The New York Times: An Investment Gets Trapped in Kremlin’s Vise

July 24, 2008

William F. Brow­der was one of the most promi­nent for­eign investors here, a cor­po­rate provo­ca­teur who brought the tac­tics of Wall Street share­hold­er activists to the free-for-all of post-Sovi­et cap­i­tal­ism. Until, that is, the Krem­lin expelled him in 2005.

Mr. Brow­der then focused on pro­tect­ing his bil­lions of dol­lars of stakes in major Krem­lin-con­trolled com­pa­nies, like Gazprom, and on fight­ing to return to a land where he had deep and unusu­al fam­i­ly ties. So when he ran into Dmitri A. Medvedev, the coun­try’s future pres­i­dent, at the World Eco­nom­ic Forum in Davos last year, he saw his chance.

In a brief con­ver­sa­tion at a din­ner at the Swiss resort, he pressed Mr. Medvedev for help in regain­ing his Russ­ian visa. Mr. Medvedev, then a top aide to Pres­i­dent Vladimir V. Putin, agreed to pass along his request.

A short time lat­er, Mr. Brow­der’s office received a phone call from a senior Moscow police offi­cial, who said he had learned of Mr. Brow­der’s new visa appli­ca­tion and might be able to help.

”My answer will depend on how you behave, what you pro­vide, and so on,” the offi­cial said, accord­ing to a record­ing of the call sup­plied by Mr. Brow­der. ”The soon­er we meet and you pro­vide what is nec­es­sary, the soon­er your prob­lems will disappear.”

Mr. Brow­der’s prob­lems, in fact, were just beginning.

The phone call was one move in a wide-rang­ing offen­sive by Russ­ian law enforce­ment that exposed Mr. Brow­der to the kind of crip­pling inves­ti­ga­tions that Krem­lin crit­ics have reg­u­lar­ly endured under Mr. Putin. It appeared that the ulti­mate goal was not only to seize Mr. Brow­der’s invest­ment empire, but also to make him an exam­ple of what hap­pens to those who do not toe the gov­ern­men­t’s line.

His down­fall offers a study in how the Krem­lin wields pow­er in the Putin era. The rule of law is sub­ject to its wish­es, and those out of favor are easy prey.

Mr. Brow­der’s case points to the offi­cial cor­rup­tion that afflicts Rus­sia, and the Krem­lin’s unwill­ing­ness to adopt seri­ous mea­sures to com­bat it by bol­ster­ing the inde­pen­dence of the police and the courts. The Krem­lin may be reluc­tant to do so because it wants Rus­si­a’s wealth to accrue to those loy­al to the leadership.

Until his visa was can­celed and he moved his oper­a­tions to Lon­don, Mr. Brow­der cut a col­or­ful fig­ure in Rus­sia, a for­eign ver­sion of the Russ­ian oli­garchs who earned their for­tunes in the mass pri­va­ti­za­tion after the fall of the Sovi­et Union. He court­ed pub­lic­i­ty, and his back­ground made a good sto­ry: he is the grand­son of Earl Brow­der, a leader of the Amer­i­can Com­mu­nist Par­ty in the 1930s. He often said that, not unlike Rus­sia itself, he rebelled by becom­ing a capitalist.

He arrived in Rus­sia in 1996 after a stint in Lon­don as an invest­ment banker, and quick­ly saw oppor­tu­ni­ties. Rus­si­a’s econ­o­my was under­go­ing colos­sal changes, and Mr. Brow­der posi­tioned his com­pa­ny, Her­mitage Cap­i­tal, as a vehi­cle for West­ern investors to get a piece of the action.

After Mr. Putin became pres­i­dent in 2000, Mr. Brow­der became a vocal sup­port­er of the Krem­lin, say­ing that Rus­sia need­ed an author­i­tar­i­an leader to estab­lish order and call­ing Mr. Putin his ”biggest ally” in Her­mitage’s effort to reform big busi­ness. Mr. Brow­der thrived, and the funds man­aged by Her­mitage grew to more than $4 billion.

Mr. Brow­der does not know exact­ly why the Krem­lin turned against him. But the Krem­lin was con­sol­i­dat­ing con­trol over prized com­pa­nies like Gazprom and appeared to be chaf­ing at crit­i­cism from out­side shareholders.

Once things went bad, Mr. Brow­der had no recourse. The police con­fis­cat­ed vital doc­u­ments from his lawyer’s office in Moscow. He dis­cov­ered that his hold­ing com­pa­nies had been stolen from him and re-reg­is­tered in the name of a con­vict­ed mur­der­er in a provin­cial city.

Who­ev­er was behind the scheme took over much of Mr. Brow­der’s cor­po­rate struc­ture in Rus­sia, but failed to get at his investors’ mon­ey. Even so, in recent weeks, Mr. Brow­der said he had learned that his for­mer hold­ing com­pa­nies had been used to embez­zle $230 mil­lion from the Russ­ian treasury.

This arti­cle is based on inter­views with Mr. Brow­der, his asso­ciates and lawyers, as well as on numer­ous doc­u­ments they pro­vid­ed that they say prove cor­rup­tion. Many of his asser­tions were con­firmed independently.

Requests for com­ment were made to sev­er­al law enforce­ment agen­cies in Rus­sia that Mr. Brow­der accus­es of car­ry­ing out, or refus­ing to inves­ti­gate, the scheme. They did not respond or said they would not comment.

The Krem­lin has not spo­ken pub­licly about his case, despite fre­quent appeals by Mr. Brow­der and senior British and Amer­i­can offi­cials. Twice in the last two years, Mr. Putin has been asked by reporters about Mr. Brow­der. Both times, he denied even know­ing Mr. Brow­der’s name.

”I don’t know who this Mr. Brow­der is, as you say, why he can­not return to Rus­sia,” Mr. Putin, who is now prime min­is­ter, said in May.

”Rus­sia is a big coun­try,” Mr. Putin said. ”There might have been some kind of com­pli­ca­tions. There might have been some kind of con­flicts — con­flicts with the author­i­ties, con­flicts in the busi­ness world, inter­per­son­al con­flicts. But that’s life, it’s com­pli­cat­ed and var­ied. If a per­son thinks that his rights have been vio­lat­ed, let him go to court. We have a legal sys­tem that works, thank God.”

A spokesman for Mr. Medvedev, who suc­ceed­ed Mr. Putin as pres­i­dent in May, con­firmed that Mr. Medvedev had spo­ken with Mr. Brow­der at Davos last year, but would not com­ment further.

Mr. Medvedev, a for­mer law pro­fes­sor, has vowed to wage war on cor­rup­tion, often say­ing that Rus­sia is plagued by ”legal nihilism.” Still, the Krem­lin under Mr. Medvedev has also snubbed Mr. Browder.

”If ever there was a def­i­n­i­tion of legal nihilism, this is it,” Mr. Brow­der said in an inter­view in his office in Lon­don, where he now lives.

”I was actu­al­ly fight­ing to make Rus­sia a bet­ter place, and fight­ing against cor­rup­tion, which is some­thing that they should have giv­en me a medal for,” Mr. Brow­der said. ”Instead, they dri­ve me out of the coun­try and tar­nish every­thing that I did there.”

A Per­son­al Stake

For Mr. Brow­der, 44, Rus­sia was more than a place to do busi­ness. His grand­fa­ther Earl Brow­der was a com­mit­ted Com­mu­nist from Kansas who moved to the Sovi­et Union in 1927, stay­ing for sev­er­al years and mar­ry­ing a Russ­ian. He returned with her to the Unit­ed States to lead the Com­mu­nist Par­ty for a time, even run­ning for president.

William Brow­der hoped to get rich in Rus­sia, but argued that his fight against cor­po­rate malfea­sance would also ben­e­fit the coun­try. After all, even as oli­garchs became absurd­ly wealthy in the 1990s in high­ly ques­tion­able schemes, many Rus­sians fell into poverty.

”I had a lot of my fam­i­ly in me, and tried to find a way of con­nect­ing my past to my future,” he said.

Mr. Brow­der grew up in Chica­go and attend­ed the Uni­ver­si­ty of Chica­go. After grad­u­at­ing from Stan­ford Busi­ness School in 1989, he set off for Lon­don. He lat­er became a British cit­i­zen, not out of antipa­thy toward the Unit­ed States, he said, but because he felt com­fort­able there.

His com­pa­ny, Her­mitage Cap­i­tal, was first bankrolled by Edmond J. Safra, the bil­lion­aire founder of Repub­lic Nation­al Bank in New York. Mr. Brow­der said Mr. Safra, who died in 1999, taught him not to shy away from kick­ing up a scan­dal to pro­tect his interests.

Fol­low­ing that advice, Mr. Brow­der made a lot of mon­ey and a lot of ene­mies after arriv­ing in Rus­sia in 1996, gar­ner­ing a rep­u­ta­tion as a sharp-eyed ana­lyst of Russ­ian indus­try who could also be abra­sive and headstrong.

Her­mitage start­ed with $25 mil­lion from Repub­lic. The fund was so prof­itable in its first 18 months, reap­ing a gain of 850 per­cent, that it soon attract­ed more than $1 bil­lion from insti­tu­tion­al investors and oth­ers in the West. In the Russ­ian finan­cial col­lapse of 1998, the val­ue of its invest­ment assets was esti­mat­ed by the com­pa­ny to have plunged to $125 mil­lion, but it recov­ered over the past decade, reach­ing a peak of more than $4 billion.

Despite his suc­cess, Mr. Brow­der led a rel­a­tive­ly aus­tere life in Moscow, eschew­ing the trap­pings of many expa­tri­ates and work­ing so hard, he says, that he learned to speak bare­ly a word of Russ­ian. He tried to keep a low pro­file, but did employ body­guards when he engaged in share­hold­er battles.

Mr. Brow­der con­cen­trat­ed his invest­ments on the largest Russ­ian com­pa­nies, most of them in the ener­gy sec­tor and under some Krem­lin con­trol. Her­mitage became expert at con­duct­ing foren­sic audits into their finances, uncov­er­ing all man­ner of wrong­do­ing, from insid­er trad­ing to out­right theft. He often leaked the infor­ma­tion to the Russ­ian and inter­na­tion­al press.

”It became a mat­ter of des­per­a­tion, not inspi­ra­tion,” he said. ”You had to become a share­hold­er activist if you did­n’t want every­thing stolen from you.”

Gazprom, one of the world’s largest com­pa­nies, was a favorite tar­get. Mr. Brow­der dis­cov­ered that bil­lions of dol­lars in gas had been sold at deeply dis­count­ed prices to shady intermediaries.

But by 2005, Mr. Putin had assumed com­plete con­trol over Gazprom as part of his dri­ve to re-nation­al­ize cen­tral ener­gy assets. When Her­mitage released a dossier assail­ing mis­man­age­ment and cor­rup­tion at the com­pa­ny, the Krem­lin had had enough.

A few months lat­er, Mr. Brow­der’s visa was can­celed. Over the next two years, sev­er­al of his asso­ciates and lawyers, as well as their rel­a­tives, were vic­tims of crimes, includ­ing severe beat­ings and rob­beries dur­ing which doc­u­ments were tak­en. None were solved.

Vic­tim of Cor­po­rate Raiding

The real trou­ble, though, got under way in June 2007, with Mr. Brow­der stuck out­side the country.

Dozens of police offi­cers swooped down on the Moscow offices of Her­mitage and its law firm, con­fis­cat­ing doc­u­ments and com­put­ers. When a mem­ber of the firm protest­ed that the search was ille­gal, he was beat­en by offi­cers and hos­pi­tal­ized for two weeks, said the fir­m’s head, Jami­son R. Firestone.

Super­vis­ing the raids was the same police offi­cial who called Mr. Brow­der’s office about the visa three and a half months ear­li­er, Lt. Col. Artem Kuznetsov of the Depart­ment of Tax Crime of the Inte­ri­or Min­istry. He said he was seek­ing evi­dence in an inquiry into whether one of Her­mitage’s relat­ed enti­ties, called Kameya, had under­paid its tax­es by $44 million.

Accord­ing to court doc­u­ments obtained by Her­mitage lawyers, the F.S.B., a suc­ces­sor to the K.G.B., approved the inquiry. The Inte­ri­or Min­istry and the F.S.B. would not comment.

Their role against Her­mitage was not unusu­al. Law enforce­ment has been repeat­ed­ly deployed dur­ing Mr. Putin’s tenure against Krem­lin crit­ics or those whom the Krem­lin did not favor in busi­ness dis­putes. Oppo­si­tion par­ties faced numer­ous inves­ti­ga­tions dur­ing the par­lia­men­tary elec­tions last fall.

In recent months, TNK-BP, Rus­si­a’s third largest oil com­pa­ny, has been sub­ject­ed to 14 such inquiries, appar­ent­ly in an effort to push out BP, the British oil giant, which owns half the ven­ture, BP said. The Krem­lin appar­ent­ly wants a state com­pa­ny to take over TNK-BP, ana­lysts said.

The issues sur­round­ing the Her­mitage tax pay­ment were com­plex, but there was a larg­er ques­tion: why did the police need to car­ry out search­es and seize so many doc­u­ments, includ­ing many unre­lat­ed to Kameya, when such tax dis­putes are first sup­posed to be han­dled through rou­tine bureau­crat­ic channels?

Even more curi­ous, Her­mitage asked the Russ­ian tax author­i­ties whether Kameya owed back tax­es. The answer was no.

But it did not mat­ter. Her­mitage was about to become vic­tim of what is known in Rus­sia as cor­po­rate raid­ing, or seiz­ing com­pa­nies and oth­er assets with the aid of cor­rupt law enforce­ment offi­cials and judges. The phe­nom­e­non has flour­ished under Mr. Putin.

In the weeks after the police seized the cor­po­rate doc­u­ments, some­one used them to trans­fer the own­er­ship of three of Her­mitage’s hold­ing com­pa­nies to an enti­ty based in Kazan, a provin­cial cap­i­tal 450 miles east of Moscow. The enti­ty’s reg­is­tered own­er was a man with a mur­der con­vic­tion, records show.

Now that the cor­po­rate raiders had seized the three Her­mitage hold­ing com­pa­nies, they resort­ed to a clas­sic strat­e­gy to try to drain them of money.

A law­suit was filed in a court in St. Peters­burg in July 2007 against the hold­ing com­pa­nies, assert­ing that they had defraud­ed anoth­er com­pa­ny, Logos Plus, of hun­dreds of mil­lions of dol­lars in a 2005 deal involv­ing Gazprom stock.

In fact, every­thing about the law­suit was bogus, Her­mitage lawyers said.

Her­mitage had nev­er done busi­ness with Logos Plus. The doc­u­ments sub­mit­ted to the court had obvi­ous incon­sis­ten­cies, sug­gest­ing that con­spir­a­tors were not wor­ried about being caught. A pow­er of attor­ney for one of the Her­mitage com­pa­nies was dat­ed four months before the com­pa­ny had been created.

While it is unclear whether the judge knew about the fraud, she let the case go for­ward any­way. Lawyers whom Mr. Brow­der had nev­er heard of showed up to defend the Her­mitage com­pa­nies and admit­ted wrong­do­ing. The judge ruled in favor of Logos Plus.

In all, 15 such claims were put forth in sim­i­lar cas­es. A total of $1.26 bil­lion in judg­ments were made against Her­mitage, which did not even learn of the cas­es until three months later.

Becom­ing a Per­son­al Target

In the end, the raiders got noth­ing from Hermitage.

After his visa was can­celed, Mr. Brow­der, con­cerned about such an onslaught, had qui­et­ly moved his Russ­ian assets off­shore and sold most of them. The hold­ing com­pa­nies were shells.

Still, the scheme was not done. In recent weeks, Her­mitage dis­cov­ered that the fake law­suits had served anoth­er pur­pose. The raiders used the legal judg­ments to alter the hold­ing com­pa­nies’ bal­ance sheets, wip­ing away their prof­its for 2006.

They then went to the tax author­i­ties and applied for a refund on tax­es that Her­mitage had paid in 2006 on the prof­its. The author­i­ties hand­ed them $230 mil­lion from the Russ­ian trea­sury, Her­mitage lawyers said.

While Mr. Brow­der did not suf­fer griev­ous finan­cial loss­es, his work in Rus­sia has been ruined. He has only small invest­ments left here, and has evac­u­at­ed his Russ­ian staff to Lon­don, fear­ing for their safety.

Mr. Brow­der has, over the last year or two, rein­vent­ed him­self, and Her­mitage now has more than $3 bil­lion invest­ed in oth­er parts of the world.

Begin­ning in Decem­ber, Her­mitage and its bankers filed dozens of lengthy com­plaints with Russ­ian gov­ern­ment agen­cies, pre­sent­ing numer­ous pieces of evi­dence, includ­ing the phone call from Colonel Kuznetsov. To no avail.

Mr. Medvedev appoint­ed a com­mit­tee in May to devel­op an anti­cor­rup­tion pro­gram, and Her­mitage sent let­ters to its mem­bers. None responded.

At the same time, as Mr. Brow­der has stepped up his com­plaints, the Inte­ri­or Min­istry has set its sights on him per­son­al­ly. It has opened a crim­i­nal inquiry into whether he vio­lat­ed an obscure tax law in 2001.

Her­mitage did per­suade one agency, the State Inves­tiga­tive Com­mit­tee, which is part of the pros­e­cu­tor gen­er­al’s office, to exam­ine the case. But Her­mitage has come to real­ize that this inquiry will also most like­ly go nowhere.

Last month, a Her­mitage lawyer went to a meet­ing at the inves­tiga­tive com­mit­tee about the case and saw a famil­iar face. It turns out that one of the offi­cials who is help­ing to lead the inquiry into Her­mitage’s alle­ga­tions is Colonel Kuznetsov.

Orig­i­nal was pub­lished in The New York Times.

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