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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