An investor turned activist outfoxes oligarchs
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Bill Browder may be Russian President Vladimir Putin’s No. 1 foe. For the past several years the CEO of Hermitage Capital Management has led an international campaign to expose deep corruption and human-rights abuses in Putin’s Russia. His efforts culminated with Congress’s 2012 passage of the Magnitsky Act, which forbids gross abusers of human rights in Russia from banking in or visiting the U.S. It’s named after Browder’s lawyer Sergei Magnitsky, a whistle-blower who was murdered in a Moscow prison in 2009 after uncovering massive Russian government fraud.
Before he became an unlikely human-rights activist, Browder was for a time one of the largest foreign investors in Russia. In the tumultuous years following the fall of the Soviet Union, he made a fortune for himself and his clients by confronting some of the country’s corrupt oligarchs. But in Russia, shareholder activism could be dangerous work, as Browder explains in this excerpt from his new book Red Notice: A True Story of High Finance, Murder and One Man’s Search for Justice.
In 1939, Winston Churchill made a famous speech on whether he thought Russia would join the Second World War: “I cannot forecast to you the action of Russia. It is a riddle wrapped in a mystery inside an enigma, but perhaps there is a key. That key is Russian national interest.”
Fast-forward to the present, when Russia’s erratic behavior is terrifying the whole world. Churchill’s observations about Russia still apply, but with one big proviso. Instead of the national interest guiding Russia’s actions, they are now guided by money, specifically the criminal acquisition of money.
I can attest to this firsthand. In 1996 I’d started an investment fund in Moscow called the Hermitage Fund, in partnership with the billionaire investor Edmond Safra. We had a spectacular initial success. It was the best-performing fund in the world in 1997, up 718% from inception with assets of more than $1 billion.
But our success would all be thrown into jeopardy in January 1998 when we collided with the corruption Russia is so famous for.
It began that month at a New Year’s party, where I confronted Boris Jordan, one of Russia’s leading investment bankers, about a financial scheme called a dilutive share issue that was going to steal $87 million from my fund.
He met me head-on with a meaty handshake. “Bill, how are ya?”
“Not great, Boris. What’s going on with Sidanco? If this share issue goes through, it’s going to be a real problem for me.”
The fund, together with Safra, had invested heavily in an undervalued Russian oil company named Sidanco which had gone up eight times in one year, making the fund and Safra more than $100 million. After this big win, Boris’ boss, the billionaire oligarch and former Deputy Prime Minister Vladimir Potanin, decided that we shouldn’t have that money. Boris and his colleagues threatened to implement this dilutive share issue, which would nearly wipe out our investment.
Boris didn’t want a public confrontation at a New Year’s party, so he said, “Bill, it’s all a big misunderstanding. Don’t worry about a thing.” He turned his attention to a tray of canapés and picked one up. Avoiding my gaze, he said, “Tell you what. Come over to Renaissance tomorrow at 4:30 and we’ll sort it out.”
I took him at his word and tried to enjoy the party. The next day at 4:30 p.m., I walked into Renaissance Capital’s headquarters next to the Moscow River. I was unceremoniously shown to a windowless conference room. I was not offered anything to eat or drink, so I sat there and waited.
I was ready to leave when the door finally opened–only it wasn’t Boris. It was Leonid Rozhetskin, a 31-year-old Russian-born, Ivy League–educated lawyer whom I’d met on a few occasions.
“I’m sorry Boris couldn’t make it,” Leonid said in English. “He’s busy.”
“I am too.”
“I’m sure you are. What brings you here today?”
“You know what, Leonid. I’m here to talk about Sidanco.”
“Yes. What about it?”
“If this dilution goes forward, it’s going to cost me and my investors–including Edmond Safra–$87 million.”
“Yes, we know. That’s the intention.”
“That’s the intention,” he repeated matter-of-factly.
“You’re deliberately trying to screw us?”
He blinked. “Yes.”
“But how can you do this? It’s illegal!”
“This is Russia. Do you think we worry about these types of things?”
I couldn’t believe this. “Leonid, you may be screwing me over, but some of the biggest names on Wall Street are invested with me. The pebble may drop here, but the ripples go everywhere!”
“Bill, we’re not worried about that.”
We sat in silence as I processed this.
He looked at his watch and stood. “If that’s all, I have to go.”
Shocked, I tried to think of a reply and blurted, “Leonid, if you do this, I’m going to be forced to go to war with you.”
He froze, and I did too. After a few seconds he began to laugh. What I’d said was preposterous and we both knew it. Go to war? Against an oligarch? In Russia? Only a fool would do that. When Leonid was finally able to contain himself, he said, “Is that so? Good luck with that, Bill.” Then he turned and left.
I was so upset that for several seconds I couldn’t move, and when I finally could, I shook with humiliation and anger. I marched out of Renaissance into the freezing Moscow night. When I got home I called Edmond. Nobody likes to lose money, and he was a notoriously bad loser. When I finished telling him the story, he asked, “What are we going to do, Bill?”
“We’re going to fight these bastards, that’s what. We’re going to go to war.”
“What are you talking about, Bill? You’re in Russia. You’ll be killed.”
I gathered my wits. “Maybe I will, maybe I won’t. But I’m not going to let them get away with it.” I didn’t care if I was being brave or stupid, or if there was even a difference. I’d been backed into a corner and I meant what I said.
“I can’t be part of this, Bill,” he said, safe in New York, 4,650 miles away.
I was not safe, though, and it filled me with adrenaline. “Edmond, you’re my partner, not my boss. I’m going to fight these guys whether you’re with me or not.”
He didn’t have anything else to say and we hung up. I didn’t sleep at all that night.
By the next morning, regret and uncertainty had crept into me. But when I reached my office, a rush of activity shook me from my thoughts. Packed into the room were more than a dozen heavily armed bodyguards. The one in charge came up to me and in an Israeli accent pronounced, “I’m Ariel Bouzada, Mr. Browder. Mr. Safra sent us. We have four armored cars and 15 men. We’ll be with you for as long as this situation lasts.”
Apparently, Edmond was going to fight with me after all. But how in hell was I going to fight an oligarch?
I assembled my team and we devised a plan. Our first step was to call all the Western investors who did business with Potanin and explain the details of what he was doing to us. Our message was simple: If you don’t stop him, you could be next.
Every other time foreigners got ripped off in Russia they would attempt to figure out how to resist. But then their lawyers and advisers would point out that retaliation was infeasible and dangerous, and after all the tough talk, they would slink away like wounded animals.
But this wasn’t every other time. I was never going to let Potanin get away with this without a fight.
Less than a week later, Boris called, irate and rattled. “B-Bill, what the hell are you doing calling our investors?”
I tried to sound as calm as possible. “Didn’t Leonid tell you about our meeting?”
“Yes, but I thought you understood the score.”
I continued to play along, praying that my voice wouldn’t crack. “What score?”
“Bill, you don’t seem to understand–you’re not playing by the rules!”
With a steadiness that surprised even me, I said, “Boris, if you think I’m not playing by the rules now, wait until you see what I’m about to do to you next.” I didn’t wait for his response and hung up, exhilarated. I’d won Round 1.
The next part of our plan was to make the story public. I got in touch with a reporter from the Financial Times and shared all the details. She devoured every word and promised that the article would be big. She contacted Potanin to get his side.
Because we were in Russia, Potanin had no choice but to escalate. His response was along the lines of “Bill Browder is a terrible and irresponsible fund manager. If he had done his job properly, he would have known I was going to do this to him. His clients should sue him for every penny he’s worth.”
It was an admission of his intent to screw us, and it was on the record.
The FT published the story, which was then picked up by the rest of the financial media. Over the next few weeks, Sidanco’s dilutive share issue became the cause célèbre in Moscow–along with bets on how long I was going to survive.
With so much coverage in the press, I decided to file a complaint with the Russian Federal Securities and Exchange Commission (FSEC). Pressured by the high profile of the story, the commission’s top official, a remarkably uncorrupted man named Dmitry Vasiliev, announced that he would take up the case. But investigations into Russian corporate malfeasance were virtually unprecedented, and I had no idea how Vasiliev would act.
Unbeknownst to me, Edmond wasn’t willing to wait. He had dispatched his main deputy, Sandy Koifman, to Moscow to negotiate a settlement with Potanin behind my back. I found out about this only by chance when one of my brokers spotted Sandy in Moscow.
I immediately called Safra’s chief legal officer in New York. He was embarrassed but said, “Bill, I’m sorry, but you’re way out of your league here. This is serious business involving a lot of money. I think it’s best if you let us take over from here.”
He may have been right if this were the U.S. or Great Britain, but this was Russia. I replied, “If you show even the smallest sign of weakness to these guys, our investors will lose everything, and that will be on you.” I asked for more time to see what would happen with the FSEC. I got 10 more days. “After that, if nothing’s happened, we’re taking over.”
The following days ticked by without so much as a peep from Vasiliev. On day six, Edmond’s lawyer called and said, “Look, Bill, we promised you 10 days, but nothing seems to be happening. We appreciate all that you’ve done, but it’s not working.”
The next morning I dragged myself into the office with the intention of controlling the damage. Only I didn’t have to. Without any warning, a fax arrived with a printout of the front page of the Financial Times. The headline read, Watchdog annuls sidanco bond issue. Vasiliev had shut down the whole thing.
That was it. I had won. I’d met the oligarch in the prison yard and earned some respect. More than that, I’d learned how to fight the Russians, who weren’t as invincible as they seemed.
With my new sense of self-confidence I went after the oligarchs proactively. In the subsequent years I exposed corruption at Sberbank, Unified Energy Systems and Gazprom with similar success. It turned out that Vladimir Putin, who’d come to power in 2000, had the same set of enemies as me. The oligarchs were stealing power from him and money from me. Every time I went after an oligarch Putin would mobilize the authorities and slap them down.
It seemed as if it was all too good to be true, and it was. Early one morning in October 2003, as I was running on the treadmill in my apartment watching CNN, a breaking headline came across the screen saying that Mikhail Khodorkovsky, Russia’s richest man, had been arrested.
Khodorkovsky had broken Putin’s golden rule: “Stay out of politics, and you can keep your ill-gotten gains.” Khodorkovsky had given millions of dollars to the opposition parties for the upcoming parliamentary elections, and he had begun to make statements that were clearly anti-Putin. Putin had to make an example out of him.
Khodorkovsky was put on trial, convicted and sentenced to nine years in prison. During the trial, Putin did something unprecedented: he allowed TV cameras in the courtroom to film Russia’s richest man as he sat silently in the defendant’s cage.
After Khodorkovsky was found guilty, I think most of Russia’s oligarchs went one by one to Putin and said, “Vladimir Vladimirovich, what can I do to make sure I won’t end up sitting in a cage?”
I wasn’t there, so I’m only speculating, but I imagine Putin’s response was something like this: “Fifty percent.”
Not 50% to the government or 50% to the presidential administration, but 50% to Vladimir Putin. I don’t know this for sure. What I do know for sure was that after Khodorkovsky’s conviction, my interests and Putin’s were no longer aligned. He had brought the oligarchs to heel, consolidated his power and, by many estimates, become the richest man in the world.
It didn’t take long for Putin to turn against me. In November 2005, I was expelled from the country and officially declared a threat to national security.
I thought I was done with Russia, but Russia was not done with me. Everything that had happened up until that point involved money, but what I couldn’t imagine was that in the ensuing years, Putin’s personal vendetta against me would see people close to me imprisoned and dead as my conflicts with Russia metastasized and spun wildly out of control.