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United States v. Prevezon Holdings Ltd.

United States Court of Appeals, Second Circuit

October 17, 2016

UNITED STATES OF AMERICA, Plaintiff-Petitioner,
v.
PREVEZON HOLDINGS LTD., PREVEZON ALEXANDER, LLC, PREVEZON SOHO USA, LLC, PREVEZON SEVEN USA, LLC, PREVEZON PINE USA, LLC, PREVEZON 1711 USA, LLC, PREVEZON 1810 LLC, PREVEZON 2009 USA, LLC, PREVEZON 2011 USA, LLC, Defendant-Respondent,
v.
HERMITAGE CAPITAL MANAGEMENT LTD., Movant-Petitioner.

          Argued: June 9, 2016

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

         This case presents the "extraordinary circumstances" necessary to grant a writ of mandamus. We hold that the district court abused its discretion in denying the motion to disqualify. 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.

         Writ granted.

          JACOB W. BUCHDAHL (Cory S. Buland, on the brief), Susman Godfrey LLP, New York, NY, for Movant-Appellant Hermitage Capital Management Ltd.

          PAUL MONTELEONI, Assistant United States Attorney (Cristine Phillips, Margaret Garnett, Assistant United States Attorneys, on the brief), for Preet Bharara, United States Attorney for the Southern District of New York, for Plaintiff-Appellee the United States of America.

          MICHAEL B. MUKASEY (Jennifer F. Mintz, Jarrod L. Schaeffer, on the brief), Debevoise & Plimpton, LLP, New York, NY, for Defendants-Appellees Prevezon Holdings Ltd., Prevezon Alexander, LLC, Prevezon Soho USA, LLC, Prevezon Seven USA, LLC, Prevezon Pine USA, LLC, Prevezon 1711 USA, LLC, Prevezon 1810 LLC, Prevezon 2009 USA, LLC, and Prevezon 2011 USA, LLC.

          Before: POOLER, LOHIER, and CARNEY, Circuit Judges.

          POOLER, Circuit Judge:

         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., Prevezon Alexander, LLC, Prevezon Soho USA, LLC, Prevezon Seven USA, LLC, Prevezon 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.

         BACKGROUND

         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 BakerHostetler.

         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 chief 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 "review[ed] 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). The draft declaration, never before used in any court proceedings and filed here under seal, details the Russian Treasury Fraud in a manner that closely tracks the allegations of the civil forfeiture complaint ultimately filed by the government. The draft declaration and complaint also both describe the "Rengaz" or "Renaissance" fraud, a 2006 tax refund fraud undertaken by the same criminal organization. That fraud involved subsidiaries of Rengaz Holdings, an investment fund associated with Renaissance Capital. The draft declaration and complaint allege that the same modus operandi was used to perpetrate the Russian Treasury Fraud and the Rengaz fraud, such that the government plans to introduce evidence at trial connecting the Rengaz fraud and the Russian Treasury Fraud.

         Hermitage paid BakerHostetler and Moscow nearly $200, 000 in fees. Hermitage terminated the relationship after roughly nine months and retained new counsel. Its new counsel continued the investigation into tracing the proceeds of the alleged Russian Treasury Fraud and provided its results to the United States government. The government, in turn, conducted its own investigation which led to it filing a civil forfeiture and money laundering action against Prevezon in September 2013. Prevezon hired Moscow and BakerHostetler to defend it against the government's charges.

         Hermitage filed a complaint with the Southern District of New York's Grievance Committee against Moscow and BakerHostetler, protesting Moscow and BakerHostetler's representation of Prevezon in light of their prior representation of Hermitage. On August 7, 2014, the Grievance Committee notified Hermitage it would take no action in the matter, without prejudice to Hermitage pursuing the issue in district court. On September 29, 2014, Hermitage moved for BakerHostetler's disqualification, on the ground that BakerHostetler and Moscow "switched sides" by first pursuing the perpetrators of the Russian Treasury Fraud as counsel for Hermitage and then defending those accused of committing the same fraud. BakerHostetler opposed the motion, arguing that its representation was not adverse to Hermitage because both Hermitage and Prevezon were innocent of any wrongdoing. When Hermitage raised the possibility that BakerHostetler would defend Prevezon by arguing that Hermitage committed the Russian Treasury Fraud, the district court commented that it "seem[ed] . . . very, very speculative" and BakerHostetler's counsel called the allegation "simply untrue." App'x at 175-76. The district court denied the motion, explaining that "[t]here is no indication that [Moscow] is in any substantial way taking a position which involves an attack upon or an attempt to hold liability with regard to Hermitage." App'x at 297.

         Following the close of discovery, the government moved for partial summary judgment against Prevezon, seeking to establish that (1) the Russian Treasury Fraud took place and (2) it qualified as a "specified unlawful activity" to establish liability under federal law.[4] In opposing the motion, Prevezon argued that "[t]he manner in which the [Russian] Treasury Fraud was carried out . . . is an essential element of the Government's claims." App'x at 445-46. While it previously argued that the Russian Treasury Fraud was "irrelevant" to its defense, App'x at 221, Prevezon now argued that:

The version of the fraud on the Russian Treasury (the "Treasury Fraud") told in the first, second and third complaints has been exposed by discovery to be false. It was contrived and skillfully sold by William F. Browder to politicians here and abroad to thwart his arrest for a tax fraud conviction in Russia. This public relations narrative was swallowed whole by the Government, which incorporated it into its complaint without investigation, a situation this Court has described as "troubling." When placed under oath, however, Browder's own witnesses revealed that he authorized the supposedly unauthorized acts alleged in the three complaints and knew about the events that the complaints allege he was unaware of. From this discovery, it is plausible Browder stole the money from the Russian Treasury or, at least, knew about the fraud before it occurred. . . . This case is about fraud on the Russian Treasury; it is not about fraud on an ...

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