Khodorkovsky & Lebedev Communications Center

Excerpts.

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Prosecutor Lakhtin [told] the court that Mr. Aleksanyan was a member of an organized criminal group in this case, "while in case #18/41-03 there are many unidentified organized group members," and looked pointedly at the witness.
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Mr. Khodorkovsky approached the microphone and asked that the court strike prosecutor's questions concerning whether Mr. Garanov informed the court if Yuganskneftegaz acted as an independent legal entity inside a vertical holding. "Lakhtin does not understand the basic principles of the Civil Code, which, in the context of a discussion between him and a jurist, makes the conversation simply worthless," Mr. Khodorkovsky told the court. "Discussions about an independent legal entity inside a vertical holding...," Mr. Khodorkovsky continued, but was interrupted by the prosecutor. "I'd ask not to be interrupted! Khodorkovsky is lying! The same Khodorkovsky who concealed from Russian courts that Yuganskneftegaz was part of a vertically integrated company!" Mr. Lakhtin shouted at Mr. Khodorkovsky. "Your Honor, I apologize, but I think he lost his mind! I concealed from the Prosecutor for the Khanty-Mansiysk Autonomous Region that Yuganskneftegaz was part of YUKOS, a vertically integrated oil company created by the President's order?! Did he really loose his mind?!" Mr. Khodorkovsky shot back. Judge Danilkin could do nothing but call a short recess.
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Morning Session.

The trial resumed with Mr. Lakhtin responding to the defense motion to exclude from the evidence expert report prepared by Messrs. Chernikov and Migal. The prosecutor told the court that defense was attempting to mislead the court by arguing that the experts were not appointed according to established procedure. According to the prosecutor, all procedural rules were complied with and the motion should be denied.

Next, Mr. Lakhtin turned to the Fargoil memorandum prepared by the law firm Fulbright & Jaworski. Mr. Lakhtin asked for clarification on what criminal case number was written on the memorandum. Mr. Rivkin told the court that this memorandum was used in filings by the General Prosecution in proceedings on Cyprus. According to Mr. Rivkin, a supervising prosecutor on the YUKOS case should know this. Mr. Lebedev added that this was one of the documents sent by Mr. Karimov as an exhibit accompanying the request for mutual legal assistance to Cyprus authorities.

Mr. Lakhtin told the court that the prosecution had doubts about the memorandum's authenticity. In addition, the document was commissioned by YUKOS at the time when its CFO Bruce Misamore was already listed as a suspect in criminal case #18/41-03. In addition, the memorandum was not prepared by experts who were approved by investigators. According to the prosecutor, this motion should be denied, as well.

Turning to the two remaining motions - to add the Arbitration Court decision and YUKOS consolidated reporting documents - Mr. Lakhtin asked the court for additional time to prepare a response.

Judge Danilkin DENIED the defense's motion to exclude the expert report, not finding any legal grounds to grant this motion at this stage. Next, Judge Danilkin DENIED defense's motion to enter into evidence and to examine the Fulbright & Jaworski memorandum, ruling that there were no legal grounds to recognize the memorandum in question as evidence.

Mr. Dyatlev asked the court for a short recess to find out where the defense witness scheduled to appear today was. While Mr. Dyatlev left the courtroom, Judge Danilkin asked whether defense was prepared to file their response to Mr. Lakhtin's motion to re-summon certain witnesses and to continue their interrogation. Mr. Klyuvgant told the court that defense was.

Mr. Dyatlev returned and told the court that the witness was about half an hour away from the courthouse. Judge Danilkin told Mr. Klyuvgant to proceed. Mr. Rivkin asked if the prosecutor could re-state the names of the witnesses, as there was some confusion last Tuesday when the prosecutor filed his motion. Prosecutor Lakhtin asked for a short recess.

The trial resumed with Mr. Lakhtin repeating the names of those he wanted to see on the witness stand - Ms. Lysova and Messrs. Gerashchenko, Kosciusko-Morizet, Haun, Anisimov and Muravlenko. Mr. Klyuvgant launched into a detailed objection. He began by telling the court that the prosecutor's motion was either a purposeful attempt to delay the trial or a tantrum. Defense had a third possibility in mind, but he would broach that at the very end. First, Mr. Klyuvgant told the court that the prosecutor did not proffer a single argument why any of the persons on the list should be summoned. According to Mr. Klyuvgant, the prosecutor was trying to pull a procedural bait-and-switch on the court - there were no interrogations to continue, because the court ruled that they were concluded. So the prosecutor had to motion for a repeat interrogation.

Mr. Klyuvgant reminded the court that it was the prosecution which categorically objected to questioning any of these persons, arguing that they were not competent to testify, did not know the indictment, and did not author the charges. Mr. Klyuvgant noted that the prosecution even argued against questioning the witnesses which were included on the government's list.

According to Mr. Klyuvgant, the prosecution thought to usurp the defense stage of the evidence presentation. He explained that the prosecution concluded presentation of their case in early April and refused to summon civil complainants, witnesses and experts. The court accepted the prosecution's resting their case. That was why the pending motion was either a purposeful delaying tactic or a tantrum.

Mr. Klyuvgant asked the court to note the timing of the motion. The defense is presenting its case and no one - not the prosecution, not even the court - can dictate how the evidence and witnesses are presented. Noncompliance with Section 274 of the CCP was grounds enough to deny the prosecution's motion.

Mr. Klyuvgant noted that the prosecution's list contained two foreign citizens residing outside Russia. These persons, as the prosecution taught everyone, could only by summoned by utilizing the procedures established through the Justice Ministry. Mr. Klyuvgant reminded the court that on May 20 the court agreed to summon foreign witnesses, but as far as defense was aware neither one received any documents and was only aware of Khamovnicheskiy Court wanting to question them from the news media. [Mr. Klyuvgant was describing the situation surrounding Mr. Michael Kubena and Mr. Frank Rieger. -Eds.]

Finally, Mr. Klyuvgant told the court that defense considered a third possibility for why the prosecutor filed the aforementioned motion. He told the court that it was obvious to everyone that the prosecution continuously failed to comply with Section 9 of the CCP - respecting the honor and dignity of the individual - but at least they could be forced to remain disrespectful to those who were involved in the proceeding due to their procedural status. The court should not help the prosecution to be disrespectful to others. Mr. Klyuvgant asked the court to deny the motion.

Judge Danilkin DENIED Mr. Lakhtin's motion, telling the parties that the court provided ample time to both parties to question these persons when they appeared in court originally.

Mr. Dyatlev told the court that while the witness was still on the way to the courthouse, he would like to announce some case materials which defense considered necessary to question the witness. Mr. Dyatlev read three court decisions - a trial level decision from the Arbitration Court in Khanty-Mansiysk, then cassation and appellate review of that decision. All of the Arbitration Court proceedings in question concerned a civil complaint filed by the prosecutor's office in Khanty-Mansiysk, seeking to invalidate the 1996 General Agreement for purchase of crude oil concluded between YUKOS and Yuganskneftegaz. While the prosecutor was partially successful at the trial level, with the court finding void a provision for crude oil ownership rights transfer at the well-head, the trial level court was overturned on cassation review, with cassation review being upheld on appeal. The Federal Arbitration Court for West-Siberian Region ruled that the General Agreement was valid and dismissed the prosecutor's complaint.

After reading the last ruling, Mr. Dyatlev told the court that defense was ready to question the witness. Mr. Aleksey Garanov worked in YUKOS Legal Department from 1997 through April 2003. Mr. Dyatlev explained that Mr. Garanov participated in various litigations, including the one on the validity of the YUKOS/Yuganskneftegaz General Agreement.

Mr. Garanov, a jurist, testified that he started his work at YUKOS with a job title of legal specialist. Over the years he was promoted to senior legal specialist. Asked by Mr. Dyatlev several questions meant to establish whether he had any bias, Mr. Garanov testified that he never met with Mr. Khodorkovsky, but met Mr. Lebedev during several work-related meetings. Mr. Garanov told the court that he had no reason to be biased in favor of the defendants.

Mr. Garanov testified that the legal department was headed by Mr. Aleksanyan, who had two deputies - Messrs. Gololobov and Ryzhih. Mr. Ryzhih was Mr. Garanov's supervisor. The legal department provided legal counsel to the company. According to Mr. Garanov, initially everyone in the department handled matters in all areas of the law on an as needed basis. However, after 1999, the department was re-organized and responsibilities of the staff were narrowed to focus on specific areas of the law.

Mr. Garanov testified that he participated often in litigation surrounding crude oil purchase agreements. On one occasion, when a subsidiary of Sibneft filed a lawsuit against YUKOS, he was sent to Tyumen to work on that lawsuit. While there, his superiors told him that there was a need for someone to participate in the appellate proceeding concerning the YUKOS/Yuganskneftegaz General Agreement. Mr. Garanov explained that YUKOS had to develop strategies for preventing arrest of the crude oil. One strategy involved General Agreements. Mr. Garanov, after being shown a copy of the YUKOS/Yuganskneftegaz General Agreement, confirmed that this was an agreement similar to the ones concluded with all YUKOS production subsidiaries.

Mr. Lakhtin objected when Mr. Dyatlev asked the witness to discuss his participation in the appellate proceeding. According to the prosecutor, no one knew what appellate proceeding Mr. Dyatlev was asking about and, in any event, everything that defense attorney asked Mr. Mirlin was irrelevant. When Mr. Lakhtin was reminded that the discussion was centered on the appellate court decision concerning the YUKOS/Yuganskneftegaz, the prosecutor told the court that defense was involved in impermissible revisions of court decisions.

Mr. Garanov briefly explained that the regional prosecutor contested the general agreement. The case wound its way from trial through cassation to appeal. The prosecutor's complaint was dismissed. The same events were mirrored in claims brought to invalidate General Agreements with Samaraneftegaz and Tomskneft. Prosecution lost those cases, as well.

Mr. Garanov testified that YUKOS was a vertically integrated company, headed by YUKOS-Moscow. YUKOS-EP managed the production arm of the company and YUKOS-RM the refining and marketing. Mr. Garanov testified that this was the only management structure of YUKOS he knew of during the period from 1998 through the time he left and he never heard anyone mention any parallel management structures.

Mr. Lebedev took over. Mr. Garanov testified that the case file in the aforementioned appellate case contained numerous documents to support the company's position - purchase contracts, payment orders, transfer/acceptance acts and others. One of the arguments used by the prosecutor was that the General Agreement violated Section 170 of the Civil Code - it was fictitious and all transactions made pursuant to that agreement were fictitious, as well. The documents presented by YUKOS were intended to support the very opposite assertion, and the Federal Arbitration Court agreed. Mr. Garanov testified that it was a commonly known fact that Yuganskneftegaz, Samaraneftegaz and Tomskneft were YUKOS subsidiaries.

Mr. Garanov confirmed that prior to leaving YUKOS he never heard anyone mention that all of the crude oil was stolen. He explained that YUKOS revenue came from crude oil and petroleum products sales. Prosecutor Lakhtin objected, telling the court that Mr. Lebedev was posing incorrect questions and was eliciting incorrect answers. According to the prosecutor, the witness did not read the indictment and could not know what the defendants were charged with. Mr. Garanov told the prosecutor that the information stand right outside the courtroom listed the sections of the Criminal Code Messrs. Khodorkovsky and Lebedev were charged with violating. He knew what the definition of embezzlement was. Facing off with a jurist, prosecutor Lakhtin told Mr. Garanov that he did not know the method of embezzlement. "No one knows that method!" Mr. Khodorkovsky quipped. Prosecutor demanded for the court to stop Mr. Lebedev from asking misleading questions.

Mr. Dyatlev told the court that he had a couple of follow-up questions, but will read excerpts from the indictment so as not be accused by the prosecutor of misleading the witness. Mr. Dyatlev went over several excerpts with Mr. Garanov testifying that prosecutors in various arbitration cases insisted that the general agreements were fictitious, but these arguments were dismissed by the courts. Mr. Garanov referred back to the copy of the Federal Arbitration Court decision in support of his testimony.

Afternoon Session.

The trial resumed with the prosecution taking over. Mr. Lakhtin began by asking how long the witness knew Mr. Aleksanyan. Mr. Garanov did not hide that he knew Mr. Aleksanyan from a very early age. They graduated from the Moscow State University at the same time and it was Mr. Aleksanyan who contacted him about a position that opened up at YUKOS. Soon it became apparent why Mr. Lakhtin kept asking the same questions about Mr. Aleksanyan. When defense objected after prosecutor asked for the third time how Mr. Aleksanyan influenced the hiring of Mr. Garanov, prosecutor Lakhtin shot back by telling the court that Mr. Aleksanyan was a member of an organized criminal group in this case, "while in case #18/41-03 there are many unidentified organized group members," and looked pointedly at the witness.

Mr. Lakhtin sought to find out what "informal" orders Mr. Garanov had to follow and how close his relationship with Mr. Dyatlev was. Mr. Garanov testified that Mr. Aleksanyan never issued any "informal" order to him and as far as Mr. Dyatlev was concerned - they used to be colleagues when working together at YUKOS. Several more questions about how long ago Mr. Garanov saw Mr. Aleksanyan and the prosecutor seemed ready to move on.

Mr. Lakhtin accused Mr. Garanov of not knowing what Messrs. Khodorkovsky and Lebedev were charged with, because, as the prosecutor likes to point out to almost all of defense's witnesses, Mr. Garanov did not author and did not read the indictment. Mr. Garanov testified that, in fact, he did not read either the complaint or the indictment, but he knew the sections of the Criminal Code that defendants were charged with violating and knew the language contained in those sections. Mr. Garanov confirmed that he read some of the trial coverage and told the court that he attended the trial last August two or three times when prosecutor Lakhtin was presenting evidence.

Mr. Lakhtin was unsatisfied with the answers he was getting and told the court that he was attempting to establish that Mr. Garanov was biased. Judge Danilkin asked Mr. Garanov to tell the court whether he was biased, but when Mr. Garanov stated, under oath, that he was not, the courtroom heard the prosecutor say that he did not believe the witness. Judge Danilkin told the prosecutor to move on.

The key exchange of the afternoon occurred after Mr. Lakhtin began to question Mr. Garanov on whether the latter "realized what the substance of a vertically integrated company was." The prosecutor kept pressing the point that Mr. Garanov failed to present to the Federal Arbitration court an explanation on what a vertically integrated company was. Mr. Garanov attempted to explain that as a respondent in a case his side was concerned with countering the prosecutor's arguments - not lecturing the judge on topics which were not argued in the complaint.

Mr. Khodorkovsky approached the microphone and asked that the court strike prosecutor's questions concerning whether Mr. Garanov informed the court if Yuganskneftegaz acted as an independent legal entity inside a vertical holding. "Lakhtin does not understand the basic principles of the Civil Code, which, in the context of a discussion between him and a jurist, makes the conversation simply worthless," Mr. Khodorkovsky told the court. "Discussions about an independent legal entity inside a vertical holding...," Mr. Khodorkovsky continued, but was interrupted by the prosecutor. "I'd ask not to be interrupted! Khodorkovsky is lying! The same Khodorkovsky who concealed from Russian courts that Yuganskneftegaz was part of a vertically integrated company!" Mr. Lakhtin shouted at Mr. Khodorkovsky. "Your Honor, I apologize, but I think he lost his mind! I concealed from the Prosecutor for the Khanty-Mansiysk Autonomous Region that Yuganskneftegaz was part of YUKOS, a vertically integrated oil company created by the President's order?! Did he really loose his mind?!" Mr. Khodorkovsky shot back. Judge Danilkin could do nothing but call a short recess.

As the trial resumed, the prosecutor returned to the previous topic. He demanded to know why Mr. Garanov failed to tell the panel at the Federal Arbitration Court that Yuganskneftegaz "was not an independent company and was really a part of YUKOS." This question was struck. Mr. Lakhtin rephrased it, by keeping the same formulation. Mr. Garanov explained to the prosecutor, once again, that respondent countered the claimant's assertions, which was how civil cases were argued.

Mr. Smirnov took over for his colleague. Mr. Garanov testified that there were attempts to arrest the crude oil at measurement nodes which required the legal department to look for various strategies in order to ensure that crude oil production did not screech to a halt. Transfer of crude oil ownership rights at the well-head was one of those successfully implemented strategies.

Answering Mr. Lebedev's questions, Mr. Garanov explained that YUKOS-EP was created with an explicit purpose to become the executive for YUKOS production companies. Asked about all of the claims concerning the general agreements, Mr. Garanov testified that as of April 2003 all claims against YUKOS and its production subsidiaries were resolved in the companies' favor.

Answering Mr. Khodorkovsky's questions, Mr. Garanov confirmed that he knew of three bodies which acted to express a company's will - Shareholders' Meeting, Board of Directors and the Executive. Mr. Khodorkovsky asked whether Mr. Garanov perceived any conflict that, on the one hand, Yuganskneftegaz and other production subsidiaries were independent legal entities, while on the other hand they were part of the YUKOS vertical holding, YUKOS-EP was their executive and YUKOS was their majority then only shareholder and appointed the companies' Board of Directors. Mr. Garanov testified that what Mr. Khodorkovsky described was allowed explicitly by the law, so there was no conflict.

Answering Mr. Lebedev's questions, Mr. Garanov testified that the Civil Code contained a provision explicitly allowing parent companies to give mandatory instructions to subsidiary companies. Mr. Garanov testified that he was not aware of any court cases where YUKOS production companies' by-laws, containing such provisions, were contested successfully.

A last round of Mr. Lakhtin's accusations about Mr. Garanov's motives for coming to testify and Mr. Garanov was free to leave.

Defense had several motions to file. First, Mr. Rivkin asked the court to enter into evidence and to read into record deposition of Ms. Sarah Carey, former Member of the YUKOS Board of Directors. Mr. Rivkin explained that Ms. Carey's deposition contained testimony on her knowledge of PwC's auditing as well as description of her meetings with the auditor's senior partners. Mr. Rivkin explained that Ms. Carey, due to a serious illness involving hospitalization, was unable to appear in person.

Next, Mr. Dyatlev reminded the court about the missing original court files, including the decisions themselves, in the court cases examining the validity of the YUKOS/Samaraneftegaz General Agreement. Mr. Dyatlev, after recapping the history of failed documents production requests, including one mailed by Khamovnicheskiy Court, asked the court to enter into evidence and to examine verified copies of the decisions from the trial, cassation and appellate levels, obtained from a legal documents search provider.

In the third and final motion of the day, Mr. Dyatlev explained that it was misleading to compare average prices in production regions with those at which YUKOS purchased crude oil from its production subsidiaries. Mr. Dyatlev argued that to be able to understand the price dynamics within production regions where production companies were selling crude oil lots consisting of millions of tons, the court had to examine comparable purchases between similarly situated regional players. Therefore, Mr. Dyatlev asked the court to send a documents production request to the Federal Anti-Monopoly Service, asking for it to provide a summary report on prices between Rosneft and its subsidiary Purneftegaz and Sibneft and its subsidiary Noyabrskneftegaz during the time period from 1998 through 2003.

In support of the last motion, Mr. Khodorkovsky explained that defense sought to compare the lowest prices paid by YUKOS, which the government argues were unlawful, with the lowest prices paid by YUKOS's peers, which no one declared to be unlawful. The issue wasn't in finger pointing, but in trying to have the court understand that not all prices below regional averages were considered to be unlawful.

The trial will resume on Monday, August 02, 10:00 Moscow Time.