A Hedge Fund Manager’s Crusade against Putin

Der Spiegel

Financial investor Bill Browder was once a fan of Russian President Vladimir Putin. But after his lawyer died in prison under suspicious circumstances, he launched a crusade against the Kremlin. The case has gained the attention of the OSCE and the US Senate.

The text message Bill Browder, a London-based hedge fund manager, received on his phone was lifted directly from a mafia thriller. “If history has taught us anything, it is that you can kill anyone,” Michael Corleone says in “The Godfather: Part II.” Browder doesn’t know who sent him the quote.

It wasn’t, however, the only one. The 48-year-old has several such text messages, which he believes to be from Russian intelligence agents. He explains all this in a matter-of-fact, business-like tone, as if this were all still just a question of money and business rather than life and death.

Two and a half years ago, Browder’s tax attorney, Sergei Magnitsky, was beaten in Moscow’s notorious Matrosskaya Tishina detention center. Shortly afterward, Magnitsky was dead. “Sergei was tortured to death,” Browder believes.

The case has turned a spotlight on the Russian government’s harassment of businesses and foreign investors within its borders. The Kremlin’s legal system has thrown over 100,000 businesspeople in jail, with oil baron Mikhail Khodorkovsky being the most prominent one among them.

But Browder isn’t the type to be easily intimidated. His story reads like a modern-day Damascene conversion, becoming a human rights crusader in addition to a hedge fund manager. It’s also a story of battling Russia’s strongman, Vladimir Putin, who was reinstalled as his country’s president this May and wants to consolidate Russia as an international economic power.

An Issue at the Highest Level

In his previous life, Browder headed one of the most powerful foreign hedge funds in Putin’s realm. In its heyday, Browder’s company, Hermitage Capital Management, managed investments worth $4 billion (€3.3 billion), mostly in the lucrative energy sector, for clients such as American investment bank Goldman Sachs and wealthy private individuals.

But since then, Browder has shut down his operations in Russia and brought his employees from Moscow to London. From his unadorned office in London’s Soho district, he now wages his campaign against the same country whose predatory model of capitalism made him a multimillionaire in the first place — and has proven just as successful in his new pursuit as he was as a businessman in Russia. The Browder case has become an issue at the highest levels of politics.

The Organization for Security and Cooperation in Europe (OSCE) recently issued a recommendation to its 56 member states to impose harsh sanctions against Russia, suggesting that those officials responsible for Magnitsky’s death be forbidden from entering OSCE member nations and that their bank accounts in Western countries be frozen. The US Senate had already introduced a bill prior to the OSCE recommendation that would implement similar measures. Putin, meanwhile, has hinted darkly that there will be “countermeasures.”

In his expensive suit and rimless glasses, Browder doesn’t look like the typical human rights activist. He arranges a dinner meeting at one of London’s finest Chinese restaurants; there are Rolls-Royces waiting outside his door.

Yet Browder is just as obsessed with his current battle as he once was with the hunt for lucrative investment opportunities. He almost has less free time now than he had then. What he does do in the few hours that remain after he finishes his workday he prefers to keep a secret, so as not to open himself up to attack.

This financial professional with the surprisingly shy gaze often seems agitated. He says he feels responsible: “If Sergei had never known me, he wouldn’t have had to die.”

‘Porridge with Insect Larvae’

Browder has compiled an enormous amount of material from both public archives and secret informants. He has prison commission reports, entries in real estate registers and bank account information, and says he’s identified 60 officials, some of them high ranking, who were involved in his lawyer’s death.

When Browder wants to win over allies for his cause, he quotes from some of around 450 complaints Magnitsky filed during the 358 days he was imprisoned. “At breakfast, we get porridge with insect larvae, and at dinner, rotten boiled herring,” one complaint reads. These drastic accounts — of insufficient food, filth, isolation and a lack of medical treatment — make a farce of Putin’s promises to create a modern constitutional state.

Browder didn’t get a hold of these records until after Magnitsky’s death, but they showed him a side of Russia he claims he never knew before.

For years, Browder was one of the stars of the Russian financial scene. The grandson of an American Communist Party leader who was also an admirer of Stalin, the financial manager came to the former Soviet Union in the early 1990s. He was in his late 20s then, learning his lessons in Wall Street Darwinism at the Salomon Brothers investment bank, which sent him to Russia to consult on the privatization of a fleet of fishing vessels.

It didn’t take extraordinary math skills to recognize that the business was being sold at a give-away price: $2.5 million for 51 percent of the company. Many of the 100 or so ships in the fleet were worth 10 times that amount — each.

That was the last time Browder was willing to settle for an investment banker’s consulting fee in the business of Russia’s large-scale privatization. In 1996, he founded his own hedge fund in Moscow and called it Hermitage. “It was only me, a mobile phone and a briefcase,” he says. That and $25 million in start-up capital from a sufficiently hard-boiled investor.

‘Like the Wild West’

In his first 18 months, Browder generated yields of 850 percent. To this day, he raves about the deals that were possible during those years. “Any of my customers who invested with me in Russia made 30 times their money. This was the sale of the century,” he says.

“Browder was someone who definitely couldn’t leave a single ruble untouched,” recalls Eric Kraus, a Moscow-based fund manager from France. Like Browder, Kraus set out young to seek his fortune in Russia.

To save on taxes, Browder established companies in remote regions of Russia, such as Kalmykia. He employed disabled veterans from the Soviet War in Afghanistan because that also gave him a tax break. Yet he truly seems hurt when he’s portrayed as a having been purely a profiteer. “It was exciting and crazy, like the Wild West,” is his strange explanation for his Russian adventure.

Even before his lawyer’s death, Browder liked to portray himself as a sort of David battling the Goliath of Russia’s corrupt clique of oligarchs. His business model was to obtain small shares of major corporations and banks, such as Sberbank, and then seek out corruption and mismanagement within the company.

It all seemed so easy. A few well-placed articles in international economic journals were often enough to force the corrupt elite into action. Once the companies launched an internal clean-up, their stock prices rose, as did the value of Browder’s shares. “You could do good things and earn a lot of money at the same time,” Browder says.

He didn’t even stop at partially state-run energy giant Gazprom. Hermitage repeatedly published dossiers on the company’s dubious deals, even forcing out Gazprom’s CEO in 2001. As a result, the company’s stock price doubled in the space of just a year.

“Anyone who plays that kind of game knows it’s a matter of life and death,” one foreign investor in Russia says coolly. For a time, Browder employed 15 bodyguards who would sit with him in his living room, AK-47s resting on their knees.

Part 2: A Rubber Baton and a Scapegoat

Despite the danger, yellowed newspaper clippings from those days nearly always show the hedge fund manager in the same pose, arms crossed and gaze confident. Browder imagined he had the country’s most powerful figures on his side. After all, in those days he was “one of Putin’s biggest cheerleaders,” those within financial circles say.

Even in 2003, a time when Russia was relentlessly and violently putting down a revolution in Chechnya and imprisoning oil baron Khodorkovsky on dubious grounds, Browder called Putin “a stroke of luck for Russia.” He believed Putin fought against only those oligarchs who were corrupt, and he found international reaction to the Khodorkovsky affair to be overly “hysterical.”

Not long later, though, in November 2005, Browder returned to Russia from a trip to London and found himself detained by border guards at Moscow’s airport for 15 hours. Then they sent him back to London.

Had Browder misjudged his standing with the Russian government? At that point, he had his sights on corrupt goings on at energy giant Surgutneftegas, a company Putin is rumored to profit from personally, through front men.

One thing is certain: The border guards’ refusal to allow Browder into the country marked the beginning of a bizarre financial thriller. In June 2007, agents from the Interior Ministry raided Hermitage’s Moscow office, confiscating boxes of documents — which they then apparently used to gain control of three of Hermitage’s companies.

According to research carried out by Browder’s lawyer, Magnitsky, the officials used the ownership deeds they found in that raid to set up their own front men as the new company owners, using those acquisitions to garner tax refunds equivalent to $230 million.

An Enormous Scam

That case forever linked Browder’s fate with that of Magnitsky, a man he had known personally only from a few Christmas parties. Shortly after Magnitsky accused officials of perpetrating an enormous scam against Russia’s taxpayers, the lawyer himself was arrested in connection with supposed tax evasion perpetrated by the Hermitage fund.

Magnitsky spent 358 days in prison. Russian authorities say he died as a result of a pancreatic condition, and a government commission issued a report confirming that “appropriate medical assistance was not provided.” A high-ranking prison official is under investigation in connection with the case.

The official, Browder says, is nothing but “a scapegoat.” The hedge fund manager believes there is a conspiracy at work that reaches all the way to the highest levels of the Russian administration. “This was a crime organized by the state,” he says. “Sergei discovered a typical corruption scheme for well-connected civil servants.”

Browder can cite hundreds of documents that make his claims sound at least plausible. “A rubber baton was used against the suspect,” reads one standard prison form produced shortly before Magnitsky’s death.

A secret informant also brought bank documents to London, providing Browder proof of shady cash flows sent abroad from Russia. According to these documents, the head of the tax authority involved in the Hermitage case bought properties in Dubai and Montenegro worth several million.

Browder uses every channel available to him to publicize the results of his research. He spends over €20,000 a year just to participate in the illustrious World Economic Forum in Davos, Switzerland, where he asks embarrassing questions to Russian government representatives at podium discussions and expensive dinners.

His own investment business seems to have become little more than a side project. Hermitage Capital Management has shrunk to less than a quarter of its previous size and is currently struggling its way through the financial crisis with the help of investments in China and India.

A Delicate Matter

Browder’s new office in London contains rows of desks with computers. Between them are stacks of presentation folders, all with a picture of Magnitsky’s coffin on the cover. Of Browder’s 20 employees, five are dedicated solely to investigating Magnitsky’s death.

In his new role, Browder is at least as inconvenient for Putin as he was in his previous role as a rebellious investor. Republican Senator John McCain is insistently calling on US President Barack Obama to take action against Magnitsky’s alleged murderers, the so-called “Klyuyev syndicate.” This alleged crime syndicate is said to include high-ranking tax officials, police and intelligence operatives, and is thought to have connections within the Russian administration.

Browder has found supporters across Europe. Marina Schuster, representative on human rights issues for Germany’s Free Democratic Party (FDP), for example, believes “targeted travel sanctions against officials who are proven to have played a role” could be helpful if the crime remains unresolved. It’s a delicate matter, though, and Russia’s reaction to Browder’s campaign has been considerable. The US government even issued internal warnings that the matter will have consequences in terms of cooperation on foreign affairs.

Germany’s Foreign Ministry has the same concern, but it is exercising restraint. Foreign Minister Guido Westerwelle of the FDP did bring the case up with his Russian counterpart Sergey Lavrov during his last visit to Russia, with the ministry saying afterward only: “The German government will continue to observe the course of Russia’s investigations.” Behind the scenes, German officials in favor of taking a tougher stance argue with those who have their eye on Germany’s economic interests and would prefer a more restrained form of diplomacy.

Browder, though, won’t allow himself to be shaken off. He can even be quite disagreeable with those who don’t share his viewpoint. “He thinks he’s Mahatma Gandhi,” complains one member of German parliament.

“People have to decide if they want to stand on the right side of history or the wrong side,” is Browder’s response. He’s sure that, this time, he has picked the right side.

By Matthias Schepp and Anne Seith
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