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]
