Red Notice

by Bill Browder

  Yet in my mind, I had only one choice: to stay. I had to make back all the money I had lost for my clients. I wasn’t going to leave Russia with my tail between my legs. That was simply not how I wanted to be remembered.

  15

  And We All Fall Down

  I hated myself for all that had gone wrong, but remarkably many of my clients didn’t. They had much bigger problems. Because domestic Russian government bonds had yielded more than 30 percent before the crisis, and most people viewed bonds as less risky than stocks, the average investor in my fund had five times as much invested in the Russian bond market as in the Hermitage Fund. Before things went off the rails, the bond returns were so enticing that many investors used leverage to buy even more. While my clients understood that in the worst case their investment in Hermitage could go down to zero, never did they think that their Russian bond portfolios could drop to nothing. Yet this is exactly what happened to many of them.

  One of the biggest casualties was Beny Steinmetz, the Israeli diamond magnate who’d set me up with Edmond. As a result of his bond losses, he had to divest his interests in the Hermitage Fund and the company. Losing Beny as a partner was unfortunate, but, thankfully, Edmond was still in the picture.

  Or so I thought.

  In May 1999, as I was on a weekend trip to London, I picked up the Financial Times and read that Edmond Safra had sold Republic National Bank to HSBC, one of Britain’s largest banks. Like Beny, Edmond’s bank had also bet heavily on Russian bonds and lost. In an earlier phase of his life, Edmond, who had been through more market cycles than I could count, would have ridden this out, but over the previous few years he had become sick with Parkinson’s disease. In the time that we were partners, I could see a steady deterioration in his condition, to the point that it was difficult even to have a conversation with him. For some reason Edmond hadn’t drawn up a succession plan, so if he bowed out, there was nobody to take over. Because of this, he was forced to sell the bank as quickly as he could and HSBC stepped in to conclude a deal.

  Edmond’s departure hit me hard. He was one of the world’s most brilliant financiers—and he was no longer involved in my business.

  My personal life was also disintegrating. Things with Sabrina had gone from bad to worse since my flight from the Villa d’Este. The separation, the stress, and the distance weighed heavily on our relationship. Every time I returned to London for the weekend, we would fight. We were clearly heading toward divorce, though I tried to do everything I could to stop it. I suggested we go for counseling. We went to three different therapists, but none of them gelled for us. I tried extending my trips home to three- and four-day weekends, but she was more annoyed by my presence than pleased by it.

  In spite of all this, she still planned a family break for us in August 1999. Sabrina chose a resort in Greece called the Elounda Beach Hotel. She was excited about staying there and, from the moment we arrived, was incredibly happy and nice to me. She was even sweet. This caught me off guard. I got no cold looks or arguments about work or Russia or my clients, and on the second night we even got a babysitter and left David behind to go to a local taverna. Over dinner I told her a little about Russia, and she went on and on about how wonderful David was, and for those few hours I thought, This isn’t so bad. It’s like how it used to be. I nearly asked her if anything had happened to make her demeanor change so drastically, but I decided to just go with it. I even remember her laughing at some stupid joke I made over dessert.

  The following day was more of the same. We spent the whole day at the beach, playing in the sand and ordering lunch right to our chairs. As the sun set that evening with the three of us returning to the hotel room early to get David into bed, I thought that maybe, for some unknown reason, Sabrina had turned a corner and everything would work out.

  After David fell asleep, I went into the bathroom to wash off the day’s sunscreen and sand. When I was finished, I went to the sink, ran the hot water, and began to shave. Sabrina, who’d freshened up while I was telling David a bedtime story, was in the bedroom reading a magazine. It was the picture of a perfect family vacation.

  As I was finishing up, sliding the razor up the length of my neck, Sabrina appeared in the doorway. “Bill, we have to talk.”

  I lowered the razor into the sink to rinse it, watching her in the mirror. “Sure. What is it?”

  Calmly she said, “I no longer want to be married to you.”

  The razor slipped out of my hand and I fumbled to pick it up. I turned off the water, grabbed a towel, and turned to her. “What?”

  “I no longer want to be married to you. I just can’t do it anymore.”

  “But we seem to be having such a good time,” I said feebly.

  “We were—we are. I’ve been nice because, well, I’ve made up my mind. I don’t see the point in being angry any longer.” She gave me a weak smile, turned, and went back to the bed, leaving me alone with my thoughts.

  I was devastated, but also relieved. We’d reached a stalemate. I didn’t want to live a “normal life with a normal job” in London as she wished, and she wanted nothing to do with the crazy life I lived in Moscow. We didn’t have a partnership by any objective measure, and staying together because I didn’t want the marriage to fail was the wrong reason to stay together. In a way, I was oddly thankful that she had the guts to end it when I didn’t.

  We finished the rest of our Greek vacation and, in spite of the cloud hanging over our marriage, continued to enjoy each other’s company and the company of our little boy. It was as if we were suddenly free to be friends again instead of estranged spouses who could barely stand each other. When the vacation was over, we went to the airport and, before parting to go to separate gates, Sabrina said, “Bill, I know this was my fault. I’m really sorry.”

  “It’s all right,” I said, thinking that while it was gracious of her to say that, I knew that I shared at least an equal portion of the blame.

  “We’re good people, Bill. You’re a good father and I think I’m a good mother. It just wasn’t meant to be.”

  “I know.”

  She kissed me on the cheek, said good-bye, and walked away, pushing David in his stroller. As I watched them leave, the feeling of loss that I was so familiar with overcame me. Once again, I had that visceral and empty feeling in my stomach, but this time it was worse. Losing love was a lot harder than losing money.

  I returned to Russia. As autumn set in, Moscow felt as cold and lonely as anywhere I’d ever been. The one consolation was that in spite of the gigantic losses, my firm managed to stay up and running. Strangely, in the hedge fund business, if you’re down 30 percent or 40 percent your clients will withdraw all their money and you’ll be shut down in no time. However, when you’re down 90 percent, as the Hermitage Fund was in 1999, most clients said to themselves, “What the hell. Might as well hold on and ride it out to see if it recovers.” In spite of my disastrous performance, the fund still had $100 million under management after the crash. This generated enough fees to pay the rent and a small staff and to keep the operation running.

  Except that there was literally nothing to do. From the height of the market to early 1999, trading volumes had declined 99 percent from $100 million a day to $1 million a day, and most of the fund’s positions had become so illiquid that they couldn’t be sold even if I’d wanted to sell. It was also impossible to arrange any meetings with existing or prospective clients. The people who had been so eager to invite me to their yachts didn’t even have fifteen minutes for a cup of tea in their offices.

  The most difficult part of the day was at 6:00 p.m., when business wrapped up and I made my way home. I lived in an expensively refurbished apartment not far from the Kremlin. It was fitted with a Poggenpohl kitchen and had a Jacuzzi and sauna in the bathroom. It could have been a great home, but it lacked a woman’s touch and I kept almost no personal belongings there. It was a cold, sterile, and uninviting place, which just added to my isolation.

 
Each day bled into the next, but on December 3, after spending another day watching a moribund market, the phone rang. It was Sandy Koifman, Edmond’s right-hand man. Sandy had quit Republic after HSBC took over, but we had stayed in touch. Normally his voice was deep and assertive, but as he greeted me he sounded totally different.

  “Bill, I have some very bad news to share with you.”

  It seemed as if bad news was all I got lately. “What is it?”

  “Edmond is dead.” The last word was clearly hard for him to say and I could hear that Sandy—the ex–Israeli fighter pilot—was fighting back tears.

  “What?”

  “He’s dead, Bill.”

  “H-how?”

  “He died in a fire in his apartment in Monaco yesterday.”

  “A fire? What do you mean a fire?”

  “The news is still sketchy,” Sandy said, pulling himself together. “The police aren’t releasing any details and Lily”—Edmond’s wife—“is in a state of shock. From what we understand, one of his night nurses—a man—staged a false home invasion, started a fire, and Edmond and another of his nurses died of smoke inhalation in a safe room.”

  I was speechless. Sandy was too.

  “My God, Sandy,” I finally said. “This is such terrible news. . . . I’m so sorry. So, so sorry.”

  “Thanks, Bill. I’ll be in touch when we know more. I just wanted you to hear it from me.”

  I hung up the phone carefully and quietly. This felt like the last straw. I’d already accepted that I’d lost Edmond as a partner, but he had been more than a partner. Edmond Safra had become my mentor and role model.

  And now he was gone.

  16

  Tuesdays with Morrie

  The year of 1999 was the worst of my life, and I hoped that the new millennium would bring some positive changes. But as New Year’s came and went, it was hard to see how anything was going to get better.

  It didn’t help that everyone I knew in Moscow had left. I’d had a Thursday night poker game with expats and English-speaking Russians, and, at its height in mid-1997, thirteen people regularly attended. But by January 2000, I was the only one left. It was like being the last passenger at an airport baggage carousel. Everyone else had gotten their luggage and gone home, but I was standing there all by myself, watching the creaking metal track go around and around, waiting for my bag—knowing it was lost and would never show up.

  I’d stayed in Moscow for one simple reason: I was going to make my clients’ money back no matter what it took.

  In theory, the post-crash economic conditions should have made that easy. The fund held big positions in most of Russia’s oil and gas companies. These companies sold their oil in dollars but paid their costs in rubles. Their sales had not decreased, but their costs had gone down by 75 percent because of the currency crash. In simple terms, when a company’s costs go down, its profits go up. I estimated that the profits of companies in our portfolio would rise by anywhere from 100 to 700 percent because of the devaluation. All else remaining equal, this should have led to a spectacular recovery in the shares of these companies.

  Except all else didn’t remain equal.

  Prior to the crash, the oligarchs, who were the majority shareholders of these companies, had for the most part acted honestly toward minority shareholders. Why? Because they wanted to get what they viewed as “free money” from Wall Street. Back then, Western investment bankers told them, “We can raise lots of money for you, but if you want it, don’t scandalize your investors.” So, they didn’t.

  This arrangement worked before the crash, generally keeping the oligarchs in line. But after the crash, all the bankers who had anything to do with Russia were fired and those who weren’t put their hands on their hearts and swore to their bosses that they had never even heard of Russia. When the oligarchs called their bankers in 1999 looking for that “free money,” nobody answered. Overnight, they’d become pariahs. Wall Street was closed for business for the Russian oligarchs.

  With no more incentive to behave, and with all these profits piling up after the devaluation, there was no longer any incentive not to steal. Why share the profits with minority investors? What had they done to help? Nothing.

  With the brakes off, the oligarchs embarked on an orgy of stealing. The tools they used were many and with no law enforcement to stop them, their imaginations ran wild. They engaged in asset stripping, dilutions, transfer pricing, and embezzlement, to name but a few of their tricks.

  This was a huge problem that every business person in Russia was obsessed with, and because I’d developed a reputation after my fight with Sidanco, in early January 2000 I was invited by the American Chamber of Commerce in Moscow to give a presentation to the local business community about corporate-governance abuse. It seemed as though I was the only person in Moscow crazy enough to speak publicly about the misdeeds of the Russian oligarchs.

  I decided to use the Yukos oil company as my case study. I could have picked any Russian company, but Yukos was attractive because it had had so many minority-shareholder scandals. I called my presentation “The Armed Forces of Corporate Governance Abuse” to describe the many ways that the oligarchs went about ripping off their minority shareholders. The “Army” was transfer pricing; the “Navy,” asset stripping; and the “Marines,” shareholder dilutions.

  The presentation was scheduled for 8:00 on a snowy morning in January. As my alarm went off at 6:30, I could barely pull myself out of bed. The temperature outside was minus-twenty degrees Celsius, the streets were covered with a fresh coat of snow, and the sun had not yet risen. Because the Moscow stock exchange didn’t open until 11:00 a.m., I didn’t normally get to the office until 10:30. I simply wasn’t used to getting up so early. Besides, who would go to a presentation at 8:00 a.m. on a snowy morning in Moscow? I wouldn’t have gone myself except that I was the speaker.

  Alexei picked me up at 7:45 and drove me the short distance to the American Chamber of Commerce. When I arrived, I was surprised to find the conference room completely full. I made my way in and mingled with the crowd of indistinguishable middle-aged men in gray suits. I couldn’t help but notice that in the midst of this sea of gray was a beautiful young woman in a red-and-orange dress, her hair pulled into a tight bun that rested on top of her head like a ballerina’s. All of a sudden I felt that I had gotten up at the crack of dawn for a good reason. As I made my way toward the front of the room, I gravitated toward her.

  When I reached her, I stuck out my hand. “Hi, I’m Bill Browder.”

  Her grip was firm, her fingers a little cool. “I’m Elena Molokova,” she said professionally.

  “What brings you here at such an early hour?”

  “I’m interested in the Russian investment climate.”

  I handed her my business card. She reluctantly opened her purse and handed me hers. I looked down and saw that she worked for a US public relations firm that advised Mikhail Khodorkovsky, none other than the CEO of Yukos. It now made sense. I was about to rake her company’s biggest client over the coals and they had sent someone to assess the damage.

  “You’re interested in the investment climate?” I asked, the tone of my voice perhaps betraying a bit too much surprise.

  “Of course we are, Mr. Browder,” she answered with a straight face.

  “In that case, I’m glad you came.”

  I walked away with a strange feeling, as if she were pulling me back to her ever so slightly. I couldn’t be sure, but there seemed to be a spark between us, and even though it was way too early in the morning, I felt newly motivated to do a good job with my speech. I went through the presentation with a lot more flair and drama than I would normally have, and it was well received. Elena, however, appeared unmoved. I glanced at her far more often than I should have while speaking, and her expression never changed: professional and unsmiling. I wanted to talk to her again when I was finished, but I was accosted by several men in the room, who acted as a barrier to Elena. I watched
her colorful dress from the corner of my eye as she slid out of the door and out of my life.

  But I still had her card.

  It practically burned a hole in my wallet. I wanted to call her as soon as I got back to the office, but had the good sense to wait an hour. I felt a bit like a high school kid strategizing the best way to ask out a girl without appearing to be too desperate.

  Her phone must have rung seven times before she picked up. She didn’t sound nearly as eager to hear from me as I was to talk to her, but I still succeeded in inviting her to lunch, even if her tone of voice made it clear that she considered it to be a business meal and nothing more. What the hell, I had to start somewhere. At least my foot was in the door.

  Our lunch took place a week later at a Swedish restaurant called Scandinavia, just behind Tverskaya Street near Pushkin Square. The meeting was slightly uncomfortable because neither of us knew what the other person’s agenda was. I supposed she expected me to talk to her about Russian business, Yukos, and corporate governance, and she was clearly confused when I started asking more personal questions, all of which she artfully declined to answer. By the middle of the meal we both understood that we were operating on different wavelengths, but even so, my persistence began to pay off. She didn’t open up entirely, but by the time the bill came I’d learned that Elena was not merely beautiful but incredibly smart. She’d graduated at the top of her class at Moscow State University (the Russian equivalent of Harvard) and had a pair of PhDs, one in economics and the other in political science. That she was working for the enemy made her fiercely attractive to me, even more than she had been when I first laid eyes on her.

  One way or another I had to find a way to get her.

  If she’d been any other Russian woman, this would not have been a tough get. In Moscow, Western men, and especially those with money, were the male equivalents of supermodels. Russian girls would throw themselves at you—and into your bed—almost upon meeting. There was no sport to it at all, no chase, no courting. Just “Hi,” and the next thing you knew, some slender vixen with perfect lips and mysterious eyes was wrapping herself around you as your mind calculated where the nearest bed—or private room of any kind—was.