Part 2: Hermitage Capital

Sergei Magnitsky

“I came here, saw what was going on and said, ‘This is incredible,’” recalled Bill Browder about his early days in Russia. Browder, an investment broker who made millions during Russia’s early privatization program in the 1990s, was born in the U.S. to Eva and Felix Browder.  His grandfather, Earl Browder, was the former leader of the Communist Party of the United States and after being appointed the U.S. communist chief by Joseph Stalin in 1932, he ran for president in both the 1936 and 1940 U.S. elections.  As for Bill Browder, after having received an MBA from Stanford, he worked for Boston Consulting Group London before joining Salomon Brothers (Russia) shortly after the fall of the U.S.S.R.

Early on, Browder realized that Russia’s new privatization program (see HIID) created, “a potential gold mine to which nobody was paying any attention” and that the entire Russian economy, “which was sitting on rich natural resources reserves, was obscenely undervalued.”  He snatched up cheap shares in former government enterprises and made the Salomon Brothers a ton of money. But he wanted out.  He felt that the firm was trying to “muscle him out of his business” and so in 1996 he tested his own luck and opened Hermitage Capital Management with co-partner, Edmond Safra.  However, according to Browder’s book, “Red Notice:  How I Became Putin’s No. 1 Enemy,” before teaming up with Safra he initially approached billionaire and Clinton playboy buddy, Ron Burkle.  If you’re not familiar with Ron Burkle and his Yucaipa companies, they’re the same companies that Bill Clinton invested in.  If you search for “Air F*ck One” you’ll also come across a myriad of articles about Clinton’s alleged sexcapades on Burkle’s private jet.  Does this mean that Browder was on friendly terms with Bill Clinton?  No idea.  But what I do know is that Burkle’s shady past didn’t make Edmond Safra’s any less checkered.  Quite the contrary.

Born in Aleppo, Syria, Edmond Safra was described as a Brazilian Jewish banker who was deeply involved in finance well before Bill Browder came along.  According to the icij.org, he was the “descendant of a banking dynasty from Syria” and a “colossus of the finance world who established banks across Brazil, Switzerland and the United States.” However, according to The Guardian it was rumored that Safra was connected to “drug, gold and currency trafficking, money laundering and organized crime” as far back as 1957.  And although the article demurred about Safra’s involvement with the Iran-Contra affair, there’s no disputing that at least two of his bank employees were involved according to the final Walsh report.  The New Yorker also reported that “many of Safra’s clients had been Russians alleged to have criminal ties” and a U.S. prosecutor once remarked, “Republic always had some very interesting customers who find the government looking at them, more so than maybe other banks.”  When Safra died in a suspicious fire in his Monte Carlo home in 1999, many wondered if the Russian mafia was behind the tragedy.  However, his nurse, Ted Maher, apparently an ex-Green Beret “turned registered nurse,” was eventually convicted of setting the fire—on accident.  Or not.  Yeah, I know, it’s another shady story but you’re going to have to investigate that one on your own. 

Months before his death, Safra sold his New York bank and Hermitage shares to HSBC. Bill Browder described the firm’s new structure in 1999:

“The offshore manager of the Hermitage Fund is HSBC Management (Guernsey) Limited, which has been our partner since HSBC acquired Edmond Safra’s Republic Bank in 1999.  The Hermitage Fund is organized as a unit trust, with the trustee being HSBC Private Bank (Guernsey) Limited.  Our auditors in Guernsey are KPMG and the Fund Administrator is Investors Fund Services (Ireland) Limited.” 

HSBC’s background is as dirty as anyone else in this story.  For instance, the bank was sued in 2016 for laundering millions of dollars for Mexican drug cartels.  Then, based on leaked files given to the ICIJ by French newspaper “Le Monde,” it came to light that HSBC also “profited from doing business with arms dealers who channeled mortar bombs to child soldiers in Africa, bag men for Third World dictators, traffickers in blood diamonds and other international outlaws.”  In the case of the Mexican drug cartels, U.S. Attorney General at the time, Eric Holder, declined to prosecute the HSBC which I’m sure had absolutely nothing to do with the fact that FBI Director James Comey once sat on its board in 2013.  So there’s that. 

As for Hermitage Capital’s humble beginnings before Safra’s death, according to Browder during his 2009 testimony in front of the Commission on Security and Cooperation in Europe (Helsinki Commission), he and Safra founded Hermitage as a means “for western investors to invest in the Russian stock market.”   The firm was highly successful and eventually became the largest foreign investor in Russia.  Browder contributed the company’s success to the fact that their strategy was rooted in—

“…investing in the stocks of companies that were out of favor due to bad management, corruption, shareholder rights abuses or outright theft. We would then work to change management, stop fraud and defend the interests of minority shareholders through shareholder activism.”

In other words, Hermitage attacked Russian companies like United Energy Systems, Sberbank, Lukoil, and Gazprom for wrong doing and corruption and many times made a fortune doing so.  Essentially, Browder was a whistleblower but I can’t help but wonder how most Americans would feel if a Russian investment banker wandered over to the U.S., made billions of U.S. dollars at the detriment of American citizens because of a failing privatization program that was installed with the help of Lomonosov Moscow State University (See previous post), and then had the audacity to complain about corruption in the very businesses he had invested in in order to make even more money.   It’s pretty ballsy (and greedy) and even Browder admitted that he “stepped on many high-placed toes.” 

However, during Browder’s time in Russia he was likely stepping on the toes of the oligarchs and the Russian mafia more so than, say, Vladimir Putin.  When Putin became Prime Minister in 1999 and then President in May, 2000, he loathed the oligarchs for the money and influence they had acquired during the 1990s and reining in that power became a priority.  Don’t believe me?  In a 2008 analysis completed by the “kinda, kinda not” spy agency, Stratfor, entitled, “Organized Crime in Russia,” Stratfor agreed that during the 1990s, “organized crime expanded into all sectors of the Russian economy, government and society” and that “Russian industry fell into the hands of corrupt oligarchs who worked with the organized criminals.…” However, the report also stated that Putin “has asserted control over the state to reduce corruption and break up the oligarchs’ hold over state assets; and now he is looking to increase the power of state security forces and reduce the power of organized crime.”  And that’s coming from Stratfor, folks.  

If I had to theorize I’d say that Putin had few initial misgivings about Hermitage Capital’s whistleblowing tactics, especially on companies headed by oligarchs in the energy sector, because it played into Putin’s agenda.  However, after a handful of Russian billionaires had been brought to heel I suspect Putin refocused his attention on Browder—another businessman that made huge amounts of money by taking advantage of the privatization program.  To boot, Browder was not Russian.  However, he was also no longer an American.  He had previously denounced his U.S. citizenship for tax purposes because he’s that kind of guy. 

U.S. taxes aside, Putin eventually went after him. That day arrived in November, 2005, after Browder returned to Russia from a business trip. He was denied entry at the Sheremetyevo Airport and was told he was banned from the country on the grounds that he was a threat to national security.  Huh.  You know who else was banned from Russia?  That’s right.  Soros.  But I digress.  In January, 2007, Browder appealed to Dmitry Medvedev, First Deputy Prime Minister of Russia and Chairman of Gazprom at the time, who, according to Browder, said that he would “look into it.”  But rather than getting his visa sorted out Hermitage Capital was raided in early June by the Russian Interior Ministry under the pretense that Hermitage had underpaid their taxes on one of their investment firms.  The Ministry made off with computers and boxes of documents while other officers simultaneously raided the office of Firestone Duncan, a firm that had been previously hired by Hermitage for legal and accounting purposes.  One of the attorneys at Firestone Duncan, Victor Poryugin, tried to stop the raid and was beaten up so badly he was hospitalized for two weeks. What followed these raids is a pretty convoluted story.

Let’s first rewind to 2006.  After Browder was kicked out of Russia, Browder moved all of Hermitage’s assets outside of the country including the firm’s assets from three Russian investment firms Browder had established for the purpose of investing in Gazprom.  And, yes, this is the same Gazprom that was chaired by First Deputy Prime Minister of Russia, Dmitry Medvedev, who Browder had asked for help with his visa.  And this is worth noting: Hermitage pulled the same stunt with Gazprom as it did other companies.  Browder bought stock in it and then he blasted the company for poor management and theft.  In fact, some say that Browder was the driving force behind the sacking of Gazprom’s president, Rem Vyahkhirev, in 2001.  The GlobeandMail.com wrote, “The move has huge significance…It is expected to trigger an overhaul of Gazprom’s murky insider dealings…allowing a cleanup of the corruption that has plagued the company for years.” After Vyahkhirev was fired, Alexei Miller, a “deputy energy minister and close ally of Mr. Putin” was brought in to head up the massive energy company and *voila* Gazprom’s stock skyrocketed.  Browder made a killing.  And do you see what I mean about Browder’s tactics working to the benefit of Putin’s early agenda? 

Back to Hermitage Capital.  So Browder removed all of his (Gazprom) investment firms’ assets outside of the country.  In 2006, these investment firms made a combined profit of $973 million.  Not bad, eh?  But you have to pay your taxes, right?  Right.  So Hermitage Capital paid $230 million in taxes to the Russian government on that $973 million profit and everything seemed hunky dory.  Now, fast forward one year to Hermitage and Firestone Duncan’s offices being raided and their computers and documents taken by the authorities.  A month after the raid, Hermitage’s three investment firms were illegally seized and their ownership was fraudulently transferred.  This could only have been done by someone who had in their possession Hermitage’s corporate documents such as its original charter, corporate seal, and original certificate of registration—all legal documents that had been seized during the June, 2007 raid by the Interior Ministry.   

The easiest way to describe the scam that transpired after the firms were illegally transferred is this:  Russian criminals, some of whom worked in the Interior Minister and tax office, stole Hermitage’s investment firms and made it look like they owned them.  They created fake contracts between Hermitage Capital and other companies that they legitimately owned showing that Hermitage had breached those contracts.  Then they brought these contracts and other fake documents to court showing Hermitage owed them money for breach of contract.  When they went to court pretending to be the owners of Hermitage’s investment firms, they simply pleaded guilty in all the cases.  They did this multiple times in different jurisdictions.  At the end of the day, their legit companies were awarded a combined a total of $973 million from Hermitage. (See Wikileaks)

Since Browder had moved all of Hermitage’s assets out of the country, the criminals couldn’t collect the $973 million.  There was nothing there.  But that wasn’t the scam the criminals had in mind.  After being awarded the $973 million they couldn’t collect, they went back and changed the three investment firms’ profits in 2006 from $973 million to $0 (citing the court awards).  Since Hermitage had paid $230 million in taxes on those profits that no longer existed on paper, they were now owed a refund.  The criminals simply doctored more documents, filed for a tax refund in the name of Hermitage Capital, and *voila!* they received $230 million dollars in tax returns after the Russian tax authorities approved the refund the same day they filed.

And let’s throw this into the shady mix:  If the criminals were awarded $973 million from Hermitage in court decisions that took place in 2007, how in the world would that affect Hermitage’s 2006 profits?  Wouldn’t these 2007 court awards affect Hermitage’s 2007 profits, not 2006?  Maybe I’m overthinking it?  (See Wikileaks)

A few things to note.  Browder claimed that he learned about the fraudulent activity only after he received an October, 2007 phone call from the St. Petersburg courts in reference to a court case against Hermitage.  I find that sketchy as hell but, whatever, I’m not an investment broker.  After the scam came to light he hired Sergei Magnitsky, an accountant at Firestone Duncan, to look into the affair.  After some initial digging, Magnitsky realized that the exact same scheme used against Hermitage had been used against another Moscow-based firm’s subsidiaries, Renaissance Capital. 

As the Telegraph UK put it, “After RenCap [Renaissance] had sold the companies, the new owners used false and backdated claims in court to created a loss in the companies that allowed them to recover $107m pf previously-paid capital gains tax”—the obvious difference here being that Renaissance sold its subsidiaries before the fraud occurred.  However, the Telegraph noted that the companies were sold to a group that had connections with Renaissance’s owners, Stephen Jennings, Leonid Rozhetskin, Anton Kudryashov, Richard Deitz and Boris Jordan.  With that kind of information, Browder was quick to accuse Renaissance Capital, its owners, and former executives like Richard Olphert of wrong doing. Renaissance denied any involvement in either of the scandals.

By December, 2007, Hermitage Capital had enough information from Sergei Magnitsky’s research that they were able to file a “six 255-page criminal complaints with the Russian authorities.”  Even though the complaints contained information that allegedly showed that the Interior Ministry was involved in the fraud, the Tax Ministry didn’t care, the Interior Ministry didn’t care, and the Russian Audit Chamber didn’t care.  Nor did the Anti-Corruption Commission, the Minister of Finance, or the Russian General Prosecutor. No one seemed to care.  And as a gentle reminder, the $230 million that was taken was stolen from the Russian government in the form of a fraudulent tax refund, NOT Hermitage Capital.  Kinda weird then how the Russian government didn’t seem to care and how keen Bill Browder was to nail the alleged thieves, huh?

The story continues…

On November 24, 2008, after giving statements and testimony about his findings that officials from the Interior Ministry were involved with the Hermitage tax fraud scheme, Sergei Magnitsky was arrested and detained on tax evasion charges linked to Hermitage. He languished in a Russian prison while Browder filed claims in the state of New York because he believed “Western investors in Russia had colluded with authorities to steal hundreds of millions of dollars through tax refunds and then laundered the money through New York banks.”  Former U.S. Attorney General John Ashcroft represented him in the filings.  In October, 2009, Browder posted a ten-minute video on Youtube condemning Russia’s actions.  At the time that he posted it, Magnitsky had already spent eleven months in prison but it wasn’t until 9:35 minutes into Browder’s Youtube video that he actually mentions Magnitsky’s plight because, again, that’s the kind of guy he is.

Five weeks after the Youtube video was posted, Sergei Magnitsky died in Moscow’s Matrosskaya Tishina prison from what can only be described as criminal misconduct or possibly even murder.  His official cause of death was reported as heart failure although some investigations concluded that he was beaten before his death.  From the articles and reports that I’ve came across it seems everyone at least agreed to the facts that Magnitsky had developed pancreatitis and a blocked gall bladder—neither of which received any adequate medical treatment.

It should be noted that Magnitsky’s mother allegedly stated she did not think that he was intentionally murdered although a year after his death she contacted the Physicians for Human Right’s International Forensic Program for further review. They reviewed documents given to them by Hermitage Capital and felt that Russia’s investigation into Magnitsky’s death was far from adequate.  They further concluded that the prison’s “neglect was calculated, deliberate and inhumane” and that “medical neglect…was undoubtedly a significant factor leading to his death.”  Magnitsky was 37.

After Sergei Magnitsky’s death, Bill Browder spearheaded an international, anti-Russian campaign which included convincing the U.S. to pass the 2012 Magnitsky Act, an act that sanctioned any Russians the U.S. believed had been involved in Magnitsky’s death.  In fact, Magnitsky’s death came to embody the familiar Western narrative that Russia is a corrupt and evil place.  However, I have to wonder if the anti-Russian propaganda Browder churns out about the Hermitage Capital scam and Magnitsky’s death isn’t part of more sinister plot?  I mean, is Putin really a monster?  Where did the fraudulent, Hermitage tax refund go?  Are we really to believe everything a former  U.S. tax-dodging man who fattened his pockets at the expense of the Russian citizens and then turned boiling mad after being kicked out of the country, has to say? And, yes, he was a whistleblower of sorts but let’s be honest, he wasn’t looking out for anyone but himself.  If he really wanted to help stop corruption in Russia why didn’t he lobby the halting of the U.S.-implemented privatization program instead of making millions off of it?

This convoluted story has only lead me to more questions instead of answers.  More to come.

Full Russian series HERE.

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