Case 1:13-cv-06326-TPG Document 152 Filed 10/22/14 Page 1 of 7
`U.S. Department of Justice
`[Type text]
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`United States Attorney
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`Southern District of New York
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`The Silvio J. Mollo Building
`One Saint Andrew’s Plaza
`New York, New York 10007
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` October 22, 2014
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`BY ECF
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`The Honorable Thomas P. Griesa
`United States District Judge
`Southern District of New York
`500 Pearl Street
`New York, New York 10007
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`Re: United States v. Prevezon Holdings, Ltd., et al., 13 Civ. 6326 (TPG)
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`Dear Judge Griesa,
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`The Government writes to provide further information regarding the pending motion by
`non-parties William Browder and Hermitage Capital Management Ltd. (“Hermitage”) to
`disqualify Baker & Hostetler LLP and Baker Botts LLP as counsel for defendants, Docket Items
`(“D.I.”) 124-26. At the conference on October 14, 2014, the degree of relationship between
`Baker & Hostetler’s prior representation and this case was discussed. In light of that discussion,
`the Government writes to provide further information regarding its view of the issues that are
`likely to be significant in the litigation of this case, and of Hermitage’s status as a victim of the
`2007 fraud scheme.
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`I.
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`The Central Issues in This Case
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`In order to establish that the defendants were involved in money laundering, justifying
`forfeiture, the Government principally has to prove: (1) that specified unlawful activity occurred,
`(2) that Prevezon received proceeds traceable to that specified unlawful activity, and (3) that the
`money laundering transactions were made with the requisite guilty mental state. Without
`proving these elements, among others, the Government cannot prevail. 1 Accordingly, the
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`1 The full set of elements necessary for forfeiture and money laundering penalties, are set forth in
`18 U.S.C. §§ 981(a)(1)(A), 983(c)(3), 1956(a), (b), (h), and 1957. Of these, several of them—
`such as the existence of a financial or monetary transaction—are not likely to be the subject of
`substantial dispute. Defendants have indicated they intend to dispute the Government’s
`allegations as to the movements of funds within the Prevezon entities. To the extent this cannot
`be readily resolved based on discovery from the defendants—which the defendants have still not
`produced—it does not appear to overlap with the prior Baker & Hostetler representation.
`Additionally, since the Government, pursuant to 18 U.S.C. § 981(a)(1)(A), seeks forfeiture not
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`Case 1:13-cv-06326-TPG Document 152 Filed 10/22/14 Page 2 of 7
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`complaint in this case sets forth each of these elements. Based on the draft declaration Baker &
`Hostetler prepared for Hermitage, it appears that Baker & Hostetler’s prior representation has
`significant factual overlap with the complaint’s allegations as to the first element (the existence
`of the specified unlawful activity), some overlap as to the second (the tracing of the proceeds of
`specified unlawful activity), and potentially significant overlap as to the third (the guilty mental
`states), depending on the course of discovery. As set forth below, it appears that the defendants
`intend to dispute the complaint’s allegations as to each of these elements.
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`1. The Existence of Specified Unlawful Activity
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`The complaint in this case alleges the existence of the 2007 fraud scheme, a necessary
`element in this case. The draft declaration Baker & Hostetler prepared for Hermitage also
`alleges essentially the same facts regarding the 2007 fraud scheme. Baker & Hostetler now
`apparently intends to dispute the Government’s attempt to prove those facts regarding the 2007
`fraud scheme, a necessary element in the Government’s case.
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`The specified unlawful activity alleged is the 2007 fraud scheme. In order to prevail, the
`Government must prove that the 2007 fraud scheme existed. See, e.g., 18 U.S.C. § 1956(a)(1)
`(requirement that financial transaction “in fact involves the proceeds of specified unlawful
`activity”); 18 U.S.C. § 1957(a) (requiring that property “is derived from specified unlawful
`activity”). In order to plead this element, the Government was required to allege the 2007 fraud
`scheme. Because the fraud scheme was so elaborate, establishing its existence takes a substantial
`portion of the complaint. See, e.g., Compl. ¶¶ 14-16, 18-44. Baker & Hostetler’s draft
`declaration, prepared for Hermitage in the prior representation, also goes into a similar level of
`detail on the same particulars of the 2007 fraud scheme. Compare D.I. 125-12 ¶¶ 3, 12, 15-21,
`30-33 (Baker & Hotstetler draft declaration describing 2007 fraud scheme) with Compl. ¶¶ 14-
`16, 18-44 (complaint describing same scheme). One of the telling indicia of fraudulence in the
`2007 fraud scheme was the strikingly similar modus operandi it shared to the 2006 fraud scheme.
`In order to help establish that the 2007 fraud scheme was in fact a fraud, the complaint sets forth
`this suspiciously similar modus operandi. See Compl. ¶¶ 46-54. The Baker & Hostetler draft
`declaration prepared for Hermitage sets forth the same facts and similarities. Compare D.I. 125-
`12 ¶¶ 47-55 (Baker & Hotstetler draft declaration describing telling similarities between 2007
`fraud scheme and 2006 fraud scheme) with Compl. ¶¶ 46-54 (complaint describing same
`similarities). Accordingly, there is substantial factual overlap between the complaint, which sets
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`just of the laundered $857,354 but also of the property involved in laundering it—a broader set
`of property worth several million dollars—defendants may, if forfeiture is ordered, attempt to
`have the forfeiture reduced based on Eighth Amendment grounds. The ultimate proportionality
`of a forfeiture is not an element and can only be determined after discovery on the issue has
`revealed the full gravity and magnitude of the offense, Supp. R. G(8)(e); United States v. 8
`Gilcrease Lane, 587 F. Supp. 2d 133, 148 n.10 (D.D.C. 2008), but the equity that would remain
`subject to forfeiture under the Government’s proposed Amended Complaint is comparable to a
`ratio of forfeiture to crime proceeds that has been upheld as proportionate. See, e.g., United
`States v. Wyly, 193 F.3d 289, 303 (5th Cir. 1999). This issue is likely to relate in part to the 2007
`fraud scheme, and may thereby have factual overlap to the prior representation.
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`Case 1:13-cv-06326-TPG Document 152 Filed 10/22/14 Page 3 of 7
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`forth the complex 2007 fraud scheme in order to prove a specified unlawful activity, and the
`Baker & Hostetler draft declaration, which sets forth the same facts.
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`The existence of the 2007 fraud scheme is likely to be a significant disputed issue in this
`litigation. The defendants indicated, at the October 14 conference, that the existence of the 2007
`fraud scheme is “history” that they considered “irrelevant.” See Tr., Oct. 14, 2014, at 58. Since
`the Government is required to prove the specified unlawful activity, however, the existence of
`the 2007 fraud scheme is relevant, and it will necessarily be in dispute unless the defendants
`stipulate to it.
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`The defendants appear to intend to dispute at least significant aspects of the existence of
`the 2007 fraud scheme. Since the last conference, counsel for the Government asked counsel for
`the defendants to advise whether they were prepared to stipulate to the relevant paragraphs of the
`complaint (paragraphs 14-16, 18-44, 46-54), and offered to expressly reserve any motions in
`limine seeking to exclude particular facts on the basis of Rule 403. See Ex. A at 1 (email from
`Government to defense counsel). Counsel for the defendants has today rejected that request,
`indicating that they might agree to stipulate that there was a theft from the Russian treasury
`(without conceding that it was specified unlawful activity), but only on the condition that the
`Government delete from the complaint all of the descriptions of how that theft was accomplished
`and other details that may be crucial to proving the defendants’ intent and the ultimate
`proportionality of the forfeiture; agree not to present any witnesses from Hermitage; and agree
`that no Hermitage witnesses have information likely to lead to the discovery of relevant evidence
`relating to the tracing of funds or Prevezon’s intent. See Ex. A at 1-2. In the absence of such an
`agreement—which the Government cannot make since, among other things, the Government
`does intend to call Hermitage witnesses as to such issues and cannot accurately represent that no
`Hermitage person has information likely to lead to discovery of relevant evidence as to such
`topics, see D.I. 141 at 3—the defendants have indicated they intend to dispute the Government’s
`allegations regarding the 2007 fraud scheme. Indeed, in a memorandum of law dating back to
`March of 2014, the defendants have disputed the allegations in the complaint describing the 2007
`fraud scheme. See D.I. 80 at 10 (“The Russian government and the Russian courts tell a different
`version of events than the one relied upon by the Government.”). Accordingly, the defendants
`have already disputed the Government’s allegations regarding the specified unlawful activity—
`an element the Government must prove—and appear to intend to continue to do so.
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`2. The Tracing of the Proceeds of the Specified Unlawful Activity
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`In order to prevail, the Government must prove not merely that the specified unlawful
`activity existed, but that the defendants received its proceeds. The complaint in this case alleges
`that the proceeds of the 2007 fraud scheme were traced to Prevezon through a multi-layered
`series of transfers, a necessary element in this case. The draft declaration Baker & Hostetler
`prepared for Hermitage also alleges essentially the same facts regarding the first layer of these
`transfers. It appears that Baker & Hostetler will now dispute the complaint’s tracing of proceeds
`from the 2007 fraud scheme to Prevezon, apparently including the first step of that tracing.
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`Case 1:13-cv-06326-TPG Document 152 Filed 10/22/14 Page 4 of 7
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`In order to establish that the defendants received fraud proceeds, the complaint traces the
`proceeds of the 2007 fraud scheme to Prevezon. As alleged, the proceeds of the fraud were
`transferred through a number of shell companies in several layers of transactions. The complaint
`alleges that the first layer of transactions—which are the foundation for the following layers—
`were transfers of money in fraudulently-procured tax refunds from the Russian treasury to
`accounts set up by the fraudsters at two Russian banks, Intercommerz and USB. See Compl. ¶¶
`77-81. The Baker & Hostetler draft declaration, prepared for Hermitage, alleges the same facts.
`Compare D.I. 125-12 ¶¶ 4, 33 with Compl. ¶¶ 77-81. The complaint also alleges several
`suspicious indicia regarding these transfers—that the accounts were set up a matter of weeks
`before the U.S. $230 million were wired into them, and that the banks maintaining these
`accounts were extremely small. See Compl. ¶¶ 78-81. The Baker & Hostetler draft declaration
`alleges these facts as well. Compare D.1. 125-12 ¶ 33 with Compl. ¶¶ 77-81.2
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`The tracing of funds from the Russian treasury to Prevezon will be a central disputed
`issue at trial. Defense counsel has repeatedly disputed the Government’s tracing—of which the
`transfers from the Russian treasury are the first step—in its filings and indeed has various
`motions pending due to disputes with the Government’s tracing. See, e.g., D.I. 80 (motion
`seeking dismissal based in part on objections to tracing).3 As stated above, counsel for the
`Government asked counsel for the defendants to advise if they would stipulate to the paragraphs
`of the complaint concerning the transfers from the Russian treasury to the Parfenion and USB
`accounts—i.e., the paragraphs concerning the same facts that were included in Baker &
`Hostetler’s draft declaration—and was advised that they would not enter any stipulations in the
`absence of concessions the Government is not in a position to make (including forgoing calling
`Hermitage witnesses, which the Government presently expects to eventually call, and making a
`representation that Hermitage witnesses do not have information likely to lead to discovery of
`relevant evidence, which is not accurate). Accordingly, it appears that Baker & Hostetler will
`dispute the tracing of the proceeds, including the transfers that their draft declaration describes.
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`3. The Requisite Culpable Mental State
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`In order to prevail, the Government must also prove that the money laundering
`transactions were made with the requisite mental state. The complaint sets forth that Prevezon
`received the fraud proceeds from two Moldovan shell companies and that the funds were wire
`transferred under false descriptions of their purposes. See Compl. ¶¶ 91-94, 101-110. The
`Government is not aware of any indication that Baker & Hostetler’s prior representation of
`Hermitage involved the Moldovan shell companies or Prevezon. Accordingly, the factual
`overlap as to this element of the Government’s case is less direct. However, an exploration of
`the defendant’s intent and knowledge through discovery may well create substantial factual
`overlap with the prior representation, since the details of the 2007 fraud scheme may be key
`evidence showing the defendants’ intent.
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`2 These transfers were made in rubles.
`3 As the Government has explained, the defendants’ contentions in this regard are meritless, see
`D.I. 88 at 15-16, but the defendants continue to press them vigorously.
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`Case 1:13-cv-06326-TPG Document 152 Filed 10/22/14 Page 5 of 7
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`Counsel for the defendants claims that the defendants knew nothing of the 2007 fraud
`scheme. While the Government can still prevail even if this is true,4 the Government and the
`Court are not required to take such denials at face value. 5 Indeed, the Court has already rejected
`essentially the same arguments. See, e.g., Tr., Jan 7, 2014 (D.I. 81-12) at 14-15 (“MR.
`CYMROT . . . There’s nothing here that says that Prevezon knew anything about the Russian
`fraud. There’s nothing here that says that they transferred or that this transfer somehow
`benefited the Russian fraud and the people who did it. That’s our point. THE COURT: I don’t
`read the complaint the way you’re reading it at all.” (emphasis added)); id. at 15 (“MR.
`CYMROT: And none of it is facts that would support a finding that they participated in any way
`in the Russian fraud. They transferred money to Germany. THE COURT: I just completely
`disagree with your reading of the complaint.” (emphasis added)). In any event, a defendant’s
`denial of knowledge that the funds in a transaction are proceeds of crime is hardly surprising—it
`is to be expected in virtually any contested money laundering action. The Government is entitled
`to take discovery to probe whether or not the defendants’ denials of knowledge are true. If in
`fact the defendants did have knowledge of some aspects of the 2007 fraud scheme, then the facts
`regarding the 2007 fraud scheme—many of which are set forth in the Baker & Hostetler draft
`declaration prepared for Hermitage—would be highly relevant to proving the requisite guilty
`mental state.
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`Indeed, the details of the 2007 fraud scheme are quite likely to be relevant to the
`defendants’ intent. The complaint alleges that the defendants received and laundered the
`proceeds of an elaborate fraud scheme through a similarly elaborate network of money
`laundering activity over a short span of time in suspicious circumstances strongly suggesting the
`defendants’ awareness of at least elements of the scheme. In fact, in criminal cases,
`conspirators’ actions in entrusting a defendant with property approximately as valuable as the
`$857,354 at issue here can be the principal evidence supporting an inference—beyond a
`reasonable doubt—that the defendant must have had a trust relationship with the conspirators
`that would have entailed knowledge of their criminal purpose. See United States v. Anderson,
`747 F.3d 51, 66-73 (2d Cir. 2014) (finding that conspirators’ actions in entrusting criminal
`defendant with bag containing $900,000 of drugs, together with other evidence about practices of
`conspiracy, was sufficient evidence to permit inference that conspirators must have informed
`defendant of the contents of the bag, which he never in fact received); see also id. at 66-67
`(citing cases). Indeed, factors such as “the complexity and scale of the money laundering
`scheme,” whether or not there is direct evidence of the defendant’s participation in all aspects of
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`4 To engage in money laundering, a defendant need not know the details, but need only know—
`or consciously avoid knowing—that the funds represent proceeds of some form of crime. See,
`e.g., United States v. Maher, 108 F.3d 1513, 1526 (2d Cir. 1997). Moreover, if the personnel at
`the Moldovan shell companies had the requisite guilty intent, the property involved in the
`transactions would be forfeitable unless Prevezon could affirmatively prove that it was an
`innocent owner under 18 U.S.C. § 983(d).
`5 The defendants’ repeated attempts to adjudicate the issue of their knowledge informally and
`without discovery, which have continued at every stage of this litigation, are premature, as this
`Court has already recognized. See Tr., Mar. 4, 2014 (D.I. 81-3), at 22 (“THE COURT: . . .
`[W]e’re not going to really continue having the merits of the case argued informally in court.”).
`The Court made clear that such issues should be resolved in an “orderly way” instead. Id.
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`Case 1:13-cv-06326-TPG Document 152 Filed 10/22/14 Page 6 of 7
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`Hermitage’s Status as a Victim of the 2007 Fraud Scheme
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`it, are highly relevant to establishing such a fact, even beyond a reasonable doubt. United States
`v. Huezo, 546 F.3d 174, 182 (2d Cir. 2008); see also id. at 181-82 (describing aspects of “large-
`scale conspiracy to launder money” beyond the direct participation of the defendant, relying on
`such complexity to sustain knowledge inference in criminal case). Accordingly, the scale and
`complexity of the underlying criminal activity here—both the 2007 fraud scheme and the pattern
`of laundering its proceeds before a portion of them reached Prevezon, activity that took place just
`weeks after the payment of the tax refunds—may be powerful evidence of the level of trust that
`would have to have existed between the defendants here and those they received the funds from.6
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`In all, of the three principal issues the Government is required to prove in the complaint,
`there is an extremely high degree of factual overlap as to the first (the existence of the 2007 fraud
`scheme), some factual overlap as to the second (the tracing of the 2007 fraud scheme’s proceeds
`to Prevezon), and potentially significant factual overlap as to the third (the requisite mental state
`for commission of money laundering) if, as the allegations of the complaint suggest, the
`defendants’ denials of knowledge are not well founded.
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`II.
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`The Government also writes to advise the Court of its view that Hermitage is a victim of
`the 2007 fraud scheme.7 Although the proceeds of the 2007 fraud scheme consisted of funds
`paid from the Russian treasury as fraudulently-obtained tax refunds, Hermitage was a victim of
`the scheme because the corporate identities of three of the Hermitage Fund’s portfolio
`companies—Rilend, Parfenion, and Makhaon—were fraudulently misappropriated.8
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`This misappropriation involved law enforcement raids of the Moscow offices of
`Hermitage and of Hermitage’s local law firm, the confiscation of documents from these offices,
`the use of these documents to fraudulently re-register these portfolio companies to new owners
`(fraudulently divesting HSBC Guernsey, the trustee holding these companies for the Hermitage
`Fund, of ownership of these companies), and the forgery of contracts and orchestration of sham
`legal proceedings purporting to give rise to huge liabilities on the part of the stolen companies.
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`6 Similarly, if in fact the defendants did have some awareness of the 2007 fraud scheme, or if it
`was foreseeable to them, then the details of that scheme would be highly relevant not just to their
`intent to commit money laundering but also to any claim the defendants might ultimately make
`regarding the proportionality of the forfeiture of more than $857,354 from them. See Tr., Jan 7,
`2014 (D.I. 81-12) at 12 (“THE COURT: I’m not talking about 857,000. I’m talking about the
`broader allegation of Prevezon participating in money laundering in a broad sense, not about
`$857,000.”). If discovery ultimately reveals that the defendants’ understanding in laundering the
`money was more limited, that may affect the Government’s position on the proportionality of the
`requested forfeiture, but where, as here, the defendants received funds under suspicious
`circumstances suggesting a broader understanding, the Government cannot be forced to simply
`take the defendants’ word for it without any discovery.
`7 At the conference, counsel for the defendants stated his belief that Hermitage was not “the
`victim whose funds were stolen” in the 2007 fraud scheme. Tr., Oct. 14, 2014 at 25.
`8 Hermitage is an investment advisory firm that primarily advised the Hermitage Fund, an
`investment fund focused on investments in Russia.
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`Case 1:13-cv-06326-TPG Document 152 Filed 10/22/14 Page 7 of 7
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`These liabilities were then used to steal funds from the Russian treasury through fraudulent tax
`refund applications.
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`The Government believes that Hermitage is among the victims of the 2007 fraud scheme,
`having suffered harm from the theft of these companies from the Hermitage Fund. See 42 U.S.C.
`§ 10607(e)(2)(A) (defining “victim” as “a person that has suffered direct physical, emotional, or
`pecuniary harm as a result of the commission of a crime, including . . . in the case of a victim
`that is an institutional entity, an authorized representative of that entity”); see also U.S. Dep’t of
`Justice, Attorney General Guidelines for Victim & Witness Assistance (“Victim Guidelines”) at
`7, available at http://www.justice.gov/sites/default/files/olp/docs/ag_guidelines2012.pdf (citing
`id.); cf. Victim Guidelines at 10-11 (indicating that, in identity theft cases involving individuals,
`use of personal identification information in commission of crime can cause pecuniary harms
`including “out-of-pocket losses as well as time reasonably spent in an attempt to remediate actual
`or intended harm.”).9
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`Hermitage’s status as a victim does not necessarily give it a pecuniary interest in the
`outcome of this civil forfeiture action, which concerns the United States’ attempts to forfeit
`property involved in the laundering of funds stolen from the Russian treasury through fraud.
`However, the Government believes that Hermitage’s relationship to the 2007 fraud scheme is
`that of a crime victim, having suffered harm as a direct result of the fraudsters’ actions.
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`Very truly yours,
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`PREET BHARARA
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` United States Attorney
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`by: /s/ Paul M. Monteleoni
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`Paul M. Monteleoni
` Christine I. Magdo
` Andrew C. Adams
` Assistant United States Attorneys
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`(212) 637-2219/2297/2340
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`cc: Counsel of Record (by ECF)
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`9 See also Victim Guidelines at 12 (“The victims’ services and rights laws apply to foreign
`nationals meeting the definitions of victim . . . regardless of whether they reside in the United
`States.”); id. at 13 (“Some crimes perpetrated in foreign countries or by persons located in
`foreign countries are also subject to United States jurisdiction.”).