defendant fully accepted the claim • The lawyer of HSBC will not be prosecuted for filing a false accusation according to Para. 1, Article 306 of the Russian Criminal Code due to an honest misunderstanding • The request to open a criminal case is declined due to the lack of a crime

63

What happened to the complaints?
One case was ultimately opened by the Russian State Investigative Committee, but it was soon dragged down to the lowest level of the organization
Complaint 6

Russian Investigative Committee

R. Rassohov, from Major Crimes Department of Russian Investigative Committee

Opened Criminal Case against fake directors of three Russian entities of HSBC and unknown individuals

5 Feb 2008

Moscow City branch of Russian Investigative Committee

Considered the Criminal Case against fake directors of three Russian entities of HSBC and unknown individuals and made decision to drag it down

Southern District Department of Moscow City branch of Russian Investigative Committee

Lowest possible level of investigation

Appointed Mr. Gordievsky as investigator for opened criminal case 18 Feb 2008 64

What happened to the complaints?
In February 2008, as part of this newly opened case, the Russian State Investigative Committee began to question the possible suspects

Investigative Committee
questioned the officials involved

Judge Orlova Judge in Kuznetsovin St.Petersburg St.Petersburg

Investigator Yushkov

Major Pavel Karpov

Lieutenant Colonel A. Kuznetsov

etc...

65

What happened to the complaints?
In June 2008, Hermitage learned that the prime suspect, Lieutenant Colonel Artem Kuznetsov, had joined the group managing the investigation

Investigative Committee
questioned the officials involved Lieutenant Colonel A. Kuznetsov

Judge Orlova Judge in Kuznetsovin St.Petersburg St.Petersburg

Investigator Yushkov

Major Pavel Karpov

Lieutenant Colonel A.Kuznetsov

etc...

66

Complaints to the Tax Authorities
We also brought the fraud to the attention of the federal tax authorities in a number of locations
Jan 17 and Jan 25 2008

Moscow Tax Authority #25

Jan 17 and Jan 25 2008

Federal Tax Authority #7

25 Jan 2008

Moscow Tax Authority #28

Hermitage

30 April 2008

Inter-Regional Tax Authority (Khimki)

June 2008

Inter-Regional Tax Authority (Rostov / Novocherkassk)

67

What happened to the complaints?
On 17 January 2008, in response to Hermitage’s initial complaint, Moscow Tax Inspectorate No. 25 replied that the registration file of “Rilend” had been confiscated in the course of document collection for a new criminal investigation

Registration file of “Rilend” was confiscated by the District Branch of the Moscow Interior Ministry as part of the investigation under Criminal Case # 225589

68

What was the new criminal case about?
The new criminal case was a way for Mr. Markelov, one of the perpetrators of the original theft of the Hermitage companies, to destroy all of the files relating to the fraud

Complaint

Documents disappeared
Dmitry Yushkov,
Investigator of North Branch of Moscow Interior Ministry Criminal Case # 225589

Mr.Markelov, fraudster, owner of OOO "Pluton"

Registration file of Rilend seized by investigator

?

All the documents have now disappeared
69

What happened to the complaints to the tax authorities?
Two of the complaints were thrown out and never replied to

Letter on behalf of Makhaon

Hermitage and

Tax Authority #28
Letter on behalf of Parfenion

70

Moving Companies
Immediately after writing to the tax authorities, on 18 January 2008 the tax service website showed that “Rilend”, “Mahaon” and “Parfenion” had been re-registered in the remote city of Novocherkassk (Rostov region)

71

Moving Companies
Even after the tax authorities in Novocherkassk were alerted to the fraud, they still agreed to re-register the stolen companies from Moscow to Khimki
Letter alerting them to the fraud

72

We wrote to the Novocherkassk tax authorities and asked for all documents on the companies
On the same day, they refused to give us information “because it had not been received yet”, they provided this information to the perpetrators to further reregister the stolen companies February 8, 2008
February 8, 2008 Letter from the Tax Authority to HSBС Extract from the registrar provided by the Tax Authority to Pluton

“No registration documents have been received yet” 73

Moving Companies
In spite having knowledge of the fraud, the tax authorities still allowed the companies to be transferred to a new company called Boily Systems
September 11, 2007
HSBC PRIVATE BANK (Guernsey) LIMITED Trustee to Hermitage Fund
100% 100%

March 17, 2008
Boily Systems Ltd, (BVI)

OOO Pluton,
(Kazan, Tatarstan)

Corporate Director

HSBC MANAGEMENT (Guernsey) LIMITED Corporate Director

Corporate Director

GLENDORA HOLDINGS LTD Cyprus 100% 100%

KONE HOLDINGS LTD Cyprus 100% V.Kurochkin OOO RILEND, Novocherkassk

100%

100%

100%

100%

100%

100%

General Director

General Director

General Director

V.Markelov OOO PARFENION, Novocherkassk

V.Khlebnikov OOO MAKHAON, Novocherkassk

R.Starova OOO RILEND, Khimki

R.Starova OOO PARFENION, Khimki

R.Starova OOO MAKHAON, Khimki

OOO RILEND, Moscow

OOO PARFENION, Moscow

OOO MAKHAON, Moscow

74

Political Appeals
On Jan 29, 2008 at the World Economic Forum in Davos, Mr. Browder met Alexei Kudrin, the Russian Finance Minister, to inform him about the fraud and hand over a letter to Dmitry Medvedev
Bill Browder Alexei Kudrin, the Russian Finance Minister Dmitry Medvedev, the Russian Prime-Minister then

Now the President of Russia

75

Appeal to the President
Hermitage has written to each of the nineteen members of the newly created Presidential Anti-Corruption Committee, outlining this fraud and asking that it begin an immediate investigation
“Russia is a country of legal nihilism at a level ... that no European country can boast of …corruption in the official structures has a huge scale and the fight against it should become a national program.”
Presidential Anti Corruption Committee
President Medvedev

19 copies – sent to each member

-

Hermitage Letter

D. Medvedev (President) M. Varshchevsky (Member of Cabinet) Y. Chaika (General Prosecutor) A. Bastrykin (First Deputy General Prosecutor) A. Bortnikov (Director of the FSB) L. Bruichovy (Presidential Aide) A. Dvorkovich (Presidential Aide) V. Zorkin (Head of the Russian Constitutionl Court) A. Konovalov (Minister of Justice) A. Ivanov (Head of the Supreme Arbitration Court)

-

A. Kycheren (Member of the Social Chamber) V. Lebedev (Head of the Supreme Court) O. Markov (Presidential Aide) S. Stepashin (Head of the Audit Chamber) K. Chuichenko (Presidential Aide) E. Nabiulina (Minister of Economic Development) S. Naryshkin (Head of the Presidential Administration) R. Nurgaliev (Minster of the Interior) S. Sobyanin (Deputy Prime Minister)

76

Some Legal Relief
HSBC/Hermitage have been able to reverse the fraudulent claims against the stolen companies when they have direct control over the litigation
Fake court award for $ 307m against Rilend

Hermitage learned about fake case
18 Oct 2007

Cassation appeal
21 Dec 2007

Cassation won
29 Jan 2008

Fake award nullified
13 May 2008

3 Sep 2007

Fake court award for $ 70 m against Machaon

Hermitage learned about fake case
18 Oct 2007

Cassation appeal
28 Dec 2007

Cassation won
14 Feb 2008

Fake award nullified
18 Apr 2008

3 Sep 2007

Fake court award for $ 0.1 m against Parfenion

Hermitage learned about fake case
18 Oct 2007
Fake court award for $ 575 m against Parfenion
13 Nov 2007

St Petersburg Arbitration Court
Fake award nullified
11 June 2008

Cassation appeal
16 Jan 2008

Cassation won
4 March 2008

21 Sep 2007

Hermitage learned about fake case Cassation appeal
20 March 2008
22 Apr 2008

Cassation won
1 July 2008

Kazan Arbitration Court

Fake court award for $ 312 m against Rilend
6 Dec 2007

Hermitage learned about Cassation Cassation fake case appeal won
20 March 2008
5 May 2008 9 June 2008

Moscow Arbitration Court

77

Global Law Enforcement
International law enforcement agencies have also opened investigations
Date Jurisdiction Action and Result

5 June 2008
Cyprus

Criminal Complaint Filed; Investigation Opened

20 May 2008
Guernsey Police

Criminal Complaint Filed; Investigation Opened

9 July 2008
British Virgin Islands

Freezing and Disclosure Order re Boily Systems Ltd.; Order GRANTED on 10 July 2008 Meeting & Discussion; Vetting File Opened

3 April 2008
United Kingdom

78

Disclaimer
The information is based on data obtained from publicly available sources, which have not been verified by Hermitage Capital Management Limited, or any of its respective associates or affiliates. As a result of the difficulty in obtaining reliable data in Russia, we do not represent this information to be accurate and complete and we do not accept any responsibility for the reasonableness of any conclusions based upon such information.

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