(FORTUNE Magazine) – You know," Viktor Kozeny announces, as he steers his twin-engine KingAir, Captain Viktor, into the blackening skies over the Caribbean, "when it gets dark and there's a haze like this, it is just like what happened to J.F.K. Jr." Kozeny and I are alone at 8,000 feet, heading back to his home in the Bahamas from a daylong joy ride to the Turks and Caicos Islands. ("We will get a hamburger," Viktor explained.) I'm seated, none too happily, in the co-pilot's chair, with night closing in fast, the Nassau airstrip still 90 minutes away, and lightning stabbing the horizon. "You cannot see anything," Viktor continues, in case I've missed the point. "You are totally blind. But don't worry," he finally adds, with a devilish grin. "What happened to Kennedy will not happen to us."

Flying with Viktor Kozeny has always been a white-knuckle ride. While he's not exactly a household name, Kozeny, 36, is notorious in financial circles as an emerging-markets buccaneer--a charming, shrewd, thoroughly ruthless fellow who finds his "opportunities" in the struggling economies of Eastern Europe. It is a reputation he established in the early 1990s, when he plundered his native Czech Republic during its painful transition to capitalism. Ever since, he has been known as the "Pirate of Prague"--a title first pinned on him by FORTUNE.

You might think that's the sort of image that would send respectable American investors running for their T-bills. Think again. It is precisely Kozeny's reputation that drew an astonishing collection of blue-chip investors to Kozeny's latest scheme, including vaunted Wall Street hedge fund manager Leon Cooperman, former Senate Majority Leader George Mitchell, and AIG, the insurance giant.

This time around, Kozeny's theater was the former Soviet Republic of Azerbaijan, one of the most byzantine, corrupt, and inscrutable nations on earth, a place where the phrase "investing risk" takes on a whole new meaning. Less than a decade into its experiment with capitalism, Azerbaijan has no stock market, no meaningful financial regulation, and a rich history of graft and cronyism. Yet it was there that the Americans, embracing Kozeny's pitch that he had the place wired, bet hundreds of millions of dollars in the belief that they were in on the deal of a lifetime. With Kozeny's help, they were going to make 20, 50, even 100 times their money in just a year or two. Kozeny may have been a pirate, but he was their pirate.

Instead, like most get-rich-quick schemes, this one collapsed--leaving the sophisticated Western investors looking like a bunch of Dubuque dentists suckered by a two-bit stock promoter. How it all happened is a wild, wondrous tale of embarrassed millionaires ("You're gonna make me look like a schmuck," says one), murky geopolitics, and common duplicity and greed.

Not surprisingly, everyone involved in the scheme is now busily trying to lay the blame elsewhere. The investors who hopped into bed with Viktor now say he seduced them. Several bluntly call him a crook. Two of the biggest participants, Cooperman's Omega Advisors and AIG, are suing him for fraud. Liens have been slapped on the $25 million London home Kozeny bought from Andrew Lloyd Webber.

Kozeny, of course, sees things differently, and in more than 20 hours of conversation with FORTUNE, he made it clear that he isn't about to take the fall alone. For starters, he blames Azeri officials, who, he complains indignantly, "double-crossed" him after taking millions of dollars in payoffs. "They sucked us in," he declares. "We got fucked and hosed."

He's just as angry, though, at his finger-pointing estranged partners. As Kozeny sees it, they knew exactly what they were getting into with him: "They told me, 'You do the dirty work.' " And, he adds, if they don't back off, he'll hit back. During our conversations, Kozeny passed on nasty personal tidbits involving several of them--and claimed to have a lot more, which he would use if he had to. "I'm not a confrontational guy," he says with a boyish shrug. "But if they want to have a fight, they will pay for it very dearly."

GATSBY IN PRAGUE

On Dec. 20, 1997--just as he was starting to round up investors for his venture in Azerbaijan--Viktor Kozeny and his resplendent third wife, Ludka, threw a party in Aspen. Not just any party, mind you, but the sort that even local jetsetters would still remember two years later.

The setting was the Kozenys' $19.7 million mountaintop chalet--a property he'd bought barely six months earlier. The guests were 150 of Aspen's rich and famous--Ivana Trump among them--many of whom the Kozenys had never met. Bowls of caviar greeted the guests. Expensive champagnes and fine wines flowed freely all night. Natalie Cole provided the entertainment. As the guests left, they received gifts from Asprey & Garrard, the exclusive London jewelry store. "I wanted to meet some neighbors," says Kozeny nonchalantly of his $1 million shindig.

In fact, casual extravagance--the grand, outrageous gesture--has long been part of Viktor's modus operandi, a way of creating a Gatsby-like aura that generates interest in himself and his deals. Combine that with Viktor's natural gifts--irresistible charm, unflappable confidence, a smoothness that never seems slick, and a talent for selling a scheme without appearing to do anything of the sort--and you have...well, you have the makings of a great con man.

In Kozeny these gifts were evident early on. As an 18-year-old living in Germany--his family had arrived from Czechoslovakia two years earlier--Viktor attended a lecture in Munich given by an eminent American physics professor named Marlan Scully. Explaining that he was a physics prodigy who had fled communism, Kozeny waved around a notebook that contained his scribbled "theories." The professor was so moved by Viktor's story that he invited Kozeny to study with him at the University of New Mexico. Days after Scully returned to Albuquerque, Kozeny appeared on his doorstep, asking for a place to stay and a $100 loan.

It didn't take long for Scully to realize that Kozeny "didn't know zilch" about physics. Yet the professor tried to help him anyway, eventually persuading a colleague to take Kozeny into his home. Within months, however, the Czech teenager had run off with the man's wife--a 37-year-old mother of three.

Next stop: Cambridge, Mass., where Kozeny enrolled in summer classes at the Harvard Extension School. His soon-to-be first wife bankrolled his expenses, which, as she describes it now, were extravagant even then. (They were divorced two years later.) Kozeny eventually talked his way into the real Harvard--where he wound up, by his own account, on "triple probation": "The trials and errors of a young man," he explains now. Yet when he finally graduated after six years, with a degree in economics, he walked away with a handful of glowing recommendations, including one from Harvard law professor (and future Supreme Court Justice) Stephen Breyer.

On to Flemmings, the respected London investment bank. Partner Michael Ladenburg was so smitten by Viktor during a breakfast job interview that he hired him without checking a single reference. But then, according to Ladenburg, Kozeny often refused to do the work he'd been assigned, spending his days in furtive telephone conversations. He told his boss that he was working on big deals in Eastern Europe, deals so secret that he couldn't reveal any details. He was fired after six months.

It was 1990. With just $3,000 to his name, Kozeny, then 26, faced the new decade without a job and with a new wife who was pregnant with his first child. Yet he was unfazed. For he was indeed preparing to make his first move into the murky world of emerging markets. By the end of the year, he had moved to Prague, taken up with his married secretary, Ludka, dumped his wife and baby daughter, and hung out his shingle as a "business consultant." He began launching businesses and courting government officials, searching for the angle, the idea, the connection that would make him rich.

He found it in something called privatization vouchers. The vouchers were intended to jump-start the post-communist government's program to privatize the nation's state-run industries. Each Czech citizen was offered the chance to buy a booklet of vouchers for $35, which he could then tender for shares in the newly privatized companies. But after 41 years of communist rule, people were deeply suspicious of government-promoted capitalism; few were willing to spend a week's salary on some scraps of paper.

To a born promoter like Kozeny, this situation screamed of opportunity. He quickly set up a group of closed-end mutual funds, which he called the Harvard funds, and made an outrageous guarantee: If people turned over their vouchers to him, he would pay them ten times their money if they wanted to cash out after a year. He pitched this guarantee brilliantly, with a Western-style advertising blitz that included slick TV spots urging Czechs to entrust their vouchers to the fund "with the American name." Incredibly, more than 820,000 people did exactly that.

Kozeny's promise had all the earmarks of a Ponzi scheme; as Viktor now admits, he didn't have a clue where he would come up with the $200 million or so that would be required to make good if his investors cashed out en masse. But, in truth, the game Kozeny was playing had more to do with his access to inside information. Kozeny had wonderful new friends in the Czech government; he regularly played squash with the Interior Minister, for instance. And his government consulting work would also help give him the inside track in identifying the most valuable state-owned assets. He felt sure that the vouchers would be worth far more than his public guarantee.

Other funds jumped in to offer even fatter guarantees, but Kozeny was the man of the moment. His Harvard funds collected enough vouchers to give him control of more than 15% of the Prague stock market. He then astutely swapped those vouchers for stakes in 50 choice companies. When the funds began trading, their value multiplied by more than 20 times. The market value of Harvard's assets ballooned to $1 billion.

There were three responses to Kozeny's success. First, people began to treat him like a celebrity--and he began to act like one, hiring full-time bodyguards and riding around town in a chauffeured Mercedes. Second, the government, nervous that Kozeny was getting too powerful, rushed through a law barring mutual funds from owning more than 20% of any one company. "They had to slow me down," Kozeny boasts, "because basically I would own the country."

And third, the press began to ask questions about how Kozeny acquired his investment intelligence. These questions came to a head in late 1992, when a former Czech secret police agent was arrested for allegedly selling Kozeny state secrets--variously reported as either information about investment targets or dossiers containing embarrassing personal details about top government officials. Kozeny denied receiving anything confidential and insisted that he was actually the victim of blackmail. But with an official investigation under way (it was later dropped), Kozeny decided it was time to leave. One day in January 1994 the best-known businessman in the Czech Republic summoned his driver and disappeared across the border toward Switzerland, never to set foot in his homeland again.

THE PIRATE MEETS THE EXILE

It's a balmy evening in Lyford Cay, a Bahamas haven for the international rich and famous. My dinner host is David McGrath, a tall, likable 50-year-old whose shaggy hair, goatee, and deep voice make him seem like the reincarnation of Wolfman Jack. McGrath knows everyone in Lyford Cay. For example, the actor Sean Connery has joined us for this seaside dinner; Connery and McGrath play golf together at the Lyford Cay Club almost daily. McGrath is telling me about first meeting Viktor Kozeny in 1994, not long after the young Czech blew into town.

"He was this big, fair-haired kid who was saving the Eastern bloc," recalls McGrath. "He explained to me he was in the process of using a great deal of his profits to do good for the country. He claimed he was buying a thousand mammogram machines for all the hospitals in the Czech Republic. I thought this guy was wonderful. I thought he was Robin Hood.

"Everybody was charmed at first," adds McGrath. "He exudes personality and friendship. He has that 'grip of steel' handshake. And he stares you right in the eye." Connery looks up from his steak and scoffs: "If he tries that 'grip of steel' thing on me again, I'm going to punch him in the nose."

For Kozeny, Lyford Cay was akin to finishing school, populated as it was with international financiers, tax exiles, and corporate rogues. They knew tricks he hadn't even imagined--and had the sort of money he only dreamed about. To ensure that he got to know the right people, Kozeny hired McGrath to introduce him around, and signed an agreement promising McGrath 10% of the profits of any resulting deals. The two men wrote out a list of 16 high-rollers--people with the money and clout to be potentially useful to Kozeny. Among those on the list was the well-known executive turned tax exile, Michael Dingman.

In his 1980s heyday, Dingman was one of the most controversial figures in business--a corporate turnaround artist with a penchant for asset shuffling. Dingman built, merged, and liquidated conglomerates. Once CEO of Wheelabrator-Frye, he later took hold of a group of money-losing divisions at AlliedSignal, bundled them into a company called the Henley Group, and spun it off with what was then the biggest stock offering ever. Though the Henley Group never made an annual profit, Dingman became fabulously wealthy after orchestrating a series of bewilderingly complex financial transactions. His career was tarnished by suits from shareholders who claimed that he was the chief beneficiary of his own dealmaking. Dingman, who was embittered by his treatment, eventually renounced his U.S. citizenship and moved to the Bahamas. Even after relocating to the international tax haven, he remains a director of Ford Motor Co.

The 63-year-old Dingman was a generation older than his new neighbor. Still, he saw Kozeny as a kindred spirit, and the two men were soon sharing an office. Dingman delighted in his role as mentor: "I see myself in Viktor," he later told a reporter.

In November 1995 the two men announced a startling new play in the Czech Republic. Exploiting the absence of disclosure requirements, Dingman and Kozeny had secretly assembled big stakes in eight key Czech industrial companies, including a controlling interest in three of them. In addition to using Kozeny's Harvard funds to do this, Dingman committed $140 million of his own money. Their stated goal: nothing less than the restructuring of Czech industry. This, they promised, was only the start of a massive investment venture that would introduce the entire region to free-market capitalism--"a KKR of Eastern Europe."

Maybe that really was the goal. Dingman and Kozeny briefly tried to restructure some of the companies, but they soon gave up in the face of stiff resistance from the locals. Instead, the two men dropped all pretense of playing the good guys and focused instead on a simpler goal--getting rich fast. In the span of a few months, Kozeny executed more than 1,000 separate transactions, trading assets back and forth among Dingman's investment company and the various Harvard funds, selling off assets and sucking out cash. When all the dust had settled, Kozeny had built a fortune variously estimated at between $200 million and $700 million.

Not surprisingly, Kozeny's frenzied wheeling and self-dealing crippled some of the companies and devastated the Harvard funds, which lost 80% of their value. (The funds are now in liquidation.) The episode shattered investor confidence in the country as well. "Foreign investors wrote off the Czech Republic, in very large part due to what Kozeny did," says Richard Wood, a Prague-based investment banker. Kozeny was eventually fined $37,000 for securities violations and forced to repay $6.8 million to the Harvard funds.

Kozeny even burned his Lyford Cay friend David McGrath. McGrath says that when he tried to collect on his profit-sharing agreement--presumably worth tens of millions of dollars--Ko-zeny insisted that McGrath had gotten him to sign it when he was drunk. McGrath threatened legal action before settling for $1 million. But he did obtain a measure of revenge: When Kozeny's mother and stepfather applied for membership in the Lyford Cay Club, McGrath led a successful effort to have them blackballed.

THE SMELL OF OIL

"You buy carpet?" asks the uniformed officer in broken English, staring at my luggage through the X-ray machine at the Baku International Airport.

I nod. Oriental rugs are a bargain in Baku, Azerbaijan's capital, and I had bought one in a tiny shop for $200, well within the legal limit for duty-free export.

"Oh," the officer says sadly, shaking his head. "Big problem." He strokes his chin theatrically, as if in deep thought, then suddenly brightens. "Fifty dollar!" he declares. "Then--no problem!" We haggle briefly before finally settling on a more modest bribe: 20 bucks.

If there is a theme to doing business in Azerbaijan, it is that just about everyone expects a piece of the action. It is a place where officials are routinely on the take and where transactions are rarely straightforward. Which perhaps explains why Viktor felt that this was the perfect spot to make his biggest killing yet. In Azerbaijan all the skills and assets he had assiduously gathered and refined over the years would come into play--not only his charm and salesmanship, but just as important, his new wealth and his new friends.

His most valuable new friend continued to be Dingman, who in early 1997 began introducing Kozeny around Aspen, where he had a vacation home. For the young Czech, Dingman's embrace kicked open important doors in the U.S., both on Wall Street and in social circles.

At the same time, Kozeny was shrewdly using his wealth to create an almost mythic persona. He did this by throwing money around so cavalierly, so flamboyantly, that even multimillionaires were astonished.

He was known, for instance, to spend as much as $21,000 on a single dinner--one in which he sent back an $8,000 bottle of wine, complaining that it was "too young." He had a jet for globe-hopping and a seaplane for island-hopping, as well as a 165-foot yacht (Contemplation, he called it), a fleet of luxury cars, and a 500-acre private island in the Bahamas. His homes included an oceanfront mansion in Lyford Cay, where he added a $14 million swimming pool the size of a small lake; the Andrew Lloyd Webber house in London; and a 15,000-square-foot chalet in Aspen. The $19.7 million he'd paid for it was a local record.

As it happens, the house was next door to one of the first people Dingman had introduced him to in Aspen. Rick Bourke, 54, was the co-founder and chairman of the luxury handbag company Dooney & Bourke. His chalet was huge too, and he also owned a boat and a private jet. Like most people who meet Kozeny for the first time, Bourke was instantly charmed. As he and Viktor grew closer, Kozeny explained how he circled the globe in search of opportunities that might provide "excess returns." He invited Bourke to come along on his next trip. "We will have a good time," Kozeny promised.

Indeed they did. In May 1997 the two men took off in Kozeny's jet on a whirlwind tour around the world, with a dozen stops in exotic locales like Minsk, Belorussia; Bucharest, Romania; and Kazakhstan. But it was Azerbaijan, on the western shore of the Caspian Sea, that captured Kozeny's attention. What did he find there? You guessed it: privatization vouchers.

Just as in the Czech Republic, the government of Azerbaijan was offering vouchers to its citizens to allow them to participate in the country's privatization program. Each Azeri citizen got a booklet of four vouchers--for free--which they would be able to exchange for shares in the formerly state-owned companies. The Azeri government had already begun privatizing mom-and-pop businesses like bakeries and barber shops. The plan was to eventually expand the program to the few big enterprises that might interest foreign investors. Although no timetable had been announced, a tiny gray market had emerged already, with speculators buying up vouchers for cash from Azeris. Most, however, were short-term traders, hoping to resell the vouchers for a quick profit.

Kozeny had bigger ideas. By the time he got back to the U.S., he had already decided to dispatch a team with $500,000 in cash to start buying vouchers on the streets of Baku. By July he had spent $15 million and was hunting for outside investors. ("As an outcome of my extensive travel," Kozeny wrote to one such prospect, "I have discovered that yet another sleeping beauty has emerged, and her name is Azerbaijan.") By September, Kozeny was speaking of the venture as "a $150 million voucher fund." And by December--the time of his infamous Aspen party--he had hatched an outrageous scheme. Of all the companies in Azerbaijan, only one was genuinely coveted by Western investors: SOCAR, the giant national oil company. Kozeny's plan was to collect enough vouchers to buy it.

Azerbaijan has always been about oil. You can even smell it as you drive into Baku, cooking in the rusting refinery outside town, oozing from decrepit wells into black inland pools. Smaller than Indiana, sandwiched between Russia and Iran, Azerbaijan was the world's first big oil producer, generating more than half the globe's supply by 1900. Under Soviet control, the sprawling Azeri oil industry grew antiquated and inefficient. But by 1997, after President Heydar Aliyev--a 74-year-old former KGB general and Soviet Politburo member--had stabilized the country, Azerbaijan was enjoying a new oil boom. Western companies were striking rich deals with Aliyev to chase huge untapped reserves--perhaps as many as 100 billion barrels--believed to lie deep under the Caspian Sea.

If it were really possible to use vouchers to gain control of SOCAR, then the deal could be the bargain of the century. As Kozeny explained it, the booklets were trading at a fraction of the value of the underlying oil assets; Azerbaijan's potential untapped reserves were so huge that investors would be getting in on "the next Kuwait." Best of all, he said, they'd get out fast--for Kozeny wasn't planning on holding on to SOCAR for long. He was going to flip it! When one of the investors asked if they could make ten times their money, Kozeny scoffed. "Twenty, 50, 100 times!" he declared.

It was a great story--especially as Kozeny told it. Operating from his new Aspen home, he chatted constantly about "the great opportunity" he was pursuing. When business associates arrived in town, he invited friends over for informal seminars on Azerbaijan. But he never asked directly for money. On the contrary, wherever he went with his new friends, Kozeny picked up the tab. They flew on Viktor's jet, stayed at the best hotels, ate at the best restaurants. Kozeny made his business one big party--a blast to be around. "He created the club, and you were in the club," says one Kozeny watcher. By early 1998 all Aspen seemed to be clamoring to invest in Azerbaijan. "People would get you in the corner, and say, 'Are you in Viktor's deal?' " recalls one investor. Adds another: "People just threw money at him."

Bourke was in, of course. He and some friends put up $8 million. Others followed, including Aaron Fleck, a 77-year-old Florida money manager, who added $4 million, and Richard Friedman, the Boston developer who loans his Martha's Vineyard vacation home to the Clintons, who came in for $1 million. Bourke had introduced Kozeny to George Mitchell, the former Senate Majority Leader and respected special government envoy to the peace talks in Northern Ireland. After dining with Kozeny at a Florida resort, Mitchell decided he, too, wanted in. The former Senator invested $200,000. He also agreed to serve as vice chairman (Kozeny was chairman) on the board of the venture, which Kozeny had named Oily Rock Group Ltd.

By the time he'd worked his way through his new network, Kozeny had raised about $50 million. But for his scheme to work, he needed a lot more than that. So Kozeny headed for Wall Street. His chief ally there was Fleck, the money manager, who had impeccable Wall Street connections--and who had become a true believer in both Kozeny and the deal. ("I treated him like a son," Fleck now says ruefully.)

Their plan was to find four institutional investors to sign on for $25 million apiece. But when they got to Omega Advisors, Leon Cooperman's $4 billion hedge fund, they hit pay dirt. Cooperman, a big, volatile man, is widely regarded as one of Wall Street's toughest, smartest investors. He turned Kozeny and Fleck over to his emerging-markets partner, a 34-year-old named Clayton Lewis. A month later, Lewis delivered the startling news that Cooperman's hedge fund wanted to invest not just $25 million; it would come in for $110 million. What's more, the Omega partners would add $15 million from their own investment pool--two-thirds of which came from Cooperman himself. Lewis, meanwhile, rounded up additional funds--including $15 million from Columbia University, $15 million from AIG, and $25 million from other big investors. By the time they were finished, Omega and Lewis had funneled around $180 million into Kozeny's venture. Cooperman was delighted; he told a Wall Street friend that he was anticipating a "ten-to-100 bagger."

By Kozeny's count, the fund wound up totaling $450 million--including (he claims) "hundreds of millions" from his own pocket. The money was deposited in a Swiss bank account.

One name, though, was conspicuously absent: Dingman's. When an old friend sounded him out about Kozeny's latest venture, Dingman replied that he was inclined to pass. While Kozeny's methods were "often quite profitable," Dingman wrote, it was sometimes difficult "tying down what the deal is and making sure that our position is equal to his. On this subject I...remain concerned that one can honestly verify 'who's on first.' " After listening to Dingman's warning, the old friend invested $250,000 anyway.

"WE'RE IN BED WITH THE PRESIDENT"

Tom Farrell, a 35-year-old former bartender with a master's degree, a red handlebar mustache, and a scruffy beard, is the first man Viktor Kozeny sent into Azerbaijan. A Virginia native, he has lived in Russia since 1991 and provided security and translation services whenever Kozeny visited the region. He doesn't have much sympathy for the blue-chip investors who now claim to be shocked at what happened. "These are very rich, intelligent people who knew exactly what they wanted--huge returns in a very risky area very quickly," says Farrell. "They involved themselves for one reason: basic greed. Why else were they with Viktor Kozeny--a guy with questionable methods who made a lot of money?"

It's a very good question. For at face value, the deal simply didn't make a whole lot of sense. For starters, there was the fact that this was all happening in Azerbaijan, where things are rarely as they seem. "They are a marvelous people," says one diplomat of the Azeris. "They reel you in and skin you alive." In addition, there was the target of Kozeny's scheme. SOCAR wasn't just another Azeri company; it was a sacred cow, the only state asset of real value. SOCAR provided some 75,000 Azeris with jobs--and dirty-fingered government officials with a bottomless source of personal wealth. The notion that President Aliyev would hand it over to foreign speculators, at a fraction of its value, seemed preposterous--no matter how many vouchers they bought up. When put in those terms, the deal hardly looked like the "slam-dunk" Viktor liked to call it. Quite the contrary.

So why were the Western investors willing to overlook these obvious risks? For one reason only: They had the Pirate of Prague in their corner. It was easy to suspend skepticism because Viktor made it all seem like a wonderful adventure. His rich new friends, such as Bourke and Fleck, allowed themselves to be swept up in the globe-trotting excitement of it all.

Among the Wall Street players, it was more a case of greed overcoming judgment. Omega Advisors, for instance, seems to have understood what it was getting with Kozeny--but went ahead with the deal anyway. "Viktor's like a puppy dog," one Omega executive would later say. "When you're around him, he's lots of fun. If you turn your back, he'll shit on the carpet." Wary of his reputation for self-dealing, the hedge fund even made Kozeny sign a formal agreement intended to prevent him from ripping it off.

As for AIG, its "due diligence" was a case study in self-delusion--as documents obtained by FORTUNE show. In checking out Kozeny, the company called people already in the deal, such as Bourke--who said, not surprisingly, that Viktor was "brilliant, dedicated, a visionary"--and Omega, which told AIG that it had "gainedcomfort" with Viktor. AIG did find a lawyer who warned of Kozeny's "moral blind spots"--but claimed they were manageable. Incredibly, an AIG memo blamed the controversy surrounding Kozeny's Czech dealings on "investor jealousy." (AIG declined to comment on its involvement with Kozeny.)

Besides, didn't Kozeny have the whole thing wired? Ultimately, that's what the investors believed--and that was all that mattered. In March 1998, after traveling to Azerbaijan, Omega's Clayton Lewis prepared a "highly confidential" memorandum. SOCAR, he reported, would be privatized "well ahead of the [presidential] elections in October." The Kozeny group had "excellent relations" with those who called the shots--including "a personal invitation from the President encouraging us to participate."

Another internal AIG memo made a similar claim. Shafik Gabr, an Egyptian business executive and a Kozeny investor, advised the insurance company in April that he had met with Aliyev and had come away convinced that privatization would go forward. The AIG memo summarizing Gabr's comments also suggested that the President was in the bag: "Alief [sic] is involved in the deal, however the specifics of his involvement are not known."

Aliyev's support was crucial if the scheme was going to work. Any decision about when--or whether--to privatize SOCAR rested with Aliyev alone. That's the way things worked in Azerbaijan. "When the President made a decision, it was a decision," says a former ambassador. "Until he did, there was no decision." But everything the group heard--whether from Azeri officials or Kozeny--gave them confidence that they had nothing to worry about. As Fleck would later put it, "We were told point-blank that [the privatization of SOCAR] was going to happen." Mitchell gained an audience with Aliyev--and reported back that privatization would proceed. Kozeny, for his part, was not subtle about the reason. "We're in bed with the President," a former aide recalls him saying.

This impression was only reinforced every time the investors showed up in Azerbaijan. From the moment they arrived at the airport, they were treated like visiting royalty--whisked through customs, then motorcaded into Baku. They had long chats and dinners with top officials, especially the men running the State Property Committee (SPC), the government agency in charge of privatization. The No. 2 man at the SPC, a 45-year-old former math professor named Barat Nuriyev, became, over time, a particularly important and reassuring contact. One of the nation's leading intellectuals, Nuriyev was charming, witty, fluent in English--and a seeming advocate of capitalism and privatization. Nuriyev developed first-name relationships with several of the Americans, who regularly called to chat. He knew exactly what they were up to--and he egged them on. The privatization of SOCAR was just around the corner, he would tell them. And they believed him.

VOUCHERS? OR VALLPAPER?

By the spring of 1998 it all seemed to be on track. Tom Farrell, aided by a squad of former Russian military officers, was buying vouchers by the bushelful. Because he was paying for them with cash, Farrell flew to Zurich, where he picked up as much as $20 million in U.S. currency, carefully packed into suitcases. ("Into each Samsonite," Kozeny explains, "you can fill about five million bucks.")

Viktor, meanwhile, had set up a Western-style investment bank, called the Minaret Group, in the most expensive office building in Baku--and quickly hired more than 100 people, including 30 Westerners lured by the promise of huge bonuses. (Farrell, who had previously been living in a one-room apartment in St. Petersburg, says that if the deal had succeeded, his piece was supposed to be "bigger than $100 million.") To store the mountain of vouchers, Kozeny constructed a fortified bunker, with steel doors, round-the-clock armed security, and a high-tech surveillance system.

In late April, Kozeny presided over the official opening of Minaret's headquarters. Mitchell flew on Kozeny's jet with his young wife and infant son, who were dropped off in Monaco--where they stayed on Kozeny's yacht. Afterward, Kozeny flew Mitchell to Dublin, where he gave a speech on the talks in Northern Ireland. (Says Kozeny with a smile: "It was my little contribution to the peace process.")

Mitchell also joined the boards of two advisory groups the investors set up to promote the venture in the U.S. The directors, who also included Cooperman, Lewis, Bourke, and Fleck, were to be paid $50,000 a year--except Mitchell, who was to get $100,000. The directors established the American-Azerbaijan Business Council and urged the U.S. government to support privatization--because of the "foreign-policy benefits" of getting SOCAR into Western hands. Washington lobbyists were hired for $30,000 a month, PR consultants for $10,000 a month.

And all the while, the Kozeny investors pounced on every opportunity to curry favor with the Azeris. When Nuriyev's son applied late to the University of Michigan's graduate engineering program, Fleck--a UM alumnus and donor--pulled strings to get him in. When Fleck heard that Aliyev's daughter and granddaughter were fans of the Backstreet Boys, he called a friend in the recording industry to try to arrange a face-to-face meeting.

And yet...where was the privatization? It had been nearly a year since Kozeny had hatched his scheme. For months the Kozeny group had been assured by Nuriyev and others in the Azeri government that the announcement was right around the corner. Time and again, dates would be whispered--and then pass with no news. It was supposed to take place in April, then June, then late summer. Each time the deadline came and went. Finally, the investors were told that the announcement would be made right after the presidential elections, set to take place in October.

By then, though, the atmosphere surrounding the deal had begun to change. That summer, Aliyev had flatly rejected a Minaret proposal for a $15 billion redevelopment of Baku's downtown waterfront. The plan was "grandiose" and "insensitive," the President bluntly declared through an interpreter, after listening to a presentation. Minaret execs--who, like Viktor's investors, had thought the President was in Kozeny's pocket--were in shock. "That's the first time we said, 'Shit, things may not be working out,' " recalls Farrell.

Kozeny didn't return to Baku for another two months--an unusually long stretch. When he did arrive, it was to lay off half the Minaret staff. Finally, Kozeny's investors were getting worried.

The presidential election came and went. Still no announcement. Bourke and Fleck, escorted by Kozeny, flew to Azerbaijan to assess the situation. They were joined by an Omega executive named Eric Vincent, who was now minding the investment for the hedge fund. (Clayton Lewis had departed after racking up huge losses in Russia.) When they raised their concerns with their Azeri friends, they got the usual assurances. But this time, the encounters left them unsettled. Finally, it began to dawn on them that maybe they were being strung along. Maybe Kozeny didn't have the Azeris in his back pocket after all. Maybe the privatization of SOCAR wasn't just around the corner. Maybe the investors might not make "20, 50, 100 times" their money. In fact, they might lose every penny.

After they'd returned to the U.S., a deeply suspicious Fleck asked Kozeny about the expiration date on the vouchers: August 2000. Back when they all felt sure that the SOCAR announcement was imminent, nobody paid much attention to the expiration date. But what would happen to the vouchers, Fleck now asked, if August 2000 came and went with no privatization?

"Vallpaper," Kozeny responded with a hearty smile. "They make very nice vallpaper."

SWINDLER--OR SWINDLED?

By then the investors were coming to an even darker conclusion: They were being swindled. Kozeny had casually given Omega's Eric Vincent a report from the European Union detailing how much money the Azeri government had reported raising from the sale of privatization "options." Options were the Azeris' vehicle for milking foreign investors who wanted to exercise vouchers. Under the rules established by the Azeris, one option was required to "cover" one voucher. And the official price of an option, sold directly by the government, was about $25. To pay for the options it needed to cover its vouchers, Omega, along with the other institutional investors, had wired Kozeny about $100 million.

But the EU document reported that the government had received only about $13 million--total--from the sale of options. So where had the $100 million gone? There were only three apparent possibilities: Kozeny had pocketed the money. Azeri officials had pocketed the money. Or Kozeny and the Azeris had conspired to share the booty.

Cooperman and AIG quickly came to the conclusion that Kozeny was the crook. Though they'd never noticed it before, their option certificates carried dates from the fall of 1997. That was before Omega was even in the deal. More to the point, the government price for options back then was less than $1, rather than $25. The document Omega had forced Viktor to sign was supposed to prevent him from charging Omega any more than he'd paid to buy either vouchers or options. Cooperman now believed Kozeny had sold Omega options at $25 a pop that he had acquired in 1997 for less than $1--pocketing north of $90 million in profit. And Cooperman isn't the only one who believes that's what happened. Nuriyev recalls that Kozeny bought all his options--some 13 million--in 1997, paying between 50 cents and $1 apiece. Says Nuriyev: "He didn't buy any at $25." Antos Glogowski, president of AJG Investments, the only other large options purchaser at the time, recalls that in 1997, when the options were $1, "Viktor put in for a huge amount." Colin Caomin, a former Minaret executive, also confirms the story: "Viktor bought the options at the lowest prices. He bought them all--lock, stock, and barrel--then he passed the markup on." In doing so, says Caomin, Kozeny was able to pull much of his own money out of the deal.

Cooperman, not surprisingly, went ballistic. He demanded that Kozeny meet with him. When Viktor demurred, he angrily fired off a letter demanding an explanation. Kozeny never responded. To FORTUNE, however, the Pirate of Prague offered a simple explanation: The Azeris had double-crossed him. According to Kozeny, not long after Farrell and the Russians began buying vouchers on the streets of Baku, one of Farrell's Russians was tossed in jail--and his bag of cash and vouchers seized. The incident led to an audience with Aliyev, who told Viktor to see the boys at the State Property Committee for instructions on how to avoid more trouble. That, in turn, produced an accommodation: Kozeny would get back his money, his vouchers, and his Russian. But he would have to make his voucher purchases through a single broker--Nuriyev's brother. To Kozeny, the implication was clear: The President was getting in on the action. "You don't do anything there unless the people on top get their lick," he states. Omega's options were also purchased this way, says Kozeny, with the Azeris pocketing the missing millions.

Did this arrangement give Viktor pause? Hardly. "It's a totally corrupt country," he says. "I could accept that we buy them for a markup." Indeed, he believed the arrangement had certain, shall we say, benefits: "It's a more sophisticated way to bribe people."

Kozeny adds one final, nasty morsel: He says that Cooperman and the other Western investors knew all these details, an allegation the investors vehemently deny. Not that Kozeny is particularly worried about Cooperman's problems. "I've lost more money than anybody," he says. And besides, he adds, offering a classic Viktor rationale, if the deal had gone through, no one would have cared about being ripped off.

And what do the Azeris have to say about all this? They deny any government corruption, and say it's not their fault that the Westerners decided to hop in bed with Kozeny. Though Aliyev did not respond to FORTUNE's inquiries, Hafiz Pashayev, the Azeri ambassador to the U.S., says, "Westerners should invest in Azerbaijan, but not through Kozeny." For his part, Nuriyev insists that no Azeri officials took money from Kozeny. Nor, he says, did his brother sell vouchers to Viktor--he merely provided free advice about reliable sources for buying vouchers.

Which is not to say that Nuriyev didn't make a little money for himself. He freely admits giving his brother $10,000 to trade vouchers for him and then using his knowledge of Kozeny's dealings to reap $2.8 million in a matter of months. "I had some inside information," he shrugs, explaining that whenever Kozeny was buying, the price of vouchers would soar--and promptly fall when he stopped. Nuriyev offered to trade vouchers for government friends, but they turned him down. "The market economy," he sighs. "People don't understand it here. They're stupid."

But if he wasn't in cahoots with Kozeny, then why did he make it appear that way to Viktor's group? "These are financial guys," explains Nuriyev. "They need some relationship with inside guys, because they need some inside information. [They] thought, 'Barat is here because of Viktor.' It was not for Viktor. It was for the investors. They come to my country, they want to invest. I have to be polite, clever. I have to make them feel clever here. Viktor used those things."

As for how he could offer such blanket assurances that SOCAR would be privatized, Nuriyev shrugs again. "I believed it would happen," he says. Unbeknownst to the Westerners, he and others at the SPC were engaged in a power struggle with Aliyev's economic advisers, who opposed privatizing SOCAR anytime soon. Nuriyev's side lost--and he was ousted from the government.

One final question: Did Kozeny really have a "personal invitation" from Aliyev to do business in Azerbaijan? Nuriyev sneers. "Everybody has a 'personal invitation.' "

EPILOGUE

It is now six months before the options expire, and the Azeris are still making noises about privatizing SOCAR. But the Kozeny group has long since abandoned hope, and with good reason. When Viktor tried to use some vouchers to buy a stake in one small company, the Azeris refused to accept them. Early last year, Bourke and Vincent flew to Baku and pleaded with Aliyev for help. The old man was unmoved. More recently, Omega and AIG filed suit against Kozeny. They want the courts to seize control of the voucher project--and Kozeny's assets.

And Viktor? I returned to the Bahamas before Christmas and caught up with him at a Nassau restaurant called Cafe Johnny. He was dressed in a blue, double-breasted blazer and open-collared pink shirt, and hovering over a huge plate of cheese fries sprinkled with bacon. "Do they have these in America?" he asked, after greeting me with his "grip of steel." "They're my favorite!"

Kozeny told me that he was "downsizing." His yacht and jet were gone, as was the oceanfront house with the monster pool. He still had his Mercedes, though, and we were soon driving to Paradise Island, a new casino-resort across a drawbridge from Nassau. As we walked by the enormous yachts in the marina, I pressed him one last time. Did he sell Cooperman options for $25 that he'd bought for a buck apiece? Did he pocket more than $90 million?

"I wish," replied Kozeny. "If I'd made $90 million, there would be another party in Aspen." Of course, with lawsuits looming, it's also possible that Kozeny's "downsizing" is yet another maneuver, designed to protect what he has left. When it comes to Viktor, who can say for sure?

We walked on. "The time is ripe to do Internet deals," Kozeny told me excitedly, explaining that he was through doing business in Eastern Europe. Then again, he also thought he might like to teach business someday. He'd call his course "The Unregulated Environment." Or better yet, added the Pirate of Prague with a broad smile, "Experiences in the Real World."

Research assistance provided by JAN STOJASPAL in Prague.

WRITE TO PETER ELKIND AT: peter_elkind@fortunemail.com