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

“We were notified by the Immigration Service that the CEO

Lieutenant Colonel Artem Kuznetsov
Moscow Interior Ministry
Department of Tax Crime
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 Hermitage Offices Items Taken Allegations
Moscow in Moscow during Search against
1 Server Kameya

$44 million of
7 computers underpayment in
25 officers, led by dividend
Lieutenant Colonel withholding tax;
Kuznetsov criminal
investigation

5 boxes of documents

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 Firestone Duncan Items Taken during Search
Moscow Moscow Office 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 Was Was fined Hospitalized
Was
Duncan tried arrested 15,000 for 2 weeks
beaten up
to stop the Rubles
confiscation of
unrelated
documents
belonging to
other clients

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 Hermitage's criminal

Hermitage's tax lawyer
civil lawyer lawyer
Hermitage In the same week the
His house burglarized In the week of his appointment
Office apartment of tax lawyer of
Some money was taken his briefcase was stolen
Raid Hermitage was broken into,
with essential valuable from his car; it was found in
nothing was taken
items left intact the police station 5 hours later

Two weeks June 4,

Week of June 11, 2007
before raid 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

Request for Clarification from Official Confirmation of Tax Rate from

Kameya’s Russian Tax Counsel
... given that the sole shareholder the Russian Ministry of Finance
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

Request for Clarification from Official Confirmation of Tax Rate from

Kameya’s Russian Tax Counsel
... given that the sole shareholder the Federal Tax Service
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 Actual Tax status per
Assessment
Allegation 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
Taxes paid by some of the leading Russian companies
$250
(2006, US$ million)
$232

$200 $190

$158
$150 $135 $131
USD mln $130

$103 $97
$100
$71
$57
$50 $42

$0

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Source: Companies’ financial statements, and St Petersburg newspaper “ Versia v Pitere” 25 June 2007
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 Step 2 Step 3 Step 4 Step 5

Company Tax Company Tax Interior
files Tax Authority has a chance Authority Ministry
Returns Audit to address comes up Officials
concerns with claim get
involved
if claim is
Excerpts from Russia’s Tax Code: unpaid
• 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 Step 2 Step 3 Step 4 Step 5

Company Tax Company Tax Interior
files Tax Authority has a chance Authority Ministry
Returns Audit to address comes up Officials
concerns with claim 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 Target of Asset Search

HSBC PRIVATE BANK
(Guernsey) LIMITED
International Advising Advising
Investor Client Client
Hermitage Capital
Trustee to Hermitage Fund
100%
100% 100%

Cyprus Corporate HSBC MANAGEMENT Corporate

Holding Director (Guernsey) LIMITED Director
Company GLENDORA KONE
HOLDINGS Corporate Director HOLDINGS
LTD LTD
Cyprus Cyprus

100% 100% 100% 100%

General Director General Director General Director

OOO Kameya,
Moscow OOO RILEND, OOO PARFENION, OOO MAKHAON,
Moscow Moscow 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 HSBC MANAGEMENT Corporate

Director (Guernsey) LIMIT ED Director
GLENDORA KONE
HOLDINGS Corporate Direc tor HOLDINGS
LTD LTD
Cyprus Cyprus

100% 100% 100%

Lawsuit
Lawsuit
General Director General Director General Director
OOO RILEND, OOO PARFENION, OOO MAKHAON,
Moscow Moscow 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
Power of
12 May OOO
OOORILEND,
RILEND, Attorney Logos Plus
Moscow
Moscow
2005
Regional
representative $$$
Kozlov M.V.

General Director
Power of
21 December OOO
OOORILEND,
RILEND, Attorney Foregone profit Logos Plus
Moscow
Moscow
2005
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" Parfenion
Power of Attorney was formed
to Mr. Kozlov

17 Jan 12 Apr
Four months before!
2005 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
Rilend's corporate Corporate seal
seal was produced

12 May 18 May
2005 Six days before! 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
Advocate
Trustee to Hermitage Fund Not A.A.Pavlov
rep. of OOO Rilend

100% 100% aware

Corporate HSBC MANAGEMENT Corporate
Director (Guernsey) LIMIT ED Director
GLENDORA KONE
HOLDINGS Corporate Director HOLDINGS
LTD LTD
Cyprus Cyprus E.A.Maltzeva
rep of OOO Parfenion
100% 100% 100%

General Director General Director General Director

OOO RILEND, OOO PARFENION, OOO MAKHAON,
Moscow Moscow 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

Fake POAs to lawyer

“Hereby, the defendant
from Rilend, Parfenion confirms that he
and Mahaon understands the charges,
doesn’t have any objections
Advocate and fully accepts the
A.A.Pavlov claims”
rep. of OOO Rilend
Advocate Pavlov, attorney
for the defendant

“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
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, 350
Moscow $308
300

250

200

Logos Plus
mln
OOO PARFENION, US$
150
Moscow
100
$68
50
$0.1
0

OOO MAKHAON, Award against Parfenion Award

Award against
against Makhaon
Mahaon Award against Rilend
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 OOO Pluton,

(Guernsey) LIMITED (Kazan, Tatarstan)

Trustee to Hermitage Fund

100% 100%

Corporate HSBC MANAGEMENT Corporate

Director (Guernsey) LIMIT ED Director
GLENDORA KONE
HOLDINGS 100% 100% 100%
Corporate Direc tor HOLDINGS
LTD LTD
Cyprus Cyprus

100% 100% 100%

General Director General Director General Director General Director General Director
General Director
OOO RILEND, OOO PARFENION, OOO MAKHAON, OOO RILEND, OOO PARFENION, OOO MAKHAON,
Moscow Moscow Moscow Moscow Moscow 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 V.Markelov V.Khlebnikov

OOO RILEND, OOO PARFENION, OOO MAKHAON,

Moscow Moscow 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 V. Markelov V.Khlebnikov

General Director General Director General Director
OOO RILEND, OOO PARFENION, OOO MAKHAON,
OOO RILEND, OOO PARFENION, OOO MAKHAON,
Moscow Moscow Moscow
Moscow Moscow 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

Original Certificate of Original Certificate of

Corporate Seal Registration with the Registration with Tax Original Charter
State Registrar Authorities

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
Major Pavel Karpov documents and electronic copies of
documents of Mahaon, Parfenion and Rilend
… These documents and seals of these
companies were not given to anybody.

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

4 June September Today

2007 2007 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
Examination Examination and
Fake and Court decision
questioning of
questioning of on documents outsource contractors
Criminal employees of withdrawal to justify enhancement
F&D and from the banks of the case
case Hermitage
Major Pavel Karpov

Fishing Information requests on cash accounts and securities

About 50 Interior
expedition Ministry officers
balances of Russian and foreign Hermitage advised entities
led by A.Kuznetzov
Lieutenant Colonel raided offices of
Hermitage
Artem Kuznetsov Moscow and its
account adviser
Firestone &
Duncan tree trucks
Filed groundless report of documents
requesting the criminal confiscated
case to be opened

May 2007 4 Jun

2007

Fraud
execution Substitution Substitution Fake Execution
Forgery of real of legitimate 9 fake lawsuits
orders
2005 directors shareholders lawsuits awarded
issued by
agreements with criminal with the fake filed worth
Advocate Pavlov & Co fake ones one US$1.26 bln 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 V.Markelov V.Khlebnikov

OOO RILEND, OOO PARFENION, OOO MAKHAON,

Moscow Moscow 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:
Instar files Rilend lawyer Ms. Mayorova
Early Sep 2007 $312m lawsuit appointed by criminals “admits
against Rilend liability” and judge awards
Search for Instar $312m
Hermitage’s
assets ended
with no result,
but… 22 Oct 2007 13 Nov 2007

Kazan:
Grand Active files New Parfenion director Mr.
$575m lawsuit Markelov (convicted of murder in
against Parfenion 2001) “admits liability” and judge
awards Grand Active $575m

36
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

General Director
16 Nov Instar
OOO RILEND,
2005 Moscow
Deputy General
Director $$$ Director
Kurochkin V. Plaksin G.

General Director
5 May
OOO RILEND, Foregone profit Instar
2006 Moscow
Deputy General
Director $$$ Director
Kurochkin.V. 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
Fake agreement was sealed with an
registered in
invalid address
Moscow

5 May 16 Nov
7 months
2005 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

General Director
19 Sep Power of Grand Active
2005 OOO Parfenion, Attorney
Moscow
Regional General
representative $$$ Director
Kozlov M.V. Sheshenia

14 Aug General Director

Power of
2006 OOO Parfenion, Attorney Foregone profit Grand Active
Moscow
Regional General
representative $$$ Director
Kozlov M.V. Sheshenia

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 Appointment of
the General Director of Mr. Sheshenia as a
Grand Active General Director

19 Sep 3 July
2005 2 Years after! 2007
40
Total fake court orders
In total, fake judgments were issued in 3 courts of US$ 1.26 billion

In total 15 claims were files

St.Petersburg in St.Petersburg, Kazan and
Moscow Moscow that resulted in
Kazan 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
New account
OOO RILEND, 17 December 2007 Bank formed: 28.02.2002
Novocherkassk
Region: Moscow
Equity: $1.5 mln
Total Assets: $25.6m*
V.Khlebnikov
New account Ranked No. 920 **
OOO MAKHAON, 17 December 2007 Universal
Novocherkassk
Savings Bank

V.Markelov
Bank formed: 10.12.1991
New account Region: Moscow
OOO PARFENION,
Novocherkassk
13 December 2007 Intercommerz Equity: $11.8m
Total Assets: $571m*
Bank Ranked No. 432**

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)
42
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

Size of Corporate Accounts held at the Intercommerz Bank

US$ mln.

+$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
Parfenion (US$ Mln.)

Rilend

US$
mln
=
Makhaon
=

Profit of Fake Claims Profit of Fake Claims Profit of Fake Claims

2006 awarded to the 2006 awarded to the 2006 awarded to the
Company Company Company
(RUB 13.88 Bln.) (RUB 7.57 Bln.) (RUB 1.67 Bln.)
45
Source: Fake lawsuits, Hermitage Fund’s companies financials 2006
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

Universal
USB Bank
Savings Bank

V.Kurochkin
Top 10
open
Depositors
OOO RILEND, account
Moscow 1. Rilend $75m
2. Makhaon $16m
3. ... ...
4. ... ...
5. ... ...
V.Khlebnikov 6. ... ...
open
7. ... ...
OOO MAKHAON, account 10. ....... ...
Moscow

17 December 2007 01 January 2008

Source: Reporting 0409157
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
1. Parfenion $139m
V.Khlebnikov
open 2. ... ...
$139m
3. ... ...
OOO PARFENION, account ...
Moscow 4. ... ...
5. ... ...
6. ... ...
7. ... ... ...
10. ... ...

13 December 2007 01 January 2008

Source: Reporting 0409157

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 Companies stolen Fraudulent owners
HSBC PRIVATE BANK HSBC PRIVATE BANK OOO Pluton,
(Guernsey) LIMITED (Guernsey) LIMITED (Kazan, Tatarstan)

Trustee to Hermitage Fund Trustee to Hermitage Fund

100% 100% 100% 100%

Corporate HSBC MANAGEMENT Corporate Corporate HSBC MANAGEMENT Corporate

Director (Guernsey) LIMITED Director Director (Guernsey) LIMITED Director
GLENDORA KONE GLENDORA KONE 100% 100% 100%
HOLDINGS Corporate Director HOLDINGS HOLDINGS Corporate Director HOLDINGS
LTD LTD LTD LTD
Cyprus Cyprus Cyprus Cyprus

100% 100% 100% 100% 100% 100%

V.Kurochkin V.Markelov V.Khlebnikov

General Director General Director General Director General Director General Director General Director
OOO RILEND, OOO PARFENION, OOO MAKHAON, OOO RILEND, OOO PARFENION, OOO MAKHAON, OOO RILEND, OOO PARFENION, OOO MAKHAON,
Moscow Moscow Moscow Moscow Moscow Moscow Novocherkassk Novocherkassk Novocherkassk

Intercommerz
Universal Bank Universal
Savings Bank Savings Bank

Hermitage companies Perpetrators

paid stole
$230 m Budget of $230 m
in capital gain taxes to
Russian Federation in capital gain taxes from
the Russian budget the Russian budget
February December
2006 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, Boily Systems Ltd, Boily Systems Ltd,

(Kazan, Tatarstan)
(BVI) (BVI)

100% 100% 100%

100% 100% 100% 100% 100% 100%

R.Starova R.Starova R.Starova

V.Kurochkin V.Markelov V.Khlebnikov R.Starova R.Starova R.Starova
OOO RILEND, OOO PARFENION, OOO MAKHAON,
OOO RILEND, OOO PARFENION, OOO MAKHAON, OOO RILEND, OOO PARFENION, OOO MAKHAON, Khimki Khimki Khimki
Novocherkassk Novocherkassk Novocherkassk Khimki Khimki Khimki
Tax Authorities

Pluton stole Boily purchase Boily filed for

three companies three stolen liquidation of
from Hermitage companies for three stolen
Fund Sep, 2007 $750 on February companies on
8, 2008 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 Moscow Interior Federal Interior
Ministry Ministry Ministry

Major General Major General Colonel of Justice

Who approved A. Mihalkin I. Glukhov A. Anichin
and supervised the
spurious cases and
asset searches? Colonel Colonel
A. Klevtsov A. Stepantsov

Active
Lt. Colonel Major Major Major
participants in A. Kuznetzov P. Karpov N. Budilo R. Ahmedzhanov
the cases
Raided Hermitage offices Kept custody of Opened new Continued spurious
under false pretenses documents used in a spurious cases cases long after it was
fraud against Hermitage clear that there were no
Supervised search where companies tax claims
lawyer was assaulted by Threatened
Active officers witnesses Accepted forged
Participants' documents from
Confiscated documents later perpetrators to
Role used in fraud assist with fraud

Conducted wide ranging asset

search beyond the scope of
investigation
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
- 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
D. Vasiliev
Capitan FSB
- 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 Judge Judge
E. Orlova S. Alekseev M. Kuznetzov
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
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
55
Involvement of Lawyers
St. Petersburg Kazan Moscow

No one
Claimant's attended
Advocates from
Instar
Advocate
Advocate Advocate A. Pavlov
A. Turukhin K. Yakovlev Grand Active
Logos Plus Logos Plus

Defendant's
Advocates Advocate
Advocate Advocate
Y. Mayorova
E. Maltzeva A. Pavlov Director Y. Mayorova
Mahaon Director
Parfenion Rilend Sheshenia
Parfenion Rilend
Parfenion
V. Markelov
Husband & Wife

All cases were conceded by so-called advocates 56

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

t
p lain Co
mp
m
Co

Li
nt

la ints

tig
ai
pl

at
m

Appeals

io
Co

n
Russian law Russian Arbitration court International law
Russian tax government
enforcement to overturn fake enforcement
authorities
agencies officials judgement 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 complaint to
HSBC/Hermit. HSBC/Hermit
lawyer HSBC/ Head of
complaint to telegram to
complaint to Hermitage Central District
Head of Head of Moscow St.Petersburg
Head of letter to
Investigative Investigative
Investigative Committee Moscow Tax Investigative
Committee Committee
Selection of A. Bystrykin
Committee A.
Bystrykin
V. Spasennyh Service
P. Vymetsu
HSBC/Hermit
HSBC/Hermit
complaint to
Hermitage
complaint to
HSBC/Hermit
third
complaints HSBC/Hermit HSBC /Hermit
complaint to Complaint to
HSBC/Hermit HSBC/Hermit HSBC/Hermit
lawyer
HSBC
acomplaint to telegram to /Hermitage
HSBC/Hermit
complaint to
secondary
complaint to
Head of
Investigative
19 members of complaint on
Anticorruption inaction to
Head of Committee set
Head of Committee of
filed by General
Prosecutor
Head of Internal
Affairs of Interior
complaint to Invetigator
General R.Rassohov of Investigative
letter to
Federal Tax
St.Petersburg
Investigative
Head of
Investigative Interior up by
President
Head of
Investigative
Ministry Prosecutor Investigative Committee Ministry A.
A. Committee
HSBC/ Y. Chaika Y. Draguntsov
Y. Chaika Committee A. Bystrykin
Service Committee
Lavrenko A. Bystrykin Anichin
Medvedev Committee
A. Bystrykin

Hermitage
3 Dec 3 Dec 11 Dec 30 Jan 13 Feb 14 Feb 19 Feb 26 Feb 3 Apr 25 May 7 Jun
2007 2007 2007 2008 2008 2008 2008 2008 2007 2008 2008

$240m
$113m

$36m $41m
Execution of
tax fraud 3 Dec 3 Dec 11 Dec 30 Jan 13 Feb 14 Feb 19 Feb 26 Feb 3 Apr 25 May 7 Jun
2007 2007 2007 2008 2008 2008 2008 2008 2007 2008 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
255-page
1 Complaint

Yuri Chaika
255-page Russian General
2 Complaint Prosecutor

Hermitage
255-page
3 Complaint

Lawyers Yuri Draguntsov

255-page Internal Affairs of
4 Complaint
Russian Interior Ministry

5 255-page
Complaint

AlexanderBastrykin
6 255-page
Russian State Investigative
Complaint
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
255-page
1 Complaint
255-page
Complaint
Yuri Chaika
Russian General
Prosecutor
Hermitage

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

Yuri Chaika Investigative

2 255-page
Russian General Department of
Complaint 255-page
Prosecutor Complaint Moscow Interior
Hermitage 255-page Ministry
Complaint
255-page
Complaint
Lawyers Prosecutor
Yuri Draguntsov
255-page of Moscow
Complaint
4 255-page Internal Affairs of
Complaint Major
Russian Interior Ministry Pavel Karpov

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 Investigative
Department of Department of
Moscow Interior Moscow Interior
Ministry Ministry

Major Major
Pavel Karpov Pavel Karpov

Person who confiscated the Person investigating the

documents needed for the fraud
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
Opened Criminal Case
Russian against fake directors
Investigative of three Russian entities
of HSBC and unknown
Committee individuals
R. Rassohov, from
Major Crimes
Department of Russian 5 Feb 2008
Investigative Committee

Considered the Criminal Case

Moscow City branch of against fake directors of three
Russian entities of HSBC and
Russian Investigative unknown individuals and
Committee made decision to drag it down

Southern District Department

of Moscow City branch of
Lowest possible Appointed Mr.
Gordievsky as
investigator for
Russian Investigative
Committee
level of investigation 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 Major Lieutenant

Investigator
in Kuznetsovin Pavel Colonel etc...
Yushkov
St.Petersburg St.Petersburg Karpov A. Kuznetsov

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 Major Lieutenant

Investigator
in Kuznetsovin Pavel Colonel etc...
Yushkov
St.Petersburg St.Petersburg Karpov A.Kuznetsov

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

Inter-Regional Tax Authority

30 April 2008
(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
Criminal
Dmitry Yushkov, Case # Registration file
Mr.Markelov,
fraudster,
Investigator of North Branch
of Moscow Interior Ministry
225589 of Rilend
seized by investigator
?
owner of OOO "Pluton"

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 March 17, 2008
HSBC PRIVATE BANK OOO Pluton, Boily Systems Ltd,
(Guernsey) LIMITED (Kazan, Tatarstan) (BVI)
Trustee to Hermitage Fund

100% 100%

Corporate HSBC MANAGEMENT Corporate

Director (Guernsey) LIMITED Director
GLENDORA KONE 100% 100% 100% 100% 100% 100%
HOLDINGS Corporate Director HOLDINGS
LTD LTD
Cyprus Cyprus

100% 100% 100%

V.Kurochkin V.Markelov V.Khlebnikov R.Starova R.Starova R.Starova

General Director General Director General Director
OOO RILEND, OOO PARFENION, OOO MAKHAON, OOO RILEND, OOO PARFENION, OOO MAKHAON, OOO RILEND, OOO PARFENION, OOO MAKHAON,
Moscow Moscow Moscow Novocherkassk Novocherkassk Novocherkassk Khimki Khimki Khimki

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
Alexei Kudrin, Dmitry Medvedev, the
Bill Browder the Russian Finance Russian Prime-Minister
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

- D. Medvedev (President) - A. Kycheren (Member of the Social Chamber)

- M. Varshchevsky (Member of Cabinet)
- Y. Chaika (General Prosecutor)
19 copies – - A. Bastrykin (First Deputy General Prosecutor)
sent to - A. Bortnikov (Director of the FSB)
each - L. Bruichovy (Presidential Aide)
member - A. Dvorkovich (Presidential Aide)
- V. Zorkin (Head of the Russian Constitutionl
Court)
- A. Konovalov (Minister of Justice)
- A. Ivanov (Head of the Supreme Arbitration
Hermitage Letter Court)
- 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 Hermitage
for $ 307m against learned about
Rilend Cassation Cassation Fake award
fake case appeal won nullified

3 Sep 21 Dec 29 Jan 13 May

18 Oct
2007 2007 2008 2008
2007
Fake court award Hermitage
for $ 70 m against learned about
Machaon Cassation Cassation Fake award
fake case appeal won nullified

3 Sep 28 Dec 14 Feb 18 Apr

2007
18 Oct
2007 2008 2008 St Petersburg
2007
Fake court award Hermitage Arbitration Court
for $ 0.1 m against learned about
Parfenion Cassation Cassation Fake award
fake case appeal won nullified

21 Sep 16 Jan 4 March 11 June

18 Oct
2007 2008 2008 2008
2007
Hermitage
Fake court award
for $ 575 m learned about
against Parfenion fake case Cassation
appeal
Cassation
won
Kazan
13 Nov 22 Apr 1 July
2007 20 March 2008 2008 Arbitration Court
2008

Fake court award

Hermitage
for $ 312 m learned about Cassation
Cassation
against Rilend fake case appeal won
Moscow
6 Dec 5 May 9 June
2007 20 March 2008 2008
Arbitration Court 77
2008
Global Law Enforcement
International law enforcement agencies have also opened investigations

Date Jurisdiction Action and Result

Criminal Complaint Filed;

5 June 2008
Investigation Opened
Cyprus

Criminal Complaint Filed;

20 May 2008
Investigation Opened
Guernsey Police

Freezing and Disclosure Order

9 July 2008 re Boily Systems Ltd.; Order
GRANTED on 10 July 2008
British Virgin Islands

Meeting & Discussion;

3 April 2008
Vetting File Opened
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.

79