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

Persecution of Hermitage in Russiain order to steal US$ 230 million

from the Russian people

July 20081

222

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.”

3

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

?

Visa withdrawal:New application

http://www.ruvr.ru/files/Image/Editiors/bulgaria/Russia/Goverment/Dmitry-Medvedev-1.JPG

http://images.google.co.uk/imgres?imgurl=http://media3.washingtonpost.com/wp-dyn/content/photo/2006/07/12/PH2006071202053.jpg&imgrefurl=http://www.washingtonpost.com/wp-dyn/content/article/2006/07/12/AR2006071201782.html&h=145&w=228&sz=20&hl=en&start=7&tbnid=8pJ9qO2FyRiopM:&tbnh=69&tbnw=108&prev=/images%3Fq%3Dbill%2Bbrowder%26gbv%3D2%26svnum%3D10%26hl%3Den%26sa%3DG

No visa was issued. Instead, on 17 February 2007, Artem

Kuznetsov, a Lieutenant Colonel of the Interior Ministry, called Hermitage:

“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.”

Lieutenant Colonel Artem KuznetsovMoscow Interior MinistryDepartment of Tax Crime

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

Visa Withdrawal –Visit from the Interior Ministry

44

5

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 KameyaInterior Ministry of

MoscowHermitage Offices

in MoscowItems Taken

during Search1 Server

7 computers

5 boxes of documents

Allegations againstKameya

$44 million of underpayment in

dividend withholding tax;

criminal investigation

25 officers, led by Lieutenant Colonel

Kuznetsov

Raid on Hermitage Office

66

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 SearchAll servers & computers

25 officers, reporting to Lieutenant Colonel

Kuznetzov A.K. 2 vans full of client documents were taken away

Raid on Firestone Duncan Office

77

Lawyer Victor Paryugin, from

Firestone Duncan tried

to stop the confiscation of

unrelated documents

belonging to other clients

Was beaten up

Was arrested

Was fined15,000 Rubles

Hospitalizedfor 2 weeks

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

Raid on Firestone Duncan Office

8

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

Targeting Hermitage Lawyers

Two weeksbefore raid

Hermitage's long-timecivil lawyer

His

house

burglarizedSome

money

was

takenwith

essential

valuableitems

left intact

June 4,2007

HermitageOfficeRaid

Week of June 11, 2007

Hermitage's criminallawyer

In

the

week

of

his appointmenthis briefcase was stolen

from

his

car; it was found inthe police

station

5 hours later

Hermitage's tax lawyerIn the same week the

apartment of

tax

lawyer

ofHermitage

was broken

into,nothing

was

taken

9

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%

What was the basis for these raids?

10

The Russian Ministry of Finance confirmed the correctness of the

tax rate 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

... given that the sole shareholder 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

Request for Clarification from Kameya’s Russian Tax Counsel

Official Confirmation of Tax Rate from the Russian Ministry of Finance

Were the Dividend Withholding Taxes paid correctly?

10

11

The Federal Tax Service also confirmed the correctness of the tax rate applied

Request for Clarification from Kameya’s Russian Tax Counsel

Official Confirmation of Tax Rate from the Federal Tax Service... given that the sole shareholder

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

Were the Dividend Withholding Taxes paid correctly?

12

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

4.0

-1,145-1,500

-1,000

-500

0

500

1,000

Interior Ministry TaxAssessment

Actual Tax status perFederal Tax Services

mln Rubles

Allegation

Did Kameya

owe any money to the Federal Tax Service?

13

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

Did Kameya

owe any money to the Federal Tax Service?

14

In contrast to what the investigators were alleging, Kameya

was one of the largest tax payers in Russia

Source: Companies’

financial statements, and St Petersburg newspaper “

Versia

v Pitere”

25 June 2007

Was Kameya

a good taxpayer?

$232

$190

$158

$135 $131 $130

$103 $97

$71$57

$42

$0

$50

$100

$150

$200

$250

VTBGazp

romba

nk

TMK

Kamey

a

Baltika

Aeroflo

tRost

eleco

m

GAZ

Avtova

z X5W

imm Bill

Dann

USD mln

(2ndlar

gest

bank

)(T

op-fi

ve B

ank)

(Larg

est Pipe

Mak

er)

(Larg

est B

rewer)

(2ndLarg

est A

utomak

er)(L

argest

Auto

maker)

(Larg

est R

etaile

r)(L

argest

Dair

y Mak

er)

(Lon

g-dist

ance

Monop

oly)

(Larg

est A

irline

)

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

15

If there had been a legitimate tax claim, there is a normal procedure for this to be dealt with

Company files Tax Returns

Tax Authority

Audit

Tax Authority comes up with claim

Interior Ministry Officials

get involved if claim is

unpaid

Step 1 Step 2 Step 3 Step 4

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

Company has a chance

to address concerns

Step 5

How should the process really work?

16

Company has a chance

to address concerns

The Interior Ministry launched an investigation completely leapfrogging the normal process of investigation concerning tax payments

Company files Tax Returns

Tax Authority

Audit

Tax Authority comes up with claim

Interior Ministry Officials

get involved if tax is unpaid

Step 1 Step 2 Step 3 Step 4 Step 5

How should the process really work?

17

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

If taxes weren’t the real target, what was?

Colonel lieutenantArtem Kuznetsov

Subpoena of all bank accounts and documentsrelated to Hermitage fund assets

14, 27 June 2007 26 July 200717 July 2007 28 August 2007

18

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 SearchHSBC PRIVATE BANK

(Guernsey) LIMITED

Trustee to Hermitage Fund

GLENDORAHOLDINGS

LTDCyprus

KONEHOLDINGS

LTDCyprus

OOO RILEND,Moscow

OOO PARFENION,Moscow

OOO MAKHAON,Moscow

100% 100%

100% 100% 100%

General Director General Director General Director

Corporate Director

Corporate Director

Hermitage Capital

OOO Kameya,Moscow

CyprusHolding

Company

InternationalInvestor

AdvisingClient

AdvisingClient

100%

100%

HSBC MANAGEMENT(Guernsey) LIMITED

Corporate Director

What was the real aim of the investigation?

19

HSBC PRIVATE BANK(Guernsey) LIMITED


GLENDORAHOLDINGS

LTDCyprus

KONEHOLDINGS

LTDCyprus

OOO RILEND,Moscow


OOO MAKHAON,Moscow

100% 100%

100% 100% 100%


Corporate Director

Corporate Director


Corporate Direc tor

Lawsuit

Lawsuit

Lawsuit

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

US$500 mln claims in total!

Next, mysterious lawsuits started appearing

OOO RILEND,Moscow

OOO RILEND,Moscow

OOO RILEND,Moscow

General Director

Logos Plus

$$$

OOO RILEND,Moscow

General Director

Logos Plus

$$$

Foregone profit

RegionalrepresentativeKozlov M.V.

Power ofAttorney


Power ofAttorney

20

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

12 May 2005

21 December 2005

Fake agreements

Fake liabilities

What did these lawsuits allege?

21

No, the agreements that the lawsuits were based on never existed. The Hermitage Fund never did business with any company named Logos Plus

Was there any basis to these lawsuits?

22

Parfenion "issued"Power of Attorney

to Mr. Kozlov

Parfenionwas formed

17 Jan2005

12 Apr2005

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

Four months before!

The people who forged the agreements made numerous mistakes

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 signedand "stamped" byRilend's corporate

seal

Rilend'sCorporate sealwas produced

12 May2005

18 May2005Six days before!

23

“Mr. Strazhev,”

the director of Logos Plus who filed the lawsuits against HSBC and Hermitage appeared before the court using a stolen passport

The person suing the Hermitage Companies did not exist

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

24

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



GLENDORAHOLDINGS

LTDCyprus

KONEHOLDINGS

LTDCyprus

OOO RILEND,Moscow


OOO MAKHAON,Moscow

100% 100%

100% 100% 100%


Corporate Director

Corporate Director


Corporate Director

Notaware

E.A.Maltzevarep of OOO Parfenion

AdvocateY.M Mayorova

rep. of OOO Mahaon

AdvocateA.A.Pavlov

rep. of OOO Rilend

Unknown lawyers showed up on the scene

25

These three lawyers fully acknowledged and accepted all the claims

Fake POAs to lawyer from Rilend, Parfenion

and Mahaon

“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

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

AdvocateA.A.Pavlov

rep. of OOO Rilend

Unknown lawyers showed up on the scene

26

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

million

OOO RILEND,Moscow


OOO MAKHAON,Moscow

Logos Plus

US$376 million

St.Peterburgs Court Awards against Hermitage Fund companies on fake allegations

$68

$308

$0.10

50

100

150

200

250

300

350

Award against Parfenion Award against Mahaon Award against Rilend

mln US$

26

Award against Makhaon

27

Because HSBC’s name had been fraudulently wiped off the companies’ share registrar and replaced by a new company called OOO Pluton

How did these lawyers end up representing Hermitage Fund companies without being instructed by HSBC -

the Hermitage Fund Trustee?



GLENDORAHOLDINGS

LTDCyprus

KONEHOLDINGS

LTDCyprus

OOO RILEND,Moscow


OOO MAKHAON,Moscow

100% 100%

100% 100% 100%


Corporate Director

Corporate Director


Corporate Direc tor

OOO RILEND,Moscow


OOO MAKHAON,Moscow

100% 100% 100%


OOO Pluton,(Kazan, Tatarstan)

27

Pluton

was owned by a man named Victor Markelov

V. Markelov

OOO RILEND,Moscow


OOO MAKHAON,Moscow

100% 100% 100%

V.Kurochkin V.Markelov V.Khlebnikov


100%

Who owned Pluton?

28

29

It turns out that Victor Markelov

is a 41 year old Saratov resident convicted of murder in 2001

Who is Victor Markelov?

29

30

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

OOO RILEND,Moscow


OOO MAKHAON,Moscow

OOO RILEND,Moscow


OOO MAKHAON,Moscow

General Director General DirectorGeneral DirectorV. Kurochkin V. Markelov V.Khlebnikov

30

31

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

32

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 …

Documentsneeded to change

the ownership

Corporate SealOriginal Certificate ofRegistration with the

State RegistrarOriginal Charter

Original Certificate ofRegistration with Tax

Authorities

How could ownership be transferred?

33

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)

Major Pavel Karpov

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.

Who had all of these documents?

4 June2007

Interior

Ministrytakes

documentsduring

the

raid

Fraudulent

changeof

ownership

anddirectors

September2007

Today2008

Documents

stillheld

by

theInterior

Ministry

Colonel lieutenantArtem Kuznetsov

34

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

FakeCriminal

case

Fishingexpedition

Fraudexecution

About 50 InteriorMinistry officers

led by A.Kuznetzovraided offices of

HermitageMoscow and itsaccount adviser

Firestone &Duncan tree trucks

of documentsconfiscated

4 Jun2007

Examinationand

questioning

ofemployees

ofF&D andHermitage

Court

decisionon

documentswithdrawal

from

the

banks

Examination

andquestioning

ofoutsource

contractorsto

justify

enhancementof

the

case

Information

requests

on

cash

accounts

and

securitiesbalances

of

Russian

and

foreign

Hermitage

advised

entities

9 fakelawsuits

filed

Forgery of2005

agreements

Substitutionreal

directorswith

criminalfake

ones

Substitutionof legitimateshareholderswith

the

fakeone

Fakelawsuitsawarded

worthUS$1.26 bln

Executionorders

issued

bythe

court

Lieutenant ColonelArtem Kuznetsov

May 2007

Major Pavel Karpov

Filed

groundless

reportrequesting

the

criminalcase

to

be

opened

Advocate Pavlov & Co

No, there were no assets or cash in the stolen Hermitage Fund companies in Russia

Did their plan succeed?

OOO RILEND,Moscow


OOO MAKHAON,Moscow

100% 100% 100%



35

… we learned in late March 2008 that the perpetrators had continued filing bogus cases even after they did not find assets

However the perpetrators did not stop their activities…

Early Sep 2007Search for

Hermitage’s assets ended

with no result,but…

Instar files $312m lawsuit against Rilend

Rilend lawyer Ms. Mayorova appointed by criminals “admits

liability” and judge awards Instar $312m

19 Oct 2007 14 Nov 2007

Moscow:

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

22 Oct 2007 13 Nov 2007

Kazan:

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

16 Nov 2005

Fake agreements

Fake liabilities for $ 312 m

5 May 2006

OOO RILEND,Moscow

General DirectorInstar

OOO RILEND,Moscow

General Director

$$$

Foregone profit

DeputyDirector

Kurochkin V.

DeputyDirector

Kurochkin.V.

GeneralDirector

Plaksin G.

Instar

GeneralDirector

Plaksin G.

$$$

37

1. Rilend

has never had a Deputy Director

2. Rilend’s

corporate seal did not match the company’s location, despite being registered in Moscow for nearly 7 months

DeputyDirector

Kurochkin V.

This lawsuit was flawed as well

7 months

Fake agreement was sealed with aninvalid address

16 Nov2005

Rilend wasregistered in

Moscow

5 May2005

38

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

19 Sep 2005

Fake agreements

Fake liabilities for $ 575 m

14 Aug 2006

What was the Kazan lawsuit about?

39

OOO Parfenion,Moscow

General DirectorGrand Active

OOO Parfenion,Moscow

General Director

$$$

Foregone profit



GeneralDirector

Sheshenia

Grand Active

GeneralDirector

Sheshenia

$$$

Power ofAttorney

Power ofAttorney

1. Parfenion

never had any regional representative

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


2 Years after!

This lawsuit was flawed as well

40

Agreement signed by MrSheshenia in capacity ofthe General Director of

Grand Active

Appointment ofMr. Sheshenia as aGeneral Director

19 Sep2005

3 July2007

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

MoscowSt.Petersburg

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

IntercommerzBank

UniversalSavings Bank

OOO RILEND,Novocherkassk

OOO PARFENION,Novocherkassk

OOO MAKHAON,Novocherkassk

V.Kurochkin

V.Markelov

V.Khlebnikov

New account13 December 2007

New account17 December 2007

New account17 December 2007 Bank formed: 28.02.2002

Region: MoscowEquity: $1.5 mlnTotal Assets: $25.6m*Ranked No. 920 **

Bank formed: 10.12.1991Region: MoscowEquity: $11.8mTotal Assets: $571m*Ranked No. 432**

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

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)

In addition to the perpetrators filing lawsuits, we learned that they also set up bank accounts for the stolen companies

42

It appeared that large amounts of money were flowing through these banks at the same time that the new accounts were opened

We looked at the banks and found unusual activity


IntercommerzBank

US$ mln.

Size of Corporate Accounts held at the UBS Bank

Size of Corporate Accounts held at the Intercommerz Bank

+$97 mln

+$143 mln

Account Opened

Account Opened

US$ mln.

Source: Central Bank of Russia (www.cbr.ru) 43

Deposits equal to taxes paid

Source: Central Bank of Russia (www.cbr.ru), Hermitage Fund’s companies tax reporting 44

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)

http://www.cbr.ru/

Fake claims equal to Hermitage Fund profits

Fake Claims awarded to the

Company (RUB 13.88 Bln.)

Profit of 2006

Rilend

Parfenion

Makhaon



Profit of 2006

Profit of 2006



US$ mln

Profits vs. Fake Claims (US$ Mln.)

=

=

=

Source: Fake lawsuits, Hermitage Fund’s companies financials 200645

We looked back at the fake lawsuits and realized that the awards

were exactly equal to Hermitage Fund profits in 2006

Fake losses adjusted the profits to ZeroThe perpetrators seemed to be intend on eliminating any historic

profits from the

Hermitage Fund companies retroactively

Profit “Adjustment” via Fake Losses

Source: Fake lawsuits, Hermitage Fund’s companies financials 2006 46

2006

To steal the tax money paid by Hermitage by applying for a $230m

tax refund

Why would they want to eliminate historic profits?

Source: Fake lawsuits, Hermitage Fund’s companies financials 200647

Taxes Paid vs. Tax Refund


48

Central Bank Confirmation –

USB BankUSB 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

Source: Reporting 0409157

OOO RILEND,Moscow

V.Kurochkin

OOO MAKHAON,Moscow

V.Khlebnikov open

account

17 December 2007 01 January 2008

Top 10Depositors

1. Rilend2. Makhaon

USB Bank

$75m$16m

open

account

3. ... ...

10. ....... ...

4. ......5. ......6. ...

...

...7. ...


V.Khlebnikov

13 December 2007 01 January 2008

$139m

Intercommerz Bank

open

account ...

...

Top 10Depositors

1. Parfenion2. ...

$139m...

3. ... ...

10. ... ...

4. ......5. ......6. ...

...

...7. ...

49

Central Bank Confirmation –

Intercommerz

BankIntercommerz

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

Source: Reporting 0409157

The overall strategy of the perpetrators was to steal tax money

50

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

(Guernsey) LIMITED


GLENDORAHOLDINGS

LTDCyprus

KONEHOLDINGS

LTDCyprus

OOO RILEND,Moscow


OOO MAKHAON,Moscow

100% 100%

100% 100% 100%


Corporate Director

Corporate Director


Corporate Director




100% 100% 100%



Budget ofRussian Federation

$230 m

February2006

December2007

$230 m

IntercommerzBankUniversal

Savings BankUniversal

Savings Bank



GLENDORAHOLDINGS

LTDCyprus

KONEHOLDINGS

LTDCyprus

OOO RILEND,Moscow


OOO MAKHAON,Moscow

100% 100%

100% 100% 100%


Corporate Director

Corporate Director


Corporate Director

Hermitage companiespaid

in capital gain taxes tothe Russian budget

Perpetratorsstole

in capital gain taxes fromthe Russian budget

On June 5, 2008 Boily

Systems Ltd filed for liquidation of the three stolen companies

Destroying the evidence of the crime – Company Liquidation

Boily filed for liquidation of three stolen

companies on June 10th, 2008

Tax Authorities

Source: EGRUL statements51

OOO RILEND,Khimki

OOO PARFENION,Khimki

OOO MAKHAON,Khimki

100% 100% 100%

R.Starova R.Starova R.Starova

Boily Systems Ltd,(BVI)




100% 100% 100%



OOO RILEND,Khimki


OOO MAKHAON,Khimki

100% 100% 100%



Boily purchase three stolen

companies for $750 on February

8, 2008

Pluton stole three companies from Hermitage Fund Sep, 2007

52

It is now obvious why we were a targetBecause our companies paid more taxes than almost anyone else in

Russia

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

53

Interior Ministry Role in Hermitage FraudThe interior ministry played an active role in supporting and executing the fraud against Hermitage

Major GeneralA. Mihalkin

Major GeneralI. Glukhov

Colonel of JusticeA. Anichin

ColonelA. Klevtsov

ColonelA. Stepantsov

Lt. ColonelA. Kuznetzov

MajorN. Budilo

MajorR. Ahmedzhanov

MajorP. Karpov

Who approvedand supervised thespurious cases and

asset searches?

Activeparticipants in

the casesKept custody ofdocuments used in afraud

Raided Hermitage officesunder false pretenses

ActiveParticipants'

Role

Opened newspurious casesagainst HermitagecompaniesSupervised search where

lawyer was assaulted byofficers

Confiscated documents laterused in fraud

Threatenedwitnesses Accepted forged

documents fromperpetrators toassist with fraud

Continued spuriouscases long after it wasclear that there were notax claims

Conducted wide ranging assetsearch beyond the scope ofinvestigation

Moscow InteriorMinistry


Federal InteriorMinistry

54

The FSB also played a roleFrom 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)

-

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

A. KuvaldinCapitan FSB

D. VasilievCapitan FSB

V. VoroninGeneral major

Head of Department "K"Federal Security Service "FSB"

55

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

Involvement of Russian Courts

JudgeI.Salimzianov

JudgeS. Alekseev

JudgeE. Orlova

JudgeM. Kuznetzov

JudgeE. Kim

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

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

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

56All cases were conceded by so-called advocates

Husband & Wife

St. Petersburg

E. MaltzevaParfenion

AdvocateY. Mayorova

MahaonAdvocateA. Pavlov

Rilend

AdvocateA. TurukhinLogos Plus

AdvocateK. YakovlevLogos Plus

AdvocateA. Pavlov

Grand Active

AdvocateY. Mayorova

Rilend

Kazan Moscow

No oneattended

fromInstar

Claimant'sAdvocates

Defendant'sAdvocates

DirectorSheshenia

Parfenion

Involvement of Lawyers

DirectorParfenion

V. Markelov

57

Hermitage Attempts to Stop FraudSince 3 December 2007, we have filed 35 complaints in Russia and

7 overseas to try to

stop and reverse these frauds

Hermitage

activitiesto

stop

fraud

Russian

lawenforcement

agencies

International

lawenforcement

agencies

Arbitration

courtto

overturn

fakejudgement

Russian government

officials

Russian

taxauthorities

Complaint

Compla

int

Appeals

Litigation

Complaints

58

But they prevented nothing

We gave the Russian law enforcement agencies every chance to stop these frauds starting a month in advance in 35 different complaints

Selection of complaints filed by HSBC/ Hermitage

Execution of tax fraud

3 Dec2007

3 Dec2007

11 Dec2007

13 Feb2008

19 Feb2008

26 Feb2008

3 Apr2007

25 May2008

7 Jun2008

HSBC/Hermitcomplaint to

GeneralProsecutorY. Chaika

HSBC/Hermit.complaint to

Head ofInvestigativeCommittee

A. Bystrykin

HSBC /HermitComplaint to

Head of InternalAffairs of Interior

MinistryY. Draguntsov

HSBC/Hermitlawyer

complaint toGeneral

ProsecutorY. Chaika

HSBC/Hermitlawyer

complaint toHead of

InvestigativeCommittee A.

Bystrykin

HSBC/Hermitlawyer

complaint toHead of Internal

Affairs ofInterior Minist ry

Y. Draguntsov

HSBC/Hermittelegram to


A. Bystrykin

HSBC/Hermittelegram to

Head of MoscowInvestigativeCommittee

V. Spasennyh


Head ofSt.PetersburgInvestigative

Committee A.Lavrenko

HSBC/Hermitsecondary

complaint toHead of

InvestigativeCommittee

A. Bystrykin

HSBC/Hermitthird

complaint oninaction to


A. Bystrykin


Head ofInvestigativeCommittee of

InteriorMinistry A.

Anichin

30 Jan2008

HSBC/Hermitacomplaint to

InvetigatorR.Rassohov ofInvestigative

Committee

HSBC/Hermitage

letter toFederal Tax

Service

14 Feb2008

HSBC/Hermitageletter to

Moscow TaxService

HSBC /Hermitcomplaint to

Head ofCentral DistrictSt.PetersburgInvestigative

CommitteeP. Vymetsu Hermitage

complaint to19 members ofAnticorruptionCommittee set

up byPresident

Medvedev

3 Dec2007

3 Dec2007

11 Dec2007

13 Feb2008

19 Feb2008

26 Feb2008

3 Apr2007

25 May2008

7 Jun2008

30 Jan2008

14 Feb2008

$240m

$113m

$36m $41m

59

Six criminal complaints were filed December 3 –

11, 2007 by HBSC and Hermitage with the major Russian authorities

What happened to the complaints?

Yuri ChaikaRussian General

Prosecutor

AlexanderBastrykinRussian State Investigative

Committee

Yuri DraguntsovInternal Affairs of

Russian Interior Ministry

255-pageComplaint

255-pageComplaint

2

255-pageComplaint1

3

5 255-pageComplaint

4 255-pageComplaint

6 255-pageComplaint

Lawyers

Hermitage

60

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


Prosecutor



255-pageComplaint1

3 255-pageComplaint

255-pageComplaint

255-pageComplaint

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.”

Hermitage


61

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


Prosecutor



Lawyers

2 255-pageComplaint

4 255-pageComplaint

Prosecutorof Moscow

255-pageComplaint

255-pageComplaint

InvestigativeDepartment of


MajorPavel Karpov

255-pageComplaint255-pageComplaint


Hermitage



MajorPavel Karpov



MajorPavel Karpov

Person who confiscated thedocuments needed for the

fraud

Person investigating thefraud

62

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


63

The St. Petersburg branch of the Russian State Investigative Committee was unable to find any crime at all in their review of the complaint

•

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

5Response to Complaint


64

One case was ultimately opened by the Russian State Investigative Committee, but it was soon dragged down to the lowest level of the organization

RussianInvestigativeCommittee

Moscow City branch ofRussian Investigative

Committee

Southern District Departmentof Moscow City branch of

Russian InvestigativeCommittee

R. Rassohov, fromMajor Crimes

Department of RussianInvestigative Committee

Opened Criminal Caseagainst fake directors

of three Russian entitiesof HSBC and unknown

individuals

Considered the Criminal Caseagainst fake directors of threeRussian entities of HSBC and

unknown individuals andmade decision to drag it down

Appointed Mr.Gordievsky asinvestigator for

opened criminal case

5 Feb 2008

18 Feb 2008

Lowest possiblelevel of investigation

6Complaint


65

In February 2008, as part of this newly opened case, the Russian

State Investigative Committee began to question the possible suspects

Investigative Committeequestioned the officials involved

Judge Orlovain

St.Petersburg

JudgeKuznetsovinSt.Petersburg

InvestigatorYushkov

MajorPavel

Karpov

LieutenantColonel

A. Kuznetsovetc...


66

In June 2008, Hermitage learned that the prime suspect, Lieutenant Colonel Artem Kuznetsov, had joined the group managing the investigation

Investigative Committeequestioned the officials involved

Judge Orlovain

St.Petersburg

JudgeKuznetsovinSt.Petersburg

InvestigatorYushkov

MajorPavel

Karpov

LieutenantColonel

A.Kuznetsovetc...

LieutenantColonelA. Kuznetsov


We also brought the fraud to the attention of the federal tax authorities in a number of locations

67

Federal Tax Authority #7

Moscow Tax Authority #28

Inter-Regional Tax Authority(Khimki)

Moscow Tax Authority #25

Inter-Regional Tax Authority(Rostov / Novocherkassk)

Jan 17 andJan 25 2008

Jan 17 andJan 25 2008

25 Jan 2008

June 2008

30 April 2008

Complaints to the Tax Authorities

67

Hermitage

68

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


69

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

All the documents have now disappeared

CriminalCase #225589

Mr.Markelov,fraudster,

owner of OOO "Pluton"

Dmitry Yushkov,Investigator of North Branchof Moscow Interior Ministry

Complaint

Registration fileof Rilend

seized by investigator

Documentsdisappeared

?

What was the new criminal case about?

70

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

Letter on behalf of Parfenion

Tax Authority #28

70

Hermitage and

71

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)

Moving Companies

71

72

Moving CompaniesEven 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

73

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

We wrote to the Novocherkassk tax authorities and asked for all documents on the companies

“No registration documents have been received yet”

February 8, 2008Letter from the Tax Authority to HSBС

February 8, 2008Extract from the registrar provided

by the Tax Authority to Pluton

73

In spite having knowledge of the fraud, the tax authorities still allowed the companies to be transferred to a new company called Boily

Systems

Moving Companies



GLENDORAHOLDINGS

LTDCyprus

KONEHOLDINGS

LTDCyprus

OOO RILEND,Moscow


OOO MAKHAON,Moscow

100% 100%

100% 100% 100%


Corporate Director

Corporate Director


Corporate Director




100% 100% 100%



OOO RILEND,Khimki


OOO MAKHAON,Khimki

100% 100% 100%



74

March 17, 2008September 11, 2007

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

Political Appeals

Dmitry Medvedev, the Russian Prime-Minister

then

Now the President of Russia

75

http://images.google.co.uk/imgres?imgurl=http://www.washprofile.org/files/images/browder.jpg&imgrefurl=http://www.washprofile.org/en/node/4958&h=180&w=150&sz=7&hl=en&start=12&sig2=55xzdMfnd3Z8Vw8jTW8dcw&tbnid=ar5teXkJt5DIXM:&tbnh=101&tbnw=84&ei=yk16SPa_F6SgwwH168BU&prev=/images%3Fq%3Dbill%2Bbrowder%26gbv%3D2%26hl%3Den

http://images.google.co.uk/imgres?imgurl=http://blog.kievukraine.info/uploaded_images/3066-760409.jpg&imgrefurl=http://blog.kievukraine.info/2006_02_01_kievukrainenewsblog_archive.html&h=735&w=619&sz=149&hl=en&start=2&sig2=51MltnCY01SbWM6-WNf87Q&tbnid=6vLlDcFLgI5POM:&tbnh=141&tbnw=119&ei=Gk96SInkH4PqwwGZ4Pl0&prev=/images%3Fq%3Dkudrin%26gbv%3D2%26hl%3Den

http://images.google.co.uk/imgres?imgurl=http://media.npr.org/programs/day/features/2007/dec/putin/medvedev200.jpg&imgrefurl=http://www.npr.org/templates/story/story.php%3FstoryId%3D87809345&h=280&w=200&sz=43&hl=en&start=32&sig2=vOX2HJAMcFZoDUWu4ygbVw&tbnid=Z1OMhwFvaxeArM:&tbnh=114&tbnw=81&ei=dk96SLOzAZXIwgHk1rFv&prev=/images%3Fq%3Ddmitr%2Bmedvedev%26start%3D21%26gbv%3D2%26ndsp%3D21%26hl%3Den%26sa%3DN

http://images.google.co.uk/imgres?imgurl=http://www.aerogrammes-postalstationery.com/inventory/Envelopes/New%2520Zealand/env4cAirMail&imgrefurl=http://www.aerogrammes-postalstationery.com/inventory.php%3Faction%3DView%26cat%3Dehp&h=233&w=400&sz=14&hl=en&start=22&sig2=EkyP96tLxaZFdr0P29MXuQ&tbnid=4oJbAxpGZMnGDM:&tbnh=72&tbnw=124&ei=zFB6SOPdGZeowQG0vpBo&prev=/images%3Fq%3Dmail%2Benvelope%26start%3D21%26gbv%3D2%26ndsp%3D21%26hl%3Den%26sa%3DN

Appeal to the PresidentHermitage 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

Hermitage Letter

President Medvedev

-

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


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


E. Nabiulina

(Minister of Economic Development)

-

S. Naryshkin

(Head of the Presidential Administration)

-

R. Nurgaliev

(Minster of the Interior)-

S. Sobyanin

(Deputy Prime Minister)

19 copies –

sent to each

member

76

77

Some Legal ReliefHSBC/Hermitage have been able to reverse the fraudulent claims against the stolen companies when they have direct control over the litigation

KazanArbitration Court

MoscowArbitration Court

St PetersburgArbitration Court

Hermitagelearned about

fake case Cassationappeal

21 Dec2007

Fake court awardfor $ 307m against

Rilend

3 Sep2007

18 Oct2007

Cassationwon

29 Jan2008

Fake awardnullified

13 May2008



28 Dec2007

Fake court awardfor $ 70 m against

Machaon

3 Sep2007

18 Oct2007

Cassationwon

14 Feb2008

Fake awardnullified

18 Apr2008



16 Jan2008

Fake court awardfor $ 0.1 m against

Parfenion

21 Sep2007

18 Oct2007

Cassationwon

4 March2008

Fake awardnullified

11 June2008



22 Apr2008

Fake court awardfor $ 575 m

against Parfenion

13 Nov2007 20 March

2008

Cassationwon

1 July2008



5 May2008

Fake court awardfor $ 312 m

against Rilend

6 Dec2007 20 March

2008

Cassationwon

9 June2008

International law enforcement agencies have also opened investigations

Global Law Enforcement

British Virgin Islands

Guernsey Police

5 June 2008

9 July 2008

3 April 2008

20 May 2008

Freezing and Disclosure Order re Boily Systems Ltd.; Order GRANTED on 10 July 2008

Date

Criminal Complaint Filed; Investigation Opened

Criminal Complaint Filed; Investigation Opened

Meeting & Discussion; Vetting File Opened

Jurisdiction Action and Result

78United Kingdom

Cyprus

7979

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.