On 4 June 2007 a group of twenty-five Interior Ministry officers, led by Lieutenant Colonel Kuznetsov, raided the Hermitage offices in Moscow, with a warrant relating only to Kameya, and seized documents, computers and other materials involving three quite unrelated Hermitage companies: Makhaon, Parfenion and Rilend. On the same day Kuznetsov, also without a warrant, raided an American-owned law firm, Firestone Duncan, which specialises in legal paperwork. He confiscated the statutory documents and seals of the three Hermitage subsidiary companies – in all two vanloads of materials. That was outrageous enough. What was worse was the way the officials behaved during the raid. When a lawyer at Firestone Duncan protested, the visitors beat and arrested him. After paying a 15,000 rouble (roughly $500) fine he was released, and spent two weeks in hospital. His name is still available in news reports of the incident, but I am omitting it at the request of friends who say he fears for his safety.
This was no coincidence. According to Hermitage, all the lawyers associated with the company suffered robberies or break-ins in the two-week period around the raid. By the brusque standards of Russian law enforcement, the raids were not in themselves unusual. The unannounced arrival of masked men toting machine guns, who remove documents and computers from your office, is a run-of-the-mill business risk in Russia, no more unusual than, say, having British health and safety inspectors demanding that you fit new fire doors, or America’s Internal Revenue Service quibbling over allowable business expenses in a tax return. The twist in Russia is that such searches and seizures are often carried out by state officials on behalf of a third party, such as a business rival to the victim. Having identified the source of the persecution, the victim starts negotiating – or if he has good connections himself, considers counter-measures.
Mr Browder, from his exile in London’s Mayfair financial district, was puzzled. Clearly the problem had, as he put it to me, ‘metastasised’. But why? The raid could be revenge by one of the politically influential companies he had chivvied for bad management and impenetrable finances. Or the aim could be simply to derail his campaign to return to Russia. At any rate, he reckoned, it was a headache not a nightmare, particularly as he had largely wound down his operations there anyway. This was a big misjudgement: far from being the vengeance of some disgruntled subject of Mr Browder’s campaigns, the raid was carried out by his erstwhile ally, the Russian state itself. Despite multiple requests and complaints, the authorities did not return the confiscated items. Nor did they explain on what grounds they were holding them.
Hermitage then received a troubling phone call. A bailiff from the St Petersburg Arbitration Court was seeking to enforce judgements to the tune of several hundred million dollars arising out of lawsuits against Hermitage companies. But Hermitage had never heard of these cases. A baffled Mr Browder commissioned Mr Magnitsky, head of the tax and audit department at Firestone Duncan, to investigate. A notable figure in the field of tax law, Mr Magnitsky was an ideal choice. He immediately found that no fewer than ten cases had been lodged in St Petersburg. While a colleague set off for Russia’s second city to find out more about these mysterious lawsuits, Mr Magnitsky began scouring official registries for clues. In October 2007 he made his first breakthrough. While the documents and seals of his client had been supposedly in the custody of Kuznetsov and a colleague, Major Pavel Karpov, they in fact had been used to re-register the companies.
Such chicanery may seem puzzling to outsiders who live in a world where courts offer redress, the media highlights official wrongdoing, and elected representatives are able to take up grievances. A Western policeman who steals a company document risks losing his job and would probably face prosecution. Anyone trying to use the stolen document would be guilty of attempted fraud and face criminal charges too. But for all its outward signs of normality, Russia offers none of these routes to justice, which is why crimes involving stolen corporate documents are common. Possession is nine-tenths of the law – or all of it. The result is corporate raiding, Russian style. In the West, this technique involves brainy and ruthless investment bankers who swoop on a company to dislodge a dozy management team. The Russian equivalent involves a powerful bit of the state machinery stealing a company from its owners. This often starts with a raid in which company documents are confiscated by officials, and then end up in the hands of the raiders who use them to change the company’s ownership. The victims may negotiate a settlement where they stay on as managers. At worst they are lucky to escape with their lives. Something on these lines seemed to be happening, although the motive was puzzling. The perpetrators had gone to some lengths to loot a pestilential foreigner’s assets, presumably in the belief that the effect would be lucrative or at least punitive. But it was neither. With its investments wound down, Hermitage thought it had little to lose, and needed care little for the wrath of Russian officialdom.
While Mr Browder and his colleagues pondered this puzzle Mr Magnitsky prepared criminal complaints implicating Kuznetsov and Karpov. He also discovered a new twist: the new owner of the Hermitage companies was a previously unknown firm called Pluton, registered in the provincial republic of Tatarstan. It was not the sort of outfit that would normally engage in high finance. The owner was a former sawmill employee called Victor Markelov who had served a jail sentence for manslaughter. His fellow directors were two other ex-convicts.[12] All three had been released from jail early. Though odd by Western standards, such developments are not unusual in Russia, where ex-convicts, as well as drunks and tramps, often feature in corporate frauds. For a modest financial or liquid consideration, they will sign whatever papers are required, providing a fig leaf of disguise for the perpetrators at modest cost.
By this stage Hermitage had lost its companies, but the fraudsters had not gained anything except to drive Mr Browder out of Russia. But the next stage of the swindle was to change that. It involved a lawsuit, based on forged backdated contracts purporting to show that the Hermitage companies had promised to sell a large quantity of Gazprom shares. Claiming that the companies had then reneged on the deal, the claimants (three previously unknown firms) sued for a startling $1.3bn in damages for foregone profits. The supposedly broken contracts could hardly have been flimsier. They were littered with inaccuracies. They referred to bank accounts that were opened only subsequently. They used inaccurate addresses. A power of attorney – a document rarely used in the West but an essential part of any business transaction in Russia – was dated four months before the company concerned had come into existence. One of the claimants identified himself using a passport that later turned out to be stolen. In evidence, they presented a mixture of forged documents and copies of materials seized in the raids. In any legal system worthy of the name, the investigators who took custody of these documents should have safeguarded them, not let them fall into the hands of fraudsters.
With proper legal representation, these ludicrous cases would have been easy to win. But the stolen Hermitage companies did not have proper lawyers. In a complaint to the Russian chief prosecutor, Yuri Chaika, Hermitage says of its supposed representatives that it:
Had no prior knowledge of, or acquaintance with, these lawyers… never hired or appointed them and… never authorised or ratified their appointment as attorneys or agents of any kind.8
12
l They were: Valery Kurochkin, a convicted thief, and Vyacheslav Khlebnckov, a convicted burglar. The three companies were called Instar, Logos Plus and Grand Active.