by Bill Browder
The expression on her face never changed, and she had the same remarkable calm that she had always had in the past. She said quietly, “Let’s see what they do next and then we’ll deal with it. These people may be nasty, but they’re only human, just like everybody else. They’ll make mistakes.”
Elena squeezed my hand and gave me one of her soft smiles.
“What about our vacation?” I asked. We had a family trip planned for August, as soon as the baby could travel.
“That’s simple, Bill. We go. We carry on with our lives.”
Thankfully the next few weeks were quiet at work, with no more alarming Russian information. In mid-August 2007, we boarded a plane to make the short flight to Marseille in the south of France. Veronica slept most of the way, and Jessica and I played a little game with a plastic bottle and a bag containing half a dozen wads of paper. David handed us bottles and rags and favorite toys and snacks and did his homework in between. We touched down in Marseille, and I automatically turned on my BlackBerry to see if I’d received any calls or emails. There was nothing—nothing important, anyway—and I took this to be a good omen for the trip.
We disembarked and made our way through the airport. We collected our bags and went outside to wait for our van. As soon as we stepped outside, the heat—thick and full and pleasant—washed over us. Our driver helped us load our things and we piled in. As we pulled away from the curb, my mobile phone rang. It was Ivan.
“Bill, it’s happening again,” he said, panic-stricken.
Without even knowing what he was about to say, my leg started twitching. His panic was contagious. “What’s happening?”
“The police are raiding Credit Suisse in Moscow.”
“What does that have to do with us?”
“They’re searching for anything that belongs to Hermitage.”
“But we don’t have anything there,” I pointed out.
“True, but the police don’t seem to know that.”
“What are they looking for then?”
“Hold on. I’ve got a copy of the search warrant.” He dipped off the line and was back in half a minute. “They’re searching for anything that belongs to Hermitage Capital Management, Hermitage Capital Services, Hermitage Capital Asset Management, Hermitage Asset Management. . . . It goes on for two more pages. Should I continue?”
“No.”
Apparently, the police were playing some strange game of Battleship, using every possible formulation of our company’s name in hopes of landing a direct hit. I almost had to laugh at the amateurishness of it.
“Who’s leading the raid?” I asked.
“That’s the really fucked-up part, Bill. It’s Artem Kuznetsov.”
Goddamm it! Artem Kuznetsov? He seemed to have his hands in everything bad that was happening to us in Russia.
We hung up, but I knew that we had just turned another corner. Aslan, our source, had been right—these people were indeed after our assets. The only thing I couldn’t understand was why they didn’t know that we no longer had any assets in Russia. Weren’t the Russian secret police smarter than that? Perhaps not. As Elena had pointed out, maybe they really were just as fallible as everyone else.
Kuznetsov left Credit Suisse empty-handed, but he kept trying to find Hermitage assets. Over the next two weeks, as I tried to enjoy the warmth of southern France, Kuznetsov raided more banks in Moscow. He raided HSBC, Citibank, and ING; in each instance he came away with nothing.
As I learned about each of these raids, I was drawn further and further from my family. Instead of decompressing, singing lullabies to Veronica and Jessica, and playing with David in the pool, I spent most of my holiday on conference calls as we tried to figure out what our enemies were going to do next.
When my “vacation” was over, I went back to London and huddled with the team to plan our next steps. The key legal issue was the criminal case against Ivan. I didn’t really care about the bank raids, but I profoundly cared about anything that might lead to Ivan’s being arrested or extradited.
Since Eduard had found Major Karpov to be so unforthcoming about Ivan’s case, Sergei came up with an interesting idea of how we might get more information. “If the police won’t tell us what they’re doing, why don’t we go directly to the tax authorities and see what they have to say?”
This was a good idea, and we instructed our accounting firm to send a letter to the Moscow tax office where Kameya had submitted its returns, asking if Kameya owed any taxes.
On September 13, Sergei called Ivan back almost giddy with excitement. “The accountants got a reply to the letter. You won’t believe this, but it says that Kameya doesn’t owe any money at all. In fact, it says that Kameya actually overpaid its taxes by a hundred and forty thousand dollars!”
When Ivan told me this, I was amazed. This was ironclad proof that the charges against him were utterly bogus. It was as if members of the New York City Police Department had raided a Manhattan office on suspicion of tax evasion when the IRS had no problem with the taxes in question. No matter how distorted the Russian legal system was, this letter completely exonerated Ivan.
After this, I began to relax for the first time in months. As September moved into October, no more bad news came out of Russia. I had been operating in full-blown crisis mode, but over that fall, little by little my Russian crisis meetings started to be replaced by regular investment meetings. It was a great relief to talk with analysts about stocks instead of lawyers about raids.
One country that kept on coming up in these meetings was South Korea.
South Korea is hardly a developing country like Thailand or Indonesia, but its stock market traded at a 40 percent discount to the United States on a price-earnings ratio basis. This made it interesting for an investor like me. If I could find no good reason for this discount, then certain Korean stocks could potentially re-rate. I decided to get on a plane in October to visit some Korean companies to determine why their equities were so cheap.
I arrived in Seoul on the evening of Sunday, October 14. After a twelve-hour flight and a two-hour drive from Incheon Airport into town, I checked into the Intercontinental and unpacked. Even though it was 11:00 p.m. in Seoul, my body thought it was early afternoon. I spent most of that night trying and failing to go to sleep and eventually gave up. I pulled myself out of bed and sat at the window overlooking the lights of Seoul. The city—bright and twinkling and distinctly foreign—stood outside like a scene from a movie. Whether in Tokyo, Beijing, Hong Kong, or Bangkok, every Western traveler seems to have one of these jet-lagged, late-night moments upon arriving in Asia.
I got only a few hours of sleep that night and had a painful time getting out of bed in the morning to meet Kevin Park, a thirty-five-year-old Korean broker who was taking me to visit various companies. He’d arranged meetings with banks, a real estate company, and an auto parts supplier. The jet lag made every meeting drag, and I practically had to pinch myself under the table to stay awake. It was a hard day.
By the evening, I was ready to collapse, but Kevin insisted on taking me to a Korean barbecue. He had been so helpful and earnest in planning the trip I couldn’t turn him down. I drank two Diet Cokes in my room, splashed some cold water on my face, and met him in the hotel lobby. At the restaurant we ordered bulgogi, bibimbap, and kimchi. At the end of dinner, just when I thought I could finally go back to the hotel and fall into bed, Kevin told me we were meeting some of his work colleagues for drinks at a nearby karaoke bar. It was excruciating as he and his friends tried to ply me with Johnnie Walker Black Label as they took turns at the karaoke machine. Finally, at midnight, when I could no longer keep my eyes open, he took pity on me and put me in a taxi back to the hotel.
The next day consisted of more meetings and more food, yet in spite of the jet lag and overbearing hospitality, I was having fun being a regular investment analyst again and I savored being momentarily removed from the grave things going on in Russia.
I returned to the Interc
ontinental at the end of the day to check my messages. British mobile phones don’t work in Korea, so my office was forwarding my messages to the hotel. As I leafed through a little stack of white paper in the elevator, I saw one from Vadim that read, “Call me when you get this. Urgent.”
Vadim never overreacted, so when he said “urgent,” it really was urgent. My heart started pounding as I raced to my room to make the call.
He picked up on the first ring. “Bill, we got a call from a bailiff at the Saint Petersburg court early this morning. He said there’s a judgment against one of our Russian investment companies, and he wants to know where he can find the money to satisfy it.” Although we had sold all of our shares in Russia, we had to keep the empty investment holding companies in place for three years in order to liquidate them properly.
“Judgment? What judgment? What’s he talking about?”
“I don’t know.”
“Do you know if this person is even real?” It was perfectly plausible that this was some kind of clumsy setup.
“No, but I don’t think we should ignore it.”
“Of course not. How much money was he talking about?” I imagined that we had misplaced a $200 courier bill and this had somehow found its way to court.
“Seventy-one million dollars.”
Seventy-one million dollars? “That’s insane, Vadim! What is this about?”
“I have no idea, Bill.”
“Vadim, get Eduard and Sergei on this ASAP. We need to find out what’s going on.”
“I will.”
My week of distraction had been shattered. The Russians hadn’t given up at all.
This whole bailiff thing was ludicrous. Where the hell did this claim come from? Who was behind it? How could they make a claim on assets that were no longer even in Russia? They couldn’t. Or could they?
I could barely think about Korea anymore. I had to get back to London as soon as possible. I called Kevin, apologized profusely that I wouldn’t be able to make dinner, and asked him to cancel the rest of my meetings. I then called Korean Air and booked the first flight to London the next morning.
After the long flight, I went straight to the office to meet Vadim and Ivan. We settled into the conference room and they debriefed me on what they’d learned while I was in the air.
The first thing was that the judgment was indeed real. Eduard had taken the train to Saint Petersburg, gone to the court, retrieved the case file, and taken pictures of the documents with his digital camera. Vadim pulled one of these pictures from a stack of papers and laid it in front of me. He pointed at a word on the page. “This says Mahaon,” which was one of the fund’s dormant investment holding companies. “And this is the amount.” It was in rubles, but I did a quick mental calculation and could see that it was roughly $71 million.
“How could we not have known about this?” I demanded, thinking it was some colossal oversight on our side.
“Sergei was wondering the same thing,” Vadim said. “While Eduard was in Saint Petersburg, Sergei checked the company ownership database.”
“And?” I asked with a sinking feeling.
Ivan sighed. “Mahaon’s been stolen, Bill.”
“What do you mean stolen? How do you steal a company?”
Ivan, who knew a bit about the company registration process, said, “It’s not simple. But basically a company’s owners can be illegally changed without you knowing if the person taking control of the company has the company’s original seals, certificates of ownership, and registration files.”
This hit me hard. “Those are the documents that were seized by the police,” I said quietly. “When they raided Jamie’s office.”
“Exactly,” Ivan confirmed.
He explained that once this was done, the new owners could act just like any other owners of a company. They could run it, liquidate it, take its assets, relocate it—anything they wanted.
Everything had now become clear. We had become the victims of something called a “Russian raider attack.” These typically involved corrupt police officers fabricating criminal cases, corrupt judges approving the seizure of assets, and organized criminals hurting anyone who stood in the way. The practice was so common that Vedomosti, the independent Russian newspaper, had even published a menu of “raider” services with prices: freezing assets—$50,000; opening a criminal case—$50,000; securing a court order—$300,000; etc. The only way to fight these Russian raiders effectively was to retaliate with extreme violence, which was obviously not an option for us.
Sergei spent the night doing research and called us the next day to explain how it had all happened: “Mahaon, plus two other companies that belonged to you, have been reregistered to a company called Pluton, located in Kazan.” Kazan is the provincial capital of Tatarstan, a semiautonomous republic located in central Russia.
“Who owns Pluton?” I asked.
“A man named Viktor Markelov, who, according to the criminal records database, was convicted for manslaughter in 2001.”
“Unbelievable!” I exclaimed. “So the police raid our offices, seize a ton of documents, and then use a convicted killer to fraudulently reregister our companies?”
“That’s exactly what happened,” Sergei said. “And it gets worse. Those documents were then used to forge a bunch of backdated contracts that claim your stolen company owes seventy-one million dollars to an empty shell company that you never did any business with.”
“My God,” I said.
“Wait. It gets even worse. Those forged contracts were taken to court, and a lawyer who you didn’t hire showed up to defend your companies. As soon as the case started, he pleaded guilty to seventy-one million dollars in liabilities.”
As rotten and incomprehensible as this was, everything now made sense. As the story crystallized in front of my eyes, I started laughing. At first a little, then loudly. There was nothing funny about what was going on, but I was laughing out of sheer relief. At first everyone else was silent, but then Ivan joined me, followed by Vadim.
We now knew exactly what they were up to, and they had completely failed. They wanted the Hermitage money, but none of it was there. Based on the published price list of corporate raiding, these guys had spent millions bribing judges, cops, and clerks only to get nothing.
The only person who didn’t laugh was Sergei. “Don’t relax, Bill,” he said ominously over the speakerphone. “This is not the end of the story.”
“What do you mean?” Vadim asked.
“I don’t know,” Sergei answered, his phone line crackling slightly. “But Russian stories never have happy endings.”
25
High-Pitched Jamming Equipment
We could have walked away from the situation right then and there. Except for one big wrinkle: a criminal case was still open against Ivan.
We decided the best way to defend Ivan was to go after Kuznetsov and Karpov, both of whom were obviously involved in both Ivan’s case and the theft of our companies. To do that, we decided to file criminal complaints against them with the Russian authorities. Because our legal team was so stretched, we brought in Vladimir Pastukhov, the lawyer who had urged Vadim to flee Russia in 2006, to help out.
He came to London and installed himself in the conference room of our new offices. With the successful launch of Hermitage Global, we had moved into a newly refurbished building on Golden Square, just behind Piccadilly Circus, and were no longer crammed together in a warren of serviced offices in Covent Garden.
Vladimir surrounded himself with our files, and over several days interviewed each of us. He then started drafting a long complaint about the theft of our companies and the creation of these huge fake liabilities. A special section described the fraud’s reliance on the documents and electronic files that were seized during the police raids led by Kuznetsov and which Karpov kept in his custody.
While Vladimir was working on offense, Eduard was in Russia working on defense. For five months he’d been trying to get the
relevant parts of the case file on Ivan to prepare his defense, and for five months Major Karpov had steadfastly refused to hand them over. Eduard had been filing complaints with prosecutors and Karpov’s superiors, but they’d achieved nothing. With every refusal his frustration mounted. It wasn’t just professional for Eduard, it was starting to get personal.
But then, on November 29, Eduard received an unexpected call from Karpov, who said that he was finally willing to provide some of the documents that Eduard had been requesting for months. Eduard cleared his schedule and rushed to the Moscow Interior Ministry headquarters on Novoslobodskaya Ulitsa. Karpov met him at the entrance, and when they reached his small office, Karpov waved his hand toward an empty seat.
Eduard sat.
“I know you’ve been asking for the Cherkasov documents, and I’m prepared to share some of them with you today,” Karpov said with a magnanimous smirk.
Eduard regarded Karpov with a mix of exasperation and contempt. “You should have given them to me a long time ago.”
“Whatever. I’m giving them to you now. Be grateful.” Karpov then stood, took a ten-inch stack of paper in both hands, walked to the other side of his desk, and plonked them in front of Eduard. “There’s one thing, however. The copier is broken, so if you want any copies, you’ll have to do them by hand.”
Eduard is normally dispassionate and professional, but here was a thirty-year-old police officer strutting around in a $3,000 Italian suit, with an expensive watch and manicured nails, taunting Eduard like a high school bully. After five months of trying to get this information, this behavior was simply too much for Eduard. He’d been an Interior Ministry investigator himself and had never treated anyone this way.
Eduard was so frustrated that he shouted, “I don’t know what you think you’re doing! We’ve caught you. We know everything about what happened in Saint Petersburg!”