Courtroom Report: February 3, 2010
Mr. Maliy was back. Mr. Lakhtin informed everyone that the audio of Mr. Maliy's interrogation was found. After a brief confusion with the audio tape - it seems part of the tape contained a conversation between two investigators - the courtroom heard Mr. Iogan's interrogation of Mr. Maliy. [You can read a summary in our Monday's report. -Eds.] Afterwards, Mr. Lakhtin asked whether Mr. Maliy affirmed the transcript and the audio. Mr. Maliy did. Mr. Lakhtin asked Mr. Maliy to explain what he meant by "responsibilities under American laws," but Mr. Maliy was unable to be specific, asking the prosecutor to invite an expert in American law to explain specifics.
Mr. Khodorkovsky took over. He asked Mr. Maliy to explain another big project, besides the YUKOS listing, that Mr. Maliy began working on after joining YUKOS. Mr. Maliy testified that the Directorate of Corporate Finance was laying the groundwork for a YUKOS Eurobond issue. To do that, YUKOS needed to secure a credit rating, with the company choosing Standard & Poor's and Moody's as the agencies to rate the company.
Mr. Maliy described in detail how the process for securing a credit rating progressed. He testified that he worked closely with Mr. Bruce Misamore, YUKOS' CFO, in preparing a presentation, called a "rating book," for these agencies. Company's business-plans and financial information were given prime attention. During meetings with representatives from each agency, each lasting several hours, YUKOS representatives were questioned extensively on the company's state. Mr. Maliy described the question and answer session with a slang term meaning "detail-oriented," with questions focusing on the company's financials health and future income. Mr. Maliy testified that they achieved two goals with the publication of YUKOS's rating - in addition to the published the rating, the agencies published the basis for their decisions. Mr. Maliy testified that the ratings awarded to YUKOS were the highest amongst Russia's corporate borrowers. As a matter of fact, the rating was on par with Russia's sovereign credit rating. Mr. Maliy testified that this was a big achievement and the entire department was very proud.
Mr. Maliy testified that the information used by credit agencies was widely available to the public, even before the announcement of the company's credit rating. He explained that, besides YUKOS' US GAAP statements, rating agencies examined the company's cash and cash equivalents - the company's most liquid assets found on its balance sheet, and interviewed the company's managers. Credit agencies analyzed the company's revenues, profits and crude oil production volumes.
Mr. Khodorkovsky asked about the proposed YUKOS/Sibneft merger and what impact it would have had on the SEC Form F-1 which, as Mr. Maliy told the investigator, was ready in draft form in late 2002. Mr. Maliy explained that the proposed YUKOS/Sibneft merger would have required everyone "to start from zero," adding that Sibneft would have represented about 30% of the newly merged companies.
Mr. Khodorkovsky asked Mr. Maliy to explain the details of the proposed merger and whether it happened. Mr. Maliy testified that YUKOS and Sibneft officially merged on October 3, 2003. On that date YUKOS became the owner of 92% of all outstanding Sibneft shares. In return, controlling shareholders of Sibneft received a 26.01% block of shares in the newly created company. Mr. Maliy explained that the merger had both cash and stock components, with YUKOS paying $3 billion USD in three tranches to Sibneft's majority shareholders, the final $1.25 billion USD paid on October 3, 2003. Prior to the merger, Sibneft conducted extensive due diligence, with Skaden Arps and Citibank acting as its legal and financial advisers, respectively.
According to Mr. Maliy, at the time of the merger Sibneft had more liabilities than cash on hand, while YUKOS had about $4 billion USD more in cash and securities on its balance sheet than it had in liabilities. Mr. Maliy explained that YUKOS, in addition to paying large dividends, made an open tender offer for up to 10% of outstanding YUKOS shares, allocating $2.6 billion USD for the tender, based on YUKOS' capitalization of $26 billion USD.
Mr. Khodorkovsky asked about YUKOS ADRs. Mr. Maliy testified that sometime prior to his joining YUKOS the company issued Level I ADRs, with Deutsche Bank acting as a depository. Mr. Maliy provided a brief explanation of what a Level I ADR was and explained the SEC requirements YUKOS had to meet in order for these ADRs to be traded in New York. According to Mr. Maliy, YUKOS filed its US GAAP statements with the SEC. Mr. Maliy explained that YUKOS had a Russian and an English version of its website, so even before a document was filed with the SEC it was available on the website, which meant the markets had the information before the SEC did.
Mr. Khodorkovsky turned to several passages from the transcript of Mr. Maliy's interrogation, asking Mr. Maliy to explain what the latter understood some of investigator Iogan's terminology to mean. Mr. Maliy testified that he did not know what Mr. Iogan meant when he stated in his questions that [Group MENATEP] obtained YUKOS shares by "lack of authentic product-based transactions." [We have made the best possible attempt at translating Mr. Iogan's phrase. -Eds.] Mr. Maliy, under a piercing look from Ms. Ibragimova, said that, as the court heard from the audio tape, not all of Mr. Iogan's questions were precise or grammatically correct.
Mr. Khodorkovsky asked questions based on some of the matters Mr. Maliy highlighted to Mr. Sheiko, when discussing progress on the proposed listing. Mr. Maliy did not remember much about Behles Petroleum, Baltic Petroleum and South Petroleum. He did not know what happened after Pricewaterhouse Coopers was asked to investigate these companies' possible affiliation with Group MENATEP or some of its individual shareholders. Mr. Maliy explained that he used "affiliation" as it was used under US GAAP.
Explaining PWC's inquiry about the beneficiary agreement with Messrs. Muravlenko, Ivanenko, Kazakov and Golub, Mr. Maliy testified that the question was over whether the value of the agreement was going to be reflected as a YUKOS expense. However, he confirmed that it would have been a non-cash expense and would not have affected the company's cash flow.
After a short break Mr. Khodorkovsky turned to the Russian-language version of the Form F-1 draft and asked Mr. Maliy, after he would read a specific passage, to tell the court whether the information was publically available before Form F-1 was drafted. Mr. Khodorkovsky read a statement where the company was explaining that its crude oil, after being transferred into Transneft's pipeline and mixing with crude oil from other companies, became an export mixture, called "Urals." That crude oil was of lower quality than Brent and, when compared to Brent, was sold at a discount. Mr. Maliy confirmed that this information was widely known. Next, Mr. Maliy confirmed that the information about export crude oil sales being more profitable than export petroleum products sales was also widely know at the time.
Mr. Maliy defined "transfer pricing," explaining that these were prices established between companies within a single group. Next, Mr. Maliy confirmed that most of the crude oil YUKOS exported was through Transneft's pipeline network - 91% in 2000, 86% in 2001 and 91% in 2002. Mr. Maliy, while uncertain whether this information was publically available, testified that it was a well known fact that most of Russia's crude oil was exported through Transneft and that transportation tariffs were publicly available.
Looking at lines for "revenues," "net income," and other financial information, Mr. Maliy explained that this information was borrowed from YUKOS' US GAAP consolidated statements. He noted that PWC verified all figures before they were added to the Form F-1 draft.
Mr. Khodorkovsky asked whether information provided to credit rating agencies was the same as was used in the Form F-1 draft. Mr. Maliy explained that, while the presentation to credit rating firms did not focus on exactly the same matters, the substance was the same. Mr. Khodorkovsky asked whether anyone asked Mr. Maliy to distort anything when putting together the presentation or drafting Form F-1. "God forbid! Never!" Mr. Maliy responded with certainty.
As he informed the parties yesterday, Judge Danilkin was ready to adjourn at 15:00. Ms. Ibragimova made a short statement, demanding the court schedule a hearing on Friday. Ms. Ibragimova wanted to conclude Mr. Maliy's questioning this week, explaining that after Messrs. Khodorkovsky and Lebedev were done, the prosecution would have follow-up questions.
Mr. Rivkin told the court that the defense objected, both because they were planning on meeting with their clients at Matrosskaya Tishina and because a visit from Messrs. Khodorkovsky and Lebedev's family members was planned as well. Mr. Rivkin added that, earlier, Mr. Maliy informed everyone that he was available next Monday.
Judge Danilkin adjourned the hearing without ruling on Ms. Ibragimova's request. As he was leaving the room, Ms. Ibragimova continued her exchange with defense attorneys, telling them that the prosecution had another witness lined-up for Monday, whose questioning was postponed because of Mr. Maliy's.
"We're working on Friday!" Judge Danilkin told everyone, one foot inside the chambers.
The trial will resume on Thursday, February 4, 10:30 Moscow Time.