United States v. Prevezon Holdings Ltd.

839 F.3d 227, 2016 U.S. App. LEXIS 18614, 2016 WL 6069181
Court of Appeals for the Second Circuit·Decided October 17, 2016·No. Docket No. 16-132-cv·Published·Cited by 40 cases

Opinion

POOLER, Circuit Judgé:

Appeal from United States District Court for the Southern District of New York (Thomas P. Griesa,, J.)2 from the denial of Hermitage Capital Management Ltd.’s (“Hermitage”) motion to disqualify counsel for Prevezon Holdings Ltd., Preve-zon. Alexander, LLC, Prevezon Soho USA, LLC, Prevezon Seven USA, LLC, Preve-zon Pine USA, LLC, Prevezon 1711 USA, LLC, Prevezon 1810 LLC, Prevezon 2009 USA, LLC, and Prevezon 2011 USA, LLC (together, “Prevezon”).

This case presents the “extraordinary circumstances” necessary to grant a writ of mandamus, as Hermitage is without other viable avenues for relief and the district court misapplied well-settled law. Accordingly, we grant the petition for a writ of mandamus and instruct the district court to enter an order disqualifying John Moscow and BakerHostetler LLP from representing Prevezon in this matter.

[230]*230BACKGROUND

I. The underlying fraud.

The underlying litigation arises out of a 2013 civil forfeiture action (the “Forfeiture Action”) brought by the United States alleging that Prevezon received the proceeds of a complex, sweeping scheme that defrauded the Russian treasury of roughly $230 million (the “Russian Treasury Fraud”). The government alleges Prevezon laundered portions of the fraud proceeds in New York by buying various real estate holdings in Manhattan. We draw much of the background section from the second amended complaint, and note that the accuracy of the government’s allegations remains untested.

Hermitage, an investment advisory firm, is a victim of the Russian Treasury Fraud. Hermitage advised the Hermitage Fund, an investment fund that focused on investments in Russia. A group of corrupt Russian officials and other individuals known as the “Organization” raided Hermitage’s Moscow office and the office of its Russian law firm in 2007. During the raid, the Organization stole corporate documents, including the official seals, of portfolio companies controlled by the Hermitage Fund. This practice is known in Russia as “reiderstvo,” or corporate raiding. The Organization used the stolen documents to fraudulently transfer ownership of the portfolio companies to members of the Organization. The Organization then forged faked contracts with sham companies, creating the illusion that the portfolio companies owed nearly a billion dollars to the sham companies. The sham companies sued the portfolio companies. Lawyers purporting to represent the portfolio companies appeared in these actions and admitted the portfolio companies’ full liability-

The fraudulent legal proceedings yielded judgments worth roughly $973 million for the Organization. The Organization then used the sham judgments to apply for tax refunds on behalf of the portfolio companies on the ground that the judgments represented losses that were equal to the profits reported by the portfolio companies in the previous tax year. Since the faked losses fully offset the profits, the portfolio companies were entitled to a refund of the taxes paid on those profits. Two days after the refund applications were filed, refunds of roughly $230 million were paid out by the Russian treasury to bank accounts controlled by the Organization. A portion of that money was then wired to various accounts controlled by members of the Organization in banks around the world, requiring transfers of funds through the Southern District of New York. As part of the laundering process, the funds were deposited into different bank accounts in different countries multiple times. The government alleges that a portion of those monies (roughly $3 million) were transferred into accounts in Prevezon’s name. Prevezon then purchased real estate in Manhattan using money that, at a minimum, was comingled with laundered proceeds from the Russian Treasury Fraud.

II. Hermitage’s involvement with Bak-erHostetler.

When Hermitage learned of the fraud, it hired attorneys in Russia to investigate, including Sergei Magnitsky. Magnitsky conducted an investigation that discovered the fraud, and Hermitage ultimately filed six criminal complaints with the Russian authorities. Hermitage and its lawyers instead found themselves the focus of the criminal investigation. After Russian authorities opened up a criminal case against two Hermitage lawyers who drafted several of the legal complaints, the lawyers fled Russia. Russian authorities also pursued criminal proceedings against Hermitage’s [231]*231chief executive officer, William Browder, and other Hermitage employees and lawyers.

Magnitsky, who gave testimony against corrupt public officials alleged to be members of the Organization, was arrested in November 2008. After 358 days of pre-trial confinement, Magnitsky became ill and died. Russia’s Human Rights Council determined that Magnitsky’s arrest and detention were illegal, that on the last day of his life Magnitsky was beaten by guards wielding rubber batons, and that necessary medical care was withheld. The Public Oversight Commission for the City of Moscow for the Control of the Observance of Human Rights in Places of Forced Detention issued a report stating: “The members of the civic supervisory commission have reached the conclusion that Magnitsky had been experiencing both psychological and physical pressure in custody, and the conditions in some of the wards of [the prison] can be justifiably called torturous.”3

In September 2008, Hermitage hired attorney John Moscow of BakerHostetler “[t]o help gather evidence for them to defend [Hermitage] in Russia,” App’x at 192, and to try to interest the United States government in investigating the fraud and reclaiming the fraud’s proceeds. BakerHostetler’s retention letter described the scope of its representation:

In this engagement, we expect to perform the following: extensive analysis of the factual and legal background of the events in question; examination and analysis of evidence in both testimonial and documentary form, including the testimony of expert witnesses; preparation and presentation of prosecution memoranda, if appropriate, to the United States Department of Justice (or other law enforcement agency); and cooperation and support to the United States Department of Justice if an investigation is pursued by them.

App’x at 107.

BakerHostetler and Moscow represented Hermitage for roughly nine months. During that time, Moscow and his colleagues reviewed non-public documents from Hermitage related to the Russian Treasury Fraud, which allowed the firm to create a case timeline and chronology, and discussed “potential individuals for depositions in connection with the prosecutions in Russia.” App’x at 116. Moscow' met with staff at the U.S. Attorney’s Office for the Southern District of New York, including a lengthy meeting on December 3, 2008 with former Assistant U.S. Attorney Marcus Asner, and with the office of the Attorney General in the British Virgin Islands. The firm also “reviewed] bank records” and researched a “proper service agent for” a bank involved in routing proceeds of the Russian Treasury Fraud.

BakerHostetler also drafted a twenty-five page declaration in anticipation of Hermitage seeking a Section 1782 subpoena, which allows a federal court to order discovery in the United States “for use in a ... foreign ... tribunal,” 28 U.S.C. § 1782(a).

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United States v. Prevezon Holdings Ltd., 839 F.3d 227, 2016 U.S. App. LEXIS 18614, 2016 WL 6069181 (2d Cir. 2016).

839 F.3d 227 (United States v. Prevezon Holdings Ltd.) — published by Counsel Stack Legal Research, free access to 12M+ legal documents.

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