Khodorkovsky & Lebedev Communications Center

Excerpt.

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First was a round of introductions. "Good day, Mr. Malahovsky. Just in case, let me introduce myself. I'm Platon Lebedev," Mr. Lebedev began. "Good day. Finally we got introduced. Members of the so-called organized group. We only meet each other in courts. You know, that's how I met Pereverzin!" Mr. Malahovsky explained. The courtroom chuckled, appreciating the irony of Mr. Malahovsky's words.
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Morning Session.

The trial did not start at the scheduled time. For about 40 minutes the courtroom kept waiting for Judge Danilkin to enter and to announce his ruling on whether Ms. Hardin will be allowed to testify as a specialist. Among those waiting were the oft-mentioned by prosecutor Lakhtin Mr. Kevin Dages and Ms. Laura Sekhar, along with Mr. Romanelli and Mr. Somov. Finally Judge Danilkin ascended the dais and began reading his ruling.

After a detailed summary of arguments from both sides, as well as of Ms. Hardin's personal statement, Judge Danilkin granted prosecutor Lakhtin's motion and disqualified Ms. Hardin. Judge Danilkin reasoned that Ms. Hardin was not engaged by the court or by the investigators. "She did not examine the materials of the current criminal case, which prevents this court from establishing the objectivity of her testimony as a specialist. This circumstance allows the court to doubt Ms. Hardin's professional competence as a specialist. The court considers that Ms. Hardin does not have the required special knowledge to [help] decide questions in this criminal matter, which precludes her from participating as a specialist," Judge Danilkin found grounds to disqualify this specialist, as well. [We would like to take our readers back about two and a half months, to show how Judge Danilkin is always able to find requisite grounds to deny defense an opportunity to question a specialist they engaged. Aptly, this involves Mr. Kevin Dages as well. The wrangling around Mr. Dages' ability to testify continued over June 3rd and June 4th. Finally, on June 7th, Judge Danilkin issued his ruling, disqualifying Mr. Dages and, effectively, launching a string of disqualifications of both Russian and foreign specialists. Unlike Mr. Dages, Ms. Hardin testified that she worked for a Russian corporation, was knowledgeable in Russian Accounting Standards (RSBU), worked with and consulted Russian and CIS companies for most of her career, had close familiarity with Russian corporate law and more than a close familiarity with Russian business practices. In addition, she consulted the Russian government on implementation of certain accounting rules and practices. However, this seemingly unassailable set of skills and expertise lost its value in two and a half months since Mr. Dages was disqualified for lacking precisely in these attributes. Thus, with the court's latest ruling, it became abundantly clear that, regardless of what kind of educational background, work experience and skills a specialist posses, he or she will not be able to testify in Khamovnicheskiy Court if engaged by the defense. -Eds.]

Ms. Hardin left the courtroom. After a short break, a middle-aged man, wearing a gray t-shirt and black pants, and handcuffed to a tall, silent guard, was escorted in. The courtroom met Mr. Vladimir Malahovsky. [Mr. Malahovsky would remain handcuffed throughout the day, with the guard standing silently by as the former Energotrade executive testified. -Eds.] Mr. Viktor Anoshin, Mr. Malahovsky's attorney, met his client and was allowed 10 minutes to prepare in the courtroom next door.

As the trial resumed, Mr. Lebedev filed an objection to the actions of the presiding judge. He objected to the court attributing to Ms. Hardin a statement that she was engaged to explain what actually happened to the laundered funds obtained by Mr. Khodorkovsky and him from sales of the embezzled crude oil. Mr. Lebedev insisted that Ms. Hardin said nothing of the sort and for the court to state something like this in the ruling was both inexcusable and unbecoming of someone who was a judge in the Russian Federation.

Mr. Malahovsky took the stand. There was a bit of confusion as Judge Danilkin asked where Mr. Malahovsky worked. With the judge visibly embarrassed, Mr. Malahovsky told the court that prior to his arrest he was the Executive Director of Energotrade. With preliminaries out of the way, Mr. Khodorkovsky took over.

Mr. Malahovsky testified that Mr. Khodorkovsky did not incorporate Energotrade and he had no knowledge of Mr. Khodorkovsky having any influence over the companies he worked for during his tenure at YUKOS. The witness confirmed that crude oil his companies purchased was transferred to refineries or was shipped directly to the ultimate purchasers. Mr. Malahovsky testified that crude oil purchase and sales transactions happened pursuant to a mutual agreement by both parties.

Mr. Malahovsky testified that he learned about YUKOS being the ultimate beneficiary of the crude oil transactions his companies participated in from the various documents found in his criminal case file and from arbitration court cases dealing with tax claims against YUKOS. Mr. Malahovsky confirmed that all of the companies he headed during his tenure at YUKOS had services agreements concluded with YUKOS-Moscow, YUKOS-FBC and YUKOS-RM.

Mr. Miroshnichenko took over. Mr. Malahovsky testified that there were no reasons or circumstances he was aware of which could influence his ability to testify objectively. He assured the court that he never met any of Messrs. Khodorkovsky and Lebedev's attorneys and none of them made an attempt to pressure him in any way.

Mr. Malahovsky testified that he joined YUKOS in December of 1999, heading Alta-Trade until May 2001. In May of 2001 he became General Director of Ratibor, where he worked until September 2002. From September 2002 until his arrest on December 10, 2004, he was the General Director of Energotrade. Mr. Malahovsky confirmed that each of the companies he worked for were direct subsidiaries of YUKOS. He was a hired employee and did not hold stakes in any of the companies he managed.

Returning to the service agreements entered into between the aforementioned companies and YUKOS-Moscow, YUKOS-FBC and YUKOS-RM, Mr. Malahovsky, after examining several copies of the agreements from the case materials, confirmed his signature and explained the purpose of the services arrangements. He explained that the agreements were necessary to allow for normal business functioning of the companies he managed. The treasury, accounting and crude oil counter party services were provided by the three YUKOS subsidiaries, which allowed his companies to get professional services while operating with a small staff.

Mr. Malahovsky testified that his responsibilities and functions as a General Director were established by the companies' by-laws and by the Civil Code. Mr. Malahovsky described the "normal functioning" of his companies as being able to enter into crude oil purchase and sales agreements, where he paid less for crude oil when buying and obtaining more for it when selling. Mr. Malahovsky confirmed that, based on the service agreement, all counter-parties were found by YUKOS-RM. Crude oil exports were made through three commission agents - YUKOS, YUKOS Trans Service and YUKOS Export Trade.

Mr. Malahovsky testified when he was hired to manage Alta-Trade he was provided with assurances that this and any other company he may manage will be completely legitimate. Mr. Malahovsky explained that in addition to the aforementioned assurances he learned for himself that it was indeed so.

Mr. Miroshnichenko asked Mr. Malahovsky whether he was ever aware of any laws, regulations, or business practices, stating that trading companies had to store and to ship the crude oil they purchase by using their own resources. Mr. Malahovsky replied that the first time he ever heard such an assertion was from the prosecutor in his criminal case. "If someone wants to travel from one city to another, he does not buy the train and train tracks - he buys a railroad ticket. It would have been unusual for my company to have competing capabilities with Transneft. That would have made no sense," Mr. Malahovsky explained that absurdity of what the government was asserting.

Mr. Malahovsky testified that while accounting services for his companies were provided by YUKOS-FBC, he provided all necessary documentation and verified the resulting reports and statements. Furthermore, his companies were audited regularly and he had no reasons to doubt the auditors, who never found any major financial or accounting issues.

Mr. Malahovsky testified that as an executive he knew that he could refuse to sign any contracts which violated the by-laws or the Civil Code. He explained that when he was the head of Alta-Trade, Ratibor and Energotrade, he never considered the question of why there was a chain of companies involved in crude oil sales. From the materials in his criminal case he learned of the allegations that the purpose was to achieve a lower tax rate for YUKOS.

Mr. Malahovsky testified that while the contracts presented by YUKOS-RM already contained the price, he would check it to make sure that it tracked the regional average prices. Mr. Malahovsky explained that he was able to do so by looking at the price data provided by KORTES and, beginning in 2002, from the information e-mailed to him on a regular basis by Tomskneft.

Mr. Malahovsky learned from the materials in his criminal case that crude oil production subsidiaries were profitable. According to Mr. Malahovsky, what these companies received for the crude oil not only covered production costs but allowed these companies to grow.

He explained that on a monthly basis he would check to ensure that all contract payments were made appropriately. He testified that any outstanding debt was insignificant, averaging at most 1-2% of the total amount. Asked if he heard of crude oil shortages, Mr. Malahovsky testified that once in a while 10 tons could go missing, due to theft on the railroad or something similar happening.

Mr. Malahovsky explained that crude oil could not have been purchased at world prices from production subsidiaries. "In 2005 I tried to calculate what we would have been paying for gasoline if [purchasing crude oil in the production regions at world prices]. At the time I came up with 35 rubles per liter, instead of 14," Mr. Malahovsky explained the well known, but ignored, economics of the government's assertions.

Finally, Mr. Miroshnichenko asked whether Mr. Malahovsky was ever forced to act against his will, through mental or physical pressure. Mr. Malahovsky confirmed that he never was. "Do you know anything about embezzlement of the entire crude oil produced by YUKOS subsidiaries from 1998 through 2004?" Mr. Miroshnichenko asked the question being asked of all witnesses. "It would be difficult to imagine anything more absurd!" Mr. Malahovsky replied.

After a short break, during which Mr. Malahovsky conferred with his attorney while remaining handcuffed to the prison guard, Mr. Lebedev took over. First was a round of introductions. "Good day, Mr. Malahovsky. Just in case, let me introduce myself. I'm Platon Lebedev," Mr. Lebedev began. "Good day. Finally we got introduced. Members of the so-called organized group. We only meet each other in courts. You know, that's how I met Pereverzin!" Mr. Malahovsky explained. The courtroom chuckled, appreciating the irony of Mr. Malahovsky's words.

Mr. Malahovsky testified that neither Ratibor nor Energotrade had any tax-related issues while he managed the companies. As far as he was aware, Energotrade, now part of Rosneft, had none to this very day. He explained he was surprised to discover that while YUKOS was hit with multi-billion dollar tax claims, none of the YUKOS traders were taken to court.

Mr. Malahovsky noted that, to this very day, he was not aware of a single crude oil purchase contract entered into by the companies where he worked being contested by anyone, included the counter-parties, or having been found violating any legislation. Mr. Malahovsky confirmed that he personally signed the tax returns of the companies he headed and knew that the companies paid all taxes.

Mr. Lebedev, turning to the text of the indictment, asked Mr. Malahovsky about the orders the latter received directly from Mr. Lebedev, as was asserted by the government. Mr. Malahovsky assured the court that he never received any orders from Mr. Lebedev, in person, over the phone or through any third parties. Mr. Malahovsky reminded the court that, considering he met Mr. Lebedev just a bit earlier, he would not have expected to receive any orders from him when he worked for YUKOS.

In another excerpt from the indictment, Mr. Lebedev read a passage where the government insisted that he assigned a role to Mr. Malahovsky. Mr. Malahovsky was emphatic, telling the court that he never met Mr. Lebedev, he never received any instructions from him and he had no idea what role the government was talking about.

Afternoon Session.

Majority of the afternoon session was spent by the prosecutors investigating some other criminal case, as barely any questions touched on the subject matter in Messrs. Khodorkovsky and Lebedev's trial. Prosecutor Smirnov was the first one to cross-examine Mr. Malahovsky.

Mr. Smirnov was interested in finding out about a company called Yauza-M and what funds Mr. Malahovsky was paid by this company through his bank account. Without explaining how this was relevant to the current proceeding, Mr. Smirnov questioned Mr. Malahovsky about a Mr. Stepanov who, as it turned out, invited Mr. Malahovsky into a simple partnership and, using an account opened by Mr. Malahovsky at DIB, transferred a little more than 150 million rubles into Mr. Malahovsky's bank account, then asked Mr. Malahovsky to purchase securities. The transaction took place in 2000 and Mr. Malahovsky, after handing over the securities to Mr. Stepanov never heard from him again. However, prosecutor Smirnov demanded to know where the money went and argued that Mr. Malahovsky withdrew the money for personal use.

Mr. Lebedev told the court that defense agreed not to object to any of the questions posed by the prosecution, but asked the court to intervene when the government veered off the subject matter at hand. Mr. Lebedev told the court that Mr. Smirnov's questions were a perfect example, as neither Yauza-M nor Mr. Stepanov was mentioned once in the indictment.

Mr. Smirnov demanded to know whether the companies Mr. Malahovsky managed could have gone about their business without concluding service agreements with YUKOS-affiliated subsidiaries. Mr. Malahovsky explained that his companies purchased crude oil from YUKOS production subsidiaries. According to him, his companies would be able to function without the YUKOS service companies, but it would have required a lot of organizational and financial investment.

Mr. Malahovsky testified that his salary was determined by the founders of the companies he managed. He confirmed that Alta-Trade and Ratibor continued to exist and to function after he transferred from them.

Mr. Malahovsky testified that he could and did refuse to sign the crude oil purchase contracts when he thought the terms put his company at a disadvantage. He explained that he could send the contract back to YUKOS-RM with notes on the changes he wanted made. One of the more common issues was when the price did not reflect transportation costs, which went against his company's bottom line. According to Mr. Malahovsky, the issue of crude oil pricing almost never came up - domestic prices did not vary significantly and there were strict tax code limitations on the interval of variations. He repeated that he was able to verify domestic average pricing based on KORTES price summary reports. "Unfortunately, I did not have access to them during my own trial," Mr. Malahovsky noted.

Mr. Smirnov asked whether Mr. Malahovsky needed to travel to the place where crude oil was transferred to sign the transfer acts. There was laughter in the courtroom, as Mr. Malahovsky explained that with modern communications there was no necessity to travel anywhere and these documents could be signed anywhere, as well.

Mr. Malahovsky testified that he knew that Mr. Khodorkovsky was the head of YUKOS. Just as with Mr. Lebedev, Mr. Malahovsky testified that he never met Mr. Khodorkovsky.

Mr. Smirnov asked whether Mr. Malahovsky knew that YUKOS was a vertically integrated holding. Mr. Malahovsky testified he was aware of that fact and that all of the companies he managed were part of the YUKOS consolidation perimeter. Asked how he knew that, Mr. Malahovsky testified that he provided information to auditors on regular basis and saw the consolidated financial reporting of YUKOS. He confirmed that the profit of the companies he managed was consolidated into YUKOS.

Mr. Smirnov asked what Mr. Malahovsky knew about "transfer pricing," but refused to explain what he meant by the term, telling Mr. Malahovsky to answer which ever way he understood the question. Mr. Malahovsky told the court that transfer pricing was used but did not differ from regional prices. Mr. Smirnov told Mr. Malahovsky that that's what he thought - but Mr. Malahovsky explained that it wasn't his opinion but information which was reflected in KORTES summary reports.

After a short recess Mr. Smirnov tuned to questions about YUKOS Capital S.a.r.l. and what Mr. Malahovsky knew about the company. Mr. Malahovsky did not remember the company, at first. After being shown several loan agreements concluded between YUKOS Capital and Energotrade, with Mr. Malahovsky signing on the latter's behalf, the witness told the court that, due to a passage of time and where he's been serving his sentence, he did not remember what the purpose of the loan was.

Mr. Smirnov motioned to read transcripts of Mr. Malahovsky's interrogations. Mr. Rivkin asked what material contradictions the government discovered in Mr. Malahovsky's testimony and heard back that there was contradictory testimony about Yauza-M and Mr. Stepanov. Mr. Lakhtin, raising his head from the notebook's screen, insisted that the transcripts provide extensive details concerning Mr. Malahovsky's relationship with Mr. Stepanov.

Mr. Lebedev objected, informing the court that the prosecution, pretending that Mr. Malahovsky was interrogated as a witness, would attempt to read into record the testimony he gave both as a suspect and as an accused. Mr. Lebedev explained that the prosecutor insisted on the impossible - his testimony as a witness here could not contradict the testimony he gave as a suspect or as an accused in a different case. The law was clear - only testimony of a witness, who testified as a witness during the preliminary investigation, could be read in court. Judge Danilkin asked to see the transcripts. He told the prosecutors that he did not see any contradictions and ruled that the motion was premature, as the prosecution failed to exhaust their questions. Mr. Lakhtin insisted that Mr. Malahovsky mentioned specific sums during his interrogation, but the judge corrected the prosecutor by noting that all sums were mentioned by the investigator.

Mr. Smirnov took a different track. He asked if Mr. Malahovsky's testimony today differed in some way from what he testified to in Basmanny court during his own trial. Mr. Malahovsky explained that in 4 years not all things may have remained as clear in his memory, but he did not think there was any substantial difference. "So how did that court weigh your testimony?" Mr. Smirnov asked with an unfriendly smile slowly turning up on his face. The gallery began to rumble with outrage. "12 year prison sentence," Mr. Malahovsky replied without a pause.

After another short recess, Mr. Smirnov asked if the companies Mr. Malahovsky managed were audited. Mr. Malahovsky explained that each of the companies was audited regularly and no issues with his companies were ever uncovered. However, just as with the KORTES price summaries, the government did not include a single audit in his criminal case file, although they did include the payment confirmations for the audits that were performed.

Prosecutor Lakhtin took over. The courtroom heard the usual inquiries about why the witness joined YUKOS and was he paid enough. Soon the prosecutor, during a barrage of mostly struck questions, offered his view on Mr. Malahovsky's work at YUKOS. "You were paid too much for the amount of work you did!" the prosecutor yelled at Mr. Malahovsky after another salary-related question was struck by the court. The prosecutor would not let up, resulting in an exchange where Mr. Malahovsky and he inquired of each other whether their workload grew over time. Finally, Judge Danilkin told the prosecutor to stop the discussion, because the witness was testifying to the court.

Soon it was Judge Danilkin's turn to yell at the prosecutor. Prosecutor Lakhtin, once again insisting that there were material contradictions in Mr. Malahovsky's testimony, motioned to read the transcripts of Mr. Malahovsky's interrogations. Judge Danilkin told the prosecutor that he did not ask the questions which were asked by investigators. "We asked! But despite being warned of criminal liability for refusing to testify, he would not answer!" Mr. Lakhtin yelled. "Stop, [Mr. Lakhtin]! Do not try to mislead the court - the witness was not warned about Section 308!" Judge Danilkin raised his voice at the prosecutor. [Section 308 of the Criminal Code describes sanctions for refusing to testify. -Eds.]

The prosecutor finally took the court's hint and began to question Mr. Malahovsky using the interrogation transcript, mostly on Mr. Stepanov and Yauza-M. Mr. Malahovsky explained that he did not remember when he talked to the investigator, as he spent two months at the General Prosecutor's Office being questioned over and over on the same topics. Mr. Lakhtin began insisting once again that the need to read the transcripts was clear.

Mr. Lebedev objected, once again informing the court that Mr. Malahovsky was never questioned as a witness during any preliminary investigations. He insisted that the prosecution had the right to continue to question Mr. Malahovsky, but that was as far as it went. Mr. Rivkin added that the indictment had no mention of any Yauza-M and he did not understand how the sums that Mr. Lakhtin sought so hard to read were relevant to the case. Mr. Khodorkovsky told the court that the prosecutor always demanded for Mr. Khodorkovsky to cite to the indictment, so he was asking the prosecutor to point out where in the indictment Yauza-M was mentioned.

The prosecutor continued to insist on reading the transcripts. As these things are inevitably resolved, Judge Danilkin granted the prosecutor's motion, albeit partially. Mr. Lakhtin read the portion of the transcript concerning Mr. Stepanov and Yauza-M. Mr. Malahovsky, after the prosecutor read the transcript, told the court that he did not know where the contradictions were - he never received the funds. He confirmed his signature on the interrogation transcript. Prosecution had no more questions.

Mr. Lebedev asked Mr. Malahovsky to tell the court where Energotrade's office was based. Mr. Malahovsky testified that the company's office was based in Mordovia and was managed by Mr. Malahovsky's deputy. As the staff of the company grew, so did the office space they leased.

Mr. Malahovsky confirmed that Energotrade paid all crude oil purchase, commission sales and transportation expenses, as required by various contracts. Mr. Malahovsky confirmed that, to his knowledge, not one of the crude oil purchase contracts was voided or was contested in court.

Mr. Khodorkovsky asked whether during his trial Mr. Malahovsky ever asked the court to summon Mr. Khodorkovsky to testify. Mr. Malahovsky explained that there were motions to that effect filed, but not by him personally.

Mr. Lebedev asked whether anyone in Basmanny Court asked Mr. Malahovsky about Mr. Lebedev. Judge Danilkin struck the question. Mr. Lebedev objected to the actions of the presiding judge, explaining that prosecutor Lakhtin was just allowed to read a portion of an interrogation transcript on a completely irrelevant subject, while he was asking specifically if anyone even bothered to find out whether Mr. Malahovsky knew Mr. Lebedev. Mr. Lebedev reminded the court that about 100 pages in the indictment discusses how Mr. Lebedev instructed Mr. Malahovsky to act a certain way. While Judge Danilkin reminded Mr. Malahovsky that the question was struck, Mr. Malahovsky managed to reply that no one asked him about Mr. Lebedev.

Mr. Malahovsky confirmed that the companies he managed sold petroleum products and crude oil. Some of the crude oil was being sold for export to China. A moment of laughter followed when Mr. Lebedev asked whether Rotterdam was in some way connected to China, explaining that the government insisted that the crude oil should have been sold at Rotterdam prices. Finally, Mr. Malahovsky testified that no one ever approached him with an offer to purchase the crude oil at Rotterdam prices in Russian regions.

Mr. Lakhtin made a final attempt to find out whether Mr. Malahovsky remembered anything more on the YUKOS Capital loan to Energotrade. Judge Danilkin struck these questions.

Judge Danilkin announced that Mr. Malahovsky was "free to leave." "You mean completely free?" Mr. Malahovsky did not loose his sense of humor at the court's turn of a phrase.

After Mr. Malahovsky was escorted out, defense attorneys informed the court that Mr. Lebedev was ready to start testifying on Monday.

The trial will resume on Monday, August 23, 10:00 Moscow Time.