May 11, 2017 / 8:35 PM / 2 years ago

U.S. wins right to go after some proceeds from notorious Russian tax fraud scheme

(Reuters) - Not so long ago, Congress and then President Barack Obama were so disgusted with Russian authorities that they passed a law called the Magnitsky Act of 2012, which was intended to hold accountable Moscow officials responsible for human-rights atrocities like the months-long imprisonment and ultimate death in 2009 of Russian lawyer Sergei Magnitsky.

Magnitsky was widely believed to have been killed for helping to expose a quarter-billion-dollar tax fraud scheme in which a Russian criminal outfit, in cahoots with tax officials, effectively stole the corporate identities of three Russian companies in the portfolio of a Guernsey hedge fund, Hermitage Capital; obtained sham judgments against them and made off with tax refunds based on the sham judgments.

Under the Magnitsky law, according to a Politico report last month, more than 40 Russian officials have been barred from traveling to or maintaining financial interests in the U.S. (Politico’s article was prompted by what it called "unexpectedly" strong support for a European Union version of the Magnitsky Act from President Donald Trump.)

Now, thanks to a ruling Wednesday from U.S. District Judge William Pauley of Manhattan, the U.S. government also has a shot at recovering a small bit of money from the fraud Magnitsky helped uncover. The judge denied a summary judgment motion by Prevezon Holdings, a Cyprus-based corporation that allegedly invested about $2 million of the ill-gotten proceeds of the Russian tax fraud scheme in New York real estate. His decision clears the way for the Manhattan U.S. Attorney’s office to proceed to a trial to force Prevezon to forfeit the real estate and cough up penalties for money laundering.

As I’ve reported, much of the pre-trial fighting in the case was over Prevezon’s original defense firm, BakerHostetler. A key part of the firm’s strategy was to discredit the government’s leading witness, Hermitage Capital co-founder William Browder. The trouble was that BakerHostetler had previously represented Hermitage. And not just in general matters - in the investigation of the very tax fraud scheme at the heart of the government’s case against Prevezon. The trial judge who presided over the case before Judge Pauley took it over last year waffled on whether to disqualify BakerHostetler, but last October, the 2nd U.S. Circuit Court of Appeals bounced the firm for good.

Quinn Emanuel Urquhart & Sullivan took over. Its summary judgment motion in March argued that the government couldn’t show Prevezon was a participant in the tax scheme or a money launderer. In particular, the firm asserted there was no fraud against a foreign bank because the allegedly deceived Guernsey institution was just acting as a trustee for Hermitage portfolio companies; there were no U.S. money transfers because transactions occurred between foreign companies using foreign banks; and that, based on the elaborate flow charts the government relies upon, there’s no direct link between scam proceeds and Prevezon’s real estate deals.

In Wednesday’s ruling, Judge Pauley said, essentially, that at best, Prevezon showed disputes of fact that have to be resolved by a jury. On the complex tracing of the various shell companies through which money flowed to Prevezon, for instance, Judge Pauley agreed that the government had not identified the individuals behind supposedly suspicious transfers and had not tethered transactions to the Russian tax scam. Nevertheless, he said, “there is enough evidence, viewed in a light most favorable to the government, for the jury to make those determinations.”

Trial is scheduled to begin next week, although Prevezon has asked for a short adjournment. The docket does not show a ruling from Judge Pauley on the request and his chambers did not return my call asking about the trial date. Prevezon lawyers Faith Gay and Adam Abensohn did not respond to a email request for comment.

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