Khodorkovsky & Lebedev Communications Center

Morning Session.

The trial resumed with Judge Danilkin offering Mr. Lebedev to start presenting testimony in connection with the charges he was facing. Mr. Lebedev began his testimony, using a slide show presentation which he promised to give a copy of to the court so that it could be entered into record. The first slide read "Welcome to the Big World of Multinational Business. Platon L. Lebedev, director, ‘Group MENATEP,' (1998-2003). Testimony 2010 ©"

In the prologue to his testimony, Mr. Lebedev discussed various risks of conflicts that any "big business" had to consider. According to Mr. Lebedev, the most difficult conflicts to solve were conflicts between corporations and governments, or "between business and power." Mr. Lebedev told the court that when the source of the conflict and the arbiter are one and the same - "the power" - the subjectivity of risks was unavoidable, but was reduced to a minimum with a civilized arbiter, with civilized objectivity, and characterized by good faith purposes and reasonable trust towards the opponent.

"In our case, in the YUKOS case, when the power and her puppeteers chose for the role of ‘the arbiter' [Birukov and Karimov], i.e. used ‘blunt force unrelated to the law' (MBK's terminology), it was the worst option to resolve any, potential or existing, conflicts between business and power... According to the ‘domino effect' theory, many potential risks to the powers from the YUKOS case will multiply (and quickly) into real and sharp conflicts..."

Mr. Lebedev began his testimony by providing a geography lesson to the government which, as represented by investigators and the prosecutors, continues to insist that Group MENATEP Ltd. (GML), with whose history he would begin his testimony, was incorporated on "the island of Gibraltar." While explaining the reasons on why it was beneficial to incorporate a company in Gibraltar - easily understood rules for incorporating a company, professional administrative services by licensed secretary companies, and a jurisdiction with developed legal and judicial systems, Mr. Lebedev, using maps and references to the Big Soviet Encyclopedia, read passages from the indictment where the government insisted that GML was incorporated by Mr. Lebedev on "the island of Gibraltar" on September 5, 1997. In addition to explaining that GML did not even exist on that date - the company registered was called Flaymon Limited - Mr. Lebedev explained to the court that no company he was aware of was registered on Gibraltar Island on Lake Erie. A print out from Google Maps showed the locations of the two places.

Mr. Lebedev described the history behind a decision to create a holding company which came to be known as Group MENATEP Limited. Mr. Lebedev testified that in 1997 Mr. Khodorkovsky, looking to create an international holding company, approached him and several others, with a proposal to become a shareholder in the holding to-be and to consider questions about jurisdiction where the holding should be based, how to structure its assets, how to manage it and so on. Mr. Lebedev asked the court to note that he was honored by Mr. Khodorkovsky's offer. According to Mr. Lebedev, when a smart and talented businessman, with genius capabilities in various management spheres, on both macro- and micro-levels, makes a proposal to become his business partner, it was his evaluation of you capabilities.

Mr. Lebedev explained that Gibraltar was picked for the aforementioned reasons and, also, because Menatep Ltd., incorporated there, successfully conducted its activities there, as well. Mr. Khodorkovsky agreed with the choice of Gibraltar. Mr. Lebedev explained, also, why Russian Federation was not a good place to register a multi-national business - including no convertible currency, strict regulation and restrictions on foreign currency transactions, double taxation and others. The risks were many and unpredictable - as was proved by the 1998 default. Mr. Lebedev noted the fortuitous choice of incorporating in Gibraltar - there were no issues with managing assets in the United States, Western and Eastern Europe, and Russia - at least until the YUKOS case. And, even in 2010, GML continues to function as a multi-national holding company, in spite of provocations from the "organized prosecutorial group" in the YUKOS case.

Mr. Lebedev went over the holding's history of the important dates and the shareholder structure as of 1998, 2002 and March 2003. He discussed the latest change in the shareholder structure prior to his arrest, explaining that it was prompted by a proposed legislation which Mr. Khodorkovsky presented to Prime Minster Kasyanov on behalf of the Russian Union of Industrialists and Businessmen. Mr. Lebedev explained that the business union proposed a one-time $20 billion USD payment into the federal budget, in view of the fact that companies privatized 7-8 years prior had their capitalization increase several times. Many years later, Mr. Lebedev found out - reading Kommersant Vlast - that President Putin, after receiving the proposed legislation, "swept it under the rug."

After a short recess, Mr. Lebedev went over the various bodies connected to GML. First was the Multinational Advisory Board, consisting of the Honorable Stuart Eizenstat, Mr. Dudley Fishburn, Margery Kraus, Dr. Otto Graf Lambsdorff, Mr. Frits Blokestein and Mr. Lebedev. Mr. Lebedev noted that that he was honored too have worked with all of these persons. Mr. Lebedev told the court that while on the Advisory Board, other members knew him as the sole Director of GML, as well as for being on the European Consultation Advisory Board of The Carlyle Group and being Chairman of a number of banks.

He identified GML's legal advisor - Clifford Chance law firm, investment advisor - UBS Warburg, and the independent auditor - Ernst and Young. About auditing, Mr. Lebedev noted that while Ernst and Young was GML's auditor, the other members of the Big Four - PricewaterhouseCoopers, KPMG and Deloitte - all worked with companies within the holding.

Mr. Lebedev explained that GML had a very simple management structure. He was the sole director. Secretary services were provided by Steadfast Corporate Services. Analytical, administrative, financial and accounting services were provided by GML Management Services S.A., a wholly-owned subsidiary. Mr. Lebedev explained that the idea was to use outsourcing, which was used by YUKOS, as well, such as when all accounting services for all YUKOS subsidiaries were provided by YUKOS-FBC, staffed with specialized professionals.

Mr. Lebedev told the court that managing GML involved a system of corporate procedures and rules allowing minimizing risk. While many of these were GML's commercial secrets, he was willing to share one of these "know-how," because it will help to uncover facts of indictment's falsification, including in the so called "legalization."

For the rest of today's hearing Mr. Lebedev explained how investigators, including Messrs. Karimov, Alyshev and Ms. Rusanova among them, sought to falsify laundering charges, by trying to connect GML, Nassaubridge Management Ltd. and Open Russia Foundation. Mr. Lebedev began by explaining that an accusation and, worse, a fact of "money laundering" was a black mark on any financial organization. Having consulted in the 1990s the Financial Action Task Force on Money Laundering, he implemented a concrete management strategy for GML to prevent someone with the intention to compromise the organization to be able to do so. Mr. Lebedev explained that each entity within the multi-level holding performed specific transparent functions, which was easily understood by banks and financial controllers.

Using the parent company as the first example, Mr. Lebedev explained that GML was exclusively involved in investment activity through its wholly-owned subsidiaries, a list of which was found in the case materials. The only income that GML had came from dividend payments from its "daughters" or from interest payments from subsidized loans made to the same. The banks where GML maintained its accounts were prohibited from and would not accept any deposits except those from GML's wholly-owned subsidiaries. This "special regime" prevented the risk of "suspicious" funds being deposited or transactions with "suspicious" firms.

The same rules applied to GML's subsidiaries. Another example was Yukos Universal Limited, which controlled and managed (in addition through Hulley Enterprises Ltd.) the majority stake in YUKOS. Same risk management strategy applied. Only proceeds from sales of YUKOS shares, or dividend payments from YUKOS and Hulley could be deposited into YUL's bank accounts. The same applied to Hulley Enterprises - it could only receive dividend payments from YUKOS or proceeds from sales of YUKOS shares. Mr. Lebedev explained that with this type of structure, the banks easily understood why the funds were coming from outside the companies and what the purpose of the intra-holding transfers was, all the way up to the parent company - GML.

Mr. Lebedev told the court that Messrs. Birukov and Karimov, without being aware of this "know-how," fell into a trap when they, amongst other things, attempted to attribute to Mr. Lebedev disposing of laundered funds by asserting that YUL and Hulley Enterprises were involved in crude oil sales, as well as transactions with the Open Russia Foundation (ORF). Before turning to the ORF episode, Mr. Lebedev asked the court to note that the indictment was full of assertions that YUL sold crude oil and petroleum products - but not even a single contract in support of this falsification.

Mr. Lebedev presented the court with an excerpt from a report of crime he filed while in Chita concerning an order drafted by Mr. Karimov, sanctioned by Mr. Birukov, and presented to him on December 12, 2006, by investigators Alyshev and Rusanova. On that date, Mr. Alyshev and Ms. Rusanova informed Mr. Lebedev that on December 12, 2004, investigator Karimov, with Mr. Birukov's sanction, opened an investigation into Mr. Lebedev "laundering funds donated for the benefit of the Open Russia Foundation through GML's bank accounts." Messrs. Karimov and Birukov insisted that laundering took place with the help of Fargoil and Nassaubridge Management Ltd., companies which were not GML's subsidiaries.

Mr. Lebedev described the actions he and his defense team took, which resulted in the following: an August 2007 decision by Federal Tribunal in Switzerland to deny a mutual legal assistance to the Russian Federation; an April 2008 decision by a district court in Cyprus to deny another mutual legal assistance to the Russian Federation; and an April 2009 decision by an appellate court in Chita confirming gross violations of the law by Mr. Karimov and Co. in the falsified ORF episode. Mr. Lebedev added that there was only one supervising prosecutor over all of Mr. Karimov's crimes - prosecutor Lakhtin.

Mr. Lebedev described how Mr. Karimov, in his attempts to get anything from the Swiss and Cypriot authorities, insisted that Mr. Lebedev moved "dirty funds" from Barclay's Bank in Cyprus to UBS Bank in Switzerland. However, although the mutual legal assistance requests were sent pursuant to a case opened to investigate the ORF episode, no mentioned of ORF was made. Instead, Mr. Karimov described how Messrs. Khodorkovsky and Lebedev "embezzled approximately $8 billion USD in revenues from crude oil sales by [YUKOS production subsidiaries]." Mr. Lebedev asked the court to note that he found out about these specific mutual legal assistance requests more than two and half years after the investigation was opened. So, ORF was missing, but Messrs. Birukov and Karimov insisted that Nassaubridge transferred funds directly to GML.

Mr. Lebedev digressed from the slide show testimony and asked the court to note that while the ORF episode simply disappeared, the millions of dollars in accounts under arrest in Russian banks remained so to this very day. So for more than 5 years those funds are sitting there, while the interest keeps accumulating and, as Mr. Lebedev told the court, it wasn't difficult to figure out who kept benefiting from it. "At least they could have bought Lakhtin better technical equipment!" Mr. Lebedev exclaimed in mock outrage, causing an outburst of laughter from the gallery.

Afternoon Session.

As the trial resumed after a lunch recess, Mr. Lebedev told the court that despite Mr. Karimov's allegations about "fictitious Cypriot companies," Cypriot authorities provided the prosecution with the companies' audits from PricewaterhouseCoopers (Cyprus), which, unlike the ones made by their "scared" colleagues in Moscow, were never withdrawn and remained in full force to this very day. In addition, Mr. Karimov was informed that all Cyprus-based companies paid taxes on Cyprus and had 7 billion rubles withheld as a 5% dividend tax by the Russian Federation on the dividend payments they received from Russian subsidiaries. Finally, Nassaubridge Management paid its 2002-2003 profit to Moonstone Services Ltd., its parent company which itself was part of the YUKOS foreign trading structure. Mr. Lebedev noted that audited financial reporting did not show a single payment to GML. Mr. Lebedev supported each statement with reference to the case materials and slides of the documents he mentioned.

Mr. Lebedev testified that having learned this from the case materials, he studied financial reporting for companies within the YUKOS consolidation perimeter - ZAO YUKOS-M, YU-Mordovia, Fargoil, Ratibor, Evoil and others - and discovered that these companies paid billions of dollars in taxes into the Russian federal budget, and the Russian authorities never issued complaints to any of these companies. This information was forwarded to Swiss and Cypriot authorities, as well. He asked those authorities to note that the very fact of tax payments into Cyprus and Russia's federal budget was the strongest reason to deny mutual legal assistance and completely excluded qualification of "intra-holding transactions" as "embezzlement" and "money laundering." Also, the very fact that YUKOS was forced to pay additional taxes for its traders, while the traders were not assessed a single ruble in unpaid taxes, meant that there could not have been "embezzlement" and "money laundering."

Mr. Lebedev noted that the case file contained a PwC report on the movement of funds by way of Fargoil paying dividends to Nassaubridge, Nassaubridge paying dividends to Moonstone, and Moonstone paying dividends to Brill. Mr. Lebedev told the court that, after examining this and other similar reports, he understood that Mr. Karimov and Co. knew in 2004 that Nassaubridge Management and other companies were all part of the YUKOS group. In addition, interrogation transcripts of Ms. Petrosyan and Mr. Ivlev contained the same information.

Mr. Lebedev noted that when the Cypriot authorities replied to Mr. Karimov's request for document production, they noted that all documents have been sent previously to an appropriate agency within the Russian Federation. However, they attached the audited financial reports of Nassaubridge Management Ltd., Dunsley Ltd. and Fiana Ltd. Each report contained a statement that YUKOS was "the ultimate beneficial shareholder." Mr. Lebedev noted that, not knowing until 2007 about the existence of such Russian companies as Fargoil, Ratibor and Evoil, pursuant to the documents received through Mr. Karimov's request he was able to obtain additional evidence of the investigator falsifying the ORF episode as well as the charges in this criminal case.

Mr. Lebedev shared with the court some of the assertions Messrs. Khatypov and Karimov made when testifying in Cyprus court. Mr. Lebedev described the confusion when the aforementioned gentlemen attempted to convince the judges that YUKOS intra-company crude oil transactions were actually "embezzlement," while payments made, including tax payments, were "money laundering."

He described this exchange between a judge and Mr. Karimov, discussing YUKOS operations as a vertically-integrated holding:

Judge - Isn't it normal for consolidated companies to have common results?
Karimov - I don't understand [the question].

Mr. Lebedev concluded today's portion of his testimony by telling the court that GML had plenty of other risk-hedging "know-how," but those remained commercial secrets of an acting multinational company. However, even what he already explained showed how companies can protect themselves from risks involving crimes by corrupt government officials.

The trial will resume on Tuesday, August 24, 10:00 Moscow Time.