Khodorkovsky & Lebedev Communications Center

Morning Session.

Before the trial resumed, a group of cameramen was allowed into the courtroom to shoot several minutes of Messrs. Khodorkovsky and Lebedev preparing for today's hearing. Two photojournalists were on hand as well. After less than five minutes this group was escorted out and was replaced by the prosecution entering the courtroom. A few minutes later Judge Danilkin ascended the podium. He immediately raised his voice at two gallery members who made a few chuckles, telling them that if they want they can laugh in the hallway.

With that, Mr. Lebedev began cross-examining Mr. Zubkov. After Mr. Zubkov explained to the court that, although he attended one of the early meetings concerning the proposed listing of YUKOS on the NYSE, he never met Mr. Lebedev in person, Mr. Lebedev tuned to the first set of documents he wanted to show to the witness. These were GML's disclosures to YUKOS management about ownership structure of YUKOS shares, GML's ownership, and voting arrangement for YUKOS shares controlled by YUKOS Universal Ltd. The second document was the accompanying press release. After Mr. Zubkov confirmed that he was familiar with the document addressed to YUKOS management, he confirmed, point by point, that he knew of no facts that could contradict information disclosed about ownership structure of YUKOS shares, GML's ownership, and the voting arrangement for YUKOS shares controlled by YUL. The last one specifically stated that Mr. Lebedev had the deciding vote when it comes to GML's decisions concerning YUKOS shares controlled by YUL.

Mr. Lebedev turned to the types of standards under which YUKOS drafted its financial statements and its auditors conducted audits. Mr. Zubkov testified that YUKOS used Russian Accounting Standards when drafting mandatory financial statements under Russian laws and US GAAP to draft consolidated financial statements. PricewaterhouseCoopers applied US GAAS (Generally Accepted Accounting Standards) to audit YUKOS US GAAP consolidated financial statements. Mr. Zubkov confirmed that PwC, in addition to being the official auditor of YUKOS, audited YUKOS crude oil production subsidiaries, Yuganskneftegaz being one those. However, about the latter he was uncertain concerning the entire time period of 2000 through 2004.

Mr. Lebedev asked a series of questions about specifics Mr. Zubkov's work, both in his individual capacity and as a member of a group of PwC partners and employees working with YUKOS and its production subsidiaries. Mr. Zubkov testified that, although Russian Accounting Standards differed from US GAAP, the primary company data used in drafting financial statements according to each standard came from the same sources within YUKOS and its subsidiaries. Mr. Zubkov explained that the purpose of an audit is to verify that the company's financial statements were accurate. To do that, a series of tests is performed on selected transactions. During the audit, the group builds and maintains a repository of documents used, which may not necessarily become part of the final auditor's report or the financial statements. According to Mr. Zubkov, the "YUKOS working group" was not a formalized section within the Moscow office of PwC, and could have included employees who worked on Yuganskneftegaz audits.

Mr. Zubkov testified that, although he was never involved in auditing Yuganskneftegaz, he was aware that the company produced and sold crude oil. His connection to Yuganskneftegaz involved researching tax related litigation, arising from issues about corporate profit tax and natural resources tax. Mr. Zubkov testified that, from what he remembered, during the time he was involved in that task, none of the tax cases resulted in any significant additional tax liabilities.

Mr. Lebedev asked whether Mr. Zubkov was aware that Yuganskneftegaz was one of the civil complainants in the case. Mr. Zubkov was not and told the court that none of the investigators who interrogated him ever mentioned this particular circumstance. Answering additional questions, Mr. Zubkov confirmed that, although he was not a member of Yuganskneftegaz working group, group members would have been required to report any crude oil embezzlement, if uncovered during an audit. As far as Mr. Zubkov was aware, no crude oil embezzlement was discovered during Yuganskneftegaz audits and that Yuganskneftegaz data was contained in YUKOS consolidated financial statements. Mr. Lebedev asked if Mr. Zubkov may have come across commentary in the audit repository that described crude oil embezzlement, but Mr. Zubkov never saw this type of commentary.

Mr. Lebedev asked what PwC was auditing. "Revenues from sales of crude oil," Mr. Zubkov replied. [Mr. Zubkov, in addition to testifying that he was unaware of instances of crude oil embezzlement, would continue to answer audit and financial statements related questions using words like "sale," "revenue," "costs," and "profit." We remind our readers that Messrs. Khodorkovsky and Lebedev are charged with embezzlement of crude oil, something that, almost a year into the public proceeding, even a single witness from inside or outside YUKOS is yet to confirm. -Eds.] He went on to explain that the Moscow office did not audit crude oil export sales. Those audit operation were performed by PwC Geneva office, with the Moscow office using their information. Prompted by Mr. Lebedev's questions, Mr. Zubkov explained that during his work on YUKOS audits, export sales were made through Petroval S.A., based in Geneva, acting as a commission agent for Routhenhold Holdings Ltd. After arranging sale of crude oil shipment, Petroval transferred the funds, minus commission, to Routhenhold. According to Mr. Zubkov, Routhenhold purchased and had ownership rights to crude oil purchased from Russian crude oil traders. Information on Routhenhold came from the PwC Cyprus office.

After a five minute break Mr. Lebedev asked Mr. Zubkov to look at PwC's "Report of Independent Accountants" accompanying YUKOS consolidated financial statements containing information for 2000, 2001 and 2002. Mr. Zubkov testified that PwC issued "clean opinions." ["Unqualified Opinion," also know as "Clean Opinion," indicates that financial statements are free from material misrepresentations and are in accordance with GAAP. -Eds.] Discussing consolidated financial statements, Mr. Zubkov confirmed that although the actual documents contained consolidated information from the parent company, its subsidiaries and certain affiliated companies, consolidated financial statement was considered to be the financial statement of a single entity, YUKOS. Mr. Zubkov, answering a series of questions, clarified what he meant by the term "affiliated," explaining that he considered it to mean "controlling financial interest." He said, hedging his response, that "controlling financial interest" was almost always present when a company was consolidated. He added that a company would also be consolidated where YUKOS had an influence on that company's corporate policy. As an example, Mr. Lebedev asked why YUKOS never consolidated Gazprom. Mr. Zubkov told the court that, for a time, YUKOS owned about 1% of Gazprom and probably did not play a role in influencing its policy. Mr. Lebedev noted that he had to use these kinds of examples because the prosecution made a jumble out terms like "affiliated," "controlled" and "dependent."

Afternoon Session.

As the hearing resumed, Mr. Lebedev began by asking whether audit procedures could have revealed embezzlement of 350 million tons of oil between 1998 and 2003 from YUKOS and its production subsidiaries. Mr. Zubkov, after taking a pause, told the court that he had difficulty answering what he considered a "hypothetical question."

Mr. Lebedev turned to the topic of YUKOS purchasing Bank MENATEP collection rights. Answering a series of questions while examining YUL resolution and YUKOS financial statements, Mr. Zubkov testified that, while not privy to exact details of all transactions involved, he did not know of any facts to disprove information contained in a resolution by YUL directors, where over $224 million in Bank MENATEP collection rights, acquired from YUKOS, were being written off. Furthermore, Mr. Zubkov testified that he saw a document during work on a 2000 audit which listed all collection rights that were assigned to YUL. Finally, Mr. Zubkov, while examining the draft SEC Form F-1, [Adding a moment of levity, Mr. Zubkov asked for an English-language version, once again telling the court that he preferred to work with originals. -Eds.], testified that the information about YUKOS receiving over 89 million of its shares and $30 million USD in cash during sale of Bank MENATEP collection rights was correct. Mr. Lebedev touched on another transaction that involved YUL and a YUKOS subsidiary, in which YUKOS, in December 2000, purchased 4% of its shares from YUL. Mr. Zubkov, after examining additional information in YUKOS financial statements, confirmed that by the end of 2001 the price of those shares more than doubled. [These were in addition to the fact that YUKOS used some of Bank MENATEP collection rights to offset its own liabilities before the bank. -Eds.]

Mr. Lebedev, returning to audit procedures, asked whether PwC simply followed management's assessments, or used their own resources to uncover risks. Mr. Zubkov testified that while PwC could rely on secondary resources, like the news media, it mainly used the information provided by the company. Mr. Zubkov explained that PwC could disagree about risk assessments of certain episodes in the company's activity, which meant that these would have to be resolved before auditor's report was signed.

Mr. Lebedev asked if Mr. Zubkov, who was actively involved in the 2001 audit, heard about any crude oil embezzlement accusations made by Kenneth Dart in the news media or in any lawsuits filed during that year, as alleged in the indictment. Mr. Zubkov testified that whatever issues Kenneth Dart had with YUKOS happened and were resolved in late 1990s, but he couldn't be more specific. He confirmed that if his colleagues saw anything in the media concerning crude oil embezzlement, a question would have been posed to YUKOS management concerning the issue.

Prior to turning the floor over to Mr. Khodorkovsky, Mr. Lebedev asked about Mr. Zubkov and Ms. Kovalihina's exchange concerning "establishing YUKOS privatization cost." [This was one of the formulations to which Mr. Lebedev objected yesterday. -Eds.] Mr. Zubkov, confirming that Russian Fund for Federal Property (RFFI) published all privatization related documents after privatizing federal asset, explained that he was attempting to explain that he was asked to analyze the chain of transactions ending with YUL controlling majority of YUKOS shares. Mr. Zubkov confirmed that he was looking for all the documents related to that event and was not attempting to analyze costs.

After a short break, requested by Mr. Zubkov, Mr. Khodorkovsky took over and returned to questions about YUKOS consolidated financial statements. Mr. Zubkov, examining information documents in Volume 131, confirmed that information he was looking at seemed to match with his recollections. However, looking at a Russian language translation of one of the 1999 statements, Mr. Zubkov told the court that to be certain he had to see an English version of a US GAAP consolidated statement, because the Russian may have been a draft. Mr. Khodorkovsky lamented that he, too, would have liked to see an English version.

Mr. Zubkov testified that YUKOS financial statements were available through the company's website and were widely discussed in business press. Furthermore, after the company began coming out with quarterly statements, Mr. Misamore, YUKOS CFO, participated in quarterly conference calls with investors and journalists.

Mr. Khodorkovsky asked directly, after quoting from Mr. Zubkov's explanation of what the latter meant by the "YUKOS group of companies" and explaining that the prosecution accuses Mr. Lebedev and him of embezzling 350 million tons of crude oil between 1998 and 2003, whether YUKOS sold crude oil to third parties. Mr. Zubkov testified that YUKOS sold crude oil and petroleum products to third parties, with the revenue being reflected in consolidated financial statements.

Mr. Zubkov continued to look at various parts of the consolidated statements. He continued to confirm that the figures he was looking at - profit, operating costs and others - were similar to what he remembered. Mr. Zubkov, when asked whether PwC conducted any analysis to make sure that YUKOS profit ratios did not abnormally exceed that of the industry, testified that part of the audit consisted of an analytical review. He explained that there was a mandatory analysis of the company's balance sheet and export sales. A comparison of average monthly prices at which crude oil was sold to market price data would be made. Mr. Zubkov pointed out that crude oil sales took place in various regions, which made market data collection difficult. According to Mr. Zubkov, it wasn't mandatory to reflect movement of crude oil within consolidation perimeter.

Mr. Khodorkovsky asked whether PwC found any information which suggested fraud or embezzlement. Mr. Zubkov testified that he could not remember anything specific that came to mind.

Mr. Zubkov explained some of the nuts and bolts of creating consolidated financial statements. Data was obtained from subsidiaries, added and corrected, delivering final results. In turn, PwC would determine which subsidiaries provided data and what needed to be tested. Mr. Zubkov confirmed that tax statements were one type of documents examined during the aforementioned process.

Mr. Khodorkovsky asked whether consolidated financial statements contained figures for undistributed profit. Specifically, he wanted to find out if part of the undistributed profit could disappear from one year to next year. As an example, Mr. Khodorkovsky referred to a trading company with undistributed profit being consolidated one year and disappearing the next year. Mr. Zubkov, showing lines containing figures for undistributed profit, testified that he could not recall instances where part of undistributed profit simply disappeared.

Mr. Khodorkovsky was ready to go into new round of questions, but Ms. Ibragimova told the court that the witness looks a bit tired, but may be too shy to tell the court. Mr. Zubkov, while telling the court that he worked long hours, did not mind if the hearing ended sooner. Mr. Khodorkovsky, who looked to have had plenty of questions, did not object to adjourning.

The trial will resume on Tuesday, March 9, 11:30 Moscow Time.