Khodorkovsky & Lebedev Communications Center

1)    What exactly are Mikhail Khodorkovsky and Platon Lebedev accused of?

The prosecution has accused Messrs. Khodorkovsky and Lebedev of:

• Embezzling all oil produced by three YUKOS production subsidiaries for six years;
• Embezzling shares held by a YUKOS subsidiary in one of the production companies and five other companies; and
• Money laundering resulting from the sale proceeds of the allegedly embezzled oil and the shares in the indirect subsidiaries.

a) What exactly did they allegedly steal and under what alleged circumstances?

The Embezzlement of Oil
Khodorkovsky and Lebedev are charged with being the leaders of an organized group which embezzled the oil production from YUKOS Oil Company’s three major production subsidiaries – Yuganskneftegaz (YNG), Samaraneftegaz (SNG) and Tomskneft (TN) – between 1998 and 2003.  They allegedly used their positions within YUKOS improperly to force the production subsidiaries to sell all of the oil they produced to YUKOS, or YUKOS-related trading companies, at artificially deflated prices.  The "organized criminal group", lead by Khodorkovsky and Lebedev, then allegedly refined and re-sold the oil at higher prices, thereby "stealing" everything from the production companies.

Stealing shares in the indirect subsidiaries
Again as leaders of an organized group, Messrs. Khodorkovsky and Lebedev are also charged with embezzling the shares held by a YUKOS subsidiary – Vostochnaya Neftennaya Kompaniya (or "Eastern Oil Company" or "VNK"), a holding company that owned a controlling interest in six operating companies, including Tomskneft.  The prosecution alleges that they embezzled the shares by improperly causing VNK to enter into six agreements with YUKOS to exchange YUKOS' shares for VNK’s shares in its operating subsidiaries.

Laundering the Sales Proceeds and the Shares
Finally, the prosecution alleges that Khodorkovsky and Lebedev "laundered" the monetary proceeds resulting from the alleged embezzlement of oil and VNK shares through (a) the downstream transfer of funds between YUKOS owned or controlled companies, and (b) the movement of the VNK shares in the share swap agreements.  Thus, they are charged as members of an organized group with money laundering.

b) What is the sum of the theft being imputed to them?

In connection with the alleged embezzlement of oil, Khodorkovsky and Lebedev are accused of misappropriating 349,403,578 metric tons of crude oil worth 892.4 billion rubles -- or 25.3 billion USD using an exchange rate of 35.3.

In connection with the alleged embezzlement of the VNK shares, Khodorkovsky and Lebedev are accused of embezzling 3.6 billion rubles or 102 million USD using an exchange rate of 35.3.

Thus, the total value of what was embezzled is 896 billion rubles -- or more than 25.4 billion USD using an exchange rate of 35.3.

The amount allegedly "laundered" is more than 487.4 billion rubles plus 7.5 billion USD -- or a total of 21.4 billion USD using an exchange rate of 35.3 on the amount asserted by the prosecution in rubles.

2)    What are the grounds for the Defense's unequivocal claim of innocence as to the current charges?

Khodorkovsky and Lebedev unequivocally deny the charges and assert their innocence.  The charges on their face are absurd; they could not have embezzled all of the oil produced and VNK's shares were swapped both for due consideration and for a valid reason and returned.

There is nothing in the case materials to support the allegation that they "embezzled" all of the oil produced by the production subsidiaries or the shares in the indirect subsidiaries or otherwise "laundered" the proceeds of either alleged crime.  The charges themselves demonstrate either an ignorance of, or a willful disregard for, the most fundamental aspects of the oil and gas industry and the operation of either a major Russian or an international vertically integrated oil and gas company.  While either deficiency would be enough to discredit the charges, the combination of this antipathy for basic business practices and total lack of evidence clearly demonstrates the charges have been brought for reasons alien to justice and fair trial principles.

The Oil Charges
In reality, this current embezzlement charge represents an effort to criminalize legitimate business transactions and management decisions essential to the growth and development of YUKOS from the nascent stages of privatization through to its success as one of Russia's pre-eminent corporations, which were completely legal. These same business practices are used routinely by other Russian oil companies and the major international vertically integrated oil companies worldwide.  Moreover, the wisdom and efficacy of the business practices at issue cannot be credibly disputed.  When Khodorkovsky and Lebedev bought into YUKOS in 1996, it was ill managed, inefficient, and unprofitable.  The company was 3 billion USD in debt, owed back taxes and back wages, and was on the verge of bankruptcy.  At that time, buying an interest in YUKOS was like buying into General Motors today.  The production companies particularly suffered from a complete lack of management and financial controls.  Holdovers ran the production companies based upon antiquated priorities and management practices which were opaque and wholly inconsistent with an international free-market environment.  International oil field technology and practices (e.g., use of coordinated drilling plans) were nonexistent.  Funds generated from oil sales were spent without regard for business need or future concerns.  For example, wells were drilled in order to create or maintain jobs rather than to maximize efficient oil production.  Falling world oil prices and the collapse of the Russian ruble in August 1998 placed the viability of the company in further jeopardy.

In what the prosecution now seeks to characterize as the criminal acts of an organized group, Khodorkovsky and Lebedev hired leading international consultants and experienced international executives and overhauled YUKOS at all levels.  In particular, the creation of a single management company, YUKOS-EP, dramatically improved the operating efficiency of the exploration and production companies through upgraded technology and management practices, such as centralized budgeting and control over the cash flows, internal audit controls and shared services.  Contrary to the prosecution’s allegations, YUKOS never deprived the production companies of funds.  Rather, the business reforms ensured that adequate funding was available to meet operations expenses and capital expenditures so as to develop the entire company, and in particular the production subsidiaries.

Not only were Khodorkovsky's and Lebedev's actions taken in good faith, but also in the best interests of the YUKOS shareholders and employees.  YUKOS became a leader in transparency and corporate governance, and published US GAAP compliant audited financial statements.  Indeed, all of the actions undertaken by YUKOS at the direction of Khodorkovsky and Lebedev occurred in a setting of complete transparency of those steps and belie the allegations now surfacing.  Conclusive proof of the effectiveness of their decisions is found in YUKOS' performance.  YUKOS increased production and decreased production costs, began a series of successful acquisitions of domestic and foreign assets, and paid record shareholder dividends.  At the time of Mr. Khodorkovsky's arrest in October 2003, YUKOS had a market capitalization of approximately 40 billion USD.  In 2007, after all YUKOS assets were finally sold through auctions in the course of the state forced bankruptcy proceedings,  the Yukos bankruptcy receiver reported that the sale of YUKOS assets, excluding the sale of Yukos' main production subsidiary YNG, ultimately generated 24.9 billion USD  (872 billion rubles).  YNG, YUKOS' most valuable asset, was sold at a December 2004 auction for 9.35 billion USD.  It would be impossible to generate this amount if one accepted the prosecution's numbers of alleged embezzlement.

The VNK Charge
The allegation that Khodorkovsky and Lebedev caused the share swap in order to embezzle VNK's shares in its subsidiaries completely misconstrues their actions and ignores several key facts.  The share swap agreements were a means of lawful asset protection and were subsequently acknowledged by a senior official in the Russian government.  Before YUKOS acquired its interest in VNK, previous VNK management had entered into fraudulent transactions that resulted in litigation and judgments against VNK or its subsidiaries and exposed its six subsidiaries, including Tomskneft, to seizure.   These agreements were a means to protect VNK's interest in these subsidiaries while new management defended various legal proceedings.  The charges omit that: a) the agreements provided for valid consideration for the share swap; b) the agreements empowered VNK to reverse the share swap unilaterally at any time, which in 2001, after threats to the VNK assets were resolved, it did; c) the VNK shares were returned and d) the VNK subsidiaries remained on the YUKOS US GAAP consolidated financial statement. In addition, an independent appraiser was hired to value the VNK shares and establish a fair ratio for the swapped shares.  Therefore, VNK, which the prosecution calls a victim in the charges, was never actually deprived of the benefit of its property.

Moreover, including the VNK allegations in the new charges is further evidence of the improper motivations behind them.  It is well established that the Russian authorities extensively investigated the YUKOS/VNK share swap agreements from 1999 to 2001.  Then Prime Minister Putin personally authorized one investigation.  Since the YUKOS/VNK share swap agreements protected VNK, they benefited the Russian Federation which at the time was a 37% shareholder in VNK.  The Minister of State Property, German Gref, was aware and approved of the share swap.  He actually sent YUKOS a draft cooperation agreement acknowledging the need to protect these shares from being arrested and envisioning their return to VNK as soon as the legal dispute with Birkenholz, a company that entered into fraudulent transactions with the former management of VNK, was resolved.  After extensive state investigation, the authorities did not bring criminal charges against Khodorkovsky and Lebedev, but instead, in 2002, the Russian Federation opted to sell YUKOS its remaining shares in VNK.  Arguing now that YUKOS had improperly attempted to gain control of the company's assets is completely inconsistent with the state's prior agreement to sell the remaining shares to YUKOS. Furthermore, the pursuit of the VNK charge long after the Statute of Limitations expired in November 2008, ten years after the swap agreements were executed, is additional evidence that, despite the prosecution's efforts to create the appearance of legitimacy, this case is politically and economically motivated.

Money Laundering Charges
The money laundering charges are totally unsustainable because the required predicate, the underlying embezzlement of oil or VNK shares, did not occur.  Under Russian law, as in most countries, "money laundering" is defined as "financial operations and other transactions with monetary means or other property acquired by illegal means."  In other words, "laundered" funds must be the proceeds of criminal conduct and here they were not.

Moreover, "money laundering" cannot be an issue because Khodorkovsky and Lebedev did not seek to conceal illegal activity.  In fact,  Khodorkovsky and Lebedev acted with, and regularly sought to enhance, transparency.  The conduct at issue was openly disclosed in the YUKOS audited consolidated financial statements prepared in compliance with US GAAP.  Oil sales revenues were captured on the consolidated financial statements and openly reported on the YUKOS website.  The use of various offshore entities was, and remains, a common practice and followed the advice of leading international consultants such as McKinsey, PriceWaterhouseCoopers and Cambridge Energy Resources to facilitate international expansion, to protect company assets, and to optimize taxes.  Troika Dialog regularly rated Russian companies for their compliance with international corporate governance standards.  By 2002, YUKOS had achieved the highest ratings possible in all categories on the Troika Dialogue scale, including transparency.  Similarly, according to Brunswick UBS Warburg's Corporate Governance Risk Rankings of Russian oil and gas companies, YUKOS had become the top ranked oil and gas company by 2001.

3)    What is the basis for the Defense's assertion it is "absurd" that Messrs. Khodorkovsky, Lebedev and the members of the so-called organized group could have "stolen" the oil and otherwise misappropriated assets of Yukos for their personal gain?

The most obvious absurdity of the new charges is the concept that Khodorkovsky and Lebedev physically took possession and embezzled approximately 350 million metric tons of oil.  Where would they have put it?

In addition to the obvious physical implausibility of the embezzlement charge is the issue of how YUKOS, including the production subsidiaries, could have maintained and improved operations during the precise period Khodorkovsky and Lebedev allegedly embezzled all of the oil production for their personal gain.  The consolidated financial statements demonstrate that the revenues from the sale of oil and oil products, the source of the company’s overwhelming majority of its revenues, went into YUKOS accounts and were expended paying operating expenses (including the salaries of more than 58,000 people), capital expenditures, debt retirement, and acquisitions.  Between 1998 and 2003, YUKOS booked revenues from operations of 55.165 billion USD.  During the same period YUKOS paid, for example:

• 21.8 billion USD in operating expenses (including expenses at the exploration and production company level);
• 16.934 billion USD in taxes; and
• 8.971 billion USD in capital expenditures, including acquisitions and purchases of treasury stock.

The above numbers irrefutably prove that Khodorkovsky and Lebedev could not possibly have embezzled 892.4 billion rubles, or 25.3 billion USD using an exchange rate of 35.3.  Despite its willingness to misinterpret the law, the prosecution cannot change the principles of math and show how 25.3 billion USD was available to be embezzled for personal gain after YUKOS made the above expenditures out of a combined revenue stream of 55.165 billion USD.

The only funds Khodorkovsky and Lebedev received for their personal gain attributable to YUKOS were dividends based upon their respective interests in YUKOS' majority shareholder Group Menatep Limited.  The same dividends were paid to all shareholders in YUKOS.   During the period in question, the total dividends YUKOS paid to its shareholders was 2.578 billion USD.  YUKOS, in contrast to at least one other major Russian oil company, Sibneft, never paid a "special dividend" to its majority shareholder while not making a corresponding and equivalent per share payment to its minority shareholders.

The prosecution alleges that all of the sales contracts between YUKOS or its trading companies and the production subsidiaries were fraudulent because they identify YUKOS or the trading company as the purchaser when the actual intent was for the oil to be sold to third parties.  Yet again, the prosecution ignores the fundamentals of the oil and gas business and defies common sense.  There is nothing in the agreements upon which to argue YUKOS, or a trading company, was represented to be the end purchaser, and oil often moves on paper between numerous traders, each of whom take title for a period, until the oil is delivered to the end purchaser.   In short, what else would YUKOS or its trading entity do with the oil except sell it?

Furthermore, the prosecution alleges the embezzlement is evidenced by the failure to pay the production subsidiaries the Rotterdam price for the oil purchased from them at the wellhead, i.e., in Siberia or Povolzhie.  However, as anyone with any experience in the oil and gas business knows, there are numerous variable costs involved in treating and transporting oil from the production site to the delivery point in the market.  In addition, there were large taxes on oil exports.  Thus, there is no rational basis to pay the end-market price for oil at the well head.  Such an allegation is yet another absurdity.  Vladimir Milov, the President of the Institute of Energy Policy and Former Deputy Minister of Energy of the Russian Federation, addressed this point in offering this assessment of the new charges:  "…the investigator’s conclusions are based, in the end, on fundamentally flawed assumptions about the organized principles of the modern oil industry… A student-economist would be kicked out for making mistakes like these."

As noted above, Khodorkovsky and Lebedev are charged as leaders of an "organized group" which was purportedly assembled from its inception to acquire YUKOS and engage in a massive and unprecedented embezzlement scheme and then "launder" the proceeds for the exclusive benefit of the group. In addition to the obvious factual absurdity of this proposition, it contravenes the fact criminal organizations always engage in deception in order to promote their existence, whereas Khodorkovsky and Lebedev worked to bring complete transparency and corporate best practices to YUKOS.  The prosecution's incentive to disregard the obvious is a result of the serious consequences of its decision to charge Khodorkovsky and Lebedev in this manner.  Under Russian law, the charge of acting through an "organized group" extends the statue of limitations for the charges as well as much greater potential penalties upon conviction.  Furthermore, by labeling them as leaders of an organized group, the acts of others are imputed to them regardless of whether the others are charged.  Moreover, there is a stigmatism attached to such a label and it thus promotes the prosecution's goal of portraying  Khodorkovsky and Lebedev as dangerous and pernicious criminals in Russia.  Thus, the indictment, by its own terms, provides additional proof that these charges are politically and economically motivated. 

4)    Please identify the accusations the Defense contends "contain certain statements that contradict the core assertion(s)" alleged by the prosecution?

The inaccuracies in the new allegations are telltale.  For example, in charging Khodorkovsky and Lebedev with embezzlement of all of the oil produced by the YUKOS production subsidiaries, the prosecution ignores the fact that the production companies were paid for oil at the wellhead, and this payment not only covered but exceeded their production costs; and that the sale price to the end purchaser included refining expenses, marketing, transportation, financing, taxes customs duties (in the case of exported oil), logistics, as well as other risks associated with the downstream sale.  The end user price obviously is higher than the oil price at the wellhead.  Furthermore, according to the prosecution, Khodorkovsky and Lebedev and the alleged organized group embezzled more oil -- 349.4 million metric tons -- than YUKOS' production subsidiaries Yuganskneftegaz, Samaraneftegaz and Tomskneft produced during that time period - 340.9 million metric tons.

The embezzlement charge itself is self contradictory.  Prior to addressing the factual deficiencies presented by the charge of embezzlement under these circumstances, there is a legal preclusion that is also presented.  Simply put, embezzlement occurs when a person having been entrusted with custody of goods unlawfully appropriates them from the lawful owner.  In this instance, because YUKOS was initially a shareholder of the production companies which then became its wholly owned subsidiaries, and Khodorkovsky and Lebedev were the controlling shareholders of YUKOS.  Thus, they are in fact accused of theft from themselves.  The same approach applies to  Khodorkovsky and Lebedev and whether they could embezzle the oil and the shares.  Such an allegation makes no sense under the facts and circumstances of this case because; Khodorkovsky and Lebedev are being accused of stealing oil and shares effectively owned by them, albeit indirectly through corporate entities.

There is also the manner in which the prosecution portrays certain well established Russian and international business practices as the means to facilitate the embezzlement of oil.  Most of Russia's major vertically integrated oil companies maintained oil trading companies in domestic tax havens and downstreamed revenues, thereby minimizing taxes, but none have been criminally prosecuted.  Rather, to the extent they have been investigated, the matters have been resolved civilly and they received, at best, only monetary fines, i.e., a slap on the wrist.  Khodorkovsky and Lebedev have the unique distinction of being the only Russian business leaders accused of embezzling the oil sold from the production arm to the trading arm of a vertically integrated company.  Similarly, the prosecution alleges YUKOS used Swiss oil trading companies to facilitate the "embezzlement" of oil and "launder" the sales proceeds.  However, Rosneft and Lukoil utilize analogous trading structures and their executives and shareholders have not been prosecuted for any crime.

5)    The Defense has asserted "the investigation deliberately causes harm to the pseudo-victims."  What is meant by this?

Pursuant to the prosecution's allegations, the purported victims of the alleged embezzlement of oil and the shares in the indirect subsidiaries were the exploration and production subsidiaries and their shareholders.  The charges state they either did not receive the fair purchase price for their oil production or for the shares in their subsidiaries.  However, an objective review of the current condition of what were the YUKOS exploration and production subsidiaries, Yuganskneftegaz (YNG), Samaraneftegaz (SNG) and Tomskneft (TN), and their shareholders, contrasted with how these companies prospered between 1998 and 2003, makes it clear the political and economic attack waged against Khodorkovsky and Lebedev is the actual cause of the harm these subsidiaries have experienced.

When Khodorkovsky and Lebedev became associated with YUKOS, the company was approximately 3 billion USD in debt and more than half of it was attributable to its production units.  However, YUKOS consistently invested money into the production companies to improve their operations and efficiency.  For example, in 1999, in particular, capital expenditures for exploration and production amounted to 3.2 billion rubles, which was allocated to finance drilling operations, purchase of equipment, and construction projects and repairs of pipelines in the oilfields.  Also, significant expenditures were made on new projects such as development of the Priobskoye oilfield, the Zapadno-Malobalykskoye oilfield, and exploration projects in the Russian Black Sea zone.  YUKOS spent 1.3 and 1.7 billion USD on overall capital expenditures, including exploration and production, in 2002 and 2003, respectively, and had planned to spend 1.9 billion USD in 2004.

Even in 1998-1999, when world market prices for oil were at record lows, all three main production subsidiaries were marginally profitable.  In contrast, YUKOS incurred additional short-term debt due to the dire need of cash to support operations when operating costs exceeded oil prices in 1998.  By 2001, YUKOS had completely repaid all the long term debts it owed to the Russian authorities and other creditors and had increased its production capacity by reinvesting its profits in its Russian operations.

Proof of how the "pseudo victims" prospered between 1998 and 2003 is the evolution of YUKOS from a debt ridden, disorganized and inefficient company to the crown jewel of the Russian economy.  This was a company in which Exxon/Mobil and Chevron/Texaco vigorously competed to acquire a major interest during the summer and fall of 2003.  YUKOS could not have achieved the increased productivity or paid the sizeable dividends but for the leadership and business practices Khodorkovsky and Lebedev brought to the company.  Despite all of the allegations made against them, the prosecution cannot change these facts all of which seem directly to contradict the allegations of "embezzlement" and "money laundering."

In contrast, as a result of the attack on Khodorkovsky and Lebedev and the members of the alleged organized group, the shareholders in the production companies saw their shares become worthless and their equity disappear.  The supposed victims of the "embezzlement" saw their investments skyrocket between 2000 and 2003 as their YUKOS shares went from less than 1 USD per share to 14 USD per share in October 2003 and hit a high of 16 USD per share in 2004, on rumors that the attack on Khodorkovsky and Lebedev would be resolved.  This prosperity was while oil was trading at approximately 35 USD per barrel.  However, by 2006, when oil was trading at almost 100 USD per barrel, those shareholders allegedly abused between 1998 and 2003 were left with a worthless investment after the Russian Federation, through Rosneft, engineered the bankruptcy and liquidation of YUKOS, and the production subsidiaries were sold at auction for a fraction of their actual worth.

Thus, it was not embezzlement by Khodorkovsky and Lebedev or any organized group they lead who harmed the "pseudo-victims" identified in the charges, but rather the forces at the highest level of the presidential administration who orchestrated this political and economic attack and harmed those with an interest in the YUKOS production subsidiaries.  Throughout the tax proceedings against YUKOS, the tax authorities and the executive refused to consider any offer to settle the alleged tax obligations.  Rather, billions more dollars were incrementally added to the tally of alleged tax obligations.   Furthermore, the tax auction of YNG violated Russian law by requiring the sale of a core asset when there were other means to satisfy the tax debt, and finally, YUKOS was forced into bankruptcy and liquidated despite the management having presented a plan whereby the company would pay its debts and remain a viable business. 

6)    Khodorkovsky said in public that, when it is possible, he intends to "compensate those who may have been harmed by his actions."  Is this an admission of guilt?  What harm was done, to whom, and what are the damages he was referencing? 

Khodorkovsky went to jail, rather than flee, because he wanted to stand up for his principles and for his homeland.  He wanted to resist those in government who would use the criminal justice system for political and economic gain because to flee would empower them.   He is referring to his refusal to acquiesce to the will of his oppressors and not to conduct described in the charges.   The statement is not an admission of guilt, but rather a somber recognition of the great lengths the authorities will go to convict him and Lebedev, so he speaks of "compensation". Khodorkovsky's friend and colleague, YUKOS ex-general counsel Vasily Alexanyan, was arrested and was denied critical medical care for not acquiescing to efforts by prosecutors to secure false and incriminating testimony.  Separately, YUKOS in-house counsel Svetlana Bakhmina was jailed and convicted in an effort to fabricate incriminating evidence against Khodorkovsky and Lebedev.  While Khodorkovsky and Lebedev were willing to subject themselves to incarceration and isolation from their families, they did not want anyone else to suffer the same fate for their principles.

YUKOS international managers, several minority shareholders and GML, the majority shareholder, have filed various legal actions in order to secure monetary compensation.  These claimants are all victims of the Khodorkovsky/YUKOS affair.  For example, Yukos management successfully pursued legal actions to block YUKOS Finance B.V. and its ownership interest in the Mazeikiu Nafta refinery and the Transpetrol pipeline from being liquidated as part of the YUKOS bankruptcy.  As a result, management has been able to secure more than a billion US dollars.  These funds have been used to pay YUKOS legitimate creditors who were arbitrarily excluded from the list of creditors who asserted their claims in the YUKOS bankruptcy, and the remainder will ultimately be distributed to the prior company shareholders.  The international managers have filed a claim with the European Court of Human Rights for damages resulting from the expropriation of YNG.  Similarly, GML is pursuing a claim under the Energy Charter Treaty.  Various minority shareholders have filed bilateral investment treaty claims as well.   Although Khodorkovsky neither has control over, nor a beneficial interest in, these legal actions, he watches them with keen interest.  Meanwhile, he continues to fight injustice in his own case for the benefit of many people whose lives were impacted by the events of the last five years, and he looks forward to the day when justice finally prevails.     

7)    Why has the investigation of the new charges been delayed for so long?

The alleged conduct now encompassed in the new charges has been the subject of investigation since 2004.  The prosecution placed counsel on notice of its intent to announce them as official charges on the same day the court completed reading the verdict, May 31, 2005, in the first criminal case.  The new charges were formally announced in February 2007, since which time the prosecution has avoided going to trial for approximately 2 years.  There were multiple reasons for the prosecution’s delay tactics.

First, the prosecution has needed additional time for its vain attempt to develop evidence to support the new charges.  In fact, no proper investigation of the relevant facts has occurred.  The overwhelming majority of documentation on record was simply pulled in from other cases that the investigators are pursuing separately, including copies of interrogation transcripts and other documents.  Reams of documents including raw financial data have been dumped into the case file despite their origin being unknown, their content unintelligible, and their relevance undeterminable.  As a result, the current record is a mass of arbitrary data that is a nightmare to navigate.  Through illegal parallel investigations, the prosecution has pressured and blackmailed potential witnesses in order to generate seemingly incriminating testimony.  In particular, the prosecution arrested and then denied YUKOS ex-general counsel Vasily Alexanyan medical treatment unless he would provide a statement falsely implicating Mr. Khodorkovsky in alleged illegal activity.   The prosecution also pressured Yukos ex-auditor PriceWaterhouseCoopers ("PwC") until they agreed to withdraw their audits of the company based on contrived grounds that were obviously flawed.  Shortly after PwC announced its withdrawal of the YUKOS audited financial statements in early July 2007, an appellate court overturned a judgment against PwC on a 2002 tax claim and returned the matter to the lower court for reconsideration. A few days later, the General Procurator’s Office advised PwC Russia that it had found no evidence of wrongdoing by PwC Russia in its audits of YUKOS.  Furthermore, since it had no evidence to support the allegations, the prosecution used the time to manufacture convictions of ex-YUKOS managers such as Messrs. Malakhovsky and Pereverzin, and to attempt to convict Mr. Valdes-Garcia, so as to use their convictions essentially as the grounds for a faux collateral estoppel against the valid defenses raised by Khodorkovsky and Lebedev.

Second, in June 2008, the prosecution announced it was bringing "new charges," which really were only token amendments to the February 2007 charges.  The so-called “new charges” were used by the prosecution to circumvent Khodorkovsky's and Lebedev's constitutional rights, because after 18 months of confinement (which expired in August 2008) they would either have to be released or brought to trial.  After filing the "new charges," the prosecution moved the court for yet another extension of time to continue the investigation and ultimately it was extended through March 2, 2009.  During 2007,  Khodorkovsky and Lebedev became eligible for parole under Russian law and practice, having served half of their sentences.  Yet the numerous extensions allowed the prosecution to keep Khodorkovsky and Lebedev in custody on grounds of pretrial detention, even if they were granted parole.

Third, the delay reflects the conflict within the political elite in Russia regarding whether to extend Khodorkovsky's and Lebedev's jail sentence by convicting them on additional charges.  While there are those who want to continue the political and economic attack they started, there are others who recognize the first trial has tarnished Russia’s image and has contributed to concerns regarding investment as well as the rule of law in Russia.  A second trial, based on such illogical and unsupportable charges, would do even greater harm.     

8)    The Defense has repeatedly stated that "the investigators are consistently refusing to provide and attach exculpatory evidence and they are concealing other exculpatory evidence in their possession." What exculpatory evidence do you think they are deliberately concealing?

Given the nature of embezzlement and money laundering charges, a critical component of the evidence for this case is the financial records reflecting the initial payments for oil purchased by YUKOS, or YUKOS-associated trading companies, from the production subsidiaries, the flow of revenues from the sale of the oil, and the allocation of capital expenditures by YUKOS amongst its subsidiaries, in particular the production subsidiaries.  These critical documents have been offered to the prosecution or are already in the possession of the investigators.  However, the prosecution has failed to admit this crucial information and documents into the case file, in particular the Yukos electronic database and the production subsidiaries' annual and quarterly Russian accounting statements.  The prosecution has opposed the defense's efforts to have this data placed in the case materials.

Khodorkovsky and Lebedev know that the YUKOS financial documentation as well as more than 270 other documents specifically offered by the defense will reflect the production companies were paid for the oil pursuant to legitimate contracts and that the revenues from the sale of this oil or the refined oil products were captured on the consolidated financials and ultimately used for legitimate corporate expenditures such as the payment of operating expenses and taxes, capital expenditures, including significant amounts in the exploration and production companies, and the acquisition of domestic and international companies.  These records would conclusively disprove the allegations, and show that Khodorkovsky and Lebedev received the same personal benefit as any other shareholder – dividends.  In this regard, Khodorkovsky's and Lebedev's commitment to transparency and compliance with US GAAP would produce the evidence necessary to prove their innocence.  The records, which are in the hands of, but withheld by, the prosecution, as well as the records assembled by the defense, but rejected by the prosecution, also would demonstrate the improved financial performance of the production subsidiaries between 1998 and 2003 and offer the court the key evidence, so far ignored by the investigation, that the alleged embezzlement of VNK shares never took place.

In addition, the prosecution has failed to attach records reflecting the significant value of YUKOS assets at the time of its bankruptcy.  These records would constitute further proof that, contrary to the allegation that oil sale revenues were embezzled for the personal benefit of Khodorkovsky and Lebedev or the organized group, they were used to acquire genuine commercial assets with significant market value, later sold as part of the state forced YUKOS bankruptcy proceedings.

The defense believes that there are other examples of suppressed exculpatory evidence in violation of Khodorkovsky's and Lebedev's constitutional rights.  However, the prosecution has not returned documents and electronic data seized from several sources, including documentation improperly seized during an illegal search of the offices of one of Khodorkovsky's lawyers.  As a result, the defense cannot review these materials and accurately assess what has been withheld from the case materials. 

9)    How will the new trial influence other prisoners connected with the Yukos case?

As noted above Khodorkovsky went to jail, rather than flee, because he wanted to stand up for his principles and for his homeland.  Since their respective arrests, Khodorkovsky and Lebedev have resisted those in government who would use the criminal justice system for political and economic gain because to flee would empower them.  Regrettably, the prosecution has gone to great lengths to secure false incriminating testimony, including arresting and holding "hostage" people who worked for YUKOS.  The company's ex-general counsel Vasily Alexanyan was arrested and denied critical medical care and told he could secure treatment and freedom if he would testify against Khodorkovsky.  Another YUKOS lawyer, Svetlana Bakhmina was jailed and convicted in an effort to develop evidence against Khodorkovsky.

In addition, numerous other individuals associated in some way with YUKOS were forced to flee Russia in order to avoid a similar fate.  They are "hostages" in exile, driven from their homes and their families.  Courts in the United Kingdom, Cyprus, the Czech Republic and Lithuania have repeatedly rejected Russian extradition requests for some of these individuals on the grounds that their association with Yukos and/or Mr. Khodorkovsky meant they would not receive fair treatment from law enforcement or judicial officials in Russia.   A conviction on these new charges probably will serve as a basis for renewed efforts to attack and harass Khodorkovsky's and Lebedev's old Group Menatep colleagues or ex-YUKOS management or those who did business with Yukos.

As a preliminary matter, it should be noted that if these new allegations were tried by an independent court that followed the rule of law, the current charges against Khodorkovsky and Lebedev would not be sustainable, if they were allowed to go forward at all.  Related legal actions such as requests for extradition or mutual legal assistance have been heard by independent courts in Switzerland, the United Kingdom, Lithuania, Liechtenstein, Cyprus and Israel with he same result – they have rejected the requests on the grounds that the prosecution’s allegations were legally deficient or improperly politically motivated.  Furthermore, the European Court of Human Rights ("ECtHR") has ruled that Mr. Lebedev's rights were violated on numerous occasions during the pre-trial phase against him in 2003 to 2004.  The ECtHR still has Lebedev's appeal regarding additional violations in conducting the trial and Khodorkovsky's appeals under review.  The logical extension of such decisions would be to terminate, as well, all the collateral actions against related individuals as having no valid basis in law or in fact.  Since these collateral prosecutions are motivated by the need to prop up the persecution of  Khodorkovsky and Lebedev, hopefully the powers in Russia finally will be satisfied and the attacks on these individuals will end.  For those in jail, hopefully their sentences will be commuted and, for those in other countries, hopefully they will be able to go home without fear of being arrested.

Before he was arrested, Khodorkovsky explained that he did not flee Russia because he cared too much about the future of the country.  Khodorkovsky and Lebedev are confident that, just as their commitment to "best practices" legitimately turned YUKOS into the leading company in Russia, their principled stand will benefit all Russians.  The justice meted out by courts around the world will be achieved in Russia, and this court will put an end to the absurdity of the charges and the prosecution’s misconduct.  Thus, their colleagues will return to a country marked by the adherence to the Rule of Law and where all citizens can prosper from the opportunities Russia has to offer.   

For further enquiries, please contact the international defense team:

Sanford M. Saunders, Jr.
Greenberg Traurig, LLP
(O) 1.202.331.3130
(M) 1.703.244.4243
(Int M) 1.202.4153597
Email: Saunderss@gtlaw.com   

A. John Pappalardo
Greenberg Traurig, LLP
(O) 1.617.310.6072
(M) 1.617.669.5964
Email: Pappalardoj@gtlaw.com