January 30, 2012

The Harvard and Columbia Graduate Schools of Business have unveiled a landmark case study on the persecution of the Hermitage Fund and the murder of its lawyer, Sergei Magnitsky, who died after one year of torture in police custody. Sergei Magnitsky’s story exposes one of the worst cases of corruption and human rights abuse in an emerging market in recent history.

Hermitage Capital CEO William Browder, once the largest foreign investor in the Russian stock market, stated in advance of the study’s publication:

“The story of Sergei Magnitsky, and the continuing persecution by Russian authorities of other Hermitage lawyers and executives, are emblematic of the poisonous and dangerous state of Russia’s investment climate. Thanks to this comprehensive case study, the details of one of the most sophisticated and heinous state-sponsored financial crimes are now a matter of public record, to be studied and taught at business schools around the world. It will serve as a powerful reminder of the human cost of corruption.”

The case, titled “Hermitage’s Russian Quandary,” reveals previously unpublished details of the expropriation of the Fund’s Russian investment holding companies and the embezzlement of USD 230 million from the Russian treasury, monies that had been previously paid by the Fund in back taxes.

The case was prepared by Professor Eric Werker of Harvard Business School, Professor Raymond Fisman, the Lambert Family Professor of Social Enterprise and Research Director of the Social Enterprise Program at Columbia Business School, and independent researcher Lauren Weber.

The case details the rampant use by Russian law enforcement of fabricated criminal proceedings to misappropriate and steal businesses, and to pressure victims into acquiescence. It cites a price list of the “services” offered by corrupt and criminal government agents and law enforcement officers.

The case describes how the Russian Federal Security Service, a KGB successor agency, was involved in the state-sponsored scheme to illegally seize the documents of the Hermitage Fund’s Russian investment companies in order to expropriate those companies and embezzle the taxes they had paid.

Sergei Magnitsky, the young Russian lawyer at the center of the case, had uncovered and exposed this scheme, as well as a similar previous fraud that had robbed the Russian treasury of USD 240 million. He submitted the evidence in an official testimony to the Russian Ministry of Interior and was subsequently arrested on fabricated charges by the very same officials he had accused in his testimony. Sergei Magnitsky was tortured to death in pre-trial detention. He died on November 16, 2009, while still in police custody.

William Browder warned that investors have grown wary of Russia’s lawlessness. At the time of the case study’s publication, he stated:

“The brazen impunity of Sergei Magnitsky’s killers, and the empty words dispensed by Russian politicians in an attempt to whitewash this tragedy, only serve to further undermine confidence in Russia’s investment climate. Investors will not feel safe putting their money and their people in Russia until the government begins dealing with corruption and graft in earnest.”

Sergei Magnitsky was posthumously honoured in November 2010 with a Transparency International Integrity Award for taking a heroic stance against corruption. The award was created to recognise the courage and determination of individuals around the world who confront corruption, often at great personal risk.

The Russian government began persecuting the Hermitage Fund in an attempt to thwart the Fund’s shareholder activism, which had famously exposed several cases of multi-billion dollar graft at large Russian state-controlled companies, including Gazprom and Surgutneftegaz. In November 2005, as a result of his anti-corruption stance, Hermitage CEO William Browder was arbitrarily declared persona non grata and expelled from Russia as a threat to national security.

The Hermitage Fund’s early shareholder activism and public exposés of Russian corruption were previously highlighted in:
– Harvard Business School case study, “Hermitage Fund: Media and Corporate Governance in Russia,”
– Stanford School of Business case study, “Gazprom and Hermitage Capital: Shareholder Activism in Russia.”

See case study at:

To order copies or request permission to reproduce materials of the case study, call 1-800-545-7685, or go to: www.hbsp.harvard.edu/educators


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