Khodorkovsky & Lebedev Communications Center

The trial resumed with prosecutor Lakhtin replying to the two pending defense motions from two weeks ago. First, on the Moscow Arbitration Court decision from one of the YUKOS tax cases, the prosecutor told the court that the copy of the court decision was not been verified by the court, but by YUKOS, which had no right to verify anything. According to the prosecutor, this would be reason enough to deny the motion. But, as he continued, the document packet submitted by the defense, which contained the decision, included other documents, with defense failing to provide the ground for their relevance. [Mr. Lakhtin deliberately avoided mention of Mr. Dyatlev's explanation that the court decision in question was contained within a document packet sewn through with a notary's seal. This prevented the defense from extracting the court decision from the packet without tearing through the notary's seal. -Eds.]

Next, Mr. Lakhtin told the court that the defense motion to enter into evidence and to examine additional YUKOS US GAAP financial reporting documents should be denied, also. According to the prosecutor, Messrs. Khodorkovsky and Lebedev created two parallel accounting systems within YUKOS: The first set of financial reporting, drafted according to Russian Accounting Standards, did not show "the real operations with crude oil" and was provided to YUKOS shareholders and tax authorities. The second, drafted according to US GAAP, was to conceal crimes and to keep the profits to themselves. According to the prosecutor, Messrs. Khodorkovsky and Lebedev showed the US GAAP reporting to foreign investors only, in order to sell more of their shares in YUKOS - all in an effort to further enrich themselves. Mr. Lakhtin insisted that with these "facts" now made known to the court, the US GAAP reporting in question cannot be considered evidence of the lack of embezzlement and money laundering.

Mr. Lakhtin insisted that the government was not the only one to doubt the authenticity of the information contained in YUKOS US GAAP reporting. According to the prosecutor, the absence of negative commentary from international financial institutions and world-recognized auditing firms after PwC recalled all of the auditor's reports served as proof of the industry-wide agreement of the falsification of the YUKOS financial reporting.
Mr. Lakhtin found invidious motives for the defense attempting to add these documents to the case file. According to the prosecutor, should the court grant the defense's motion, defense attorneys will start reading these documents into the record - thus impermissibly delaying the trial further.

In addition, the prosecutor argued that there were reasons to doubt the authenticity of the documents' translation. According to the prosecutor, the court saw, on numerous occasions, the poor quality of translators engaged by the defense.

Prosecutor Lakhtin returned to arguing that PwC recalled its auditor's reports, explaining that it could no longer rely on YUKOS' financial reporting, with no one in the international financial community issuing negative commentary on the recall. Mr. Lakhtin accused defense attorneys, in their attempts to convince the court of the necessity to include the US GAAP financial reports in the case file, of being unprofessional. According to the prosecutor, all that defense attorneys needed to do was to visit the PwC or the SEC websites and to read the rules and guidelines on what was contained in financial reporting drafted according to US GAAP. Instead, according to the prosecutor, defense continued to attempt to convince everyone that the only way to steal crude oil was to drain in from the pipeline, and to embezzle revenue was to physically take the money.

After the prosecutor was finished, Judge Danilkin DENIED both motions. According to Judge Danilkin, the copy of the Arbitration Court decision the defense offered into evidence was not verified properly. Concerning the YUKOS US GAAP reporting, Judge Danilkin ruled there were no legal grounds based on the arguments offered by the defense to allow the court to add these documents to the case materials.
Mr. Dyatlev told the court that the defense will continue to present documentary evidence. For the rest of the hearing Mr. Dyatlev read into record the rest of the repeat tax audit of YUKOS for 2001, which he began reading last Wednesday.

One by one, tax inspectors "analyzed" the business activity of YUKOS trading subsidiaries which were based in zones with preferential tax treatment, mostly in Mordovia and Evenkia. The courtroom heard familiar company names - YUKOS-M, YU-Mordovia, Alta-Trade, Ratibor, Fargoil, Mars XXII and others. Invariably, tax inspectors concluded that these companies did not conduct any "real business activity" in the place of their incorporation. One of the most common factors in each analysis was the tax inspectors' insistence that these companies failed to build oil pipeline networks and crude oil/petroleum products storage/distribution facilities in the place of their incorporation. According to the tax inspectors, all of these companies, having YUKOS as a common denominator, were involved in "artificial movement of crude oil" between each other, while YUKOS production subsidiaries delivered the crude oil directly to the ultimate consumer. [Our readers may recognize a familiar formulation from the indictment. Of course, the tax inspectors were "concerned" with under-payment of taxes, while the prosecution now argues that there were no sales transactions taking place and all of the aforementioned companies were "instruments of embezzlement." -Eds.] According to the tax inspectors, sales of crude oil by YUKOS production subsidiaries to YUKOS trading subsidiaries, the subsequent refining of some of that crude oil at YUKOS refining subsidiaries, then the sale of the refined petroleum products by YUKOS trading subsidiaries was the proof that YUKOS had the ownership rights. Therefore, all activity of the aforementioned traders was imputed to YUKOS. The consequence was twofold: YUKOS was charged with underpayment of taxes, while at the same time it was determined that YUKOS failed to file timely VAT payment disclosures in connection with export sales.

As Mr. Dyatlev continued reading through the repeat tax audit, it became apparent that tax inspectors were in such a hurry to complete their work that they failed to adjust the company names when copying and pasting their conclusions. For example, Mr. Dyatlev read a subsection of the audit examining activities of OOO Nefteservice, but the conclusion of the subsection stated "Therefore, OOO East-Siberian Service Company did not conduct any business activity in Mordovia."

Around 16:30, Mr. Dyatlev asked the court to call a short recess, after which defense intended to file three motions. "No recess and you can file your motions tomorrow at 9:30. Keep reading," Judge Danilkin told Mr. Dyatlev, curtly.

After reading through the rest of subsections analyzing activities of other YUKOS subsidiaries, Mr. Dyatlev turned to the final section in the document, which contained the conclusions for the entire audit. The tax inspectors discussed the importance of analyzing whether a tax payer was "acting in good faith." They concluded that YUKOS "was acting in bad faith" and should be held accountable for the underpayment of taxes, along with penalties and fines.

Concluding at 17:15, Mr. Dyatlev, reminding the court that he was asked to save his commentary until after he concluded reading the audit, asked the court to take note of several important items. First, Mr. Dyatlev told the court that defense will motion to summon all of the tax inspectors to testify, as the motion defense filed in March of 2009, which included the names of these tax inspectors, was denied as being premature. Second, Mr. Dyatlev asked the court to note that the audit of all YUKOS activity for 2001 took only 14 days to conduct, as disclosed in Section 1.1 of the audit. Third, while the audit itself was 154 pages long, it lists as supplements and exhibits additional 610 pages of documents, none of which are found in the case materials. However, as the court heard, tax inspectors continuously referred to the supplements as being part of the audit. Fourth, Mr. Dyatlev asked the court to note that the tax inspectors, without any reason which was apparent from the tax audit, chose to separate all of the YUKOS subsidiaries they analyzed into two groups, with taxable activities of the first group of companies being added to YUKOS's taxable activity, while for the second group of companies the tax inspectors simply stated that they were not independent of YUKOS. Mr. Dyatlev asked the court to note that all of the companies in the first group - Ratibor, Ratmir, Fargoil, Alta-Trade and others - were consolidated with YUKOS, as the court could see for itself from the list of YUKOS consolidated companies found in Volume 131 of the case materials. Finally, Mr. Dyatlev asked the court to note that for each of the types of tax that was alleged to have been underpaid, the sum of penalties and fines was almost as much as the alleged underpayment, all because in 2001 YUKOS did not know that in 2004 tax inspectors will choose to reclassify certain taxable activities.

Mr. Dyatlev concluded his commentary and Judge Danilkin, in keeping with his earlier comments, was ready to adjourn the hearing. However, Mr. Rivkin objected, asking the court to allow the defense to file the motions they planned to file today. Mr. Rivkin reminded Judge Danilkin that pursuant to his decision, the defense was complying with the order of filing their motions at the end of the day, although they had some misgivings on whether such order could be imposed without violating Section 119 of the Criminal Procedure Code. However, today the defense was not even offered this opportunity. Mr. Rivkin explained that the order of the motions and the timing on when they are ruled upon determines defense strategies on summoning witnesses and presenting evidence. In addition, the oft-delayed response from the opposing side was an important factor in filing motions at the time when defense was ready to do so. Mr. Rivkin told Judge Danilkin that if he was not going to allow the defense to proceed with their motions when they were ready, they would ask for the court to list on the court session information sheet a specific time allocated for the defense to file motions.
Looking less than pleased by Mr. Rivkin's statement, Judge Danilkin told the defense to proceed with the motions they prepared for today.

In their first motion, read by Mr. Rivkin, the defense asked the court to enter into evidence deposition of Mr. Andrey Leonovich, former YUKOS Treasurer. Mr. Rivkin explained that the government alleges Mr. Leonovich to be an organized group member, tasked with conducting financial operations with embezzled funds which were accumulated in bank accounts of fictitious Russian companies. In addition, Mr. Leonovich's indictment, issued in absentia, alleges that he was a member of an organized group, headed by Messrs. Khodorkovsky and Lebedev, which was involved in embezzlement and laundering of property entrusted to it. Mr. Rivkin told the court that Mr. Leonovich was interrogated on several occasions, but none of the interrogation transcripts were found in the case file. This could be explained by the fact that Mr. Leonovich, as he stated in his deposition, was asked on several occasions between December 2003 and January 2004 to provide false testimony against Messrs. Khodorkovsky and Lebedev, which he refused to do. To support his argument on the importance of Mr. Leonovich's testimony, Mr. Rivkin quoted several excerpts from Mr. Leonovich's deposition, including Mr. Leonovich's explanation of the incompatibility of the government's allegations in YUKOS tax cases, leading to the company's bankruptcy, and those in the criminal cases against Messrs. Khodorkovsky, Lebedev and him, amongst others.

As soon as Mr. Rivkin concluded, Mr. Lakhtin demanded for the court to issue a warning to the defense attorney. According to the prosecutor, Mr. Rivkin violated the Criminal Procedure Code by reading excerpts from Mr. Leonovich's deposition, when the document itself was not examined in court previously. Mr. Lakhtin insisted that this type of violation became one of defense's favorite maneuvers in circumventing the requirements of the CCP.

Judge Danilkin told defense to move on to the next motion. Mr. Klyuvgant filed another motion which was directly connected to Mr. Leonovich's criminal case. Mr. Klyuvgant restated the charges against Messrs. Khodorkovsky and Lebedev, as well as reminded the court that the government alleged that Mr. Leonovich was a member of an organized group headed by Messrs. Khodorkovsky and Lebedev and was charged with violating same sections of the Criminal Code. On June 18, 2010, investigator Rusanova, in denying Mr. Leonovich's defense attorney's motion to terminate the criminal investigation against his client, wrote that "embezzlement and non-payment of taxes were not mutually exclusive," and went on to explain how the same actions which resulted in Messrs. Khodorkovsky and Lebedev's convictions for tax evasion were now being qualified as embezzlement.

At this point prosecutor Lakhtin interrupted Mr. Klyuvgant, once again demanding for the judge to issue an on the record warning to the defense attorney for quoting from a document which was not entered into evidence. Mr. Lakhtin was shouting that the court was allowing blatant violations of the Criminal Procedure Code, but Judge Danilkin told the prosecutor that Mr. Klyuvgant was filing a motion and the court saw no violations happen. Mr. Klyuvgant thanked the prosecutor for offering him a chance to catch his breath.

Mr. Klyuvgant went on to explain that the Russian Constitution, the Criminal Code, as well as the European Convention on Human Rights, contained provisions preventing a person to be tried for the same actions twice. This applied to those circumstances where the exact same actions were previously examined in a different court proceeding - even if the government chose to apply a different legal qualification to those actions.

According to Mr. Klyuvgant, the explanation offered by Ms. Rusanova in denying Mr. Dudnik's motion to terminate the criminal case against Mr. Leonovich, admitted that the facts examined during the first trial against Messrs. Khodorkovsky and Lebedev were identical to the ones being examined in the current criminal case against Messrs. Khodorkovsky and Lebedev, as well as in Mr. Leonovich's case, with the government attempting to hold the defendants criminally liable for the same actions twice. [Our readers may be more familiar with a commonly used legal term ‘double jeopardy,' which describes the core substance of Mr. Klyuvgant's arguments. -Eds.] While Messrs. Khodorkovsky and Lebedev did not agree with the verdict in Meschanskiy Court, Ms. Rusanova's statement effectively proved that the investigators and, for the past year and a half, the prosecutors pursued falsified charges of crude oil embezzlement and money laundering against them, knowing that all of the alleged acts have been examined and ruled on by the aforementioned court.

Mr. Klyuvgant argued that Ms. Rusanova's order showed the illegality of the charges of crude oil embezzlement and money laundering. In addition, Mr. Klyuvgant argued that Ms. Rusanova's order contained proof of the government's actual position in this case. Mr. Klyuvgant motioned the court to send a documents production request to the Investigative Committee for a verified copy of Ms. Rusanova's order denying Mr. Dudnik's motion to terminate the criminal case against Mr. Leonovich.

Finally, Mr. Dyatlev returned to the Arbitration Court decision motion which the court denied earlier in the hearing. Mr. Dyatlev restated the court's language concerning the improperly verified copy being offered by the defense, noted that neither the court nor the prosecution cast doubt on the relevance of the decision to the current proceeding, and motioned the court to send a documents production request to the Moscow Arbitration Court for a verified copy of the aforementioned decision.

The trial will resume on Tuesday, August 03, 09:30 Moscow Time.