2021-06-15 Forbes - Secrets of Financial Pyramids: Why a Case was Initiated Against QBF Employees and How the Company Transferred Money to Offshores by Artur Arutyunov | Date: 15 June 2021 | Forbes

Secrets of Financial Pyramids: Why a Case was Initiated Against QBF Employees and How the Company Transferred Money to Offshores

Author: Artur Arutyunov | Date: 15 June 2021

In late May, the newspaper "Kommersant" reported that the Interior Ministry's investigative department initiated a criminal case of large-scale fraud against employees of the investment company QBF. After nearly a year of investigation, it was concluded that QBF, occupying several floors in the "Capital City" tower in Moscow-City, attracted individual investments in Moscow, St. Petersburg, and its branches in the Urals, Siberia, and the Volga region, and then transferred the funds offshore. The company primarily targeted affluent clients, anticipating that they wouldn't turn to the police as they wouldn't be able to prove the legality of the funds they invested.

As Forbes discovered, this assumption was wrong. On April 8, the Interior Ministry initiated a case against QBF's Managing Director Zelimkhan Munaev, company lawyer Evgenia Rossieva, and two other top managers based on a complaint by the 24-year-old son of a former official from Yekaterinburg, said Munaev's lawyer, Sergey Borodin. Munaev and Rossieva were arrested and are currently in pre-trial detention.

Maxim Borzenkov, the son of former Yekaterinburg Deputy Mayor Ilya Borzenkov, filed the complaint. The elder Borzenkov confirmed to Forbes that between 2016-2018, his family entrusted funds to QBF. However, when they decided to withdraw, they faced issues. "Our family's funds invested in QBF were stolen. Therefore, unfortunately, we had to turn to law enforcement agencies," said Ilya Borzenkov. He did not specify the investment amount. Borodin stated that between 2016-2018, Borzenkov transferred over 1 billion rubles to QBF in several instalments.

Ilya Borzenkov left his position as Yekaterinburg's Deputy Mayor in 2008 and subsequently engaged in business. He owned the "Nord" electronics and tech store, which he sold in 2020. After his family turned to the authorities, media reports emerged suggesting the Interior Ministry's Investigative Committee suspected him of laundering state funds from Yekaterinburg's budget through QBF. He told Forbes that he left the mayor's office over 12 years ago and considers the media reports as revenge from someone within QBF.

Law enforcement previously detained Munaev in 2019 after a client who entrusted QBF with just over $1 million filed a criminal case. This case is still under investigation. Borodin also told Forbes that over the past three years, the Central Bank conducted several inspections at QBF, coinciding with searches at the company's offices and employees' homes. However, no violations were identified during these inspections.

On June 3, the Central Bank prohibited QBF from concluding new brokerage service agreements and trading derivatives in the OTC market until November 29, 2021. The Central Bank statement mentioned that the company's actions put its clients at risk. A QBF representative said there's no connection between the criminal case and the inspection. Forbes has reached out to the Central Bank for comment.

How the Scheme Worked

The investigation considers Roman Shpakov, Chairman of QBF's Board of Directors, as the organizer of the offshore scheme, a QBF client who testified told Forbes. According to "Kommersant", Shpakov left for the UAE in January 2021.

The current CEO of QBF, Stanislav Matyukhin, worked for seven years in the Federal Service for Financial Markets (FSFM) and then in the Bank of Russia as the Deputy Head of the Licensing Department of Joint-Stock Investment Funds, as per his profile on the QBF website. Forbes couldn't determine if he's involved in the case.

QBF's Investment Schemes Revealed

QBF offered its clients the opportunity to invest money under a fiduciary management agreement or through a brokerage or individual investment account. The Russian company LLC IC "QBF" holds a license from the Central Bank. However, in the office, clients were proposed to sign agreements not only with the Russian entity but also with the Cypriot QB Capital, according to five QBF clients who spoke to Forbes.

After clients signed these contracts, their money was first sent to accounts of Cypriot companies and then transferred to the Cayman or Canary Islands, or Hong Kong. Sometimes, managers openly suggested clients invest a portion of the sum in Cypriot companies, one client shared. A portion of the money was "laundered" in Russia — QBF invested them in developer projects, "Kommersant" mentioned, citing an unnamed source.

QBF provided investors with reports stating that their funds were invested in stocks or other financial assets. However, one QBF client claimed that these reports were "fake". Occasionally, the company even paid out a return, possibly funded by attracting new client funds, he notes.

QBF clients created a community on the banki.ru forum in 2018. As of now, it has 1050 messages. Users share stories about document substitution during contract signing, offshores, and issues with fund withdrawals. For instance, one forum participant (who requested anonymity) told Forbes that he had signed two contracts: one with Russian QBF, where Munaev was the director, and another with Cypriot QB Capital. Later, QB Capital was liquidated, and he decided to withdraw his money. When he came to sign the necessary papers, the financial advisor presented him with a new agreement — with White Lake Management, registered in the Cayman Islands. He never received his money.

QBF client Georgiy Lomaya wanted to participate in the Xiaomi IPO and entrusted the company with $40,000 in early 2018. "Instead of a funds management agreement with QBF, which had a Central Bank license, I was handed a contract with QBF Advisory — a 'middleman company' without a license but with a similar name," says Lomaya.

He signed the documents, after which his money was transferred to the Canary Islands. He only learned of this when he began receiving "investment" reports from an unknown company. "I asked my QBF manager about it, and he informed me of the jurisdiction change. That's when I demanded my money back," says Lomaya. The contract he signed mentioned that he could retrieve his money two months after the request. However, to date, he's only received half. "During this time, I've had three managers, all with one goal — to stall," he shares.

"I had significant issues retrieving my money from QBF. Recalling this experience is traumatic for me," says former client Vera Kuznetsova. In 2018, she entrusted QBF with money she got from selling a two-room apartment. After requesting a withdrawal, her personal manager began responding reluctantly and eventually ignored her messages altogether. Consequently, Kuznetsova sought legal advice. "They didn't want to go to court. Eventually, I managed to retrieve my money without legal intervention. But it was in rubles, even though I had invested in foreign currency. It was inconvenient and financially 'losing'," she says.

QBF clients who signed brokerage service agreements to participate in IPOs also faced withdrawal issues. "QBF attracted me with a large number of IPOs they participate in and a larger allocation than competitors," shared Alexander Kondrashov, author of the Telegram channel KondrashovInvest. In the fall of 2020, he transferred 2 million rubles to QBF to participate in various IPOs. However, one thing that alarmed him was that information about executed deals was sent to him in manually updated Excel spreadsheets, unlike major brokers with their platforms.

Another issue was that QBF revealed IPO allocation (how many shares the client would eventually receive) to clients after two hours of trading. Typically, this information is known before trading begins. QBF managers changed allocation size to their advantage — if share prices fell after the IPO, they claimed to have almost fully met the request; if it rose, they provided slightly more allocation than competitors, Kondrashov says. "I had an instance where I invested in the IPO of biotech company Kodiak. After trading started, shares fell by 30-40%, and they set a high allocation. Everything I had earned with QBF turned to dust," he shares. However, later Kodiak shares rose, and Kondrashov managed to profit. He could withdraw his money only four months after his request.

Allocation is indeed usually known before trading begins, a standard practice, a manager of one of the major investment companies told Forbes. Abnormally high allocations of 70-90% look suspicious, especially when talking about IPOs of foreign companies, he added — typically, allocations in IPOs of Western companies don't exceed 10-20%.

Response from QBF and Views of Lawyers and NAUFOR

The QBF press service did not respond to Forbes' questions regarding the transfer of client funds to foreign jurisdictions. However, they added that "every personal inquiry is promptly addressed, and a considered lawful decision is made on it."

What Lawyers and NAUFOR Say

QBF did not violate the law by offering clients to sign an agreement with a foreign company, says Oles Gruzdev, a lawyer from Forward Legal. However, this allowed QBF to escape the supervision of the Central Bank and also to conceal the ultimate beneficiary, he notes. If the investigation proves that QBF's leaders intentionally stole their investors' money, the responsibility will also fall on the Central Bank, as the regulator should have timely identified the financial pyramid, Gruzdev believes.

The Central Bank is critical of the practice of attracting money to foreign companies through the offices of Russian organizations, says Alexey Timofeev, the head of the National Association of Stock Market Participants (NAUFOR). The regulator advises Russian licensed companies to avoid this because such a practice misleads the client - they don't always understand that they fall under the jurisdiction of another country. By signing an agreement with a foreign organization, the client is subject to the laws operating in that country and cannot count on the protection of the Bank of Russia and Russian organizations representing investors' interests, Timofeev says.

The investigator in the QBF case declined to answer Forbes' questions, and both the Interior Ministry (MVD) and the Central Bank did not respond to inquiries.