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United States v. Prevezon Holdings, Ltd.

United States District Court, S.D. New York

March 30, 2018

PREVEZON HOLDINGS, LTD., et al., Defendants.

          OPINION & ORDER


         Non-party Hermitage Capital Management Ltd. (“Hermitage”) moves for an award of sanctions against Prevezon Holdings Ltd., et al.'s (“Prevezon”) former attorney, John W. Moscow, Esq., and his law firm, BakerHostetler LLP (“BakerHostetler”). BakerHostetler represented Hermitage in connection with an investigation of a tax fraud in Russia (the “Russian Treasury Fraud”). The Russian Treasury Fraud eventually served as a central factual predicate underlying the Government's theory of liability against Prevezon. After the Government commenced this action, BakerHostetler, which had long ceased representing Hermitage, was retained by Prevezon as defense counsel.

         On multiple occasions, Hermitage objected to BakerHostetler's representation of Prevezon on the basis that BakerHostetler's prior work for Hermitage created an unavoidable conflict of interest. Although Hermitage was never a party in this action, it was concerned that BakerHostetler would use confidential information obtained in the prior representation to advance Prevezon's interests. Hermitage accused BakerHostetler of switching sides to represent Prevezon, a beneficiary of the Russian Treasury Fraud, and to discredit Hermitage's position that it was a victim of that fraud. Even worse, Hermitage feared that BakerHostetler's improper use of confidential information would make Hermitage and its founder, William Browder, vulnerable to criminal prosecution in Russia.

         After demanding BakerHostetler's voluntary recusal to no avail, Hermitage moved to disqualify BakerHostetler in October 2014 and again in December 2015. The District Court denied those motions, holding that Hermitage and Prevezon's interests were not materially adverse to each other, and that the scope of BakerHostetler's prior and current representations were not substantially related. The District Court also found the risk that BakerHostetler would improperly use confidential information obtained from its prior representation to be minimal because the Russian Treasury Fraud had little to do with Prevezon's liability in this action.

         Hermitage's arguments gained more traction in the Court of Appeals. Following the District Court's second disqualification order, Hermitage sought a stay of the order and petitioned the Second Circuit for a writ of mandamus directing BakerHostetler's disqualification.[1] On appeal, the Second Circuit concluded that BakerHostetler's prior and current representations were substantially similar and that its continued representation of Prevezon posed a risk of tainting the trial in this action. Emboldened by the Second Circuit's decision, Hermitage now seeks sanctions in the form of attorneys' fees expended in connection with its disqualification motions. For the reasons that follow, Hermitage's motion is denied.


         Hermitage and Browder were never parties in this action. At all times, the Government's money laundering and civil forfeiture claims were directed at Prevezon. Nevertheless, Hermitage and Browder have, at various junctures in this litigation, made several forays into the shoals of this bitter dispute. Before the Government commenced this action, Hermitage and Browder supplied the Government with relevant information about the Russian Treasury Fraud. In discovery, after Prevezon subpoenaed them for relevant documents, Hermitage and Browder engaged in motion practice to quash the subpoenas and avoid deposition. Prevezon eventually deposed Browder about his knowledge and rumored role in the Russian Treasury Fraud. And on multiple occasions, Hermitage and Browder sought to disqualify Prevezon's original choice of counsel, BakerHostetler.

         On May 15, 2017, the Government and Prevezon settled the claims in this action. But before the ink on that settlement had dried, Hermitage fired off a sanctions motion against Moscow and BakerHostetler.[2] As if the Second Circuit vindication of Hermitage's objection was not enough, Hermitage seeks to hold its former counsel accountable for what it perceived as “unprecedented disloyalty.” Hermitage's motion for sanctions re-opens an internecine saga marked by years of sparring between the parties about the merits of Hermitage's disqualification bid. Unsurprisingly, those efforts were expensive. Hermitage now seeks to recoup over a million dollars in attorneys' fees expended in its quest to disqualify BakerHostetler.

         I. Hermitage's Involvement in This Action

         Despite their status as non-parties, Hermitage and Browder have cast a long shadow over this litigation in many ways, but none more important than their involvement in the Russian Treasury Fraud. The illicit proceeds derived from that fraud represent the starting point of the money laundering scheme undergirding the Government's claims against Prevezon.

         In 2007, a Russian criminal organization (the “Organization”) orchestrated the Russian Treasury Fraud-an elaborate tax refund scheme resulting in a fraudulently-obtained tax refund of approximately $230 million. To execute the scheme, members of the Organization raided Hermitage's Moscow office and its Russian law firm, Firestone Duncan. During the raid, the Organization stole corporate documents associated with three portfolio companies under Hermitage's control. The Organization then used those documents to transfer ownership of Hermitage's portfolio companies to themselves. Members of the Organization caused the portfolio companies to enter into contracts with shell companies for no other purpose than to generate sham litigation between the companies. That collusive litigation eventually resulted in judgments totaling $973 million against Hermitage's portfolio companies. The Organization then submitted the judgments in connection with tax refund applications on behalf of the portfolio companies. A few days after the applications were filed, the Organization received a $230 million refund. See United States v. Prevezon Holdings, Ltd., 251 F.Supp.3d 684, 687 (S.D.N.Y. 2017).

         After learning that its portfolio companies were stolen, Hermitage began to investigate the origins of the Russian Treasury Fraud. As an initial step, Hermitage reported the crime to Russian law enforcement authorities, filed six criminal complaints against members of the Organization, and deployed its lawyers and accountants to investigate. But instead of assisting Hermitage in recouping its losses, the Russian authorities retaliated against Hermitage and Browder by accusing them of orchestrating the Russian Treasury Fraud.

         II. Hermitage's Retention of BakerHostetler as Counsel

         In September 2008, Hermitage hired Moscow and BakerHostetler. They were tasked with “gather[ing] evidence for them to defend [Hermitage] in Russia, ” collecting evidence on individuals who may have been responsible for the fraud, and to convince law enforcement authorities in other jurisdictions to prosecute the parties responsible for the Russian Treasury Fraud. The engagement letter[3] between BakerHostetler and Hermitage provides more details on the parameters of BakerHostetler's representation:

In this engagement, [BakerHostetler] expect[s] 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.

(Declaration of Mark A. Cymrot in Opposition to Motion for Attorneys' Fees, ECF No. 731 (“Cymrot Decl.”), Ex. E at 1.)

         During the course of BakerHostetler's nine-month engagement, 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.” United States v. Prevezon Holdings Ltd., 839 F.3d 227, 231 (2d Cir. 2016). Moscow also “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 . . . and with the office of the Attorney General in the British Virgin Islands.” Prevezon Holdings, 839 F.3d at 231. BakerHostetler “reviewed bank records and researched a proper service agent for a bank involved in routing proceeds of the Russian Treasury Fraud.” Prevezon Holdings, 839 F.3d at 231.

         BakerHostetler's work also encompassed collecting evidence supporting Hermitage's claims against certain parties in the Russian Federation. The firm drafted a twenty-five page declaration in support of Hermitage's application under 28 U.S.C. § 1782 seeking documents from Renaissance Capital (the “Declaration”). The Declaration references and describes the Russian Treasury Fraud. (Declaration of Jacob W. Buchdahl in Support of Motion for Attorneys' Fees, ECF No. 719 (“Buchdahl Decl.”), Ex. 1 at ¶¶ 10-33.) It also enumerates the details of another fraud strikingly similar to the Russian Treasury Fraud, and attributes much of the underlying misconduct to Renaissance Capital (the “Renaissance Fraud”). (Buchdahl Decl., Ex. 1 at ¶¶ 36-67.) In sum, the proposed § 1782 application sought U.S.-based discovery from correspondent U.S. banks of accounts into which proceeds of both the Renaissance Fraud and the Russian Treasury Fraud were deposited. Hermitage claimed that tracing these proceeds were critical to prosecuting its claims in the Russian Federation and recovering the proceeds of the Russian Treasury Fraud. (Buchdahl Decl., Ex. 1 at ¶¶ 7, 73-77.)

         Before BakerHostetler could file the Declaration, however, Hermitage terminated the firm's engagement and retained new counsel. Hermitage's new law firm, Brown Rudnick, subsequently expanded the scope of the Declaration. After filing the § 1782 application, Brown Rudnick continued investigating and tracing the proceeds of the Russian Treasury Fraud. Later, it presented its findings to the Government.

         III. Prevezon's Retention of BakerHostetler and Hermitage's Initial Objection

         In September 2013-approximately four years after BakerHostetler ceased representing Hermitage-the Government filed this forfeiture action against Prevezon. Prevezon retained BakerHostetler as defense counsel. In October 2013, Hermitage's counsel at Brown Rudnick alerted BakerHostetler that the “adverse interests of Prevezon to those of our clients immediately place [BakerHostetler] and certain of its members in an actual conflict of interest” under Rule 1.9 of the New York Rules of Professional Conduct. (Cymrot Decl., Ex. A at 4.) As a former client, Hermitage claimed that BakerHostetler possessed “material[] information and knowledge which should not be available to Prevezon, ” and demanded that BakerHostetler “recuse [itself] from the case immediately.” (Cymrot Decl., Ex. A at 4.) Absent BakerHostetler's voluntary recusal, Hermitage threatened to file a declaratory judgment action seeking disqualification.

         In November 2013, BakerHostetler declined to withdraw. It explained that its prior representation of Hermitage was limited in scope and did not involve the exchange of confidential information that it believed necessary to defend Prevezon. BakerHostetler also disagreed that Prevezon and Hermitage's interests were materially adverse because Hermitage was not a party to the Government's civil forfeiture action. (Cymrot Decl., Ex. B at 3.) Although BakerHostetler explained that it would re-consider its position if Hermitage could “identify confidential information in [BakerHostetler's] possession or an interest of Hermitage adverse to those of the Prevezon defendants, ” (Cymrot Decl., Ex. B at 3), Hermitage did not respond or move to disqualify BakerHostetler.

         IV. Hermitage's First Motion to Disqualify BakerHostetler

         About a year later, in September 2014, Hermitage moved to disqualify BakerHostetler.[4] BakerHostetler opposed the motion, arguing that Hermitage had “failed to articulate what cognizable interest it has as a bystander in this matter, and how its interests are adverse, much less materially adverse, to those of Prevezon-particularly when Hermitage is not presently a witness and no discovery has been sought from it.” (Prevezon Memo. of Law in Opposition to First Motion to Disqualify, ECF No. 134 (“Prevezon First DQ Opp.”), at 16 (emphasis original).) To support its position, BakerHostetler submitted the opinion of Professor Roy D. Simon, a legal ethics expert, who declared that no material adversity existed between Hermitage and BakerHostetler. Rather, Professor Simon explained that Hermitage merely had a “rooting interest” in this litigation-“it is just a bystander rooting for one side to win.” (Declaration of Roy D. Simon, Jr., ECF No. 136 (“Simon Decl.”), at ¶ 29.) And at oral argument, BakerHostetler represented that Prevezon did “not want to offer [Browder] as a witness; we want to take a discovery deposition, that's all, because the government named him.” (Hr'g Tr. dated October 14, 2014, ECF No. 153 (“Oct. 14, 2014 Tr.”), at 9:1-3.)

         When Hermitage hypothesized that Prevezon could seek to shift the blame onto Hermitage as part of its defense in this action, the District Court remarked that the possibility of that was “very speculative.” (Oct. 14, 2014 Tr. at 13:3.) The District Court concluded that “the issues [here] . . . are different in all substantial respects from what [Moscow and BakerHostetler] dealt with when [they] represented Hermitage back in 2008 and early 2009.” (H'rg Tr. dated October 23, 2014, ECF No. 164 (“Oct. 23, 2014 Tr.”), at 69:12-14.) The court further commented that “there is no indication that [Moscow or BakerHostetler are] in any substantial way taking a position which ...

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