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March 24, 2010 1:59 PM

From Russia with Fear

Posted by Brian Baxter

JamisonFirestone When he opened his law and audit firm Firestone Duncan in Moscow in 1993, Jamison Firestone saw Russia as a land of opportunity. Today Firestone is essentially exiled abroad, managing his business from thousands of miles away, and afraid of what could happen to him should he return to the city he called home for 17 years.

Firestone decamped to London in December after a lawyer from his firm died amid mysterious circumstances in a Moscow pretrial detention facility and in the midst of a long-running investigation by Russian authorities into one of his firm's clients, Hermitage Capital Management.

Hermitage, once the largest investment fund in Russia, is owned by William Browder, whose grandfather at one time headed the American Communist Party. Browder ran afoul of Russian authorities by railing publicly against what he called the country’s culture of corruption, as reported by The New York Times. He was ultimately punished for his outspokenness when Hermitage and two subsidiaries were put under the control of Victor Markelov, whom Browder accuses of being a former sawmill employee and convicted murderer.

Markelov entered the picture after Hermitage's lawyers, including Firestone Duncan, were caught up in the drama. The decisive event: a 2007 raid on Firestone's Moscow office staged by police from Russia's Interior Ministry. Sergei Magnitsky, the head of the firm's tax practice, later accused two officers who led the raid of stealing Hermitage documents in the process. Russian authorities, Jamison Firestone claims, subsequently used those documents as the basis for seizing the three Hermitage funds, handing them over to Markelov, and, later, collecting a questionable $230 million tax refund.

As for Magnitsky, he was arrested in November 2008 and died a year later in custody after complaining about inadequate medical treatment, as we previously reported.

The Am Law Daily spoke with Firestone after Magnitsky's death spurred him to flee Moscow. Initially optimistic that an investigation promised by Russian president Dmitry Medvedev would determine how Magnitsky died, Firestone says he quickly grew skeptical. One reason: In December he received from Russian tax authorities a batch of documents bearing what he says was his forged signature.

The documents were connected to a company called OOO Anrider, a Russian investment unit of a U.S. hedge fund and a Firestone Duncan client that was due a $21 million tax refund from the Russian government. Firestone says that, like the stolen Hermitage documents, the bogus Anrider papers were snatched from his offices during the 2007 raid. Once he saw them, he says, Firestone feared he was being set up the same way Magnitsky had been.

The following interview with Firestone has been condensed and edited for style, grammar, and clarity.

Why did you leave Russia?

I got tired of waiting within the grasp of people that could grab me, arrest me, and kill me. I'm the one who is trying to stop a crime. [Hermitage] has already lost $230 million--you'd think they'd like to prevent the theft of another $21 million. The system is broken.

[With Anrider], the crime is the same. It's a government refund crime--it's not that common.

What was it about the Anrider documents that made you suspicious?

I get a letter from the tax inspector that says, 'We received these amended declarations and we're not accepting them because the signature doesn't match yours.' Clearly someone had filed false declarations from my company, as there's 40 or so pages of my signature forged.

How did you respond?

I'm not some little guy. I run a law firm and at the time I sat on the board of the American Chamber of Commerce in Russia. So I thought I'd file a few complaints with the prosecutor's office and get the U.S. government involved.

Did that work?

Nope. It doesn't matter who you are anymore. Sometimes you think to yourself, 'God, if I could only get this heard at a high level, something would happen.' That happened here, with my employee in prison in a bad way, and nothing happened.

What would you like to see the Russian authorities do?

I'd like to see some of the offices involved lose their ability to bring these false lawsuits and false imprisonments.

Why did you choose to relocate to London?

My legal colleagues who have fled [Russia] are here, as well as a major concentration of investors interested in Russia. There are a lot of clients and potential clients here and the time difference between Moscow and London is only three hours.

Tell us how you believe these alleged schemes involving Anrider and Hermitage worked.

Think of it this way: there's a guy in a criminal group who understands how to steal taxes back from the government. He's the mastermind. And he says if you have a company that paid a lot of taxes and you create a lot of fake liabilities, you can submit an application for a refund that his buddies in the tax inspector's office can push through lightening fast.

How, in your opinion, is that accomplished?

You need some muscle to steal the companies with the taxes--that's the police. They come in and steal the company. Now you need to put them under criminal control. So you take some stupid, fall-guy criminal that doesn't have an education-- a sawmill foreman like Markelov, say--and you make him the managing director of a company with $4.3 billion in assets.

What comes next in this scenario?

You create the liability through a bunch of bogus court cases that claim the company owes the plaintiffs the exact amount of profits it declared. So if the company made $1 billion in profits, you sue the company for $1 billion to create a $1 billion liability. Then you get crooked lawyers and crooked judges involved. And the crooked lawyers bring suits against these companies that they know are completely bogus for the amount of money that the companies had previously earned. And then you get other crooked lawyers to represent the companies in court. And in court they say, 'Oh, you've got a $1 billion claim against our client, no contest!' And the crooked judge enters a judgment immediately in favor of the plaintiffs.

What makes you think all these individuals are corrupt?

Because this didn't happen once--it happened ten times with different companies, three of which belonged to Hermitage. And the same lawyers are involved in all of these cases, except sometimes they represent the plaintiffs and sometimes they represent the defendants. And the same judges are involved too. It's a classic cookie-cutter scheme with the same contracts and no contests.

Who are these lawyers?

They're Russian private practitioners and they raid companies and do illegal acts for a living.

Do your colleagues in Russia--not just at your firm, but other firms--support you in speaking out about what's going on?

They're supportive, but they don't want to scare their clients away. My firm was raided in June 2007 and lots of law and accounting firms [in Moscow] have been raided. Nobody wants to be a crusader. [My] feeling is we need to make this public not only to defend our clients, but also because if you aren't noisy, then you have no chance. I think more lawyers here are realizing that situations like this are occurring more often, and it's threatening their ability to protect their clients.

What have Western lawyers done to insulate themselves and advise their clients in this climate?

Western law firms occasionally have to rotate people out of the country because it is unsafe for them to remain. Usually it's because they have a managerial position in a firm where the authorities want to put pressure on that firm to do something that a firm wouldn't normally do--such as reveal information or falsify information about their clients.

You've been in Russia for almost two decades, probably some of the most turbulent times in the nation's history. I understand that your time there began with the death of your firm's cofounder, Terry Duncan, during clashes between reformers and Communist hardliners in 1993.

Terry was putting wounded people into ambulances in an active war zone. He wasn't asking whether they were pro- or anti-Yeltsin, they were just people to him. And he lost his life when the last guy he was pulling to safety was a 24-year old American kid and New York Times photojournalist. It wasn't a political thing during a mini-revolution.

Is there still a struggle between the old and the new?

No, I think the struggle deals more with the complete breakdown of authority in Russia. [Outsiders] think the Kremlin is in complete control of stuff, but it isn't really. Everyone basically has their own game and is stealing from everyone else. There is no authority. The people that you're supposed to get help from if you're attacked are almost always the same people that are involved in the theft. Things aren't just bad for foreign investors--they're also bad for Russians.

Medvedev has said he plans to take on Russia's 'legal nihilism.' What's your view of that?

Medvedev says the right things, but if you look at the Hermitage case, some of the corrupt police officers that stole the money are in plain sight and you can't get them investigated. Maybe Medvedev can't do it by himself.

What would you tell people about living and working in Moscow today?

I recently had a very promising University of Michigan law graduate write to me. And he said, 'I've seen your case all over the place, and I want to know whether I should still practice law in Russia.' And my answer was, 'I love Russia, but practicing law there is a different question.' If you love and have a deep respect for the law, and it's going to morally bother you to see judges, lawyers, and prosecutors shamelessly run roughshod over the system, then no, you shouldn't practice law in Russia.

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It looks like that a major client of Firestone Duncan was Hermitage Capital Management. Wikipedia provide the following information about this fund, ‘the Hermitage Fund created in 1996, has been extremely successful, earning 2,697% through December 2007.” Wikipedia, http://en.wikipedia.org/wiki/Hermitage_Capital_Management.
It is a well known that the Russian economy has been in a free fall during last twenty years. The only wealth created in Russia at that time was private capitals based on a privatization of former Soviet Union property legitimacy of which is a highly disputable issue. Furthermore, the fund's founder William Browder multiple times stated in his interviews that Russian government has stolen $4 billion from his company in Russian assets. My questions are fairly simple: how Hermitage Fund could make such profit in broken economy from zilch investment? How Firestone Duncan prior to 2009 avoided getting in troubles during ten years of a legal representation of Hermitage Fund?

I just noticed your comment today and it is based on a few misunderstandings.

Hermitage Fund was a large client for us, not our largest. We represent many investment funds and many businesses in other sectors.

It would be more fair to say that the bulk of the wealth in Russia was created by privatizing government assets, however there is a lot of private wealth in the country which was created after privatization and which had nothing to do with privatization. The vast majority of our clients are in this new entrepreneurial sector.

Mr. Browder has never said that anyone stole $4 billion from his companies. As a matter of fact, Hermitage Fund never had a penny, or I should say a Kopek, of its investments stolen. After Mr. Browder was denied entry to Russia he had the Fund sell its Russian shares, pay Russian taxes (almost $500 mil in Russian taxes were paid) and then he transferred the remaining post tax money abroad where the fund reinvested those funds safely. After this happened corrupt officers from the Ministry of the Interior raided my offices under the pretext of a criminal investigation, beat one of my lawyers so badly that he was in the hospital for 3 weeks, and they took the documents and seals for the Hermitage Fund investment companies and any other client company they could find which had paid large amounts of taxes.

The Ministry of Interior officers then used the documents and seals of three Hermitage Fund companies to re-register those three companies into the name of a convicted murder. Once that was accomplished the murder, now owner of the stolen companies, asked the Russian government to refund the taxes that these three companies had paid while they had been under the control of Hermitage, $230 million. That refund was granted in 1 working day which indicates that the criminal group had partners high up in the Russian tax service.

So there were two thefts here:
1) A theft of my client's companies (companies which were worthless to my client as they had sold all their shares).
2) A theft of $230 million of public money from the treasury by Russian public officials and organized criminals working in concert.

Now the answers to your questions:

How did Hermitage make so much money? There was a period when people generally thought Russia was going to go far. When we believed that the tomorrow would be better than today. It was a period when law seemed like it mattered and would matter more in the future. In that period, when the Russian stock market was in its infancy, some investors raised money for it and invested in it, and by and large they all make a lot of money. Hermitage Fund invested the most money and it made the most money. In 2006 when Hermitage moved its portfolio abroad for reasons of safety, the market was at its peak. There is nothing strange here about how Hermitage and many other investment funds made large profits in 2006. Russia had been the best performing stock market in the world and Hermitage Fund had invested the most money in it and it invested quite a lot of it early on. Note, they did not make money from "zilch". They raised significant amounts of money on the international markets and invested it in the shares of Russian companies.

As for how I managed to represent Hermitage Fund for ten years and work in Russia for 17 years without getting into trouble, it's pretty simple actually. We used to have this thing called law. You could advise your clients that if they dotted their i's and crossed their t's and did everything in accordance with the law that they would be OK. Now we have a "free for all" where law and government agencies are hijacked by officials working for private gain.

In the 90's Russia had a Mafia. Scary guys in track suits or loud colored jackets who drove expensive cars and who would hurt you if you didn't give them a cut. Now Russia has something worse, a law enforcement Mafia. Where criminals subcontract law enforcement officials to commit crimes. It creates a situation of no recourse because the people who steal from you are the people you are supposed to appeal to in a criminal case. When the Yukos case began I warned my colleagues that the government was creating a monster. That the government was riding roughshod over the law so that it could dismember Yukos and imprison Khodorkovsky and throw away the key. I warned people that this process of using law as a weapon and getting everyone involved to overlook the law simply so the government could achieve a desired result was extremely dangerous for Russian law. That this could become the way things are done in the future.

Now it is standard operating procedure for anyone who wants to steal to "Khodorkovsky" someone. You get come corrupt officials to open a bogus criminal case, you threaten your target with losing his assets and prison, and you offer him a way out; "just give me the assets and you can avoid prison". If the target hires lawyers to protect him, the lawyers are then attacked. We call this "Corporate Raiding" in Russia although that is really a nice sounding phrase to conceal theft with the participation of corrupt law enforcement .

So how did I manage to stay out of trouble so long? The country was different back then. Before Yukos nobody could imagine that Russian law would devolve to this sad state.

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