SpecialReport
WhoIs Kenneth Dart?
EDITOR'SNOTE: The most talked about name in the Cayman Islands today,is that of Mr. Ken Dart, whose development company is poised toproceed, following recent planning approval, with a billion dollarproject along the West Bay peninsula, which could sustain thiscountry's hope of economic growth for at least the next five years.
A very privateindividual and generous benefactor, a rare photograph of Mr. Dartappeared recently along with another near 2000 applicants forthe grant of Caymanian Status (citizenship). Not much is knownlocally of the international business connections and family ofthis individual, whose benevolent foundation is developing fiveparks on Grand Cayman to the tune of one million dollars and hasmade a slew of cash donations to community organizations, particularlyin the past few weeks.
Who then is Ken Dart?
In an effortto present a profile of this individual, Cayman Net News's researchhappened upon an extensive feature story, which was printed inone of Russia's most powerful newspapers, The St. Petersburg Timeson June 8 of 1999. Herewith is the full text of this article.
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Often portrayed in the Russian pressas representing the worst of carpet bagging capitalism and inthe Western press as a heroic defender of the underdog in theWild East, Kenneth Dart is a complicated figure whose realityfar outdoes simplistic caricatures. John Kenyon reports.
FEW heroes are as unlikely as Kenneth Dart.The billionaire heir to a U.S. foam cup fortune has perhaps donemore than any other single person to call attention to the sorryplight of minority shareholders in Russia. Through his battlesin the Russian courts with companies like Sibneft and Yukos, Darthas consistently defended the rights of shareholders in subsidiarycompanies against devious practices such as the transfer pricingand share issuance monkey business that are commonplace in post-SovietRussia.
"Whatever Dart's goal was, objectivelyhis presence and his litigation efforts on behalf of shareholders'rights, etcetera, did have a positive impact on the investmentclimate," said Ruslan Nikolov, oil and gas analyst at NomuraInternational in London.
That's not the way his most famous opponentssee it.
"What positive role can Kenneth Dartpossibly play if he is one of the three or five most famous vultureinvestors in the world?" Yukos spokes man Andrei Krasnovsaid when contacted last week.
One thing is certain, Dart's biography,at least that part of it available from public sources, makesfor about as interesting a read as there is.
A Real Expat
A search for Dart's name on the Internet reveals that he has becomesomething of a poster child for the advocates of offshore living.
These are the people who scoff at the notionthat taxes are a moral responsibility. They write books with titleslike "The Rich Die Richer - And You Can Too," and liketo invoke the following quote from U.S. Appellate Court JudgeLearned Hand to justify their actions:
"Over and over again courts have saidthat there is nothing sinister in so arranging one's affairs asto keep taxes as low as possible. Everybody does so, rich or poor;and all do right, for nobody owes any public duty to pay morethan the law demands: taxes are enforced exactions, not voluntarycontributions. 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 moneyis quoted as saying, "I talk to a new client interested inexpatriating every week. Many people can't pay the federal taxrate and live in the style they want."
Kenneth Dart paid heed to the benefits ofliving offshore in 1994, giving up his U.S. citizenship, movingto a small $5.3 million private resort on the Cayman Islands andbecoming a joint citizen of Ireland and the Caribbean nation ofBelize. Before settling on the Cayman Islands, Dart reportedlyconsidered living full time on his luxury yacht, which he hadspecially armored to be able to resist torpedo attack.
Dart himself denies that he gave up hiscitizenship for tax purposes. He says he was motivated by a needfor security following an arson attack that burned down his $1million home in Sarasota, Florida. Dart alternatively blamed hisolder brother Tom, who was upset with the way the multibillion-dollarestate had been divided up, or Brazilian bankers upset that Dartwas threatening to break up a negotiated restructuring of theSouth American country's sovereign debt for the attack.
One Web site, run by a company called BelizeOffshore Consultants & Co., touts the country's security asa tax haven in a list of Frequently Asked Questions, saying thatBelize had withstood the "best efforts of the U.S. SecuritiesExchange Commission."
Dart was not alone in his decision to rejecthis citizenship - his brother, Bob, also left at the same time,as did their tax lawyer. His wife and children, however, remainedat their Sarasota, Florida home, near where the Dart ContainerCorp. sales headquarters had been moved to from their originallocation in Michigan.
Dart's expatriation story, if it ended there,would be no different than that of the dozens of other super-richindividuals who leave the United States each year to avoid payingtaxes. In Dart's case, however, it just keeps getting more interesting.
Soon after he became a citizen of Belize,the country's government officially applied to the U.S. StateDepartment to open a consulate in - surprise, surprise - Sarasota,Florida. U.S. Ambassador to Belize George Bruno, in a cable tohis bosses at the State Department, said Dart would live at thisnew consulate and would have "special responsibilities inthe area of trade and finance."
"At a later date," Bruno wrote,"Dart would help Belize finance the establishment of a consulatein New York City," where he would "possibly serve alsoas a consular officer ... or special trade rep for Belize."Of course, as a representative of the government of Belize, Dartwould automatically be exempt from U.S. taxes. The State Departmentdenied the request, pointing out that Belize already had a consulatein Miami. Dart earned a "Chutzpah Award" from the lateAmerican 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 polystyrenebeads into cups. Dart Container Corp. is now the world's largestmanufacturer of foam cups.
According to a 1995 Business Week article,Dart Container has helped to keep its hold on the industry bytaking the paradoxical step of never patenting the process bywhich their cups were made. Taking out a patent would mean revealingthe process and, since patents run out eventually, giving theirsecrets away to their competitors.
The Darts have preferred to take the routeof extreme caution, letting only a few of their own employeeseven see the machines that have made them rich.
Dart Container currently employees morethan 3,000 people at 17 plants worldwide. Different sources haveestimated yearly revenues for the privately held company from$400 million to more than $1 billion. It regularly figures onthe Fortune magazine list of the top 400 private companies.
By all accounts, Dart has become an incrediblysuccessful investor, as a 1986 restructuring of the family trustsfreed up company profits for him to bring a return on. Accordingto the Business Week article, within three years Dart made a returnof 186 percent on a $269 million investment in Salomon Inc., inwhich he still owns a substantial minority stake. Likewise, a$300 million investment in 1991 in the Federal Home Loan MortgageCorp. was sold off over the next few years for a total of $1.3billion, a 333 percent return.
Business Week quotes a stockbroker who has done business withthe family for years as saying that Dart has a "genius"for investing.
"He certainly has the capability [tobe the next] Warren Buffett," he said.
Dart has also invested heavily in the biotechsphere. He has shown particular interest in companies and scientistsexploring the workings of the brain, funding many of them withgrants from his charitable foundation.
Debt Buy Up
Dart gained his greatest notoriety by far, however, from his buy-upof Brazilian debt and his very public battle with them to tryto kill a restructuring deal.
The Latin American debt crisis began inthe early '80s with a default on foreign debt by Mexico. The financialcrisis quickly spread to other nations in Latin America, triggeringwave after wave of bank collapse and debt default.
The debt burden built up and by 1992, includingloans from banks and other governments, topped $121 billion forBrazil, according to figures from the World Bank. Mexico's debtsreached more than $113 billion and Argentina's were nearly $68billion.
For more than a decade, the lenders, mostly North American andEuropean banks, tried more or less unsuccessfully to work outa restructuring deal with the countries in most dire need of relief.Finally, by the late '80s and early '90s, under a program knownas the Brady Plan, after former U.S. president George Bush administrationtreasury secretary Nicholas Brady, the negotiations began to havemore success.
The Brady Plan provided for debt to be swappedfor so-called "Brady bonds," which were backed by collateralput up in part by the International Monetary Fund and the WorldBank.
By 1994, the last of the big time debtors,Brazil, had finally come to an agreement with its creditors, includingmore than 750 banks, over the restructuring of some $50 billionworth of debt. There was one hitch in the plan - a flaw that threatenedto make for naught three years of intense negotiations.
Sensing that an agreement would eventuallybe reached, Dart bought up huge amounts of heavily discountedBrazilian bank debt. He quickly became Brazil's fourth largestcreditor, holding some $1.4 billion worth, or 4 percent of thetotal of the defaulted debt, for which he had paid about $375million, just over a quarter of the face value.
Dart, however, was not satisfied with therestructuring deal Brazil had worked out with its other creditors,believing it would force him to discount the debt he owned tooseverely. He threatened to pull out of the restructuring if hewas not allowed more favorable terms.
Ultimately, Dart was unable to stop thedeal from going ahead and his stake was devalued from $1.4 billionto $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 wasRussia's voucher privatization program. The Anatoly Chubais-ledscheme offered vouchers to every Russian man, woman and childwhich could be used to purchase shares in former state enterprisesas they went on the block. The vouchers could also be traded onthe open market.
While the scheme did put some of the state'sassets into the hands of Russian individuals it also created alarge number of extremely undervalued assets, something that twoof the architects of the scheme - Boris Jordan and Stephen Jenningsof Credit Suisse First Boston - soon realized.
They began to spread the word that therewas a lot of money to be made after watching a 44 percent stakein the Bolshevik Biscuit Factory sold for an amount that effectivelyvalued the company at a mere $656,400 - at best about 2 percentof its worth.
Jordan and Jennings soon moved from organizingvoucher privatization to pushing it to Western investors as theopportunity of a lifetime.
Word reached Dart, who started investing in Russia during theearly stages of voucher privatization. He focused on oil, telecomsand the power generating firms spotted across Russia and knownas energos, according to Mi chael Hunter, president of Dart Management,Inc., which represents the interests of the Dart group in Russia.
But Dart cast his net wide. His other interestsinclude, but are not limited to, shipping companies, cement production,metals companies and pulp and paper, including news print, Hunteradded.
The exact extent of Dart's holdings in Russiaremains a mystery. Likewise, how much he plunged on the country'sprivatized firms and what kind of returns he has achieved arenot subjects on which his minions wished to comment."He isa very private guy, he doesn't really like to talk about the details."
One thing, however, is certain: Russia isfar from being a highlight in the Dart story. His decision topick up minority stakes in several oil extraction and productionfirms looked like a smart move, but has instead embroiled Dart'sfirms in some extremely nasty shareholder disputes with some ofRussia's most powerful business figures.
The investments that Dart has had most causeto rue were the stakes he bought in Yuganskneftegaz, Sa ma raneftegaz,Tomsk neft and No ya brsk nef te gaz. The first two firms weresubsidiaries of oil major Yukos from the word go, and Tomskneftwas absorbed by the same firm when it snapped up Eastern Oil Co.in a December 1997 privatization that was part of the infamousloans-for-shares program.
In 1998, Dart found himself at loggerheads with both Yukos andwith Sibneft, which owns a majority stake in Noyabrskneftegaz.In each case, Dart's ire was raised by what he saw as asset strippingand unfair share dilutions.
While his dispute with Sibneft eventuallyended amicably - Dart accepted a deal that diluted his stake butrewarded him with an extra 1.5 percent holding and a seat on theboard for Hunter - the fight with Yukos is still dragging on.
In dramatic, separate shareholders meetingsfor each subsidiary held in March, Yukos managed to bar representativesacting 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 minorityshareholders with stakes so small as to be virtually worthless.
Yukos has defended its actions as beingboth legal and necessary for the long term health of the oil holdingby replenishing its working capital.
"We are confident that from a legalpoint of view our position is irreproachable and nobody so farhas managed to prove the opposite," Yukos said in a press-releaselast week.
Meanwhile Yu kos officials have been scathingin their criticisms of Dart, insisting that he is a ruthless intriguerwhose only interest is in quick profits, not in working to createvalue.
"He is trying to suck enormous assetsout of the Russian oil industry," Yukos spokesman Krasnovsaid. If that was his aim, he looks to be a long way from succeeding.
Dart and other minority investors in thethree Yukos subsidiaries have banded together in an attempt tooverturn Yukos' apparent victories at the three shareholders'meetings in March, asking NAUFOR, the National Association ofStock Market Participants, to take up the battle on their behalf.
In turn, they have asked the Federal SecuritiesCommission to intervene after being frustrated in their attemptsto engage Yukos in dialogue over the share emissions. NAUFOR hassaid that the talks broke up over Yukos' insistence that it wouldnot talk if Dart's representatives were given a seat at the table.
Dart and his allies won some breathing spacetwo weeks ago, when the Samara region arbitration court suspendedthe issuance of Samaraneftegaz shares approved at the March meetingfor that subsidiary. The court said that the 67.5 million shareemission could not go ahead until after a June 9 hearing, whenthe court will hear the minority shareholders' side.
However, a long battle looms for Dart againstYu kos, with both sides apparently digging in to fight to thedeath. Even should he eventually win some concessions from Yukos- an unlikely prospect in light of the disdain with which Yukosregards him - he is unlikely to reap much of a return from theseparticular 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 havebeen better off without him.
"As far as Russia's interests go, heis an absolute disaster," Krasnov said.
Meanwhile, Dart's representatives are more likely to turn thatlast statement on its head: As far as Dart's interests go, Russiahas been a disaster.
"There is no question that his attitudehas soured and at this juncture he would not consider making anynew investments in Russia," Dart spokesman Hunter said.
"But the jury is out on whether hewill consider further investment in Russia, and the jury is outbecause of the situation at Yukos. Dart and other investors arewaiting to see whether the regulators and the courts will enforcethe law."
Most independent observers commend the maverickinvestor for being willing to take on the battle for improvedcorporate governance.
"Russia is a place with such horrible corporate governancethat anyone trying to make a difference in this area is makinga great contribution," said one Moscow-based fund manager,who spoke on condition of anonymity.
Stephen O'Sullivan, head of research atUnited Financial Group, agrees that Dart has made a positive contributionto the investment climate in Russia.
"He's been quite active in raisingthe profile of minority shareholders' rights," O'Sullivansaid. "Markets will never improve if you never tell peopleabout what is going on."
"Dart was one of the few people whoactually stood and fought," he said.
Some contacted for this story were concernedthat looking into Dart's activities outside of Russia would onlyserve to distract from the real benefits he has brought to investorsin this country.
"The story is not about [Dart], it'sabout corporate governance," said Bill Browder, manager ofthe Hermitage Fund. "He is one of the few people that hasbeen willing to do anything about it."
If Dart comes in for any criticism, it isfor his choice to invest in oil company subsidiaries rather thanholding 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 frombrokers that told him that [subsidiaries] were safe."
"Of course, it is very easy to judgewith the benefit of hindsight," Mazalov said. "Nevertheless,it was important to note the caveats which could be found eventhen." O'Sullivan disagrees, saying no one could have predictedthe abuses that occurred.
"At the time, Dart's investments madeabsolute sense," he said.
"When he bought production companies,the holding companies only existed in vague forms. No analystswere saying you shouldn't get involved in production companies,"Sullivan said.
- St. Petersburg TimesStaff writer Kirill Koriukin contributed to this report.