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Nightmare in Prague

A decade ago, Andrew Weiss said he had never been more optimistic about any investment opportunity than the Czech Republic.

A well-known economics professor at Boston University who also runs an investment fund from the Back Bay, Weiss entered a new stock market of emerging capitalism where the path to profit often became a labyrinth, and many things were not what they appeared to be.

He now finds himself in the middle of a high-stakes financial shell game and international legal disputes that may lead to criminal blackmail charges against him overseas. The unlikely object of all the intrigue: a fading seven-story department store building in the heart of Prague.

The retailer, a publicly traded company called Kotva, can trace its brief corporate roots to the 1990s, when Czech privatization led to rampant abuse of investors who piled into the country. International financial experts and economists warned that better regulation and stiffer criminal enforcement were needed to protect the nascent capitalism.

One of the experts who went before the Czech parliament in 1997, urging a crackdown on fraud and abuse: Andrew Weiss.

''It's ironic and unfortunate that, somehow, someone who is trying to protect investors against insider wrongdoing is being pursued in this way," says Weiss's friend Lucian Bebchuk, a Harvard Law School professor and authority on corporate governance.

Weiss is worried that charges against him are imminent, though his lawyers say they have not received any official notice of criminal allegations. But similar claims are the basis of a civil suit filed against him in US District Court in Boston this month by the retailer's management. The civil suit claims Weiss has already been indicted in Prague.

Last month, Weiss held a video press conference from the Boston office of his attorneys at McDermott Will & Emery to declare his innocence to Czech news media assembled in a Prague hotel. Robert Solow, the MIT economist and Nobel laureate, introduced him on the hookup, said Weiss's lawyer.

''I'm 58 years old and have never been accused of misconduct of any kind," Weiss said at the time.

Kotva's lawyer in Boston, Joel Beckman, would disagree. ''Mr. Weiss has chosen to play it out in the press and spin it to serve his purpose," he said. ''Kotva has filed a lawsuit in federal court which raises very serious allegations. Kotva is confident it will secure relief in court before a jury."

Weiss said he decided to conduct his press conference from Boston, worried in part about possible arrest or worse if he traveled to the Czech Republic. He said several people connected with the Kotva story have run into violent trouble in the past. Beckman said he was unaware of any violence and suspected Weiss stayed home to avoid the possibility of arrest.

Weiss began his investment career decades ago, under much less stressful circumstances. As a student at Williams College, he began investing his own money successfully in a portfolio of funds. Investors later included family and friends, and continued success eventually led to the $350 million fund Weiss manages today.

His academic career got an early boost when, as a graduate student, he became a coauthor of influential research published in 1981 by economist Joseph Stiglitz. The work was widely cited over the next 20 years and prominently noted when Stiglitz won the Nobel prize in 2001.

''He's a brilliant economist, and he's an outstanding investor," says Laurence Kotlikoff, chairman of the economics department at BU and an investor in Weiss's fund. ''He's scrupulously honest, and I'd trust him with anything."

Weiss counts many academics among his investors. They have been attracted by results from a strategy of purchasing funds around the world that were either undervalued or difficult to value at all without special effort. That process is what made the Czech Republic seem so attractive to Weiss 10 years ago.

The road to capitalization became a very bumpy path, though. Some Czech funds, using money raised from investors, acquired large stakes in businesses that had been recently privatized by government. But some of those assets were diverted by fund managers, usually to themselves, and investors were left with nothing to show for their money. The process happened so often a term was coined to describe it: ''tunneling."

This is what happened to the ownership of Kotva. A Czech fund called Trend acquired a large stake in the retailer during the 1990s, but sold it at far below market price to Forminster Enterprises, a Cyprus entity whose ownership remains unclear to this day. The Trend fund collapsed and went into bankruptcy.

Investigations ensued, and Forminster's majority interest in Kotva remains frozen by Czech courts. But the managers who run the department store today were backed by Forminster.

Weiss eventually became the administrator of an investment fund that owned shares in both Trend and the retailer. He objected to a plan to place Kotva's only valuable asset, its property, into a new subsidiary and then sell the building.

The sale finally did take place last year, but the new buyers withheld $24 million, about a third of the total.

The catch: Lawsuits filed by two investment entities owning Kotva shares objected to the sale and needed to be resolved. Kotva's management insists Weiss controls both those entities and used the lawsuits to try to blackmail management into purchasing his stock.

Beckman, the Kotva lawyer, points to e-mail traffic from Weiss about an offer to sell stock and possibly trying to influence the lawsuit as key evidence.

Michael Kendall, the lawyer representing Weiss, says his client was legitimately offering to sell his stock to Forminster and recover what he could for shareholders.

''It's personally offensive for an honorable man to be accused of improper acts by dishonorable people," Kendall said.

Weiss said he was right all along. He made lots of money investing in the Czech Republic over the past decade. He expected problems along the way.

But he didn't bet on this kind of trouble.

Steven Syre is a Globe columnist. He can be reached at

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