Who Is Kenneth Dart?

Few heroes are as unlikely as Kenneth Dart. The billionaire heir to a U.S. foam cup fortune has perhaps done more than any other single person to call attention to the sorry plight of minority shareholders in Russia. Through his battles in the Russian courts with companies like Sibneft and Yukos, Dart has consistently defended the rights of shareholders in subsidiary companies against devious practices such as transfer pricing and share issuance monkey business that are commonplace in post-Soviet Russia.


"Whatever Dart's goal was, objectively his presence and his litigation efforts on behalf of shareholders' rights, etcetera, did have a positive impact on the investment climate," said Ruslan Nickolov, oil and gas analyst at Nomura International in London.


That's not the way his most famous opponents see it.


"What positive role can Kenneth Dart possibly play if he is one of the three or five most famous vulture investors in the world?" Yukos spokesman Andrei Krasnov said when contacted last week.


One thing is for sure, Dart's biography, at least that part of it available from public sources, makes for about as interesting a read as there is.


A Real Expat


A search for Dart's name on the Internet reveals that he has become something of a poster child for the advocates of offshore living.


These are the people who scoff at the notion that taxes are a moral responsibility. They write books with titles like "The Rich Die Richer - And You Can Too," and like to invoke the following quote from U.S. Appellate Court Judge Learned Hand to justify their actions.


"Over and over again courts have said that there is nothing sinister in so arranging one's affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant."


In an article in Forbes magazine called "The New Refugees," a U.S. lawyer speaking at a Bermuda conference on offshore money is quoted as saying, "I talk to a new client interested in expatriating every week. Many people can't pay the federal tax rate and live in the style they want."


Kenneth Dart paid heed to the benefits of living offshore in 1994, giving up his U.S. citizenship, moving to a small $5.3 million private resort on the Cayman Islands and becoming a joint citizen of Ireland and the Central American nation of Belize. Before settling on the Cayman Islands, Dart reportedly considered living full time on his luxury yacht, which he had specially armored to be able to resist torpedo attack.


Dart himself denies that he gave up his citizenship for tax purposes. He says he was motivated by a need for security following an arson attack that burned down his $1 million home in Sarasota, Florida. Dart alternatively blamed his older brother Tom, who was upset with the way the multibillion-dollar estate had been divided up, or Brazilian bankers upset that Dart was threatening to break up a negotiated restructuring of the South American country's sovereign debt.


One web site run by a company called Belize Offshore Consultants & Co. touts the country's security as a tax haven in a list of Frequently Asked Questions, saying that Belize had withstood the "best efforts of the U.S. Securities Exchange Commission."


Dart was not alone in his decision to reject his citizenship; his brother Bob left at the same time, as did their tax lawyer. His wife and kids, however, remained at their Sarasota, Florida home, near where Dart Container Corp. headquarters had been moved from its original location in Michigan.


Dart's expatriation story, if it ended there, would be no different than that of the dozens of other super-rich individuals who leave the United States each year to avoid paying taxes. In Dart's case, however, it just keeps getting more interesting.


Soon after he became a citizen of Belize, the government of that country officially applied to the U.S. State Department to open a consulate, surprise, surprise, in Sarasota, Florida. U.S. Ambassador to Belize George Bruno, in a cable to his bosses at the State Department, said Dart would live at this new consulate and would have "special responsibilities in the area of trade and finance."


"At a later date," Bruno wrote, "Dart would help Belize finance the establishment of a consulate in New York City," where he would "possibly serve also as a consular officer ... or special trade rep for Belize."


Of course, as a representative of the government of Belize, Dart would naturally be exempt from U.S. taxes.


The State Department denied the request, pointing out that Belize already had a consulate in Miami. Dart earned a "Chutzpah Award" from the alleged American humorist Art Buchwald for this exploit.


A Styrofoam Fortune


In the late 1950s Dart's father, William A. Dart, and grandfather William F. Dart developed a machine that could mold polystyrene beads into cups. Dart Container Corp. is now the world's largest manufacturer of foam cups.


According to a 1995 Business Week article, Dart Container has helped to keep its hold on the industry by taking the paradoxical step of never patenting the process by which its cups were made. Taking out a patent would mean revealing the process and, since patents run out eventually, giving secrets away to competitors. The Darts have preferred to take the route of extreme secrecy, letting only a few of their own employees even see the machines that have made them rich.


Dart Container currently employs more than 3,000 people at 13 plants worldwide. Different sources have estimated yearly revenues for the privately held company from $400 million to more than $1 billion. It regularly figures on the Fortune magazine list of the top 400 private companies.


By all accounts, Dart became an incredibly successful investor, once a 1986 restructuring of the family trusts freed up company profits for him to bring a return on. According to the Business Week article, within three years Dart made a 186 percent return on a $269 million investment in Salomon Inc., in which he still owns a substantial minority stake. Likewise, a $300 million investment in 1991 in the Federal Home Loan Mortgage Corp. was sold off over the next few years for a total of $1.3 billion, a 333 percent return.


Business Week quotes a stockbroker who has done business with the family for years as saying that Dart has a "genius" for investing. "He certainly has the capability [to be the next] Warren Buffett," he said.


Dart has also invested heavily in the biotech sphere. He has shown particular interest in companies and scientists exploring the workings of the brain, funding many of them with grants from his charitable foundation.


Debt Buy Up


Dart gained the most notoriety by far, however, from his buy up of Brazilian debt and his very public battle to try to kill a restructuring deal.


The Latin American debt crisis began in the early '80s with a default on foreign debt by Mexico. The financial crisis quickly spread to other nations in Latin America, triggering wave after wave of bank collapse and debt default.


The debt burden built up and by 1992, including loans from banks and other governments, topped $121 billion for Brazil, according to figures from the World Bank. Mexico's debts reached more than $113 billion and Argentina's was nearly $68 billion.


For more than a decade, the lenders, mostly North American and European banks, tried more or less unsuccessfully to work out a restructuring deal with the countries in most dire need of relief. Finally, by the late '80s and early '90s, under a program known as the Brady Plan, after Bush administration Treasury Secretary Nicholas Brady, the negotiations began to have more success.


The Brady Plan provided for debt to be swapped for so-called "Brady bonds," which were backed by collateral put up in part by the International Monetary Fund and the World Bank.


By 1994, the last of the big time debtors, Brazil, had finally come to an agreement with its creditors, including more than 750 banks, over the restructuring of some $50 billion worth of debt.


There was just one hitch in the plan - a flaw that threatened to make for nought three years of intense negotiations.


Sensing that an agreement would eventually be reached, Dart bought up huge amounts of heavily discounted Brazilian bank debt. He quickly became Brazil's fourth largest creditor, holding some $1.4 billion worth, or 4 percent of the total, of the defaulted debt, for which he had paid about $375 million, just over a quarter of face value.


Dart, however, was not satisfied with the restructuring deal Brazil had worked out with its other creditors, believing it would force him to too severely discount the debt he owned. He threatened to pull out of the restructuring if he was not allowed more favorable terms.


Ultimately, Dart was unable to stop the deal from going ahead and his stake was devalued from $1.4 billion to $980 million. The $605 million he made on the deal was, nevertheless, a not-to-be-sneezed-at 161 percent return.


Dart in Russia


The next great investment opportunity to catch Dart's eye was Russia's voucher privatization program. The Anatoly Chubais-led scheme offered vouchers to every Russian man, woman and child which could be used to purchase shares in former state enterprises as they went on the block. The vouchers could also be traded on the open market.


While the scheme did put some of the state's assets into the hands of Russian individuals it also created a large number of extremely undervalued assets, something that two of the architects of the scheme - Boris Jordan and Stephen Jennings of Credit Suisse First Boston - soon realized.


They began to spread the word that there was a lot of money to be made after watching a 44 percent stake in the Bolshevik Biscuit Factory sold for an amount that effectively valued the company at a mere $656,400; probably at best about 2 percent of its worth.


Jordan and Jennings soon moved from organizing voucher privatization to pushing it to Western investors as the opportunity of a lifetime.


Word reached Dart, who started investing in Russia during the early stages of voucher privatization. He focused on oil, telecoms and the power generating firms spotted across Russia and known as energos, according to Michael Hunter, president of Dart Management, Inc., which represents the interests of the Dart group in Russia.


But Dart cast his net wide. His other interests include, but are not limited to, shipping companies, cement production, metals companies and pulp and paper, including newsprint, Hunter added.


The exact extent of Dart's holdings in Russia remains a mystery. Likewise, how much he plunged on the country's privatized firms and what kind of returns he has achieved are not subjects on which his minions wished to comment.


"He is a very private guy, he doesn't really like to talk about the details," Hunter said.


However, one thing is certain, Russia is far from being a highlight in the Dart story. His decision to pick up minority stakes in several oil extraction and production firms looked like a smart move, but has instead embroiled Dart's firms in some extremely nasty shareholder disputes with some of Russia's most powerful business figures.


The investments that Dart has had most cause to rue were the stakes he bought in Yuganskneftegaz, Samaraneftegaz, Tomskneft and Noyabrskneftegaz. The first two firms were subsidiaries of oil major Yukos from the word go, and Tomskneft was absorbed by the same firm when it snapped up Eastern Oil Co. in a December 1997 privatization that was part of the infamous loans-for-shares program.


In 1998, Dart would find himself at loggerheads with both Yukos and Sibneft, which owns a majority stake in Noyabrskneftegaz. In each case, Dart's ire was raised by what he saw as asset stripping and unfair share dilutions.


While his dispute with Sibneft eventually ended amicably - Dart accepted a deal that diluted his stake but rewarded him with an extra 1.5 percent stake and a seat on the board for Hunter - the fight with Yukos is still dragging on.


In dramatic separate shareholders meetings for each subsidiary held in March, Yukos managed to bar representatives acting for Dart and other minority shareholders. In the shareholders' absence, Yukos succeeded in pushing through share emissions that, should they be allowed to stand, would leave Dart and other minority shareholders with stakes so small as to be virtually worthless.


Yukos has defended its actions as being both legal and necessary for the long term health of the oil holding by replenishing its working capital.


"We are confident that from a legal point of view our position is irreproachable and nobody so far managed to prove the opposite," Yukos said in a press release last week.


Meanwhile Yukos officials have been scathing in their criticisms of Dart, insisting that he is a ruthless intriguer whose only interest is in quick profits, not in working to create value.


"He is trying to suck enormous assets out of the Russian oil industry," Yukos spokesman Krasnov said.


If that was his aim, he looks to be a long way from succeeding.


Dart and other minority investors in the three Yukos subsidiaries have banded together in an attempt to overturn Yukos' apparent victories at the three shareholders' meetings in March, asking NAUFOR, the National Association of Stock Market Participants, to take up the battle on their behalf.


They in turn have asked the Federal Securities Commission to intervene after being frustrated in their attempts to engage Yukos in dialogue over the share emissions. NAUFOR has said that the talks broke up over Yukos' insistence that it would not talk if Dart's representatives were given a seat at the table.


Dart and his allies won some breathing space on Friday, when the Samara region arbitration court suspended the issuance of Samaraneftegaz shares approved at the subsidiary's March meeting. The court said the 67.5 million share emission could not go ahead until after a June 9 hearing when the court will hear the minority shareholders' side.


However, a long battle looms for Dart against Yukos, with both sides apparently digging in to fight to the death. Even should he eventually win some concessions from Yukos - an unlikely prospect in light of the disdain with which Yukos regards him - he is unlikely to reap much of a return from these particular investments.


White or Black Knight?


As far as Dart's legacy in Russia is concerned, Yukos officials did not hesitate to state that Russia would have been better off without Dart.


"As far as Russia's interests go, he is an absolute disaster," Yukos' Krasnov said.


Meanwhile, Dart's representatives are more likely to turn that last statement on its head: As far as Dart's interests go, Russia has been a disaster.


"There is no question that his attitude has soured and at this juncture he would not consider making any new investments in Russia," Dart spokesman Hunter said.


"But the jury is out on whether he will consider further investment in Russia, and the jury is out because of the situation at Yukos. Dart and other investors are waiting to see whether the regulators and the courts will enforce the law."


Most independent observers commend the maverick investor for being willing to take on the battle for improved corporate governance.


"Russia is a place with such horrible corporate governance that anyone trying to make a difference in this area is making a great contribution," said one Moscow-based fund manager, who spoke on condition of anonymity.


Stephen O'Sullivan, head of research at United Financial Group, agrees that Dart has made a positive contribution to the investment climate in Russia.


"He's been quite active in raising the profile of minority shareholders' rights," O'Sullivan said. "Markets will never improve if you never tell people about what is going on."


"Dart was one of the few people who actually stood and fought," he said.


Some contacted for this story were concerned that looking into Dart's activities outside of Russia would only serve to distract from the real benefits he has brought to investors in this country.


"The story is not about [Dart], it's about corporate governance," said Bill Browder, manager of the Hermitage Fund. "He is one of the few people that has been willing to do anything about it."


If Dart comes in for any criticism, it is in his choice to invest in oil company subsidiaries rather than holding companies.


"He was going for a tremendous return, which always carries with it a lot of risks," said Ivan Mazalov, oil and gas analyst at Troika Dialog. "Obviously he relied on reports from brokers that told him that [subsidiaries] were safe."


"Of course, it is very easy to judge with the benefit of hindsight," he said. "Nevertheless, it was important to note the caveats, which could be found, even then."


O'Sullivan disagrees, saying no one could have predicted the abuses that occurred. "At the time, Dart's investments made absolute sense," he said.


"When he bought production companies, the holding companies only existed in vague forms. No analysts were saying you shouldn't get involved in production companies," he said.


- Kirill Koriukin contributed to this report.