BILL B.: One thing I can tell you is that the story I'm gonna tell today is a kind of story you're not gonna hear from any other speaker coming to this room at any other point. Will the me start out by telling you a little bit about myself. I was here at Stanford 20 years ago. I'm actually back for my 20-year reunion which is what brought me here today. And so I thought maybe I would share with you a little bit of my own psychology when I was sitting in these seats 20 years ago. Probably when you hear me speaking, one of the questions that would show up in your mind is: What is this guy with an American accent from Chicago doing having been the -- at one point the largest foreign portfolio investor in Russia, and, what I will describe to you in a minute, now one of the biggest enemies of the State of Russia? And so let me explain to you how that all happened. Indeed I am an American. I'm from Chicago. But I come from a very unusual family. My grandfather who was also American, his name is Earl Browder, grew up in Wichita, Kansas. And the family lost its farm, the home on the farm in the 1920s and he had to work in a factory. And the factory was mistreating their workers and so he became a labor union organizer and he was very good at it. And so after working in Wichita he was recruited by the Union to work in Kansas City then to work in New York City and in New York City there were various Communists that were running around and the Communists spotted him and said, this is a talented guy. Let's invite him to Moscow. And so the Communist Party invited him to Moscow in is the 27, he moved to Moscow there, he met my grandmother in Moscow, and my father was born there. And hen in 1942 he was sent back by the Communist Party to America to become the General secretary and head of the Communist Party in America for the next 13 years. >> [Laughing] BILL B.: This is my grandfather. >> [Laughing] BILL B.: The McCarthy era came in the is the 50s and I'm sure you all know about that and so it wasn't such an easy time -- he got kicked out of the Communist party. I should my grandfather 1945 for proposing that Communism and Capitalism could co-exist and unfortunately many of his followers in eastern Europe was assassinated. He was fortunate, living in America, that he wasn't. And then he was persecuted by McCarthy and had a very terrible time even after being kicked out of the Communist party in the 1950s. So this is my family. Things normalized. I was born in 1964, so I'm 45 years old, and I grew up in a university community in the south side of Chicago and I basically was just a regular American kid. And when I became a teenager, as often happens in American families, I decided to rebel against my family. How do you rebel against a family of Communists? >> [Laughing] BILL B.: Well, I'll tell you how I rebelled. I put on a suit and tie and became a businessman. There's nothing else I could do the piss off my parents more than that. >> [Laughing] BILL B.: And I came to Stanford Business School. And so I sat in these rooms for two years, as many of you do and will be doing and have done, and I went to brown bag lunches and I went to recruiting events trying to figure out what I was gonna do with my life. And something didn't quite feel right because even though I was rebelling against my family to become a businessman, I just didn't quite feel right. And so as I was searching my soul to say what should I would do with my life? I said, what's my unique comparative advantage with all these other people that are all so smart, and all so good, and all so ambitious? And I thought, well, I'm a businessman but I am also the grandson of the head of the Communist Party. >> [Laughing] BILL B.: That's my competitive advantage. >> [Laughing] BILL B.: And it just so happened that 1989 was the year the Berlin Wall came down. And so I had a chance to do a business in the former Communist countries. And guess what? Not a single person I knew anywhere in the world had any interest in doing it. And so I showed up, I started looking for jobs where I could be doing business in eastern Europe. Everyone said, why would you wanna do that? There's no business in eastern Europe. And I looked for jobs and looked for jobs. People offered me all sorts of mainstream, normal jobs but I wanted to do business in eastern Europe. And eventually a got a job in the Boston Consulting Group in London. And they had an excentric partner there who said that, well, we don't have any business in eastern Europe but if we ever do, you can be our guy. You can be the head of our eastern European practice. >> [Laughing] BILL B.: So I said, okay. That's as good as I'm gonna get. So, I went to London, I went to work at the Boston Consulting Group, and indeed a few months later we got a first nibble of work in eastern Europe. And the work we got was with a bus factory in Poland in the southeast corner of Poland about six hours from Warsaw by car on the Ukrainian border. The bus factory was being -- almost going out of business. I think their sales had declined by 90 percent and somehow the World Bank got involved can said, we need a consultant up here. And BCG put in a big proposal that said we have experts in buses and we have experts in manufacturing we have experts in all these different things. And the World Bank said great, send 'em. And so they sent me, as a first-year associate, fresh out of Stanford. >> [Laughing] BILL B.: So I go to this failing bus factory and it's pretty clear that there's no hope for this bus factory. Their sales have declined by 90 percent. They're just gonna have to lay off 90 percent of their employees if they wanna stay in business. And so it was not a very pleasurable assignment. But one thing happened to me while I was sitting in this little town six hours from Warsaw. And I notice that in the newspaper one day they had all these financial statements in the middle of the newspaper. And I asked my translator -- I didn't speak a word of Polish -- I said, what are these financial statements? And he said, oh, these are the first privatizations of the Polish government's doing. I said, oh, that's interesting. >> [Laughing] BILL B.: I said, what does this thing say in what does this thing say? And so we started to write down the numbers and basically they were selling seven Polish companies at valuations which were half of their one-year previous earnings. >> [Laughing] BILL B.: Okay, now, I wasn't actually all that great a student at Stanford but even not being a great student I understood that if you buy a company at half of one year's earnings that's got to make sense; right? >> [Laughing] BILL B.: And I didn't have a lot of money. I don't come from a wealthy company or anything but I had saved up 4,000 bucks at that point and I took my entire life savings which was 4,000 bucks, I converted it to Polish zloty, I took it down, and I applied for shares in these first privatizations and I bought 'em. And they went up ten times over the next 12 months. Now, if you've ever made ten times your money on anything you'll know that it releases a certain chemical in your body. >> [Laughing] BILL B.: And you want that chemical release again. >> [Laughing] BILL B.: And so I knew I had found my vocation. I was gonna go and buy into privatizations in eastern Europe. So we fast forward a couple years and I end up at Salomon Brothers. And I'm -- I got a job at Salomon Brotherss as an investment banker. So I go to work at Salomon Brothers as an investment banker and Salomon Brothers doesn't exist anymore. It became part of City Group and City Group hardly exists or won't exist or whatever. And I go to work at Salomon Brothers and for those of you who have ever read "Liar's Poker", it's a great book and if you haven't, you you should. And it talks about the incredible culture of Salomon Brothers which was this dog-eat-dog place. And I go to work at Salomon Brothers and on my first day at Salomon Brothers as an investment banker for eastern Europe, they give me my business cards, they give me my desk, and they say, you basically have to earn five times what we're paying you otherwise you're gonna get fired. Earn it for the firm. Get to work. So I -- there's no training program, there's no mentors, there's no here's what you need to do. Get to work. Five times what we're paying you otherwise you get fired. So I hear that there's a privatization of the Hungarian Airline and there's some team working on it. And so I go to the conference room where they're supposed to be having a team meeting and I walk in and they say, what are you doing here? I said, well, I'm here to help. And they say, we don't need your help. This is well taken care of. Please leave. Because they didn't wanna share any of their five times with me because that was just gonna make their life more difficult. So no Hungary. I then heard about a Polish telecom privatization going on a couple days later and so I go ask try to wedge my way into that. And they say, don't etch think about trying to come anywhere near Poland. >> [Laughing] BILL B.: And I'm thinking, how am I ever gonna survive in this firm? They're extremely uncollegial. How am I ever gonna survive in this firm? And then I came up with this idea. At the time, this was 1992, there was no investment banking work in Russia. And so none of these guys were trying to protect their turf. And so I just declared myself the investment banker in charge of Russia because nobody -- >> [Laughing] BILL B.: -- nobody was -- and there was nobody -- and I declared it waiting for somebody to object but nobody objected because there was no money. There was just nothing going on. Then I had an interesting opportunity about three months into my investment banking leadership in Russia. >> [Laughing] BILL B.: I got my first bite of a mandate and it was a fishing fleet located in Murmansk which was 300-miles north of the arctic circle. And this fisher fleet, it's called the Murmansk Charter Fleet, had some kind of fishing dispute with somebody buying their fish and they had hired Cleary GottliebCleary Gottlieb to settle this dispute and Cleary Gottlieb, the big New York law firm, had recommened that they hire an investment banker to advise them on privatization. And so I went to the library at Salomon Brothers and discovered that, like, 20 years before, Salomon Brothers had done some fishing deals in Japan. And I proudly put these into a presentation to the Murmansk Troller Fleet and lo and behold they called us up and said, you've won the assignment. Please come and negotiate fees. And so I started getting in touch with them to negotiate fees and it turned out that they were ready to pay $50,000 a month for two months to advise on their entire privatization. Now, there's not an investment banker that would get out of bed for 50,000 bucks for two months or for a month but it was $50, 000 greater than zero, which is what I had earned so far as the head of the Russian investment banking business. >> [Laughing] BILL B.: And so I took the assignment. And I got on a plane to Murmansk and I got to Murmansk which is a very, very desolate, terrible place. Really just a horrible place. >> [Laughing] BILL B.: And I sat down with the head of the fishing fleet and I asked him, what's going on? How could I help? And he walked me through the math. They basically had a hundred ships, each ship costs $20 million new, so there's $2 billion worth of ships, maybe seven years old and total so about half depreciated, so a billion dollars worth of ships. And he had hired me to decide whether the management should exercise their right under the privatization program to purchase 51 percent of this fleet for two and a half million dollars. >> [Laughing] BILL B.: So it was actually quite an easy assignment. >> [Laughing] BILL B.: And, again, you didn't have to be a Stanford MBA to advise on this stuff. 5 million market cap, a billion dollars worth of ships, uh . .. >> [Laughing] BILL B.: I had that chemical reaction that I had from Poland sort of pumping through my system at this point and I thought to myself, I wanna get involved in some of this stuff. And so the first thing I did after leaving there was I instead of going back to London I went to Moscow to see whether this was just an ano, ma'am lee in fishing fleet or whether the whole situation was the same all other Russia. And it turned out that the entire Russia was being put through the same type of privatization program. And what I learned -- I didn't know a soul in Moscow, I didn't speak a word of Russian, and I got ahold of an English language Yellow Page directory that they had for English language business visitors and I just started circling people in the Yellow Page directly and going around meeting them. And I met about 30 people and over the course of a week I put together the sort of thought about what this is. And it was very simple. That they had vouchers that they gave to every person in the country and there was a hundred 150 million people in the country and each voucher costs 20 bucks. So that gave you $3 billion worth of vouchers and that was exchangeable for 30 percent of all the shared capital of all the shares in Russia which meant the entire value of Russia in 1992 was $10 billion for the whole country. All the oil, all the gas, all the metals, all the everything. $10 billion. And, boy, at this point, the adrenaline is just pumping through my system and it was clear that this was just the most unbelievable, unbelievable opportunity ever. So, I go back to Salomon Brothers, where I had been working and I say, listen, we're wasting our time with all this 50,000-dollar advisory stuff. We should get in there, buy all this stuff, and make a fortune. They're just giving it away. Gold for free. And they looked at me like I was completely out of my mind. And I thought, how could -- and people said, what? Russia? Invest in Russia? What are you? Crazy is this and I didn't know how to work in an organization, or politics, or anything. And so the more that they -- the more people sort of blanked me and didn't wanna talk about it the more I would just, like, try to find somebody else who would listen to me. Ask so I was just talking to more and more people which is exactly the wrong this I think to do in an organization that starts going on. And so pretty soon -- we used to have these group lunches with the young guys who are in the same year and people stopped inviting me to the group lunches, no more. >> [Laughing] BILL B.: No more drinks. People didn't wanna with seen with me. I was some excentric outcast. And I wasn't earning any money for the firm, either. That five times thing was coming close to being due. So I was in this terrible situation of becoming, like, an outcast in the firm, and very unpopular, and my job was on the line and I was feeling very bad about myself. And one day I got a call from a very senior person in the New York office who's responsible for the firm's balance sheet. And he said, I heard that you might have something interesting to say about Russia. Why don't you come and tell me about it? And so I prepare myself a PowerPoint presentation so hopefully I can somehow get through to this guy and maybe turn this situation around. Can so I go with New York and this guy is meeting with this very, very strange fellow with no social graces whatsoever and he was, like, one of their most successful investors in the firm but nobody could ever work on his team for long 'cause he just had no -- not a character to work with. And so I go and sit down with him and I start taking him through my PowerPoint presentation showing him these numbers that I've just shared with you. And he wasn't nodding, or giving me any kind of feedback. He was just looking at it very blankly. And I was going through my PowerPoint page after page and no feedback, no response, no nothing. And I'm starting to feel a little worried. And about halfway through my presentation he just gets up and leaves the room without saying a word. >> [Laughing] BILL B.: And I'm sitting there, and I'm thinking to myself, umm, this is not good. This is probably my last chance of getting -- doing this. And I'm trying to think about what I'm gonna say when he comes back to this room so I can somehow salvage it. And I'm getting more and more worked up trying to think about how can I pull this out in because this is my whole dream. This is how it's gonna work. And he comes back and before I have a chance to open my mouth, he says, this is the most unbelievable story I've ever heard. I've just gone to the Risk Committee and I've gotten the allocation for you to invest $25 million. Stop all this nonsense that you're doing with investment banking. We're gone in invest in this stuff. This is amazing. All of a sudden a big cloud and the big weight has been lifted off my shoulders. I go back to London and I start investing -- I go to London, get my stuff organized, I then go to Moscow, and we start investing this $25 million which was an enormous amount of money for the Russian market back then. And we get the $25 million invested and seven months later, now we're in the middle of 1984, the Economist Magazine writes an article which outlines the same economics I've just taken you through, and it's called "Sale of the Century" and all of a sudden about 30 people, rich guys, head funds, wake up and say, "God, we should be invested in this thing." And so they started calling up brokers or whoever and try to get invested. And our 25 million-dollar portfolio, in that seven month period, because of this economist's article went up five times in seven months because all of a sudden 30 people started showing up and buying this stuff. So I've gone from 25 to 125 million this was back in the days where a hundred million was a lot of money. >> [Laughing] BILL B.: And so all of a sudden all the guys who weren't inviting me to lunch and weren't hanging out with me anymore started coming around my desk saying, Bill, how can we get involved in this Russian stuff? And I'd like to buy some of this stuff for my personal account. And literally, every morning, there was, like, four guys hanging around my desk before I arrived waiting to get some advice on how they could make some of this money in Russia. But more importantly than that, the senior salespeople who had big hedge fund clients at Salomon Brothers started coming around can saying, Bill, would you be willing to come the New York and meet George Soros? [Laughing] No. >> [Laughing] BILL B.: Could you meet John Templeton? Michael Steinhardt? So I was in, like, my late 20's and I was being invited to meet the most successful investors on earth to explain to them what I had done in Russia. So I go to these meetings and I take them through my PowerPoint and every single one of them says at the end of the meeting, " That's the most amazing thing that I've ever heard. Can we give you some money to manage?" And I said, well, we're not actually in the business of managing people's money. Let me go back and ask my colleagues and see whether we can do this. So I get back and I ask my boss in London if this is something that we can do for other people. He said, great idea. For sure. Let's form a task force to study it. >> [Laughing] BILL B.: So he said, next Monday will be the first task force meeting. So I show up to the task force meeting and it's like this room. There's like 50 people showed up for the first task force meeting and there's only, like, two people in the firm who knew anything about Russia. And I look around the room and people -- and there was, like, directors, managing directors, and senior managing directors, and I was like, some junior vice president, and I was looking around the room, right, and all these guys were sort of arguing with each other about which part of the firm was gonna get the credit for this and who was gonna get the money. And I was looking around thinking to myself I know there's one thing I know for sure who's not gonna get any money outta this thing. >> [Laughing] BILL B.: So I got really angry and I went back and I was tossing and turning for a few days and I just -- I said, I just can't do this. And so I sucked up my gut, and I went into the head of the trading floor and I said, I'm quitting. I'm gonna set up my own fund to do this. He said, Bill, you're crazy. You have such a promising career. And I said, I'm sorry. I'm setting up my own fund to do this. And I went -- I left Salomon Brothers and I set up my fund called the Hermitage Fund. And I went back to all of these famous guys who I had met on Wall Street and I said, would you be willing to invest with me in my Hermitage Fund? And one of the guys who I had met was a very famous, now deceased man, named Edmond Safra, who was the owner of Republic National Bank in New York. And in the world of private banking his name was as good as it ever -- his name is a legend in private banking. You might not know about him now, but if you knew the history of wealth and private banking this man was just like gold. And Edmond Safra put up the first $25 million to be my anchor investor. We became joint venture partners and he said, if you do a good job with this 25 million then I will introduce you to all the rich people in the world and will make you a spectacular success. But you node to do a good job first. So I moved to Moscow from London in 1996 and started investing. And it was really a very interesting thing because in 1996 there was not a single Wall Street-educated principal investor who was actually sitting on the ground in Russia. There was a lot of Wall Street principal investors sitting on the ground in Wall Street and there was a lot of Wall Street- educated brokers sitting on the ground in Moscow, but no investors. And it was very interesting 'cause the brokers would all write research about things that they could make a lot of commissions buying and selling and they wouldn't write research about the things that made the most sense. And basically you end up in a situation where anything -- any stock that was researched by the brokers would trade at ten times the valuation of any stock in the same industry that wasn't researched by the brokers and nobody had had any confidence in buying the stuff that wasn't researched because they couldn't do any research. So, again, this is not rocket science. This is just simple stuff. I thought, well, here I am on the ground. I could do my own research. Why don't I go visit the company this trades at 1/10 the valuation of the other one where there's a research report? So I went and visited the oil company that traited at 1/10 the valuation of Lukoil and a couple of them at did and I rooked at them and there was no difference between the ones that were 1/10 the valuation except for the fact that there wasn't a credit Swiss research report. So after going through these companies and realizing that they're exactly the same, they had the same surley management, the same rusting oil derricks, the same bad tax inspectors, the same everything, one was ten times cheaper than the other. And, by the way, the one that was ten times more expensive was still 1/10 the valuation of the western oil companies. These are trading at 1/100 of the valuation of the western oil companies. So I decided I'm gonna invest in the stuff that's unresearched 'cause I can do my own research. So I did my own research, invested in them, and my fund went up in the first month of operations it went up 35 percent. Not in a year but in a month. So some of Edmond Safra's clients had heard about this new hot thing in Russia and they called Edmond and said, can we invest in your fund? He said, no, no, no, no. We don't know this guy. He could be stupid. He could be a crook. I have no idea. I wanna audit -- I wanna have, like, a year's track record, audits, everything, and then I'll let everybody in but I don't wanna put my name next to his until I know he's a solid guy. The next month we were up 40 percent. >> [Laughing] BILL B.: And the guys who had called him and said, Edmond, what are you trying to do? That was 40 percent we would have made if we had invested. And people were getting angry with him. They said, listen, Edmond, we're gonna take some of our money out of your bank if you're being so greedy and not letting us in this thing, just keeping it for yourself. >> [Laughing] BILL B.: And he couldn't have imagined that his business risk was not gonna be me blowing up, but me doing too well. All of these people were threatening to leave his bank because I had done so well and he wouldn't let 'em in. And so he relented, opened up the fund to outside investors, and by the end of the first year we had about a $100 million under management. We were up, like, a hundred 50 percent. The next year it was even better. We were up 200 -- I think we were up 242 percent in 1997. We were up 800 percent from when we had launched 18 months earlier. My fund was over a billion dollars -- and again, this was when a billion dollars really meant something. >> [Laughing] BILL B.: -- and I was the largest investor by any stretch of the imagination in a small market. They were writing articles about how clever I was ton front page of the New York times. My clients were inviting me to their yachts. >> [Laughing] BILL B.: I was in my early 30s's. I thought, I've just figured it all out. >> [Laughing] BILL B.: And I had no perspective. Everything that I've just told you was like -- one of them by themselves might not have been a sell signal but a young guy in his 30's with the biggest fund in the market up 800 percent in 18 months, clients and yachts, front page articles, that was a sell signal if there ever was one. >> [Laughing] BILL B.: But I was too young and too inexperienced to understand that. >> [Laughing] BILL B.: In 1997 the Asian currency started to devalue, Asian markets started to go down, the Russian government had a huge debt burden, it was rolling on a three-month basis with hedge funds and rich guys and they couldn't roll it over. Russia defaulted, devalued, the stock market went down 80 percent, my 1 billion went down to a hundred million. There was no more yacht invitations after that. >> [Laughing] BILL B.: But then I discovered something far more disturbing than losing 90 percent of your money which was that the companies I had invested in which were basically oil and gas companies in Russia were run by people who you've now -- who are now sort of properly immortalized. The Russian oligarchs. This small group of about 22 guys basically owned a majority of all these companies. And they used to behave a little bit when they thought that they had access to western capital, when the western capital markets were open. But after the Russian economy defaulted and devalued, and went to hell, there was no more western investors in any case and so they no longer had any need to behave themselves. And so in 1998 and 1999 the Russian oligarchs embarked on an orgy of stealing that's been unprecedented in the history of business. I mean, it's just remarkable every type of scam you could ever imagine, they were trying to do. Asset stripping, transfer pricing, delusion, embezzlement, you name it, they were doing it. And I was owning one or 2 percent of these companies and just watching all the money that the companies had just disappearing. And so I had to decide something. I was either gonna stay there and just put up with all this stuff or I was gonna have to -- I mean, basically there was really only two choices. You could either leave or you could fight. I could not just watch it happen. And so we decided to fight. And the most famous fight involved Gazprom. Gazprom was a company that nobody had really heard of in the west until, like, ten years ago. And Gazprom, it's biggest gas company in the world. It's about ten times the size of Exxon in terms of hydrocarbon reserves. And Gazprom, in 1999, was trading at a 99.7 percent discount to BP or Exxon per barrel of hydrocarbon reserves. Why was it at such a big discount in because everybody thought that everything was being stolen out of Gazprom. So I looked at this thing and I said to myself, could they really be stealing everything out of Gazprom? That would be just the most remarkable thing. A company ten times the size of Exxon everything being stolen. So I got together with my team and I said, let's do a stealing analysis of Gazprom. And they looked at me, how do you do a stealing analysis? >> [Laughing] BILL B.: So we started thinking, well, how to you do a stealing analysis? And in the introduction they didn't teach me this at Stanford Business School. You couldn't go to the company and say, "How much are you stealing" -- >> [Laughing] BILL B.: -- because they wouldn't tell you. That might do worse things. You couldn't go to the brokers because the brokers are so busy preening themselves in front of Gazprom to get corporate finance work that the last thing they would do was tell anybody how much stealing was going on. But I learned something as a consultant at the Boston Consulting Group which was if you wanna find out the answer to something where it's not written down somewhere, you just go and interview people. That's what the consultants do for any of you who are thinking about consulting. And so I said, let's make a list of all the people who know about stealing at Gazprom and just ask them to breakfast, lunch, dinner, tea, coffee, and see what we can learn from interviewing them. We didn't know whether anyone would accept our invitations or tell us anything but why not try? So we set up about 40 of these meals and most people accepted the invitation. Why not? And we discovered something very interesting is that in the communist days the itchest person in Russia was maybe ten times richer than the poorest person. But by 1999, the richest person in Russia was, like, 250,000 times richer than the poorest person. And that just poisoned the whole environment of the country. Everyone hated everybody else, they just hated the rich people, they hated the people that stole. And so people were in these meetings were spilling these guts out to us about all the different scams they knew about. We were filling up notebooks with all these different allegations of scams. It was interesting, really interesting stuff that people were telling us. Writing it all down. We filled up a whole notebook with these allegations but how do you know any of the stuff is true? A lot of sour grapes. Now, Russia has one other great, interesting anomaly which is it's got to be the most bureaucratic country in the world. Everything that ever happens in Russia get filed in quadruplicate in four different ministries. If you go to the bathroom you write it down, some ministry, like, registers it. And so -- and what's interesting is that you can go and just ask for the information. It's just a question of going to the ministry. And so one of my guys, one of the guys who works for me, my head of research, started going around to different ministries picking up databases on different things and we were able to take these databases we got from the ministries and cross reference them with all the stuff we learned in these breakfasts, lunches, and dinners, and we learned exactly how much had been stolen from Gazprom, by who, in what way. And basically what we learned was that nine individuals from management of Gazprom had stolen an oil company the size of Exxon out of Gazprom. That's pretty dramatic. That's the size of Kuwait. The oil reserves the size of Kuwait had been stolen out of Gazprom. But we also learned that the oil company the size of Kuwait is only 9 percent of Gazprom's reserves. 91 percent was still there. So what do you do if the market's pricing as if there's 99. 97 percent discount and you've just discovered that really there should only be a 10 percent discount? You go and buy the hell out of the thing. And that's what we did. We made Gazprom our single largest investment. That's usually where a fund manager would stop but we said to ourselves, this is just so morally outrageous what these guys is done and it's so obvious. Let's share this information with the world. >> [Laughing] BILL B.: And so we did. We broke it into seven chapters. I gave a chapter to the Financial Times, a chapter to Wall Street Journal, a chapter to the New York Times, Business Week, and each of them wrote a story, and boy did that set the Moscow night on fire. >> [Laughing] BILL B.: There are parliamentary hearings, there were shareholder votes, there was articles, more articles, there were hearings, investigations. And about seven months later, Putin, who had been President in 1999, stepped in, fired the head of Gazprom, put a new guy in and said his responsibility was to recover the lost assets and not let any more Gazprom assets leave the company. And from the moment that we started this thing until 2005 the stock price was up a hundred times. >> [Laughing] BILL B.: We got so excited by this that we started doing it elsewhere. We did it at the Unified Energy Systems, the National Electricity Company, we did it at Spear Bank, the National Savings Bank, we did it at Sergey Nevta Gas, and it was working like a charm. Not everything was remarkable as Gazprom but it was all pretty amazing. The fund went up something like 40 times from -- we went from a hundred million to more than 4 billion. I became the largest investor in Russia. It was just amazing. And now I'm gonna show you a video for the last ten minutes of what happened next because the video is better than I could ever do it. >> [Laughing]. >> It's the true kafka-esque situation. It's black is white, white is black, it's the most unbelievable thing you could ever imagine. It's one thing to be victimized of a crime. It's another thing to be charged for the crime you're convicted of. >> The following is a story so extraordinary you couldn't make it up, a story about the risks of investing in Russia today. A story about how companies are stolen, criminals take over banks, and murderers dictate to judges, about how politicians pay lip service to cleaning up the system but in fact do nothing or actively assist the criminals. It's a story whose twists and turns lead down a dark trail of corruption, violence, and the theft of $230 million from the Russian people. Crimes like the one we're about to describe happen in Russia every day. And this is how it can happen. >> Hermitage Capital Management is an investment firm that started in 1996 to focus on the Russian equity market and I founded it in partnership with the late Edmond Safra and we were the largest foreign portfolio investor in Russia. Everything had been going beautifully with the business, we had been growing the fund, we had been making money for our investors, we had been stamping out corruption in the companies we invested in. But as often happens when you step on enough toes, eventually people -- certain people -- get angry with you. >> On November the 13th, 2005, when he was returning home to Moscow from a business trip, Bill Browder was refused entry at the airport. Later he was told by the Russian authorities that he'd been banned from the country on the grounds of national security. >> I then tried using every friend and contact I had to get back into Russia. I had an interesting opportunity. I was tending the world economic forum in Davos in January 2007. Dmitri Medvedev, who's now the President who was then the First Deputy Prime Minister was making his official foreign debut and at the forum I had an opportunity to have a brief conversation with him where I asked him for help in restoring my visa. And he was responsive, he said he would help, he asked for a copy of my visa application. I thought with the help of the First Deputy Prime Minister my visa would be approved in no time at all. >> What happened next was very different from what Bill had expected. Lieutenant Colonel Artem Kuznetsov of the tax crimes unit of the Moscow Ministry of the Interior who, a few weeks after Bill Browder's appeal to the first deputy prime minister Kuznetsovto re- issue his visa, telephoned Hermitage. >> Lieutenant Colonel Artem Kuznetsov called up my head of research. >> [Speaking in native language] >> And he said, I understand that the CEO of your company wishes to get a visa to visa our country and I'm responsible for writing the report. Before I write the report, I'd like to have an informal meeting, show you a few papers, ask a few questions. Depending on how you behave and what you provide in this meeting will be the determining factor in whether the visa gets issued or not. >> Hermitage rejected this extortion attempt and refused to talk with Kuznetsov but Kuznetsov had he has own plans. On July the fourth, 2007, Lieutenant Colonel Kuznetsov led a team of 25 officers in a raid on the Hermitage Moscow offices taking servers, computers, and documents. The official reason he gave for this raid was that one of the Hermitage companies, Kamaya, had supposedly underpaid dividend withholding tax. This was not true. Not only had Kamaya paid up its tax, but the Russian tax authorities certified in writing that it had overpaid them by as much as 4 million rubles. >> In addition to Kuznetsov raiding our offices he then joined an ongoing raid on the same day at our offices at the offices of our law firm, Firestone Duncan. One of their young lawyers protested instead of trying to explain whatever their legal logic was. They took him into a conference room, beat him viciously, arrested him for resisting the search, he was fined 15,000 rubles to get out of jail, and then he was in the hospital for two weeks having to recover from his beating. >> In fact, Kuznetsov's raids were the first part of the criminal's plan: A fishing expedition to find out the amount of Hermitage's assets and in which banks they were held. At the same time, Kuznetsov seized all of Hermitage's corporate documents and certificates. These official documents would be used by the criminals to steal the Hermitage companies. What happened next occurred without Hermitage knowing. The criminals went to the Russian courts in Kazan, St. Petersburg, and Moscow and obtained judgments against the Hermitage companies on the basis of forged contracts. They even used real lawyers, armed with bogus powers of attorney to represent the Hermitage companies. Instead of defending the Hermitage companies, the lawyers pleaded guilty. HROZ PWHROSZ and two other companies belonging to the criminals were fraudulently awarded hundreds of millions of dollars by the courts. Later, Hermitage discovered that the three individuals who'd been installed as the new directors of the stolen companies, were criminals. Victor Markelov, a convicted murderer; Valery Kurochkin, a convicted thief, and Vyacheslav Khlebnikov, a convicted burglar. All three had been released from jail early by the Russian authorities. In total, three companies were stolen from the Hermitage Fund. According to the sham court judgments, together, the companies allegedly owed nearly $1.3 billion to the criminal's companies. The criminals could not have stolen the Hermitage companies or secured the judgments against them without the corporate documents and certificates seized by Kuznetsov in his raid of June the fourth and supposedly kept in his safe custody since then. Armed with the sham judgments, the criminals sent Kuznetsov to the banks to seize the assets. >> The one thing that this group of criminals hadn't bargained on was that there would be no assets there. So they put millions of dollars into this scam bribing different officials, bribing judges, getting all sorts of people involved in this thing, and they got nothing. And so for a brief period of time we felt very relieved and happy that they got nothing and that was the end of the story. But it wasn't. >> Phase two of the criminal's fraud was to steal the $230 million of tax money already paid by Hermitage to the Russian authorities by claiming a tax rebate. This they did through the brilliant ruse of demonstrating that the $1.3 billion of alleged debt, which resulted from the sham court judgments, had wiped out Hermitage's profits in 2006. Within a mere three days of submitting the claim of the 24th of December 2007, Olga Tzymai and Sergei Zhemchuzhnikov, officials of the Russian tax office, authorized a staggeringly huge tax repayment of $230 million to the criminals. The largest single tax repayment in Russian history was made without a single question being asked. $230 million, which belonged to the Russian people, had been stolen by the criminals in an organized conspiracy supported by corrupt officials in the higher reaches of the Russian state. >> [Music playing] >> The Russian tax authorities paid the money into the criminal's accounts at two obscure banks, Universal Savings and Intercomerts. They covered their tracks. They laundered the money and filed to liquidate the stolen Hermitage companies. Hermitage filed dozens of complaints at every level of the Russian state. Not a single constitution or person on the special anticorruption committee set up by President Medvedev has looked into the fraud against Hermitage. >> The most absurd part of the whole thing is that the only complaint that got any traction was one which we sent to the Russian State Investigative Committee and what traction did that get? They blamed us for the tax crime. >> Meanwhile, for Bill Browder, matters took a further turn for the worse. Bill Browder has been put on the federal search list for standing up to corruption and organized crime. >> You can't steal $230 million from the Russian budget without having very, very senior officials involved. Clearly we can see the names of the senior law enforcement officials going right up the chain. We can also see the involvement of senior tax officials, senior judges, lawyers, and then on top of that, you have all the people that we wrote to that decided to do nothing about it. That tells you something. >> [Music playing] >> Has this video is being produced, the Russian Ministry of the Interior Police have arrested Sergey Magnitsky, a lawyer and accountant, working on the Hermitage affairs at the law firm Firestone Duncan. Six other Russian lawyers working for Hermitage, who have been trying to seek justice by reporting the 230 million-dollar tax fraud to the Russian authorities, have either fled Russia or have gone into hiding. So, a story so extraordinary you couldn't make it up, a story about the risks of investing in Russia today, a story that sound like a thriller but isn't, it's a true story and it's one that's being repeated every day. >> [Music playing]
Sergey Magnitsky, his lead lawyer, died in a Moscow jail a few weeks ago. Sad. Browder is lucky to be alive.
You should watch it. It's scary.
Great story but not unheard of before. Not surprising but interesting insider perspective. It is long but you will enjoy it.. Mr Browder is a good story teller.
Thanks, I could have been productive for the last 45 minutes.
it is actually amazing and interesting Bowder's speech in front of Stanford Business students crowd.
Oh god, that 10 minute "documentary" insert was incredibly annoying.
This is an amazing story of career of Browder, who chose to focus on investing in Russia. Long story short, his fund made money by investing in undervalued, corrupt companies and then exposing their actual levels of corruption. Here is the ending which explains why not to invest in Russia
I don't feel sorry for him. He chose to play in that market. What the fuck was he expecting? He made shitloads of money on Russian people misery.
As for $250 million that was stolen ... that's pocket change. I live in ex-communist country with 4.5 million people, that's like a suburb of Moscow and we don't have natural resources like Russia. There have been few corruption scandals lately and total is around 1 billion Euros (or more). You have all kinds of plays ... mostly in construction business, but others as well.
Here is just one:
http://www.croatiablognews.com/podravka-the-spice-affair/
Economy minister resigned over this one. BTW, Merril Lynch was also mentioned.
Another:
http://daily.tportal.hr/article.aspx?kID=1&aID=6949
They paid 6 times the price for what was done.
I can only imagine what's it like in Russia, where you have much more to steal.
Russia has always fascinated me. The Russian people have been fucked for centuries, mostly because they're willing to tolerate the fact that they get fucked while laughing and smiling -- they call it "The Russian Character".