Profit By Finding The Truth

Hedge funds take a lot of flack for shorting stocks and then "driving down prices" by going public with short stories.  Recently, David Einhorn of Greenlight Capital has been the subject of disparaging articles in his attempt to explain his short position on Lehman Brothers (LEH).  It turns out the Einhorn has been exactly right in his analysis and his position has simply been a an attempt to profit by finding the truth.  He had to do extensive research, have steadfast conviction, and extremely thick skin to uncover the truth and profit from his short sale of that stock. 

Which makes the following story even more amazing.  Elliott Associates, an international hedge fund, bought defaulted Congo debt (who knew you could buy stuff like this) and went extensive goat chase to collect on the obligations.  What they found is not surprising, but amazing none-the-less.  Another way to profit by finding the truth.

Cudos to The London Times:

ON a spring morning in Paris three years ago, a young African oil executive went on a shopping spree. He spent £1,600 at Escada on the Avenue Montaigne, and £3,700 a few doors down at Christian Lacroix. A couple of weeks later he spent £4,000 at Ermenegildo Zegna and £3,200 at Louis Vuitton.

By the end of 2005, Denis Christel Sassou-Nguesso had charged more than £112,000 to his personal Hong Kong-issued credit card, up from £64,000 the previous year.

Last August Mr Justice Stanley Burnton dismissed an attempt by Sassou-Nguesso in the High Court to suppress publication of his credit card bills. Last month he lost a related action in Hong Kong.

So why is Sassou-Nguesso such an embarrassment for several prominent British and French companies – not to mention the celebrities and politicians, among them Gordon Brown, who have argued so vociferously for poor African countries to be forgiven their international debts?

The answer has all the elements of a detective novel, complete with straw men, false noses, hidden bank accounts, and American bankers who have been derided as “vultures”, but who have managed to find out more about corruption in Africa than Scotland Yard and the FBI.

It is a story that leads from the oil-rich coast of western Africa to the gas-guzzling consumers of America and Europe, via a trail of government fraud and corporate deceit that successive UK judges have publicly condemned.

It starts with Sassou-Nguesso, the son of Denis Sassou-Nguesso, president of the Republic of the Congo, one of the world’s poorest countries. Two-thirds of Congolese people subsist on less than 50p a day.

The Sassou-Nguessos are no strangers to allegations of profligate spending. Their country, also known as Congo-Brazzaville to distinguish it from the bigger adjacent Democratic Republic of Congo, controls Africa’s fourth-largest proven oil reserves. It pumps crude at about 235,000 barrels a day, worth £5.8 billion a year at today’s record prices.

When Sassou-Nguesso senior visited New York for a recent United Nations summit, bottles of Kristal champagne popped as his entourage ran up a hotel bill of £169,000 – of which £100,000 was paid in cash. Yet he repeatedly claims his country is too poor to pay off its debts.

In May last year, when he was still chancellor, Gordon Brown said he was shocked that poor African countries were being pursued by international hedge-fund creditors seeking to turn a profit on old debt they had bought at a discount.

Brown demanded international action to protect Africans from so-called “vulture funds” whose pursuit of highly indebted countries was, he said, “nothing short of scandalous”.

It was a theme close to the heart of Bono, Bob Geldof and other anti-poverty campaigners who have turned African debt relief into a popular cause.

When Danny Glover, the Hollywood actor and activist, testified before Congress last year, he urged the American government to “follow the example of Gordon Brown . . . to stop vulture funds from devouring African economic progress”.

Yet the case of Congo-Brazzaville and its free-spending rulers offers a radically different perspective on debt relief, and who, exactly, is responsible for obstructing economic progress.

Earlier this year, in a little-noticed, out-of-court settlement, the Brazzaville government paid off its “vulture” creditors, thereby ending almost a decade of legal wrangling that stretched from Bermuda and the Virgin Islands via Paris, New York and Hong Kong to London’s High Court.

It was a startling surrender for a country that has spent much of the past 10 years dodging its creditors, ignoring court orders and pleading to join the debt-relief programme run by the World Bank and the International Monetary Fund. Why give in to the vultures just as world opinion had clearly turned against the hedge funds?

My search for an answer started on the 35th floor of a Fifth Avenue skyscraper in mid-town Manhattan. This is the headquarters of Elliott Associates, a $10 billion (£5 billion) hedge fund that specialises in so-called “distressed” debt – the packages of national and corporate loans turned bad that are routinely sold by banks trying to tidy up their balance sheets.

“Our approach has always been to look for countries with a good prospect of re-negotiating debt,” Jay Newman, a senior Elliott portfolio manager, told me in the company boardroom overlooking Central Park. “We do not acquire the debt of countries that have no means to pay.”

In the late 1990s, an Elliott subsidiary named Kensington International purchased several packages of overdue Congo debt with a collective value of about $100m. It was a perfectly legal transaction and Kensington swiftly won a series of judgments in British and other courts ordering Brazzaville to pay up. The hedge fund’s attempts to initiate negotiations were ignored.

Thus began a game of cat-and-mouse across the world as Elliott’s team of private detectives and forensic accountants attempted to identify shipments of Congolese oil that might be seized and sold to repay the outstanding debts.

Armed with court-approved powers to subpoena witnesses and with search warrants, the Elliott team began a journey into the murky depths of the international oil trade. It would subsequently emerge in court that the Brazzaville government had established a network of sham companies (known in French as faux nez, or “false noses”) and bogus executives (“straw men”) in the hope of concealing their oil transactions.

The breakthrough came in 2005, when Elliott detectives discovered two consignments of Congo oil had been loaded on a vessel called the Nordic Hawk for sale to Glencore, a British company set up by Marc Rich, the Swiss-based trader. Glencore intended to sell the oil on to BP in what should have appeared as a standard and un-noteworthy industry transaction.

Kensington promptly applied to the High Court in London for injunctions to seize the proceeds of the Nordic Hawk consignments on the grounds they were fraudulently concealed sales by the Brazzaville government.

The transcript of Mr Justice Cook’s ruling, among hundreds of court documents reviewed by The Sunday Times, found that Denis Gokana, the head of the national Congo oil company SNPC, had set up a series of front companies and was in effect selling Congo’s oil to himself to disguise its true origins.

Somewhere along the way millions of dollars went missing, and the judge noted that an examination of the bank statements of one of Gokana’s companies “reveals that there was virtually no connection between the cash passing through its bank accounts and the sums it should have received for the oil it sold”.

Where the money went remains a mystery.

Critics of vulture funds say the pursuit of African debtors forces them to resort to unconventional measures to protect sovereign assets. Oxfam is among the charities to denounce vulture funds for “profiting from poverty”.

Undeterred by the “vulture” slurs, Elliott identified a new target. It decided to go after the middlemen. In 2005, Kensington filed a civil suit against BNP Paribas, the French bank, accusing it of conspiring with the SNPC “to divert oil revenues from the Republic of Congo into the pockets of powerful Congolese public officials, while at the same time protecting both the oil and oil revenues from seizure by legitimate creditors”.

BNP denied that its banking arrangements with the Congo were anything other than routine, but a New York judge rejected the company’s motion to have charges dismissed. The case was ultimately dropped as part of the settlement between Elliott and Brazzaville.

Kensington also went back to court in London, where it was attempting to obtain information and documents concerning a related pair of British companies, Vitol Services and Vitol Broking, and their dealings with Congo.

Elliott’s investigators had established that the Vitol companies had made substantial payments to Hong Kong accounts controlled by prominent Congo oil executives. Among them was Denis Christel, the president’s son, who was also head of Cotrade, SNPC’s trading arm.

Kensington argued before Mr Justice Gross of the UK commercial court in January 2007 that “the only credible explanations for these payments are that either they were made to assist Congo in hiding its assets, or they were made as corrupt kickbacks in return for valuable business”.

Vitol promptly startled the oil world by pleading the British equivalent of the Fifth Amendment – it did not want to testify for fear of incriminating itself.

The judge ultimately rejected the Vitol claim, and the case went to appeal. Despite extensive allegations of bribery and corruption detailed in court, no British police investigation has been launched. The Vitol case has also been dropped as a result of the Elliott settlement.

At first, Sassou-Nguesso shrugged off Elliott’s attempts to seize Congo’s assets. “If this is not robbery, what is?” the president once complained to Fortune magazine.

“Who is stealing from the poor?” He dismissed the hedge funds as “snakes in the ocean” and “thug gangsters” who hid in Caribbean tax havens.

Then Elliott’s trail led to Hong Kong, and to Denis Christel’s credit-card receipts.

These first surfaced publicly on the website of Global Witness, a London-based anti-corruption pressure group that has long been monitoring Congo. The group claimed in a 2005 report that the country’s main economic asset “has for too long been managed for the private profit of the elite rather than for the benefit of its entire population”.

The documents produced by Global Witness purported to show that at least part of Denis Christel’s personal expenditure had been paid for by an offshore company he controlled, Long Beach. The same company had received payments from sham oil companies set up by Gokana.

When Sassou-Nguesso went to court in London in August to make Global Witness remove the documents from its site, Mr Justice Burnton noted “it is an obvious possible inference that his expenditure has been financed by secret personal profits made out of dealings in oil sold by Cotrade. The profits of Cotrade’s oil sales should go to the people of the Congo, not to those who rule it or their families”.

The judge declined to suppress the documents. He concluded: “Once there is a good reason to doubt the propriety of the financial affairs of a public official, there is a public interest in those affairs being open to public scrutiny.”

Attempts to obtain a comment from the Brazzaville government were unsuccessful last week, but the president must have realised the spotlight on his family’s private affairs wasn’t going away.

The publication of the Hong Kong credit-card bills “made them get serious” about negotiating a settlement, a source familiar with the case said.

The terms of the settlement prevent Newman from providing details, but the question arises: Did the hedge fund really make a profit after all those years of expensive sleuthing around the globe?

In a newspaper article describing the Nordic Hawk affair, Newman likened the pursuit of Congo’s oil revenues to “a magical mystery tour”.

He said: “Far from being under control, as Bono and [others] would have us believe, corruption in Africa is out of control.

“Seasoned Third World bosses like President Sassou-Nguesso know all too well how to manipulate soft-hearted campus sensibilities and dysfunctional international financial institutions like the IMF.”

Last week Newman declined to address the profit issue, but had no regrets about his company’s approach. “It’s about the rule of law,” he said.

In the course of its near-decade-long pursuit of Congo, Elliott has probably done more than any other national or corporate entity to expose corruption in Africa. It has identified the middlemen who facilitate corrupt payments; it has traced the money trail from British oil traders to luxury boutiques in Paris.

And where was Scotland Yard while all this mischief was being exposed? Brown’s response, a month before he became prime minister last year, was to “deplore the activities of so-called vulture funds”.

Compare that to the remarks of Brice Mackosso, a Congolese citizen who campaigns for transparency in the handling of the country’s oil wealth. “If it were not for these vulture funds we would not know any facts about the way our country’s wealth is being taken away,” he said.

In June last year, a consortium of three French anti-corruption groups filed a civil complaint in Paris alleging the ruling families of Angola, Burkina Faso, Equatorial Guinea, Gabon and Congo-Brazzaville had acquired millions of euros worth of French assets that they could not have afforded on their official salaries.

The case was dismissed in November but not before a resulting police investigation accumulated hundreds of documents, including property titles, cheques, bank orders and invoices. Among them was evidence that earlier this year, the wife and son of Sassou-Nguesso bought separate flats on the same street near the Boulevard Saint-Germain for a total of £3.6m.