The Global Graft Report: What Happened To Sergei?

January 5, 2010

Her­mitage Cap­i­tal Man­age­ment was the biggest for­eign investor in Rus­sia. Then in 2005, it all went wrong. CEO William Brow­der was banned from the coun­try on what he says was a pre­text. Two years lat­er, 50 police offi­cers from the Moscow Inte­ri­or Min­istry raid­ed Her­mitage’s offices and those of its lawyers. The police took cor­po­rate doc­u­ments and seals. Those same instru­ments were alleged­ly used in 2008 to fraud­u­lent­ly obtain $230 mil­lion that the Her­mitage Fund com­pa­nies had paid in tax­es two years earlier.

Also in 2008, one of Her­mitage’s lawyers who did­n’t leave Rus­sia or go into hid­ing, Sergei Mag­nit­sky, above, was thrown into jail. He died in cus­tody in Novem­ber 2009 at age 37. His jail­ers first said he rup­tured his abdom­i­nal mem­brane; then they said it was a heart attack. Offi­cials have refused his fam­i­ly’s requests for an inde­pen­dent autopsy.

When the Glob­al Graft Report con­tact­ed Her­mitage this week, here’s what a spokesper­son there had to say:

After our lawyers helped us dis­cov­er that law enforce­ment offi­cials were involved in the theft of $230 mil­lion of tax­es that we paid to the Russ­ian gov­ern­ment two years ear­li­er, they filed com­plaints about the offi­cials’ involve­ment in the fraud. The same offi­cials got so angry that they orga­nized a major ret­ri­bu­tion cam­paign against all of our lawyers. In each case, they came up with dif­fer­ent spu­ri­ous crim­i­nal charges.

As is wide­ly report­ed, a month after Sergei Mag­nit­sky tes­ti­fied against two spe­cif­ic Inte­ri­or Min­istry offi­cers, those same offi­cers fab­ri­cat­ed a crim­i­nal case against him. They arrest­ed him for tax eva­sion for a 2001 tax fil­ing in a com­pa­ny that had a clean audit and where he was not a direc­tor or offi­cer, so he could­n’t have been guilty of any­thing. As we all know, Sergei was kept for 12 months with­out tri­al in deten­tion on those false charges and died in custody.

The case against three oth­er lawyers was just as absurd and false. After our offices were raid­ed and our com­pa­nies were fraud­u­lent­ly stolen, we hired lawyers from three dif­fer­ent law firms to go to court and chal­lenge the theft and var­i­ous fake court judg­ments. Those lawyers were giv­en pow­er of attor­ney from HSBC, the Her­mitage Fund trustee, to go to court. The police then opened crim­i­nal cas­es against the lawyers, say­ing they were oper­at­ing with “false pow­ers of attor­ney.” Accord­ing to the police, the only per­son who could have giv­en the lawyers a “prop­er” pow­er of attor­ney was the per­son who stole our com­pa­nies. It is like hav­ing your car stolen and get­ting arrest­ed for going to the police sta­tion to report it.

“So it remains to be seen if those respon­si­ble for the death of Sergei Mag­nit­sky and the fraud against Her­mitage that Sergei had exposed will ever be brought to justice.”

There were many com­plaints that went to the Russ­ian gov­ern­ment in rela­tion to the per­se­cu­tion of Sergei Mag­nistky and oth­er lawyers, and the fraud against Her­mitage and the Russ­ian state. In total, more than 50 let­ters and com­plaints were filed by Her­mitage, Fire­stone Dun­can (Sergei’s law firm), the UK For­eign Office, the US State Depart­ment, the Coun­cil of Europe, the Inter­na­tion­al Bar Asso­ci­a­tion, and the UK Law Soci­ety, among oth­ers. The com­plaints went to Pres­i­dent Medvedev, his entire anti-cor­rup­tion com­mis­sion, the Russ­ian Gen­er­al Pros­e­cu­tor, the Russ­ian For­eign Min­istry, the Russ­ian Human Rights Ombuds­man, and a num­ber of oth­er law enforce­ment agencies.

Before Sergei’s death, we received no sub­stan­tive reply from any of them. Almost all com­plaints were passed to one spe­cif­ic per­son in the Russ­ian Gen­er­al Pros­e­cu­tor’s office, a man named Andrei Peche­gin, whose job it seems to us was to col­lect any com­plaints relat­ed to Her­mitage from any gov­ern­ment depart­ment and deflect them with mean­ing­less two line respons­es. His respons­es gen­er­al­ly read “every­thing is done accord­ing to the law” with­out ever address­ing any of the issues brought up in the complaints.

Since Sergei’s death, we have got­ten mixed sig­nals. As is well known, Pres­i­dent Medvedev has ordered a major inves­ti­ga­tion, and fired a num­ber of offi­cials. At the same time, up until today, we keep get­ting the two line let­ters from Mr. Peche­gin say­ing “every­thing was done accord­ing to the law.” So it remains to be seen if those respon­si­ble for the death of Sergei Mag­nit­sky and the fraud against Her­mitage that Sergei had exposed will ever be brought to justice.

“One could lose hope com­plete­ly, but we haven’t.”

In the 1990s in Rus­sia there was a flir­ta­tion with free mar­kets and democ­ra­cy, but they nev­er had a rule of law. In the last nine years, that democ­ra­cy and free mar­ket phi­los­o­phy has also dis­ap­peared. One could lose hope com­plete­ly, but we haven’t.

Rus­sia is a coun­try with many intel­li­gent and decent-heart­ed peo­ple who long for a bet­ter life. We hope that sen­ti­ment will dri­ve the lead­er­ship to do some­thing pos­i­tive before it is too late. If you lis­ten to the speech­es of Pres­i­dent Medvedev, he talks a lot of the rule of law, legal nihilism, and inef­fi­cient gov­ern­ment and how he wants to make changes. It remains to be seen whether he has enough will and pow­er to achieve the things he says in his speech­es, but at least the Pres­i­dent is say­ing them. Ulti­mate­ly, the Russ­ian peo­ple will deter­mine if these changes hap­pen soon­er or later.

From the moment we arrived in Rus­sia in 1996 to start invest­ing until now, we nev­er kept qui­et about cor­rup­tion. We were the largest anti-cor­rup­tion activists in the coun­try for ten years, expos­ing cor­rup­tion and mis­man­age­ment at large Russ­ian com­pa­nies such as Gazprom, Uni­fied Ener­gy Sys­tems, Sber­bank and Surgut­nefte­gas. Our whole approach was that “evil tends to with­er under the bright light of pub­lic­i­ty.” So we would research how the cor­rup­tion was done and then expose it through the press.

The approach worked very well until Her­mitage’s CEO was expelled from the coun­try in 2005 as a “threat to nation­al secu­ri­ty.” Since then things dete­ri­o­rat­ed much fur­ther but we have con­tin­ued to be out­spo­ken until today. In our opin­ion, trans­paren­cy is the only true weapon against these abuses.

Pub­lished in The Glob­al Graft Report

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