Khodorkovsky & Lebedev Communications Center

Morning Session.

The trial resumed more than an hour late. As he promised yesterday, Judge Danilkin began by asking the prosecution to present their responses to motions filed by the defense on March 2. Ms. Ibragimova rose and informed the court that she will respond to two of the three motions - to play the audio recording of Mr. Anilionis's interrogation from April 6, 2004, and to enter into evidence a printout of Incoterms, as they were published in 1990.

Ms. Ibragimova read a letter from the investigation team, which was addressed to the prosecutors. The letter explained that in the case materials submitted to the Khamovnicheskiy Court there was an audiotape containing audio recordings of Mr. Rybin's interrogation on one side and Mr. Anilionis's on the other. Investigators informed the prosecution that the case file did not contain a matching transcript because Mr. Anilionis's testimony from April 6, 2004, was unrelated to the criminal case being tried before the court. Investigators informed the prosecution that having two audio recordings on the same audiotape was not a violation of the Criminal Procedure Code.

After reading the letter, Ms. Ibragimova, once again reiterating that the letter was addressed to the prosecution, told the court the prosecution would hand the letter over to the court's secretary to allow her to copy it into the official trial transcript.

Turning to Mr. Lebedev's motion on Incoterms, Ms. Ibragimova asked the court to deny it, because Mr. Lebedev's submission was an unauthenticated web printout.

Mr. Krasnov asked the court if defense would be allowed to examine the letter Ms. Ibragimova handed to the court's secretary. Judge Danilkin replied that the letter represented "oral information" and asked Ms. Ibragimova if the prosecution objected. Without hearing what Ms. Ibragimova had to say, Judge Danilkin stated that the prosecution objected. Ms. Ibragimova told the court that the letter was only offered to the court to allow the court secretary to copy the text. She offered to make a copy of the letter and to provide it to the court. Judge Danilkin thanked Ms. Ibragimova, turned to Mr. Krasnov, who remained standing, and told him to sit down. "You'll get a copy later," Judge Danilkin informed Mr. Lebedev's defense attorney. "That's it? Our opinion about this matter is of no interest...," Mr. Krasnov began asking, but was cut short with "I'm not interested in your opinion," coming from Judge Danilkin. "Having heard both sides, the court denies both motions - to enter the audio recording and the documents into evidence. Concerning the documents - there are more recent versions of Incoterms that have been published," Judge Danilkin told Mr. Lebedev.

Mr. Krasnov rose and lodged an objection against the actions of the presiding judge. First, he informed the court that its failure to allow defense attorneys to examine a document which the court accepted from the prosecution constituted a violation of defense's rights. Second, Mr. Krasnov asked the court how a written version of its decision was going to look when the court ruled not to enter into evidence an audio tape which was already in evidence. Judge Danilkin clarified his ruling, telling Mr. Krasnov that it was the opportunity to listen to the audio recording which was being denied. "Meaning examination of material evidence?" Mr. Krasnov inquired. "I said what I said," Judge Danilkin replied.

Mr. Lebedev told the court that he wanted to clarify why he sought to enter into evidence the 1990 version of Incoterms. Mr. Lebedev explained that he offered the version of Incoterms which was effective in 1998, 1999 and early 2000, because the events he questioned the witness about took place during those years. Mr. Lebedev told the court that he did not understand why the court would base its decision to deny his motion on the fact that there was a more recent version.

Without reacting to Mr. Lebedev's explanation, Judge Danilkin asked the prosecution to respond to the last motion filed on March 2. Ms. Kovalihina told the court that the indictment made no reference to the contracts that Mr. Anilionis examined in Basmanny Court, therefore entering them into evidence would violate Article 252 of the Criminal Procedure Code. [Article 252, Scope of the Trial: 1. A trial shall be conducted only with respect to the defendant and only on the charge brought against him. 2. The charge may be modified in court if the modification does not worsen the position of the defendant or interfere with his right to defense.] "Our case has all the materials which the preliminary investigation determined to be sufficient to establish the volume of what was embezzled. These include accounting statements and trading balances. Therefore, defense's motion violates the law and should not be granted," Ms. Kovalihina concluded prosecution's response. Motion denied.

The prosecution called their next witness, Mr. Stanislav Zaitsev. Mr. Zaitsev is a senior audit manager at KPMG's Moscow office. Prior to joining KPMG, Mr. Zaitsev worked at PricewaterhouseCoopers from 1996 to 2007 (1996 to 1998 at Price Waterhouse, before it merges with Coopers & Lybrand), a senior consultant, manager and, prior to leaving the company, senior manager.

Mr. Shokhin, who until this point in the trial never asked any witness, began Mr. Zaitsev's direct questioning. In a style resembling Mr. Karimov's, Mr. Shokhin asked Mr. Zaitsev to tell the court where he worked from 1998 through 2004, if he participated in auditing YUKOS and, if he audited YUKOS, what he learned about the company. The witness seemed taken aback by the expansiveness of Mr. Shokhin's initial volley, briefly explained his work history at PwC. Then, he testified that from 1997 through 2002 he participated in audits of YUKOS and some of its subsidiaries - including on location - and also briefly worked on a YUKOS-related project sometime in 2004.

Mr. Zaitsev testified that he worked as an auditor of Yuganskneftegaz from 1996 to 1999, then worked in the consolidation group. He also worked on some consulting projects, which included business trips to Samara. He also participated on a consulting project in connection with Behles Petroleum, South Petroleum and Baltic Petroleum.

Mr. Zaitsev wasn't sure how to approach Mr. Shokhin's question about what he learned about YUKOS during audit, but Mr. Shokhin told him to talk about everything - the judge will decide what was important. Judge Danilkin gave Mr. Shokhin a puzzled look.

Mr. Zaitsev gave the court a very broad overview of what he did. He told the court that he had worked on some YUKOS subsidiaries and visited some of the crude oil traders that worked with YUKOS. Then he told Mr. Shokhin that he would need more specific questions before he was able to provide more detailed answers.

Instead of offering more specificity, Mr. Shokhin asked about Mr. Zaitsev's work with Behles Petroleum, Baltic Petroleum and South Petroleum. Mr. Zaitsev testified that sometime in 1999 or 2000, he did not remember more specifically when, he was told that there was a consulting project which required some work to be done on the Isle of Man and in Switzerland. The work and procedures were specified in contract between PwC and each of the three companies. Mr. Zaitsev explained that he performed testing on a sampling of crude oil contracts. His responsibility was to examine these and to report whether he found any inconsistencies or wide divergences, including in crude oil pricing.

Mr. Shokhin asked what Mr. Zaitsev found. Mr. Zaitsev replied that what he found was in a report that was submitted to his superiors at PwC. Mr. Shokhin demanded more. Mr. Zaitsev told him that he found out how the crude oil trading business worked. Mr. Zaitsev testified that he met with the companies' representatives and learned information about these companies. He remembered that these companies purchased crude oil from YUKOS, then sold it to third parties. Crude oil traders made their profit from the margin. Mr. Zaitsev remembered that Behles, Baltic and South sold crude oil to well known companies, he did not remember the company names.

Mr. Shokhin asked about the purpose of "the YUKOS audit." Mr. Khodorkovsky objected to the form of the question, asking the court to have the prosecutor clarify whether he meant YUKOS or consolidated audit of YUKOS group of companies. Mr. Shokhin clarified his question.

Mr. Zaitsev explained that he worked Yuganskneftegaz audits. The he worked on consolidated audits from YUKOS group of companies. The last time he performed audit-related work in connection with YUKOS was in 2002.

Mr. Shokhin, less than 30 minutes into questioning Mr. Zaitsev, motioned to read the transcript of Mr. Zaitsev's interrogation. He argued that Mr. Zaitsev's testimony contained "contextual contradictions."

Mr. Lebedev objected. He told the court that prosecutor Shokhin should not be allowed to treat his witness the way he was treating him. According to Mr. Lebedev, Mr. Shokhin was demanding that Mr. Zaitsev remember specifics of what happened more than 10 years ago - without showing the witness a single document.

Mr. Krasnov told the court that Mr. Zaitsev's interrogation just started, with the prosecutor asking six or seven questions. The questions themselves were overly broad - such as asking about "all information learned." The prosecution should not be surprised that some of the answers to these abstract questions could have differed from what's in the transcript. Mr. Krasnov pointed out that the only ground for reading transcripts was existence of material contradictions - the word "contextual" was not found in the Criminal Procedure Code. Mr. Krasnov concluded by explaining that defense was looking for the court to put a stop to prosecution's reading transcripts of all the witnesses it calls to testify.

Mr. Shokhin told the court that the CCP prohibited him from explaining what contradictions he saw in Mr. Zaitsev's testimony - it was enough that, in his subjective opinion, he determined that contradictions existed. According to Mr. Shokhin, there were contradictions between what Mr. Zaitsev said during the preliminary investigation and what he said in court. He deemed these contradictions to be "material." "The court must, regardless of what Krasnov thinks, examine all the evidence, because the investigator and the supervising prosecutor found the testimony to be material," Mr. Shokhin was shouting while looking at Mr. Krasnov.

Ms. Terehova demanded to know what preliminary investigation Mr. Shokhin was talking about. The witness was interrogated for case # 18/41-03 - after Messrs. Khodorkovsky and Lebedev indicted.

Mr. Shokhin's motion was granted.

Mr. Zaitsev's transcript included additional details about his work in connection with YUKOS and, particularly, his work with Behles, Baltic and South. Mr. Zaitsev was discussing his work on the Isle of Man. His task was to analyze the price formation policies under which these companies operated. Specifically, his task was to discover whether some of the counter-parties were purchasing crude oil at prices substantially different than those charged other counter-parties. Mr. Zaitsev was explaining that he was analyzing various discounts used and whether some of the counter-parties received additional and unusual types of discounts. According to Mr. Zaitsev, all pricing began with Brent quotes, as published by one of the crude oil reporting agencies. Mr. Zaitsev mentioned that, although certain transparency was lost once all of the discounts were added, PwC did not uncover any unusual variations in crude oil sales transactions that were sampled.

Mr. Zaitsev, after a short break during which he examined the transcripts, confirmed the transcript testimony and was ready for more questions. Mr. Shokhin, however, told the court that prosecution did not have any additional questions for the witness.

Mr. Lebedev began cross-examining Mr. Zaitsev. Mr. Zaitsev spent the rest of the morning session providing detailed description of his YUKOS-related work at Price Waterhouse, then PricewaterhouseCoopers.

Mr. Zaitsev testified that he began working on projects connected with Yuganskneftegaz when the company borrowed funds from the World Bank. Mr. Zaitsev testified that he worked on the Yuganskneftegaz audit team in 1997-1999. Mr. Zaitsev remembered that he visited several sites during his audits, including production facilities. He also observed a shareholders meeting. Mr. Lebedev asked if it was a "real" shareholder meeting, or something that didn't really take place. Mr. Zaitsev, chuckling, assured the court that the shareholder meeting looked genuine to him. Mr. Zaitsev went on to spend several minutes explaining what happens during an audit. He described the initial strategy sessions and audit plan development at the Moscow office to the onsite visits to the sprawling enterprise that is Yuganskneftegaz. According to Mr. Zaitsev, all audit teams exchanged information, with everything ultimately being evaluated and combined back at the Moscow office.

Mr. Lebedev asked if the auditors knew what Yuganskneftegaz's main source of income was. Mr. Zaitsev testified that Yugansk produced and sold crude oil. Promoted by further questions, Mr. Zaitsev testified about various documents that were examined to establish the aforementioned statement. These included crude oil balances, crude oil contracts, invoices, transfer acts and Transneft shipment confirmations, among others. Mr. Zaitsev testified that audit teams included tax specialists, who examined the company's tax statements.

Mr. Lebedev asked if in 1998 and 1999 anyone told the auditors that Mr. Lebedev all of Yuganskneftegaz's crude oil the company produced. Mr. Zaitsev testified that he never heard that from anyone. Same was the answer for a question of anyone else embezzling crude oil from Yugansk. Mr. Zaitsev explained that he could not understand how the term "embezzled" was being used, but, if he was to take the literal meaning, no one ever told him that anyone embezzled crude oil from Yugansk and, furthermore, during his work on Yuganskneftegaz he never uncovered any facts pointing to crude oil embezzlement.

Mr. Zaitsev testified that PwC employees regularly met with YUKOS management and employees during the course of an audit. He went over a list of various people he personally met with during different time periods. Furthermore, he testified that YUKOS hired away at least six PwC employees to work for the company.

Before the trial was adjourned for lunch, Mr. Lebedev announced several contracts related to PwC's projects on Behles, Baltic and South. Mr. Zaitsev was asked to go over these and other documents during the lunch break.

Afternoon Session.

After lunch, Mr. Zaitsev identified persons whom he thought of as YUKOS upper management. The court heard the names of Messrs. Khodorkovsky, Beylin, Aleksanyan, Misamore and Ms. Golub. While looking at the GML shareholder disclosure statement, Mr. Zaitsev testified that he wasn't familiar with the document, because in focused on Gazprom audits in early 2002.

Mr. Zaitsev testified, after Mr. Lebedev began showing to Mr. Zaitsev some of the documents the latter had a chance to examine during lunch, that he was not aware of any fact that could disprove any of the information contained in those documents. That information included agreed upon scope of the company review, identification of transactions and documents to be sampled, and who the contracting parties were. An emphasis was made on the fact that each of the three companies being audited paid for its own expenses. Mr. Zaitsev remembered, as his interrogation transcript showed, that PwC had to re-submit its bill to each company individually, because Behles Petroleum returned those portions where it was billed for South Petroleum and Baltic Petroleum related work.

Mr. Zaitsev did not remember all of the specifics of the work he did with South Petroleum (Mr. Lebedev explained that he was not concerned with Baltic, because the latter sold petroleum products, which were not the subject of the charges), but he explained some of the general principles of what he was looking for when he was on the Isle of Man. Mr. Zaitsev testified that he did not find any unusual discounting or other suspicious arrangements. Mr. Zaitsev explained that when he told the investigator about the "loss of transparency," he only meant that for someone who was inexperienced in crude oil business, combination of discounts presented a challenge in analyzing which discounts were appropriate. As he stated earlier, Mr. Zaitsev did not uncover unusual trading or discounting in contracts with similar delivery terms and quantities.

Mr. Lebedev asked if Mr. Zaitsev found it unusual that crude oil traders made money by selling crude oil for more than they purchased it, in effect keeping the margin. Mr. Zaitsev testified that from his point of view that was normal and he wasn't surprised by this business model.

Mr. Zaitsev testified, looking at the list of Baltic and South's ultimate owners, that none of the companies were familiar to him and that he did not associate any of the companies with YUKOS. Furthermore, Mr. Zaitsev testified that at not time during his work on YUKOS related matters he thought of Behles as connected with YUKOS, or being part of the YUKOS group of companies.

Mr. Lebedev returned to Yuganskneftegaz and asked Mr. Zaitsev to explain a related consulting project he worked on for PwC. Mr. Zaitsev explained that the project he consulted on had as its goal to develop a grading scale for effectiveness of management of YUKOS production companies, specifically to make sure that local management did not misrepresent their reporting to YUKOS management. One of the criteria that were developed was to not only look at the revenue figures but to examine where the money was being spent.

After a few more questions from Mr. Lebedev, Mr. Khodorkovsky took over. He reminded Mr. Zaitsev of the very broad question that Mr. Shokhin asked about everything that Mr. Zaitsev learned about YUKOS and, after explaining how the charges against him and Mr. Lebedev were formulated, asked Mr. Zaitsev to tell the court any facts which may help the court understand: was the crude oil that was produced by Yuganskneftegaz, Samaraneftegaz and Tomskneft embezzled by Messrs. Khodorkovsky and Lebedev or was it sold? Were the funds used to Messrs. Khodorkovsky and Lebedev's personal benefit or did they go to YUKOS?

Mr. Zaitsev testified, once again, that at no time during his work he heard, saw or read anything about embezzlement. He told the court that he could not speak from a legal analysis point, but explained that he had a hard time imagining what crude oil embezzlement was. Mr. Zaitsev testified that from what he remembered of his work on Yuganskneftegaz the production subsidiary had periods of profitability in 1999. He explained, as he did several times before, that he would need to look at Yuganskneftegaz's financial statements to be more specific.

Mr. Zaitsev testified that the auditors were aware that the production companies were selling all of their crude oil to YUKOS or YUKOS subsidiaries. Furthermore, the auditors were fully aware that a portion of crude oil was not exported but went to crude oil refineries to be processed into petroleum products. Mr. Zaitsev confirmed the auditors knew that revenues reflected in financial statements were a direct result of crude oil and petroleum products sales, all from the crude oil produced by the YUKOS production subsidiaries. Asked if Messrs. Khodorkovsky and Lebedev asked any of the auditors to conceal any information from the YUKOS board or anyone else, Mr. Zaitsev testified that, while he could not speak for everyone else, he was never asked by anyone to conceal any information.

Mr. Khodorkovsky turned to Mr. Zaitsev's work on Behles, Baltic and South. Mr. Zaitsev testified that he never uncovered any instances where YUKOS sold to crude oil to any of these companies with a discount more than 20% to that of published Urals quotes. He explained that the margins he saw were close to 5%, but certainly nothing as high as 20%. Mr. Khodorkovsky assured Mr. Zaitsev that it wasn't even 3%, but that was beside the point - it wasn't 20%.

Mr. Lebedev took over from Mr. Khodorkovsky and asked Mr. Zaitsev to go over the PwC project examining YUKOS export sales from the beginning of 1998 through middle of 1999. Mr. Zaitsev explained that he wasn't very familiar with that document, but confirmed that during his work he never uncovered any information to contradict anything that PwC included in the final draft. That information consistently showed that the price YUKOS was charging for its crude oil sales was consistently higher than that of its competitors and higher than the reported average on the Russian market.

Mr. Zaitsev was free to leave.

The trial will resume on Friday, March 12, 11:00 Moscow Time.