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U.S. Appeals Court Boots Defense Lawyers In Magnitsky Money Fraud Case

  • Mike Eckel

Lawyer Sergei Magnitsky died in Russian pretrial detention in 2009.

Lawyer Sergei Magnitsky died in Russian pretrial detention in 2009.

WASHINGTON -- A U.S. appeals court has disqualified lawyers for a company accused of laundering the proceeds of a massive Russian tax fraud, whose fallout led Washington to sanction numerous Russians and helped poison U.S.-Russian relations.

The ruling by the Second Circuit Court of Appeals on October 17 was an incremental but noteworthy development that effectively paralyzes the legal team defending the company, Prevezon, which U.S. prosecutors have linked to a Russian businessman.

The three-judge panel ruled that a lower court "abused its discretion" by refusing to disqualify the legal team, who previously worked with the investment fund Hermitage Capital. A whistleblowing lawyer working for Hermitage, Sergei Magnitsky, helped investigate the $230 million tax fraud before his death in a Russian jail in 2009.

Lawyers for Hermitage, owned by British-American investor William Browder, argued that the involvement of the lawyers from the U.S. firm Baker Hostetler on Prevezon's behalf posed a conflict of interest.

"This is a precedent-setting ruling which shows the legal profession that they cannot change sides from representing victims to representing perpetrators of the same crime without grave professional consequences," Browder, a vocal Kremlin foe, told RFE/RL in an email.

U.S. prosecutors have accused Prevezon of buying luxury real estate in Manhattan using some of the proceeds from the $230 million tax fraud that first came to light in 2008.

Based on Magnitsky's research, Hermitage went public with details of the fraud, saying Russian law enforcement and tax officials colluded to illegally use companies it had owned to steal the massive sum from Russian coffers.

Magnitsky later died while in pretrial detention on fraud charges that his supporters said were retribution for blowing the whistle on the scam. His friends and family say he was tortured while incarcerated, and a Council of Europe investigation concluded that the conditions leading up to his death amounted to torture.

Russian Retaliation

Russian authorities later convicted Magnitsky posthumously of fraud, while a Russian court also convicted Browder in absentia on similar charges.

With intense lobbying by Browder, the U.S. Congress passed legislation in 2012 bearing Magnitsky’s name, penalizing those accused of complicity in the tax fraud and his death, as well as other alleged Russian rights abusers. After President Barack Obama signed the bill into law, the Kremlin retaliated by banning Americans from adopting Russian children and sanctioning several top U.S. officials.

In 2013, U.S. prosecutors moved to seize Prevezon's assets as part of a civil asset forfeiture, a legal tool that allows the seizure of property if it is shown to be connected to criminal activity.

U.S authorities said as recently as last year that Prevezon's owner was Denis Katsyv, whose father is the former top transportation official for the Moscow region.

Both the company and Katsyv himself have denied accusations of involvement with the stolen funds. He is not facing criminal charges in either the United States or Russia, as he pointed out in a February 2014 affidavit, nor has he been sanctioned under the Magnitsky Act.

Court records, however, indicate a U.S. grand jury has been investigating the money laundering allegations.

Some Swiss bank accounts reportedly connected to Katsyv have also been frozen.

Michael Mukasey, a former U.S. attorney general who is now a private lawyer helping Prevezon with the appeal, said the defense team was disappointed by the ruling, and that no decisions had been made yet about whether to appeal further.

"We are helping the client consider its options," Mukasey told RFE/RL in an e-mailed statement.

The Magnitsky Act, which has publicly hit 39 Russians with sanctions and an unspecified number secretly, became law just months after Vladimir Putin returned to the Russian presidency. The Kremlin has repeatedly cited it as a major irritant for U.S.-Russian relations.

Earlier this month, in announcing the suspension of a symbolic plutonium disposal agreement with the United States, Putin cited removal of the Magnitsky Act as a precondition for resuming the deal and other agreements.