William Browder’s war

December 09, 2011  

Reeling from the death of his lawyer in Russia, Hermitage founder William Browder is campaigning for justice — while working to reinvent himself as a global investor.

By Alexander Osipovich

  William Browder: I feel like I have two jobs at the same time. 
Photographs by Tony Law
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.

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 corporate corruption.

"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.



Hermitage Capital Management

Assets under management: $850 million

Flagship: Hermitage Global


Offices: London

Founder: William Browder

Performance: -2.79% annualized since April 2007 

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 headquarters.

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."

  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, 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.

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 victim to."

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 structure.

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.

  Browder: We couldn’t save Sergei’s life. It breaks my heart every single moment of my life.
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.

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 fraudulent companies."

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 a success.

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, California.

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 either way."

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 pressure.

"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 ground."

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 bodyguards.

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 situation.

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 life."

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 risky."

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 Magnitsky’s death.

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 death."

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 for defamation.

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 anticorruption group.

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 attitude."

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," he says.

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 says.AR

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 Hermitage.

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.  

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