Red notice

24. «But Russian stories never have happy endings»

As I sat at my desk trying to take everything in, my secretary quietly placed a message at my elbow: «Elena called. Not urgent». Normally I would have called Elena back right away, but I had so much on my mind that I didn’t.

About an hour later, Elena called again. I answered. Before I could say anything she yelled, «Why haven’t you called?»

«What do you mean? You said it wasn’t urgent».

«No — I said it was urgent. Bill, I’m in labor. I’m at the hospital!»

«My God! I’m coming right away!» I jumped up and ran for the door. I didn’t wait for the elevator and rushed down the stairs, nearly slipping in my smooth-soled loafers as I turned a corner. I ran outside into the midafternoon sun, suddenly forgetting about Department K, the FSB, and Russia.

Covent Garden is a maze of tiny roads that leads to a central pedestrian square. Hailing a taxi there was pointless because it would take twenty minutes just to get out of the neighborhood, so I sprinted toward Charing Cross Road, but when I arrived, there wasn’t an unoccupied taxi in sight. I kept running in the direction of the hospital, looking over my shoulder for cabs along the way. I dodged through pedestrians and the mixture of London traffic with its trucks, double-decker buses, and motor scooters. It seemed as if every London cab was already taken. It was too far for me to go on foot, so I kept on running and finally found a free taxi on Shaftesbury Avenue.

Fifteen minutes later I burst through the hospital doors. I was a complete mess as I made my way up to the delivery suite on the fourth floor. Elena was in the final stages of labor. She was screaming and red-faced from the contractions. She didn’t have time to be mad at me — she didn’t have time to think about me at all. I took her hand and she gripped mine so hard I thought her nails might draw blood. Twenty minutes later, our second daughter, Veronica, was born.

Unlike with Jessica’s birth, when the joy of a new baby overcame my thoughts of problems in Russia, this time my troubles were so monumental that I couldn’t get away from them. As soon as it was clear that Elena and Veronica were healthy, my Russian problems reinvaded my mind like a horde.

I wasn’t going to share the bad news about Department K with Elena, not then, anyway. I decided to let her rest and bond with our newest daughter. We went home the following day, and I put on a brave face as friends came to meet the baby and congratulate us. But I could never shake what was going on in the background. Up until then, the main reason I’d been able to hold up psychologically had been Elena. In our relationship, we had this strange rhythm of emotions. Whenever I panicked, she was calm, and vice versa. It had worked perfectly up until now, but this news was so disturbing that I couldn’t imagine the pattern would hold.

Two days after we got home, I couldn’t wait any longer to tell her. That night, after rocking Veronica to sleep, I went to our bed and sat at Elena’s side. «I have something I need to talk to you about».

She took my hand and looked into my eyes. «What is it?»

I told her about the latest message from Aslan about Department K.

Veronica, sleeping in the bassinet, interrupted me now and then with a coo or one of those staccato exhales that newborns make — ah-ah-ah-ahhh. When I was finished, I asked Elena, «What do you think we should we do?»

The expression on her face never changed, and she had the same remarkable calm that she had always had in the past. She said quietly, «Let’s see what they do next and then we’ll deal with it. These people may be nasty, but they’re only human, just like everybody else. They’ll make mistakes».

Elena squeezed my hand and gave me one of her soft smiles.

«What about our vacation?» I asked. We had a family trip planned for August, as soon as the baby could travel.

«That’s simple, Bill. We go. We carry on with our lives».

Thankfully the next few weeks were quiet at work, with no more alarming Russian information. In mid-August 2007, we boarded a plane to make the short flight to Marseille in the south of France. Veronica slept most of the way, and Jessica and I played a little game with a plastic bottle and a bag containing half a dozen wads of paper. David handed us bottles and rags and favorite toys and snacks and did his homework in between. We touched down in Marseille, and I automatically turned on my BlackBerry to see if I’d received any calls or emails. There was nothing — nothing important, anyway — and I took this to be a good omen for the trip.

We disembarked and made our way through the airport. We collected our bags and went outside to wait for our van. As soon as we stepped outside, the heat — thick and full and pleasant — washed over us. Our driver helped us load our things and we piled in. As we pulled away from the curb, my mobile phone rang. It was Ivan.

«Bill, it’s happening again», he said, panic-stricken.

Without even knowing what he was about to say, my leg started twitching. His panic was contagious. «What’s happening?»

«The police are raiding Credit Suisse in Moscow».

«What does that have to do with us?»

«They’re searching for anything that belongs to Hermitage».

«But we don’t have anything there», I pointed out.

«True, but the police don’t seem to know that».

«What are they looking for then?»

«Hold on. I’ve got a copy of the search warrant». He dipped off the line and was back in half a minute. «They’re searching for anything that belongs to Hermitage Capital Management, Hermitage Capital Services, Hermitage Capital Asset Management, Hermitage Asset Management…. It goes on for two more pages. Should I continue?»

«No».

Apparently, the police were playing some strange game of Battleship, using every possible formulation of our company’s name in hopes of landing a direct hit. I almost had to laugh at the amateurishness of it.

«Who’s leading the raid?» I asked.

«That’s the really fucked-up part, Bill. It’s Artem Kuznetsov».

Goddamm it! Artem Kuznetsov? He seemed to have his hands in everything bad that was happening to us in Russia.

We hung up, but I knew that we had just turned another corner. Aslan, our source, had been right — these people were indeed after our assets. The only thing I couldn’t understand was why they didn’t know that we no longer had any assets in Russia. Weren’t the Russian secret police smarter than that? Perhaps not. As Elena had pointed out, maybe they really were just as fallible as everyone else.

Kuznetsov left Credit Suisse empty-handed, but he kept trying to find Hermitage assets. Over the next two weeks, as I tried to enjoy the warmth of southern France, Kuznetsov raided more banks in Moscow. He raided HSBC, Citibank, and ING; in each instance he came away with nothing.

As I learned about each of these raids, I was drawn further and further from my family. Instead of decompressing, singing lullabies to Veronica and Jessica, and playing with David in the pool, I spent most of my holiday on conference calls as we tried to figure out what our enemies were going to do next.

When my «vacation» was over, I went back to London and huddled with the team to plan our next steps. The key legal issue was the criminal case against Ivan. I didn’t really care about the bank raids, but I profoundly cared about anything that might lead to Ivan’s being arrested or extradited.

Since Eduard had found Major Karpov to be so unforthcoming about Ivan’s case, Sergei came up with an interesting idea of how we might get more information. «If the police won’t tell us what they’re doing, why don’t we go directly to the tax authorities and see what they have to say?»

This was a good idea, and we instructed our accounting firm to send a letter to the Moscow tax office where Kameya had submitted its returns, asking if Kameya owed any taxes.

On September 13, Sergei called Ivan back almost giddy with excitement. «The accountants got a reply to the letter. You won’t believe this, but it says that Kameya doesn’t owe any money at all. In fact, it says that Kameya actually overpaid its taxes by a hundred and forty thousand dollars!»

When Ivan told me this, I was amazed. This was ironclad proof that the charges against him were utterly bogus. It was as if members of the New York City Police Department had raided a Manhattan office on suspicion of tax evasion when the IRS had no problem with the taxes in question. No matter how distorted the Russian legal system was, this letter completely exonerated Ivan.

After this, I began to relax for the first time in months. As September moved into October, no more bad news came out of Russia. I had been operating in full-blown crisis mode, but over that fall, little by little my Russian crisis meetings started to be replaced by regular investment meetings. It was a great relief to talk with analysts about stocks instead of lawyers about raids.

One country that kept on coming up in these meetings was South Korea.

South Korea is hardly a developing country like Thailand or Indonesia, but its stock market traded at a 40 percent discount to the United States on a price-earnings ratio basis. This made it interesting for an investor like me. If I could find no good reason for this discount, then certain Korean stocks could potentially re-rate. I decided to get on a plane in October to visit some Korean companies to determine why their equities were so cheap.

I arrived in Seoul on the evening of Sunday, October 14. After a twelve-hour flight and a two-hour drive from Incheon Airport into town, I checked into the Intercontinental and unpacked. Even though it was 11:00 p.m. in Seoul, my body thought it was early afternoon. I spent most of that night trying and failing to go to sleep and eventually gave up. I pulled myself out of bed and sat at the window overlooking the lights of Seoul. The city — bright and twinkling and distinctly foreign — stood outside like a scene from a movie. Whether in Tokyo, Beijing, Hong Kong, or Bangkok, every Western traveler seems to have one of these jet-lagged, late-night moments upon arriving in Asia.

I got only a few hours of sleep that night and had a painful time getting out of bed in the morning to meet Kevin Park, a thirty-five-year-old Korean broker who was taking me to visit various companies. He’d arranged meetings with banks, a real estate company, and an auto parts supplier. The jet lag made every meeting drag, and I practically had to pinch myself under the table to stay awake. It was a hard day.

By the evening, I was ready to collapse, but Kevin insisted on taking me to a Korean barbecue. He had been so helpful and earnest in planning the trip I couldn’t turn him down. I drank two Diet Cokes in my room, splashed some cold water on my face, and met him in the hotel lobby. At the restaurant we ordered bulgogi, bibimbap, and kimchi. At the end of dinner, just when I thought I could finally go back to the hotel and fall into bed, Kevin told me we were meeting some of his work colleagues for drinks at a nearby karaoke bar. It was excruciating as he and his friends tried to ply me with Johnnie Walker Black Label as they took turns at the karaoke machine. Finally, at midnight, when I could no longer keep my eyes open, he took pity on me and put me in a taxi back to the hotel.

The next day consisted of more meetings and more food, yet in spite of the jet lag and overbearing hospitality, I was having fun being a regular investment analyst again and I savored being momentarily removed from the grave things going on in Russia.

I returned to the Intercontinental at the end of the day to check my messages. British mobile phones don’t work in Korea, so my office was forwarding my messages to the hotel. As I leafed through a little stack of white paper in the elevator, I saw one from Vadim that read, «Call me when you get this. Urgent».

Vadim never overreacted, so when he said «urgent», it really was urgent. My heart started pounding as I raced to my room to make the call.

He picked up on the first ring. «Bill, we got a call from a bailiff at the Saint Petersburg court early this morning. He said there’s a judgment against one of our Russian investment companies, and he wants to know where he can find the money to satisfy it». Although we had sold all of our shares in Russia, we had to keep the empty investment holding companies in place for three years in order to liquidate them properly.

«Judgment? What judgment? What’s he talking about?»

«I don’t know».

«Do you know if this person is even real?» It was perfectly plausible that this was some kind of clumsy setup.

«No, but I don’t think we should ignore it».

«Of course not. How much money was he talking about?» I imagined that we had misplaced a $200 courier bill and this had somehow found its way to court.

«Seventy-one million dollars».

Seventy-one million dollars? «That’s insane, Vadim! What is this about?»

«I have no idea, Bill».

«Vadim, get Eduard and Sergei on this ASAP. We need to find out what’s going on».

«I will».

My week of distraction had been shattered. The Russians hadn’t given up at all.

This whole bailiff thing was ludicrous. Where the hell did this claim come from? Who was behind it? How could they make a claim on assets that were no longer even in Russia? They couldn’t. Or could they?

I could barely think about Korea anymore. I had to get back to London as soon as possible. I called Kevin, apologized profusely that I wouldn’t be able to make dinner, and asked him to cancel the rest of my meetings. I then called Korean Air and booked the first flight to London the next morning.

After the long flight, I went straight to the office to meet Vadim and Ivan. We settled into the conference room and they debriefed me on what they’d learned while I was in the air.

The first thing was that the judgment was indeed real. Eduard had taken the train to Saint Petersburg, gone to the court, retrieved the case file, and taken pictures of the documents with his digital camera. Vadim pulled one of these pictures from a stack of papers and laid it in front of me. He pointed at a word on the page. «This says Mahaon», which was one of the fund’s dormant investment holding companies. «And this is the amount». It was in rubles, but I did a quick mental calculation and could see that it was roughly $71 million.

«How could we not have known about this?» I demanded, thinking it was some colossal oversight on our side.

«Sergei was wondering the same thing», Vadim said. «While Eduard was in Saint Petersburg, Sergei checked the company ownership database».

«And?» I asked with a sinking feeling.

Ivan sighed. «Mahaon’s been stolen, Bill».

«What do you mean stolen? How do you steal a company?»

Ivan, who knew a bit about the company registration process, said, «It’s not simple. But basically a company’s owners can be illegally changed without you knowing if the person taking control of the company has the company’s original seals, certificates of ownership, and registration files».

This hit me hard. «Those are the documents that were seized by the police», I said quietly. «When they raided Jamie’s office».

«Exactly», Ivan confirmed.

He explained that once this was done, the new owners could act just like any other owners of a company. They could run it, liquidate it, take its assets, relocate it — anything they wanted.

Everything had now become clear. We had become the victims of something called a «Russian raider attack». These typically involved corrupt police officers fabricating criminal cases, corrupt judges approving the seizure of assets, and organized criminals hurting anyone who stood in the way. The practice was so common that Vedomosti, the independent Russian newspaper, had even published a menu of «raider» services with prices: freezing assets — $50,000; opening a criminal case — $50,000; securing a court order — $300,000; etc. The only way to fight these Russian raiders effectively was to retaliate with extreme violence, which was obviously not an option for us.

Sergei spent the night doing research and called us the next day to explain how it had all happened: «Mahaon, plus two other companies that belonged to you, have been reregistered to a company called Pluton, located in Kazan». Kazan is the provincial capital of Tatarstan, a semiautonomous republic located in central Russia.

«Who owns Pluton?» I asked.

«A man named Viktor Markelov, who, according to the criminal records database, was convicted for manslaughter in 2001».

«Unbelievable!» I exclaimed. «So the police raid our offices, seize a ton of documents, and then use a convicted killer to fraudulently reregister our companies?»

«That’s exactly what happened», Sergei said. «And it gets worse. Those documents were then used to forge a bunch of backdated contracts that claim your stolen company owes seventy-one million dollars to an empty shell company that you never did any business with».

«My God», I said.

«Wait. It gets even worse. Those forged contracts were taken to court, and a lawyer who you didn’t hire showed up to defend your companies. As soon as the case started, he pleaded guilty to seventy-one million dollars in liabilities».

As rotten and incomprehensible as this was, everything now made sense. As the story crystallized in front of my eyes, I started laughing. At first a little, then loudly. There was nothing funny about what was going on, but I was laughing out of sheer relief. At first everyone else was silent, but then Ivan joined me, followed by Vadim.

We now knew exactly what they were up to, and they had completely failed. They wanted the Hermitage money, but none of it was there. Based on the published price list of corporate raiding, these guys had spent millions bribing judges, cops, and clerks only to get nothing.

The only person who didn’t laugh was Sergei. «Don’t relax, Bill», he said ominously over the speakerphone. «This is not the end of the story».

«What do you mean?» Vadim asked.

«I don’t know», Sergei answered, his phone line crackling slightly. «But Russian stories never have happy endings».