Bill Browder - Red notice

On October 14, 1997, BP announced it was buying 10 percent out of Vladimir Potanin’s 96 percent block of Sidanco for a 600 percent premium to the price we had paid a year earlier.

It was a home run.

It had been an eventful year. Not only had my business finally taken off, but more importantly, my son, David, was born in November 1996. As Sabrina had promised, she brought him to Moscow after his birth and we’d lived there as a family ever since. She decorated the nursery, even making the curtains and cushions herself, and found a few other expat mothers to be friends with.

Even though she made these efforts, Moscow didn’t gel for her. During 1997 she made more and more frequent trips to London and by Thanksgiving she and David were barely in Moscow at all. I wasn’t happy about it, but I couldn’t force her to stay if she was miserable. So I went back to London every other weekend to see her and David.

That Christmas, Sabrina insisted on taking a vacation to Cape Town, South Africa. I’d grown up associating South Africa with apartheid and racism, so I had no desire to visit. Sabrina’s persistence was more powerful than my prejudices, though, and in the end I agreed. I didn’t care that much, anyway, since I had to keep working — as long as my cell phone had a signal and I had access to a fax machine, I’d be fine.

We flew to Cape Town on December 19, 1997, and checked in to the Mount Nelson Hotel — and my low expectations vanished. I’d never seen such an amazing place in my life.

The Mount Nelson was a grand British colonial building under the fortresslike shadow of Table Mountain. The Cape Town sun shone every day and the green lawns, guarded by dark, swaying palms, went on forever. The pool was full of frolicking children as parents lounged nearby. A continual warm breeze fluttered through the white tablecloths of the outdoor dining area and waiters with perfect manners stood by attentively, ready to bring drinks, food, or anything else we desired. The Mount Nelson was like heaven. It was the polar opposite of Moscow in December.

We settled in and I started to relax for the first time in years. As I lounged on a sun bed next to the pool, watching David play with his toys on a towel, I became aware of just how tired I was. I drifted into a state of complete relaxation. Sabrina was right to have chosen this place. I closed my eyes. I could have sat in that chair and basked in the sun for days.

But a few days after we arrived, just as I’d started to truly decompress, my mobile phone rang. It was Vadim, my new head of research. Vadim was a twenty-seven-year-old financial analyst with a PhD in economics from the top university in Moscow whom I’d hired five months earlier to professionalize my fledgling operation. He had thick glasses, a mop of curly dark hair, and the ability to figure out the most complex economic puzzles in minutes. «Bill», he said gravely, «some really disturbing news just came across the Reuters wire».

«What is it?»

«Sidanco is doing a share issue. They’re going to nearly triple the total number of shares, and they’re selling them cheap — almost ninety-five percent lower than the market price».

I didn’t get it. «Is that good or bad?» If everyone was allowed to buy the new shares, it might have been neutral or even marginally good for us.

«Very, very bad. They’re allowing every shareholder other than us to buy these new securities!»

This was absurd. If Sidanco was able to increase the total number of shares by nearly a factor of three without letting us in on the action, then Safra and the fund would essentially go from owning 2.4 percent of the company to owning 0.9 percent of the company and get nothing in return. In broad daylight Potanin and the people around him were going to get $87 million of value from Safra and my clients with the simple stroke of a pen.

I sat upright. «This is unbelievable! Are you sure, Vadim? Maybe Reuters got the announcement wrong or something».

«I don’t think so, Bill. It looks real to me».

«Go and get the original documents and translate them for yourself. This can’t be right».

I was shocked. If this dilutive share issue ended up having a bad ending, the credibility I’d built by finding Sidanco would evaporate and bring my investors enormous losses.

I was also confused. I couldn’t fathom why Potanin would do something like this. What was his purpose? Why dilute the value of our shares and create a scandal when he had just had a spectacular windfall himself? After his big sale to BP, he still owned 86 percent of the company, and with this dilution he was only getting the benefit of 1.5 percent from us. It didn’t make any financial sense.

Then I remembered why he would do this: because it is the Russian thing to do.

There’s a famous Russian proverb about this type of behavior. One day, a poor villager happens upon a magic talking fish that is ready to grant him a single wish. Overjoyed, the villager weighs his options: «Maybe a castle? Or even better — a thousand bars of gold? Why not a ship to sail the world?» As the villager is about to make his decision, the fish interrupts him to say that there is one important caveat: whatever the villager gets, his neighbor will receive two of the same. Without skipping a beat, the villager says, «In that case, please poke one of my eyes out».

The moral is simple: when it comes to money, Russians will gladly — gleefully, even — sacrifice their own success to screw their neighbor.

This was the exact principle on which Potanin and his control group seemed to be operating. Never mind that they’d made forty times more money than us: that a group of unconnected foreigners also had a big financial success was unbearable to them. This was simply not supposed to happen. It was not… Russian .

What was Russian was to have your business ruined — which was exactly what would happen to me if I didn’t get back to Moscow and fix this situation. I spent the next few nights in Cape Town trying to forget about my problems, but I simply couldn’t.

Our vacation ended several days later, and Sabrina, who wanted nothing to do with winter in Russia, took David back to London. I arrived in Moscow on January 12, 1998, the day before Russian New Year’s Eve (Russia celebrates the Gregorian calendar’s New Year on January 1, and then twelve days later celebrates again for the Julian calendar’s New Year’s Eve on January 13). As soon as I got there, I spoke with Vadim, who had confirmed everything. The share dilution would take about six weeks to worm its way through the regulatory apparatus, but the deal was going to happen.

I needed to do something to stop it.

A day later, on January 13, I saw an opportunity. I received a call from a friend who told me about a Russian New Year’s party at the home of Nick Jordan, a wealthy Russian American banker at JP Morgan. Nick had a brother, Boris, who was Potanin’s financial adviser and the head of a new investment bank called Renaissance Capital. I knew them both as acquaintances, and I convinced my friend to bring me along to the party.

The party was in an enormous luxury Brezhnev-era apartment several blocks from the Kremlin — the type that investment banks paid $15,000 a month for so that their expat employees could «endure the hardships of Moscow». It didn’t take long to pick out Boris from the crowd of caviar-eating, champagne-swilling Russian American expats. In many ways Boris Jordan was what Russians considered a classic American: a loud, chubby glad-hander cut from the same cloth as your stereotypical Wall Street broker.

I went straight for him. When he caught sight of me, he was clearly surprised, but he didn’t overreact. Instead he met me head-on with a meaty handshake. «Bill, how are ya?»