Metronome, The (14 page)

“Jack? Pavel Rostin here.”

“You missed me, you really missed me,” comes a cackling laughter. “You want your results already?”

“No, but I will be in New York tomorrow.”

“OK, why don’t we meet in The Ketch at 5? They have a good bar.”

“Sounds good, Jack. Look, I have one more name for you to check out.”

“Ha! I knew you wouldn’t be able to hold out on me! What’s the name?”

“John Brockton.”

The voice on the other end changes: “John Brockton? The same one that was killed in California with his Russian girlfriend? Is that why you are in California, you crazy Russian?”

“Look, I just want someone to look at his fund’s transactions, public information, nothing more.”

“OK, but we’ll have to keep it pretty tight, I don’t want to jeopardize Suzy.”

Neither do I. And I don’t want to jeopardize you, Jack
. I don’t say this to him.

I get a pen and a pad of paper and start drawing pictures. As my father taught me, “Pavel, when in doubt, get organized. Focus on the facts, on things you know.”

In one corner of the page, I draw a circle I call “Grand Castle Rock Fund.” Under the circle I put down Martin Shoffman. Overweight, balding, always ready with a broad smile, a joke and a firm handshake. Referring to his wife Sarah as “my much better half, I don’t know how she can put up with me.” Turns out she couldn’t. Martin, who signed a bad agreement for us and now seems to be quietly working for another hedge fund. Martin, who brought in the New Treasury Island ELP that pulled the rug from under my fund. Was his smile just a mask? Did he sell me out from the beginning?

In the other corner: a “Brockton-Streltsova’s murder” circle. Under it, Sal Rozen, Jeff Kron, Michelle Kron, Mark Bezginovich.

Jeff Kron, the man convicted of murder but proclaiming his innocence. Don’t all the murderers insist that they did not do it?

Michelle Kron, a lawyer who sacrificed her career to move to a small California town in the middle of nowhere because she believes in her brother’s innocence. And because she has nobody else left, the family destroyed by someone else’s greed.

Sal Rozen, a detective who thinks that Jeff Kron did not commit the murder.

Bezgonovich, Streltsova’s brother, who may have hired my father to investigate.

That’s three people that do not believe the official version.

Into the third corner goes “Streltsova’s investigation” circle. All I can place under is “Nemtsov? Nemschev?” from Streltsova’s notes. What was she investigating during the last days of her life? Terrorist bombings in Moscow? Laundering of money out of the failing Soviet Union? If hundreds of billions have been stolen, that’s the kind of money that someone would kill to keep secret.

In the last remaining corner, I make the list of people that may play some role but I am not sure to which circle they belong:

Major Vakunin, who finds new and unlisted numbers in hours. He must have worked with my father, but who would care about an old guy that retired many years ago? Unless that old guy’s been working on something of interest.

Investigator Pemin who commands
militzia
majors and dresses like a Wall Street financier. During the meeting, Vakunin have been clearly playing a second fiddle to Pemin. Either Pemin is very well connected for an investigator or he is not an investigator at all.

Petr Saratov, who follows orders of some colonel. Why did he say he knew my father? Not likely they worked together, Saratov seemed to be too young for that. He wanted the papers my father sent. Why did they let me live?

Sam Baker, who has people following me, probably just for divorce blackmail purposes. I don’t see him being involved in any of these cases, but I leave his name on the list for completeness. And because he spies on me.

In the middle, I put my father.

So far, Natalya Streltsova is the only connection between these circles.

Famous physicist Richard Feynman compared particle physics experiments to smashing two watches into each other as hard as you can and then trying to figure out their workings by picking up the pieces. I am looking at the pieces, sensing there is a complex mechanism behind them.

Thursday, June 15

The red eye flight wipes me out, as usual. I get home and climb into bed for a nap, but sleep does not come. The noisy weekday world keeps intruding.

I sit at the computer, pull out the pad of paper from yesterday, and start methodically Googling names.

Natalya Streltsova: Nothing before 1998 when she first appears as an investigative reporter on the Russian TV station Telenovostiy. Born in Moscow in 1970. The station is acquired by Boris Sosnovsky, one of the most powerful Russian oligarchs with strong ties to the government. In 2000, Streltsova becomes an anchor of a popular weekly program reporting on corruption, graft, and government-sanctioned pilfering. There is a picture - very pretty, blonde, willowy, tall, smiling fearlessly into the camera. She raises questions about the terrorist bombings in Russia that killed hundreds and are used to justify the second war in Chechnya. Except that Telenovostiy claims that the bombings have been orchestrated by the FSB and the GRU, the descendants of the KGB, to create a pretext for war. The TV station is sold in 2001 and the Telenovostiy’s investigative program gets cancelled. Streltsova continues as an investigative reporter for an independent newspaper, but there is nothing on her from late 2002 until late 2003 when she is found dead in Santa Barbara. I make a mental note to do more research about the bombings.

Mark Bezginovich: A newspaper article from 2001 describing a “new kind of successful Russian attorney.” Other references are not as kind, labeling him an “attorney for the mob” and mentioning his name in a number of high profile cases. There is a phone number which I write down from the Yellow Pages.

John Brockton: Born 1965 in Chicago, degree in Russian Literature from the University of Chicago in 1986, Harvard Law School in 1989. Climbs up the ranks of Millennium Mutual. A 1997 article has his picture as a “new breed of American emerging market money manager” that lives in the “emerging country” (Russia), speaks the language, and guided his fund to a fivefold appreciation in only three years. A small announcement about Brockton leaving in July 1998 “to pursue other interests.” An article from the Santa Barbara News-Press about a young multi-millionaire buying a “magnificent property” in 1999. All quiet until 2003, when the news world erupts with a sensational murder case.

Martin Shoffman: Born in 1966 in Boston, marketing degree from University of Iowa in 1988, Wharton Business School in 1993. Assorted Wall Street jobs, Lehman, Salomon, Barclay. Not really getting anywhere until becoming a co-manager of a hedge fund in 2005.

Boris Sosnovsky: A powerful Russian oligarch with strong ties to Yeltsin’s family. But as the government changes in 1999, Sosnovsy finds himself on the wrong side of the new president. Sosnovsy is forced to sell the TV station in 2001. He moved to Paris but continued agitating about the Russian government, blaming it for staging the bombings in Moscow and other things. In February of this year he was found hanging in a locked bathroom. Police declared it a suicide.

Sam Barker: U.S. congressman since 1984, currently the third longest serving congressman. Being pegged for the chairmanship of the powerful House Means and Resources Committee. Has been dogged by allegations of enriching himself by acquiring real estate that would jump in value following Congress’ decisions. Being challenged in the 2006 elections by a populist district attorney who dug up Baker’s lucrative purchase of a cheap track of land just a couple of months before freeway construction was unexpectedly funded.

What ties them together if anything?

I dial the number I found for Bezginovich. It’s an answering service. I leave my name and phone number.

I get to the Captain’s Ketch early, saunter to the bar, get a beer, and watch the testimony of the Fed chairman. A few months ago, I would be glued to the TV, hanging on each and every word. Now I just casually follow the text running along the bottom of the screen, proclaiming that there is no bubble of any kind in U.S. real estate.

A familiar cackling laughter scares the few present patrons and makes the bartender smile. Jack hits my shoulder. “These clowns won’t know a bubble if it had a neon sign posted saying B-U-B-B-L-E!”

Suzy follows him at a slight distance, probably embarrassed by his display.

It’s early, so we get ourselves a quiet corner table. The waiter makes a face when he hears we are partaking only in drinks and appetizers, but it’s too late to reseat us.

Suzy pulls out two manila folders and opens the thicker one. “The Treasure Island Exempt Limited Partnership was set up with $110 million in April of 2005. You won’t easily find this - the Cayman Islands are a jurisdiction that’s short on taxes and long on privacy. Judging by the amount and the timing, it looks like the Partnership was specifically set up to finance your hedge fund. The directors are a usual bunch of for-hire Cayman bodies, most of whom sit on hundreds of boards, get a little bit from each, and know nothing. While nominally an independent fund, the beneficial ownership and the manager indicate that it’s effectively a ‘feeder’ fund to a larger ‘master’ hedge fund by the name of White Sycamore ELP. The White Sycamore has a number of other feeder funds, with about $800 million under management. No names of interest on the management or directors roster. Here’s where it gets interesting: The White Sycamore is a ‘special purpose vehicle’ for another fund called Douglas Fir Holdings.”

“Why?”

“Generally, it’s used to separate different types of investments. In this case, perhaps to hide the true size of Douglas Fir Holdings - it appears to have a number of special purpose ‘side pockets’ and feeder funds, with likely tens of billions under management. Ownership of Douglas Fir points to The Birch Grove, a company in Cyprus. Cyprus is also known for its excellent tax treatment and privacy.”

“And for being a money-laundering haven for the Russian mafia and oligarchs,” adds Jack.

“The Birch Grove has other subsidiaries. Ultimately, it probably manages hundreds of billions of dollars - we can’t estimate. It is in turn owned by Kedr II Holdings of Switzerland. Unlike the other companies I mentioned, the Kedr is not a financial management group but a diverse conglomerate - there is a bank and a network of trading companies, mostly registered in Antigua and Panama.” Suzy draws her finger through various printouts.

“Bearer shares …” says Jack knowingly, and Suzy nods.

I hate to admit ignorance, but I have to ask. “What are bearer shares?”

“Shares that are not registered to a particular name; you claim ownership by presenting them,” Suzy patiently explains. “The ultimate in secrecy, money laundering, tax evasion… Very few jurisdictions allow them.”

“And who owns the Kedr?”

“The ownership points to Der Hornstrauch Anstalt, which is an offshore company in Liechtenstein. So far the trail ended there, Anstalts are Liechtenstein’s financial institutions that don’t disclose beneficial ownership.”

Suzy moves to the last printout page in the manila folder.

“One more thing,” she says. “This looks like a network of companies carefully set up for opaqueness. The financial management arm, The Birch Grove and her feeder companies, are relatively new, nothing before 2000. The Kedr II Holdings and other companies go back to the early 1990s. Even if we, along with unlikely help of legal authorities, get through the Caymans’ veil, we then have to pierce the veil in Cyprus, and then Liechtenstein, and we don’t even know if it ends there. I went through the names of directors and administrators for all of these companies, they are included in the printout, but I did not see anything of interest. Then I started looking for the earliest documents, and one name caught my eye: Greg Voron.”

She leans back, enjoying the effect as both Jack and I drop our jaws in surprise.

“Voron?” Jack and I say in unison.

Greg Voron is a rising star amongst private equity managers in New York City. He was profiled not long ago in
New York Finance
magazine. At 36, he already manages reportedly over $7 billion. Originally from Russia, he came to the United States in 1999 for an executive management study at Columbia. Started the Eastern Cottonwood private equity fund in 2001, in the midst of the post-Internet bubble recession, purchased distressed companies cheaply and rode the market recovery.

“Yes, Voron,” confirms Suzy. “He was there at the beginning of The Birch Grove. His name disappears after 2002, but it’s on the early documents.”

“Perhaps he figured out that they are money-laundering fronts and resigned?” My suggestion earns me a
You are such an idiot
look from Jack, who wryly observes, “Yes, I am sure this is just an innocent coincidence. And all these funds named after trees…”

I sees Jack’s eyes suddenly narrow and I instinctively start turning around. Before I have a chance to do that, I spill my drink because someone hits me on the shoulder, too hard to be friendly

“Look who’s here! An old Luddite from the risk management, a Russian quant that blew up his hedge fund, and a pretty Oriental woman. Are you planning a little ménage-a-trois?”

It’s Bob Cleyton from the trading desk. Loud and obnoxious, he despises all quants because “it’s the sales skills that matter.”

Cleyton laughs at his own joke, then turns to Jack. “Mikulski, I am warning you, I have had it with your memos trying to sabotage my business!”

Jack turns red from anger: “Your business? You are trying to sell that poor county in Missouri a lousy swap deal that will end up losing them tens of millions! A deal that you’re betting against behind their back! If you don’t care about the hardships and layoffs you are going to create for them, perhaps you should think about the potential lawsuit that you are subjecting our bank to!”

Cleyton stabs his index finger at Jack. “Mikulski, I am telling you again, sit quietly in your office, wait for retirement, and do not interfere with me!”

“Or what? You have not screwed enough grandmothers in California, you now have to screw some in Missouri?”

Cleyton leans his fists on our table, spits out, “I will bury you!” and leaves.

“What was that about screwing California grandmothers?” Suzy sounds very confused.

“Bob Cleyton used to be a trader at Enron,” explains Jack. “It was his group that gamed the electricity market in California and that was caught on tape laughing how they screwed ‘Grandma Millie.’ He should have never been allowed back into the business, but here he is, racking up tens of millions in potential damages for the bank. I’ve been trying to stop him for a while, but nobody listens. The bank president’s motto now is ‘Take risks!’ At the weekly executive meetings, they sometimes ask me to leave the room so I don’t remind them of exposure or liability.”

Jack glares across the room at the table where Cleyton is laughing with three other men. “Look at them. The one with a goatee, sitting across from Cleyton, loaded our bank’s balance sheet with billions of dollars in high risk CDOs and dicey mortgages using leveraged funds. The one in dark glasses is an analyst who a few years ago took a dozen internet companies public. He knew them to be worthless, but there was a lot of IPO money at stake. He is now handing out recommendations for technology stocks. The main requirement for a positive opinion is for the company to give our bank some business. The last one, with his back to us, is a lawyer that makes sure that none of them is personally liable when things go wrong. They are all way too smart not to know that what they are doing is a fraud. But they don’t care, they want their multi-million dollar bonuses and to hell with the consequences! Greedy predators, preying on others.”

Suzy seems to be taken aback with Jack’s outburst. “But Jack, there are laws in place to prevent this. There are underwriting standards, securities laws….”

Mikulski shakes his head. “Even if we enforced the laws, which we don’t, it’s next to impossible for the regulators to deal with the organized, complicated thievery of extremely clever financial criminals. There is that great lie at the core of our financial system. We evolved a massive network of thieves that propagate this false narrative of creating value.”

He takes a drink, puts down his glass. “Let’s get back to Pavel’s business. Suzy, any more surprises in that folder of yours?”

“Not in this one.” She smiles and picks up the second folder. “But there is a bonus: Brockton! I only had a few hours, so I started by looking at the history and performance of the Russian Leveraged Equity fund he ran. One thing jumped at me immediately.” She starts pointing to circled and underlined numbers in the printout. “In 1995, the fund underperformed its peers. In 1996, it outperformed them by a bit. In 1997, Brockton hit it out of the park, Number 1 fund in Eastern Europe, mentions in financial press, etc., etc. But when the Russian financial crisis hit in 1998, the fund was
by far
hit the worst. Brockton was already gone.” Suzy catches her breath and continues. “I reviewed the holdings in the quarterly reports, and noticed a pattern. Look at this.”

Jack and I lean in.

“Mobile Electrosvyaz. If you round the numbers, you can see how their holdings go from six million shares to five million, then back to six, back to five, back to six.”

“That does not make any sense,” I say. “A fund manager usually builds a position and then sells it.”