By Alexander Osipovich
It's a bright, cold Thursday morning in London, and William
Browder is on the warpath again. The head of Hermitage Capital
Management is starting his day with a two-hour media interview.
This afternoon he plans to get on the phone with members of
British Parliament. And he'll soon fly to Washington to lobby
U.S. senators - all part of a sweeping campaign to avenge what
he calls the torture and murder of his lawyer Sergei Magnitsky
in a Moscow jail.
||William Browder: I
feel like I have two jobs at the same time.
Photographs by Tony Law
In the meantime, Browder has a couple of hedge funds to
manage. Hermitage, which used to be the biggest foreign
portfolio investor in Russia, has evolved into a long-short
emerging-markets fund manager with investments that span the
globe from Asia to the Middle East to Latin America.
"I feel like I have two jobs at the same time," says
Browder, 47, a U.S.-born British citizen whose charming,
soft-spoken manner in private contrasts sharply with his
reputation as a tough operator in the business world. He's
sitting in a conference room, sipping a cup of tea at
Hermitage's headquarters. The room is decorated with framed
newspaper clippings about Browder's war with the Russian
authorities. Many feature photographs of Magnitsky, the lawyer
whose death in 2009 has become an international cause
célèbre and a major headache for the Kremlin.
Browder is fighting a war on two fronts. On one of them he's
waging a relentless campaign to punish the Russian officials he
accuses of complicity in Magnitsky's death. On the other he's
trying to make his comeback as an investor. Expelled from the
country where he achieved fame and fortune, Browder has sought
to reinvent himself as a global emerging-markets manager.
It has been a long, hard slog on both fronts. But the
ever-combative Browder shows no signs of backing down.
Ten years ago he won fame for his fierce battles with
Russian companies like state-controlled energy giant Gazprom.
He pioneered a model that blended activist investing with
skillful use of the media and applied that to the
rough-and-tumble world of Russian finance. Over its first
decade his Hermitage Fund enjoyed a total combined return of
more than 2,500 percent, with assets peaking at $4.5 billion in
2005, while Browder earned a reputation as a crusader against
"Bill single-handedly put corporate governance on the map in
the Russian investment space," says Bernard Sucher, former head
of Merrill Lynch & Co. in Russia.
Yet Browder had numerous detractors. Some griped that he was
a showman obsessed with publicity. His campaigns angered top
Russian executives, as well as some Western investors who might
have been his natural allies. Controversially, he was also a
strong supporter of Vladimir Putin, the former Russian
president who appears set to return to the Kremlin in 2012.
Notably, Browder was among the few prominent Westerners to
endorse the arrest of oil tycoon Mikhail Khodorkovsky, a
leading Putin rival.
Then, on November 13, 2005, Browder was unexpectedly denied
entry into Russia after a flight from London to Moscow. He soon
learned that he had been placed on a list of foreigners banned
from the country as threats to national security, public order
or public health. Moscow has never provided a clear explanation
for why this happened. But most analysts and investors, as well
as Browder himself, believe that one of his enemies - and there
are a lot of them - pulled strings to get him booted.
Some people say he had it coming. "It's an indication of how
intemperate he is that he brought so many lawsuits and made
himself so obnoxious to the powers that be that they kicked him
out, " says John Connor Jr., portfolio manager for Third
Millennium Russia Fund, a $35 million mutual fund focusing on
Russian stocks that he founded in 1998.
These days Hermitage has about $850 million in assets under
management. Its flagship, $450 million Hermitage Global fund
operates in emerging markets including Brazil, China, India,
South Africa, South Korea, Taiwan, Thailand and Turkey, as well
as more-exotic frontier markets like Nigeria, Pakistan and
Qatar. Hermitage also has $350 million in managed accounts and
$50 million in its original, Russia-focused Hermitage Fund.
Founded as a long-only fund with a mandate to find deep-value
equities in markets around the world, the Global fund switched
to a long-short strategy in early 2011 and is now
market-neutral. Hermitage has fewer than 20 employees,
including support staff, and no offices except its London
Hermitage Capital Management
Assets under management: $850 million
Flagship: Hermitage Global
Founder: William Browder
Performance: -2.79% annualized since April
Emerging markets became investor darlings in recent years
because their youthful populations and huge growth potential
looked attractive next to the sluggish, debt-ridden economies
of the developed world. But the 2008 crisis, which hammered
developed and emerging markets alike, cast doubt on the thesis
that rising giants like China could continue growing even as
the U.S., Western Europe and Japan slumped. Browder maintains
that emerging markets are doomed to suffer along with the
developed world for the foreseeable future.
So what options does that leave investors? According to
Browder, now is an ideal time to be long-short in emerging
markets. He estimates that there are 1,500 stocks that trade
more than $5 million a day in emerging markets - roughly the
same number as in the U.S. - but with far fewer hedge funds
hunting for mispricings among them.
Browder thinks his team is well positioned to seize the
opportunity. "Our approach is just to apply well-developed
research skills, which we've learned over a decade and a half
of being in the business, to markets where there's hardly
anyone else doing the same thing," he says.
Skeptics contend that Browder's moment has passed and that
he is ill suited to investing outside Russia. "Here he had a
real advantage in terms of information flow, deal flow,
contacts," says Eric Kraus, an independent financial adviser in
Moscow who has known Browder for more than a decade. "Now he is
just one more stock picker among the masses."
Browder, however, hopes that the fund's new strategy will help
him make his comeback. At the start of 2011, when the global
recovery still seemed to be on track, he became concerned about
the instability of the Arab Spring movements and debt troubles
in the developed world. He decided to scrap his old deep-value
strategy and make the Global fund a long-short fund with no net
exposure. The fund became market-¬neutral just in time to
avert catastrophe when emerging markets tanked in August and
September. The Global fund was down 5.41 percent year-to-date
through October, while the HedgeFund Intelligence global
emerging markets equity index was down nearly 11 percent over
the same period.
||Vadim Kleiner: We know
what questions to ask. We always anticipate the situation
to be worse than it is, because we came from Russia.
Browder remains confident about the long term. "We need a
bit of calm for this strategy to work, but I basically saved my
money and my clients' money from this disaster," he says.
Many observers were flummoxed by Browder's abrupt expulsion
from Russia. He was seen as a Kremlin cheerleader and had
tirelessly promoted investing in Russia. After his blacklisting
his team contacted all its friends in the Russian government
for help, but none of their appeals worked.
There is much speculation about who might have ordered
Browder's visa ban. One popular theory holds that it stemmed
from his campaign against Surgutneftegaz, an oil company that
produces 13 percent of Russia's crude output. In 2004,
Hermitage led a consortium of minority shareholders in suing
the oil producer to challenge its circular ownership structure,
which effectively allows Surgutneftegaz to own itself while
ensuring that management maintains a tight grip on the company.
Surgutneftegaz is famously secretive, and some analysts believe
that the company may actually be a piggy bank for some of
Russia's most powerful interests - perhaps even people in
Putin's inner circle.
"His deep investigations into the true ownership structure
of Surgutneftegaz and Gazprom were in my opinion the ultimate
cause of the initial denial of his visa," says Ian Hague,
co-founder of New York-based Firebird Management, which
oversees $1.4 billion in assets invested in the former Soviet
bloc and was a fellow plaintiff in the Surgutneftegaz lawsuit.
"Once he could no longer get into the country, he became
vulnerable to the kind of predation that his company fell
Gazprom and Surgutneftegaz deny ordering Browder's visa ban.
"How is it possible for a private company, hardly the largest
in Russia and far from politics, to decide such political
questions?" asks Raisa Khodchenko, a Surgutneftegaz
spokeswoman. She declined to discuss the company's ownership
In March 2006, Browder's visa ban became public knowledge,
and spooked investors began yanking cash from Hermitage. Some
were angry that it had taken four months for Browder to
disclose the problem. Browder says he kept quiet because
British diplomats had advised him to give behind-the-scenes
diplomacy a chance. "It was in nobody's interest for there to
be a scandal from day one," he says. "When we explained to the
investors that our approach was recommended by the British
Foreign Office, nobody questioned our approach."
Browder's days as a Russia investor were over. During the
course of 2006, he and his team developed a plan to move the
firm to London and transform Hermitage into a global
emerging-markets fund manager. They decided to scour the world
for deep-value deals in equities, reasoning that their Russian
know-how would help them in other corruption-riddled markets.
The firm inaugurated the Global fund in April 2007 with $625
million in capital. The fund initially did well by betting on
the Middle East, spotting attractive valuations in markets like
Egypt and the United Arab Emirates. It was up 31 percent by the
end of 2007.
At that point, with the U.S. subprime mortgage crisis picking
up steam, Browder saw trouble ahead. He correctly predicted
that a major financial institution would fail, sparking chaos
in Western equities markets. "We want to achieve the financial
markets equivalent of living in a cabin in the mountains,"
Hermitage told its investors in January 2008.
||Browder: We couldn't
save Sergei's life. It breaks my heart every single
moment of my life.
Unfortunately, Hermitage chose the wrong cabin. It sought
frontier markets with little integration into the global
financial system, and Middle Eastern assets, which it expected
to be supported by oil wealth. "We thought the Middle East
would have enough domestic liquidity to insulate it from the
worst of the crisis," says Grant Felgenhauer, an American who
joined Hermitage in 2004 as an investment director and is now a
partner in the firm. "That was true up to July 2008. And then
it really began to fall apart."
Emerging and frontier markets were not spared by the tremors
that swept the world after the Lehman Brothers Holdings
bankruptcy. The Global fund ended 2008 with losses of 42
percent and has yet to recover its high-water mark from before
the crisis. (The MSCI Emerging Markets Index was down nearly 49
percent that year.) In 2009 it was up 16 percent, while the
MSCI index soared more than 68 percent. Hermitage explained to
investors that it had failed to foresee the impact of
government interventions and had waited too long to dive back
into recovering markets. In 2010 the fund was up a
disappointing 5 percent, compared with a nearly 17 percent rise
in the MSCI index.
These days Hermitage's investment team spends nearly half
its time on the road, visiting far-flung companies and
exploring ideas for potential pairs trades. In one of its more
successful 2011 investments, the Global fund went long a
Chinese jewelry retailer called Luk Fook Holdings
International, which was poised to benefit from growing
affluence in China, while shorting Esprit Holdings, a Hong
Kong-listed international clothing retailer. The trade paid off
when Luk Fook's sales beat expectations while Esprit's annual
profits dived 98 percent amid weak sales in Europe.
The firm executes its global strategy with the same, mostly
Russian team that left Moscow in 2006 after Browder's
expulsion. The group has stuck with Browder through the firm's
ups and downs; nobody has quit in ten years.
Team members say their Russian experience helps them spot
companies with signs of fraud, mismanagement or simply bad
business models. "We know what questions to ask," says Vadim
Kleiner, a partner at Hermitage who joined the firm in 1997 and
was the longtime head of its research team. "We always
anticipate the situation to be worse than it is, because we
came from Russia."
The team's China experience has proved that corporate
malfeasance isn't limited to Russian oligarchs. Recently,
Hermitage shorted a Chinese department store company after
learning that it had loaned 50 percent of its cash to firms
making speculative investments in real estate - firms that
happened to be affiliated with the department store company's
main shareholder. Allegations of fraud at Chinese companies
have made headlines this year and snagged U.S. fund managers
like John Paulson. But Browder says it's easy to avoid
companies that cook their books, if you pay close attention.
"Fraud in China is no mystery," he says. "Everybody knows the
Browder swears by the value of visiting companies and
plunging into the details of their operations instead of
relying on research from brokerages. "If you want to do
emerging markets, you have to roll up your sleeves, get on the
airplane and actually do the work yourself," he says.
This can lead to contrarian bets. Last winter Hermitage bet
against Warren Buffett by shorting BYD Co., the Chinese
electric-car company in which Berkshire Hathaway holds a 10
percent stake. Hermitage's team found that BYD was suffering
from a stale product line and low customer enthusiasm. The firm
paired its short position in BYD with a long position in Great
Wall Motor Co., a Chinese carmaker that lacked the Buffett
blessing but boasted new lines of sport-utility vehicles and
pickup trucks with strong sales potential. The trade has proved
Sometimes Hermitage identifies a macro trend and zeroes in
on a pairs trade to gain exposure to it. Browder's team is now
betting that upheaval in global markets will lead to a
devaluation of Nigeria's currency, the naira. To profit from
that, Hermitage has shorted MTN Group, a South
Africa-¬based telecommunications company with a significant
presence in Nigeria, while going long on Vodacom, a South
Africa-based mobile phone operator with no Nigeria exposure.
The trade is still playing out.
Ironically, the man who grew rich off the Russian stock
market is the grandson of an American Communist. Earl Browder
led the Communist Party USA from 1934 to 1945 and ran for
president twice to challenge Franklin Delano Roosevelt from the
left. For years he was an admirer of Soviet dictator Joseph
Stalin and regularly visited the Soviet Union. On one such trip
he married a local woman. Their oldest son, born in Moscow, is
William Browder's father.
Earl Browder died when William was nine. Still, his
left-wing radicalism shaped the world in which the young man
grew up. "Around the dinner table," Browder recalls, "the
general consensus and assumed position in my family was that
business was an entirely crude and vulgar occupation."
In a story he often tells to appreciative audiences of MBA
students, Browder says he rebelled against his parents by
putting on a suit and becoming a businessman. He majored in
economics at the University of Chicago and went on to earn his
MBA from Stanford University in 1989, the year the Berlin Wall
fell. Browder was looking for a career that would have some
personal meaning for him. He decided to jump into Eastern
Europe's transition to capitalism.
Browder got a London-based job with Boston Consulting Group.
His first assignment was to slash costs at a failing Polish bus
factory. In Poland he learned that state assets were being
privatized at bargain prices. He invested $4,000 of his own
savings in the deals and made ten times his money in the space
of a year.
He then worked briefly for Robert Maxwell, the British
publishing tycoon who drowned off the Canary Islands in 1991,
before moving to Salomon Brothers, where he joined the Eastern
Europe investment banking team. There, Browder got his first
taste of Russia. When the young banker took a trip to the
gritty Arctic port city of Murmansk, the senior managers of a
fishing enterprise asked him whether they should take advantage
of a new government program to privatize 51 percent of their
fleet for $2.5 million. Browder calculated that the fleet's 100
ships were worth a stunning $2 billion. Russia, he concluded,
was being given away for free.
Browder's wild tales of fantastic deals on the Russian
frontier were initially met with skepticism at Salomon, but the
firm eventually gave him $25 million of its own capital to
invest. He turned it into $125 million in less than a year.
In April 1996, having outgrown Salomon, Browder went to
Moscow and launched the Hermitage Fund with $25 million from
his partners, who included banker Edmond Safra and Israeli
diamond tycoon Benny Steinmetz. As the first Wall
Street-trained principal based in Moscow, Browder used his
knowledge of second-tier companies to make a killing in
Russia's brand-new stock market. The Hermitage Fund ended 1996
with a gain of 119 percent. In 1997 it surged 228 percent,
making it the world's best-performing fund that year, according
to the AR database.
Amid economic turmoil, mafia violence and Boris Yeltsin's
boozy presidency, Browder was reaping profits from betting on
equities that larger investors were afraid to touch. "He was a
truly independent thinker who could see something worth 100
times its value and not say, 'Oh, that's crazy, I'm going to
ignore that.' He'd go after it and get into it," says James
Fenkner, an American who worked in Russian finance in the 1990s
and now runs Red Star Asset Management, a small
emerging-¬markets fund manager, from Santa Barbara,
Browder's knack for promotion and publicity helped Hermitage
grow quickly. "Bill was and still is a marketer
extraordinaire," says Slava Rabinovich, who was Hermitage's
assistant portfolio manager from 1996 to 2000. He now heads
Diamond Age Capital Advisors, a Moscow-based manager with $20
million in assets.
In 1998, Browder became a British citizen. Many of his
fellow expatriates assume he was seeking to avoid taxes; the
U.S. is among the few countries that tax their citizens living
abroad. The Internal Revenue Service put Browder on a "name and
shame" list of Americans who had renounced their citizenship.
Browder, however, says he switched citizenship because his
then-wife was English and he liked Britain. "I did not do it
for tax reasons," he says. "My tax bill was roughly the same
At age 33, Browder had rock-star status, more than $1
billion under management, coverage in the New York Times and
invitations to his clients' yachts. "I was too young and too
successful too quickly," he says. "Just my circumstances alone
should have been a strong sell signal for everyone in the
entire Russian market."
Infected by contagion from the Asian financial crisis,
Russia defaulted on its debt and devalued the ruble in August
1998. The stock market crashed, and the Hermitage Fund ended
the year with a crushing loss of 89 percent. Many other funds
shut down. "We did what we could do to minimize the impact and
not to blow up," Rabinovich recalls. Browder felt like a
laughingstock. "It wasn't just a financial disaster, it was a
public disgrace of monumental proportions," he says.
Following the crisis Hermitage embarked on a new course,
which would become its trademark. Few investors had tried to be
activists in the emerging markets, but Browder says he had no
choice. As Western bankers lost interest in Russia, he says,
oligarchs and company insiders threw out the rulebook and
launched an "orgy of stealing" that threatened to devalue
Hermitage's holdings even further.
Browder fought back, publicly accusing companies of asset
stripping, unfair stock dilutions and other moves to enrich
majority shareholders. A key weapon was his research team, led
by Kleiner, a former computer scientist; the group dug up dirt
on how funds were being embezzled. "We analyzed for ourselves
not just what was on the surface but what was hidden and could
be recovered by forensic investigation," says Kleiner. Browder
fed the information to journalists, leading to sympathetic
articles in newspapers like the Financial Times and the Wall
Street Journal, and subjecting his targets to public
"He's a formidable operator," says a veteran of corporate
communications who was once on the opposite side of a Browder
PR campaign. "He's very nimble. He gets these big companies off
on the wrong foot, and they have trouble regaining their
Browder's use of publicity made some uncomfortable. "He
played an active role in advancing corporate governance issues
in Russia, and I can say that I am grateful to him for this,"
says Igor Kostikov, who headed Russia's stock market regulator
from 2000 to 2004. "But I do not approve of the kind of
activist, semiscandalous methods that some people use. I think
it's always possible to find ways to make companies do things
more or less voluntarily."
Browder disputes the notion that he could have made an
impact through quiet persuasion. "The only thing you really had
was the ability to name and shame people," he says. Of course,
battling powerful Russian businessmen was risky. From 1998
onward Browder was often surrounded by an entourage of
Despite the dangers, Hermitage scored some successes. It
helped block a controversial asset sale by UES, the state-owned
electricity company, and Kleiner won a seat on the board of
Sberbank, Russia's retail-banking giant, in 2001. He served as
an independent director on the Sberbank board until 2004.
Browder had less luck with Gazprom. From 2002 to 2006,
Hermitage made annual attempts to win a seat on the Gazprom
board. While it never succeeded, each year it held a press
conference and released an embarrassing PowerPoint presentation
on how the gas giant was misspending its money.
Hermitage says its activism lifted the stocks of companies,
but some analysts doubt that. "I don't know of an example of a
company where you can seriously claim that Browder pressure
caused improvement," says financial adviser Kraus. "He was
largely driven by beta."
Others say Browder's activism was all about marketing. "I
don't think the activism was necessarily a significant
contributor to Hermitage's returns," says one Russian markets
veteran. "In a bull market the fact that someone is talking
about corporate governance at a company might support the stock
further if it's already rising."
Hermitage rejects such arguments. "I do think a material
part of our returns was due to changing those companies," says
Felgenhauer. He adds that Hermitage had a duty to fight abuses
by majority shareholders: "With some of the things that go on
in Russia, you would be doing your investors an incredible
disservice to just stand by and let these things happen."
In any case, the Hermitage Fund rebounded from the crisis
and enjoyed healthy double-digit returns from 2001 to 2006. But
over time it slipped behind Russia's benchmark RTS Index, and
many years the fund lagged rivals such as the Russian
Prosperity Fund, run by Moscow-based Prosperity Capital
Management. After Browder was kicked out of Russia, the fund
faded to a shadow of its former self.
Browder's war with the Russian authorities began with a
series of strange events that unfolded shortly after he was
expelled from the country.
When it became clear that Browder wouldn't be coming back,
Hermitage started quietly liquidating all its Russian-based
assets for fear they might be expropriated, replacing them with
global depositary receipts that traded outside of Russia.
Meanwhile, team members were targeted by unknown parties. One
Hermitage employee told AR that in January 2007 he returned to
Moscow after a weekend abroad to discover that his apartment
had been burglarized. The balcony door had been removed from
its hinges, and his files were lined up in stacks on the living
room floor. His laptop was missing, but jewelry and other
valuables were untouched, alleges the employee, who asked to
remain anonymous because of the sensitivity of the
Not long after that Hermitage says it received a call from a
man identifying himself as Lieutenant Colonel Artem Kuznetsov
of the Russian Interior Ministry. Kuznetsov said he needed
"information" and requested an informal meeting, according to
then-research director Kleiner, who took the call. When Kleiner
asked for the request in writing, the officer refused.
Kuznetsov resurfaced on June 4, 2007, when he led 25 cops in
a raid on Hermitage's Moscow office. They said they were
investigating a Hermitage investment vehicle called Kameya for
suspected tax evasion. Simultaneously, 25 other cops descended
on Firestone Duncan, a law firm that had advised Hermitage on
Russian tax compliance, and seized documents pertaining to
Kameya and other Hermitage vehicles.
What happened next, according to Hermitage, was a massive
fraud in which a powerful network of corrupt officials used
documents stolen in the raid to take ownership of three
Hermitage investment vehicles, then used those stolen vehicles
to steal $230 million from the Russian government via a
fraudulent tax refund paid to the vehicles. (See "Hermitage vs.
Russia," page 32.) Jamison Firestone, the law firm's managing
partner, says the officers used the Kameya warrant to conduct a
fishing expedition. "They were essentially ransacking my office
and taking documents for any company that had paid a large
amount of tax," he says.
On November 24, 2008, police arrested Magnitsky, a tax
lawyer and auditor at Firestone Duncan, in connection with the
tax evasion probe. Hermitage alleges that he was jailed to keep
the $230 million tax fraud under wraps. Magnitsky had uncovered
information that implicated officials, including Kuznetsov, in
the scheme; it was Kuznetsov who ordered his arrest.
In jail Magnitsky was kept in harsh conditions that
contributed to his worsening health problems, according to a
Russian presidential human rights commission that has
investigated his death. Soon after his arrest Magnitsky began
to suffer abdominal pains. Prison doctors diagnosed him with
pancreatitis but repeatedly ignored his requests for treatment,
according to the human rights commission. Hermitage alleges
that Magnitsky was being pressured to retract his allegations
and testify against his former colleagues.
The lawyer was finally due to receive emergency care on
November 16, 2009, but for reasons that remain unclear, he was
taken to an isolation cell, where he died that evening, at age
37. The human rights commission has said Magnitsky may have
been beaten to death.
Today, seated in the comfort of his London office, Browder
expresses deep regret for his failure to save Magnitsky. "We
did everything we could think of, but obviously we didn't do
enough, because we didn't get him out," he says. "We couldn't
save his life. It breaks my heart every single moment of my
Browder has since devoted himself to an ambitious quest to
avenge his lawyer's death. His researchers have investigated
the officials whom Hermitage accuses of stealing $230 million
and released evidence indicating that these individuals enjoy
wealth far in excess of their salaries. The revelations have
made a splash in the Russian media and won praise from Russians
alarmed about their country's high levels of corruption. "In
Russia there are few people who have carried out such a large,
detailed investigation," says Andrei Illarionov, a Moscow-based
former economic adviser to Putin who has since become a Kremlin
critic. "For people who live in Russia, this would be very
Most impressive, Browder has become a one-man lobbying
operation who has bent U.S. and British foreign policy to his
will. He has met lawmakers in Amsterdam, Brussels, London,
Paris and Washington to push for visa bans and asset freezes on
60 Russian officials he has identified as complicit in
Under Browder's pressure the U.S. State Department imposed
visa bans on the officials in July and the British government
followed suit in October. The European Union may be next.
Senator John McCain is a co-sponsor of the Sergei Magnitsky
Rule of Law Accountability Act, which would freeze any U.S.
assets held by officials involved in the Magnitsky case.
"He's achieved quite fantastic results," says Sir Anthony
Brenton, a former British ambassador to Russia and a supporter
of Browder's campaign. "When he started, I don't think anybody
seriously believed that he was going to be able to take
effective action against the people implicated in Magnitsky's
Russia's official response has been chilly. President Dmitry
Medvedev has voiced dismay at Magnitsky's death, and his human
rights commission has called for an investigation into the
alleged tax fraud. But Russian law enforcement agencies have
dismissed the corruption allegations and argued that Browder
himself is the criminal. "The behavior of British citizen W.F.
Browder and his accomplices testifies to their scornful
attitude to Russian law," the Interior Ministry said in 2009,
shortly after Magnitsky's death, in a statement detailing its
tax evasion probe of Hermitage. Browder vehemently denies the
tax evasion allegations and calls them a smoke screen designed
to distract attention from officials' own corruption and their
role in Magnitsky's death.
Russia's Interior Ministry, Federal Tax Service, Federal
Prison Service and FSB security agency did not respond to
written requests for comment from AR. Kuznetsov, the Interior
Ministry official Hermitage has accused of helping to organize
the alleged tax fraud, could not be reached. He has previously
denied the allegations and sought to have Browder prosecuted
Recently, after nearly two years of international pressure,
Russian authorities charged two prison doctors with negligence
for failing to treat Magnitsky. But few believe that anyone
higher up, or anyone involved in the alleged $230 million
fraud, will ever be charged. "Nobody wants to investigate that
because they're afraid it will go too high," says Yana
Yakovleva, head of Business Solidarity, a Russian
One of the rich ironies of Browder's life is his 180-degree
reversal on Russia. Once a passionate promoter of Russian
equities, he now warns investors away from the country, calling
it "insane" to do business there. After initially welcoming the
arrest of Khodorkovsky, he says the oil tycoon should be freed
from prison. Last January at the World Economic Forum in Davos,
Switzerland - where he used to give presentations about
opportunities in the Russian stock market - Browder disrupted a
feel-good Russia investment road show to confront a senior
Putin deputy, Igor Shuvalov, about Magnitsky's death. "You have
to acknowledge the country is changing for the better,"
Shuvalov lamely replied.
Browder says he regrets his days as a Kremlin booster. "I
was definitely wrong about Putin," he says. "I would say that
there was certainly a lot of wishful thinking in my own
Some Westerners still involved in Russia think Browder is
being unfair in his Russia-bashing. "He made a lot of money in
Russia," says Third Millennium's Connor. "He should take his
lumps and move on. Instead, he's made it his life's work to
take his revenge on Russia."
But it's hard to imagine that Browder will stop fighting.
Colleagues say he is driven by deep anguish over Magnitsky's
death. "I think it really haunts him," says Firestone.
Browder acknowledges that his life will never be the same.
"We're going to carry on doing this until we're satisfied that
the people who killed Sergei face some kind of real justice,"
As a reminder to Russian officials that he won't go away,
he's keeping a foothold in the country that cast him out. His
original, Russia-focused Hermitage Fund still has $50 million,
though it is no longer marketed to investors. Browder says he
keeps his old fund around, and holds some of his own money in
it, as a matter of pride. "I don't want them to declare victory
and say that they've shut down the Hermitage Fund," he
Hermitage vs. Russia
At the heart of William Browder's fight against the
Russian authorities is a complicated web of fraud allegations
and counterclaims stemming from the disappearance of $230
million. In June 2007 police carried out coordinated raids of
the Moscow offices of Hermitage Capital Management and its law
firm, Firestone Duncan, and seized documents pertaining to
various Hermitage investment vehicles. They also severely beat
a lawyer at Firestone Duncan, according to the firm's managing
partner, Jamison Firestone. The lawyer, Victor Paryugin, was
hospitalized for two weeks.
Hermitage says documents taken in the raids were used to
transfer ownership of three of its investment vehicles -
Mahaon, Parfenion and Rilend - to a shell company owned by a
convicted felon. In December 2007, according to tax records
obtained by Hermitage and not disputed by the Russian
government, the three vehicles received a series of huge tax
refunds adding up to $230 million. Hermitage says it never
requested the refunds, was unaware of them and never got the
money. Browder and his team allege that senior Russian
officials embezzled the money and paid themselves via the
fraudulent refunds. The money was then moved into accounts at
two obscure Russian banks and quickly vanished, moving on to
destinations unknown, Hermitage claims.
Russian lawyers working for Hermitage filed a barrage of
complaints detailing the alleged tax fraud. But the complaints
never led to any officials being charged. Instead, Hermitage
says, its lawyers were hit with retaliatory criminal probes.
All of the lawyers fled Russia - except for Sergei Magnitsky,
the Firestone Duncan attorney who had spearheaded Hermitage's
investigation of the alleged fraud. In November 2008, Magnitsky
was arrested in connection with a tax evasion case against
That case, which remains open, focuses on structures that
Hermitage used to minimize its taxes more than a decade ago.
Hermitage, like many of its peers, exploited quirks of Russian
law to reduce its taxes in the 1990s. It registered
subsidiaries in low-tax parts of the country, such as the
impoverished southern region of Kalmykia, where Hermitage says
it got a further tax break by hiring disabled people. In
another point of contention, Hermitage used its Kalmykia
subsidiaries to hold Russian-listed shares of Gazprom. From
1997 to 2006, Russia imposed a "ring fence" that restricted
foreign ownership in the gas company to American depositary
receipts; nonetheless, many Western financial institutions held
local Gazprom shares through Russian subsidiaries, and Moscow
tolerated such arrangements at the time.
Browder says that Hermitage fully complied with Russian law
and that it stopped using the Kalmykia subsidiaries after the
region's tax breaks were abolished in 2002. He accuses
officials of arresting Magnitsky to cover up their own
involvement in the $230 million tax fraud.
The Russian human rights commission that investigated
Magnitsky's death said he faced "torturous" conditions in jail.
At one point he was put in a cell with raw sewage oozing from a
broken toilet. Officials subjected him to petty punishments,
denying him phone calls to his two small children. In a series
of complaints that Magnitsky wrote in jail, he accused
investigators of pressuring him into changing his testimony. "I
am convinced that the only possibility to stop this humiliating
treatment is for me to accept false accusations, to incriminate
myself and other persons," Magnitsky wrote in October 2009, a
month before his death. Still, Magnitsky continued to accuse
officials of corruption and fraud, and he never testified
against William Browder. - A.O.