Laundering Suit Ends as Russian Firm, U.S. Claim Victory

May 12, 2017, 9:44 PM EDT May 13, 2017, 1:39 PM EDT
  • N.Y. trial promised to show laundered cash’s journey to U.S.
  • A decade of intrigue, lawyers’ deaths, surrounded condo trial

The U.S. agreed to take $5.9 million to settle a money-laundering lawsuit tied to a $230 million Russian tax fraud, avoiding a trial that was set to begin Monday.

Both the U.S. and a Cyprus-based company controlled by a Russian businessman claimed victory in avoiding a trial that promised to shed light on an intricate web of shell companies and middlemen that were allegedly used to spirit dirty money out of Russia in violation of international financial regulations.

Prevezon Holdings Ltd. said in an emailed statement that it agreed to settle the U.S. claims for less than 3 percent of the amount initially sought by the U.S. government. Acting Manhattan U.S. Attorney Joon Kim said the settlement amount was roughly 10 times the money that was allegedly traced directly into U.S. accounts and real estate.

“This settlement is nothing short of a victory for Prevezon,” Faith Gay, a lawyer for the company, said in a phone interview. “It’s almost an apology by the government.”

The attempt to seize a lower Manhattan condominium acquired by the Russians and other assets began four years ago with then-Manhattan U.S. Attorney Preet Bharara filing the claim. Bharara was fired in March by President Donald Trump and Kim, Bharara’s successor, announced the settlement late on Friday.

“The nearly $6 million represents three times the money that flowed to Prevezon from the Russian treasury fraud and more than 10 times the portion they invested in U.S. real estate,” James Margolin, a spokesman for the Manhattan U.S. Attorney’s office, said in a statement Saturday. “However they want to rationalize it, Prevezon agreed to give up multiples of the laundered money they brought into New York.”

Decade-Long Drama

U.S. lawyers were set to head to court to seize the condo, which they said was linked to hundreds of millions of dollars looted by politically connected Russians. The case was at the heart of a decade-long drama stretching from Moscow to Moldova to Manhattan — part high political intrigue, part murder mystery. There’s an investment fund manager drummed out of Russia; Russian officials who may have helped in the fraud, and two dead people who may have known too much.

The trial was scheduled to start Monday, after years of delay, with the U.S. set to offer the jury perhaps the deepest look into the way dirty Russian money was laundered.

The last-minute deal comes against a backdrop of diplomatic tensions and enormous interest in the illicit movement of Russian money. FBI Director James Comey was fired last week in the midst of a probe of Russia’s influence over the U.S. presidential elections and U.S. prosecutors are also looking into how wealthy Russians may have moved as much as $10 billion out of the country earlier this decade through Deutsche Bank AG, which has since conceded massive compliance lapses.

Government lawyers intended to argue that a trio of Russians bought U.S. assets with ill-gotten cash, including money made from defrauding Hermitage Capital, once the largest foreign owner of Russian stocks. The Russian businessmen denied the claims, saying there was no evidence to support they were part of the scam or that they knew the money was dirty.

Hermitage Chief Executive Officer, Bill Browder, who started a private investigation into the tangled web of companies that he alleged were created to move cash from the tax fraud out of Russia was expected to testify at the trial, providing a glimpse of how funds flowed from Russia to Moldovan and Latvian banks and into companies such as Prevezon via wire transfers routed though banks in the U.S.

Browder was barred from Russia more than a decade ago. One of his lawyers, Sergei Magnitsky, complained to Russian authorities that Hermitage was a victim of a fraud. He was arrested and died in a Russian prison at 37. Magnitsky’s death triggered a diplomatic standoff between Moscow and Washington and tit-for-tat sanctions, with Bharara being one of several Americans barred from Russia.

Browder said he saw the Prevezon settlement as a victory in his pursuit for justice in Magnitsky’s November 2009 death. “This sends a clear message to the people who received that money in the West that it’s not safe and will be seized,” the hedge fund manager said Saturday in an emailed statement. “I believe that this payment will give the green light to other countries to follow suit.”

Prevezon Targeted

The U.S. claimed the Manhattan condo was bought with a chunk of $230 million from fraudulent Russian tax refunds, linked to the Hermitage affair through Prevezon. The government was targeting Prevezon, owned by Moscow businessman Denis Katsyv, and 11 of its related companies in the forfeiture case. Katsyv, son of an ex-Moscow transportation minister, is involved in the firms along with Russian colleague Timofey Krit and Israeli businessman Alexander Litvak, according to court filings. Prevezon didn’t admit wrongdoing in the settlement.

The allegations were narrowed after the lawsuit was filed. At the trial, the U.S. sought the seizure of not only the luxury condo at 20 Pine Street, but also assets including more than $8.5 million from the sale of four other units bought with money allegedly tainted by Russian tax fraud funds. The government said $1.9 million from the fraud was co-mingled with clean money in Prevezon accounts, making it all subject to seizure.

The building on Pine Street was constructed in 1928 as Morgan Guarantee Trust’s headquarters. The condos are currently marketed as having 10 1/2­-foot beamed ceilings and ebony-­stained hardwood floors.

The case stems from Russian Interior Ministry officials’ 2007 decision to raid Hermitage’s Moscow offices and those of its law firm, hauling away boxes of records and corporate seals. A Russian criminal organization then used the seals to steal the corporate identities of companies belonging to Hermitage’s investment portfolio, according to court filings.

The organization re-registered the firms and sued the companies, winning default judgments of $973 million, the government said in court filings. The group claimed the judgments were equal to the profits of the former Hermitage companies and applied for a tax refund. A Russian tax official approved the $230 million refund on Christmas Eve in 2007, according to the filings.

Magnitsky, who was helping Browder investigate the alleged fraud, died in jail from heart failure and toxic shock caused by untreated pancreatitis, according to Russian authorities. Browder has said he believes Magnitsky was beaten to death while in custody.

U.S. lawmakers enraged Russia’s President Vladimir Putin by enacting the so-called Magnitsky Act, three years after the attorney’s death. The law sanctioned Russian officials, judges and investigators that the U.S. said were involved in human-rights abuses. Russia countered by banning U.S. lawmakers and officials, including Bharara, from traveling to Russia.

Whistle-Blower Dies

Browder hired other lawyers in the U.S. and Russia to track wire transfers of some of the $230 million. The fund manager got a break when a whistle-blower named Alexander Perepilichny showed up in 2010 with bank records related to the scam, Browder said in his book, ‘‘Red Notice.” Perepilichny moved to the U.K. to help Browder with his investigation, then died.

Police said the 44-year-old’s collapse while jogging in 2012 wasn’t suspicious. Others weren’t so sure. Magnitsky’s mother, Natalya, told The Telegraph at the time that “it looks strange.”

The case got even stranger earlier this year when Nikolai Gorokhov, a Russian lawyer representing Magnitsky’s family who’d turned over documents he’d uncovered about the tax fraud to Browder, fell from a window of his Moscow apartment building. The fall occurred the day before he was scheduled to appear in a Russian court in a case tied to Magnitsky’s death. Browder tweeted Gorokhov, who survived the fall, was “thrown from 4th floor apartment in Moscow.”

The case is US v. Prevezon Holdings Ltd, CA No. 13-cv-06326 (TPG), U.S. District Court for the Southern District of New York (Manhattan).

(An earlier version of this story corrected Prevezon’s lawyer’s name.)

(Updates with Browder’s comment in 13th paragraph.)
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