Khodorkovsky & Lebedev Communications Center

On Monday, the trial resumed with Judge Danilkin reading the ruling on the prosecution's motion to extend Messrs. Khodorkovsky and Lebedev's arrest. The text of the ruling was more notable for what it did not contain - even one reference to Section 108 of the Criminal Procedure Code, containing President Medvedev's changes to the law on placing those accused of economic crimes under arrest only when one of four narrow grounds exists. Instead, the court went over other arguments offered by the parties, spending more time on those argued by the prosecutor. Finally, Judge Danilkin ruled that none of the grounds that have been stated by the Ingodinskiy Court in Chita when choosing arrest as a measure of restraint have changed, the case would not end prior to August 18 and there were no medical reasons preventing Messrs. Khodorkovsky and Lebedev from continuing to remain in arrest custody. Messrs. Khodorkovsky and Lebedev's arrest was extended until November 17, 2010.

Also on Monday, defense motioned to question Mr. John Romanelli, a specialist who has over 30 years of experience in the banking industry. Mr. Rivkin explained that Mr. Romanelli would provide specialist testimony indictment contained extended passages on the loan transactions for the acquisition of VNK. Mr. Romanelli testified that he was asked to explain the circumstances connected with the acquisition, restructuring and return of collateral, involving various western banks, resulting from their participation in the December 1997 privatization of VNK. He was asked to approach it from an investment banker's perspective.

After the usual round of questions and insults directed at Mr. Romanelli, the prosecution informed the court that they needed to prepare a motion to disqualify the specialist and asked the court to adjourn until Tuesday.

On Tuesday, the trial resumed with prosecutor Lakhtin filing to disqualify Mr. Romanelli. The prosecutor presented the court with virtually the same arguments he used for other specialists, both Russian and foreign. According to the prosecutor, Mr. Romanelli did not know Russian legislation and was not the only expert in the whole world who could testify about the topics he was asked to testify about. According to the prosecutor, the court wasted two days by listening to testimony of Mr. Wes Haun, only to find out that he was not a specialist in Russian laws. The prosecutor argued that defense should not be allowed to waste anymore of the court's time by "having a conversation about nothing."

Furthermore, according to prosecutor Lakhtin, Mr. Romanelli could not use the case materials during his analysis, because he had no access to them. However, if Mr. Romanelli did, it could mean only one thing - Mr. Rivkin violated the non-disclosure agreement he made with investigators, which made Mr. Rivkin criminally liable for disclosing confidential case materials.

Having assured the court that Mr. Romanelli's incompetence was obvious, Mr. Lakhtin insisted that Mr. Romanelli was biased, as well. According to the prosecutor, Mr. Romanelli was paid by the defense attorneys. He met with employees of Compass Lexecon, including the previously disqualified Mr. Kevin Dages. "All conversations between Romanelli and Rivkin are being translated by translator Somov, who is being paid by defense!" Mr. Lakhtin came up with another "reason" for Mr. Romanelli's disqualification.

"Therefore, having exposed his own incompetence, citizen Romanelli is clearly dependent on the defense and having heard his testimony we ask for his disqualification," prosecutor Lakhtin concluded and took his seat.

Mr. Rivkin filed defense's response. He began by reminding Judge Danilkin that not too long ago defense was admonished to respect the honor and dignity of the trial's participants. He asked whether prosecutor Lakhtin's lies and insults were signs of respect for honor and dignity of those present.

Mr. Rivkin went on to highlight and to dispute every lie in the prosecutor's motion. First, Mr. Rivkin assured the court that defense had no intention to invite foreign specialist to comment on Russian laws and to try to supplant the court. Second, Mr. Lakhtin could not know what kind of primary documents Mr. Romanelli worked with - the court struck the question. Third, prosecutor Lakhtin pulled out of thin air an idea that Mr. Romanelli was going to analyze transactions from the perspective of United States laws and regulations. Fourth, Section 217 of the Criminal Procedure Code clearly stated that case materials being copies by the defense are not subject to certification by investigators. Fifth, Mr. Rivkin told the court that he was the author of commentary on the CCP section dealing with non-disclosure during the preliminary investigation. The non-disclosure was active during the preliminary investigation only. Mr. Rivkin told the court that the prosecutor demanded that all specialists know Russian laws - while the prosecutor did not know the simple basics. Sixth, Mr. Rivkin told the court that the prosecutor, having prevented questions on the substance of Mr. Romanelli's analysis, was in no position to guess what Mr. Romanelli analyzed. Finally, Mr. Rivkin told the court that of everyone present, it was Mr. Smirnov who exposed own incompetence by bringing up the Kozlov/Rusanova valuation. Mr. Rivkin told the court that the valuation concerned the first episode, while Mr. Romanelli was engaged concerning the second episode of the charges, on laundering. Mr. Rivkin concluded by telling the court that with that kind of approach it was simply insulting to consider anything which prosecutors said as grounds for disqualification.

Mr. Romanelli began by stating that he was grateful for an opportunity to address the court. He explained that his main purpose was to help the court to understand some complex transactions. If he was able to do so, he was certain the court would find a use for his testimony. Mr. Romanelli told the court that for over 30 years with professionals in the area of securities and finance laws, people whose professionalism was beyond reproach. Mr. Romanelli stressed that none of those professionals ever challenged his competence in investment banking and certainly would never have done so without listening to him first.

Mr. Romanelli objected to the assertion that he was not qualified to provide specialist analysis due to a lack of experience in working for oil companies. According to Mr. Romanelli, the prosecution's argument was irrelevant. He conducted numerous transactions in various industries and told the court that, while he never worked for a telephone company and had no idea how their equipment worked, he, nonetheless, worked on multi-billion dollar transactions in the telephone industry.

Mr. Romanelli reiterated that no one he ever worked with ever doubted his professional competence due to his familiarity or unfamiliarity with the laws of a specific country, a lack thereof. Mr. Romanelli forcefully insisted that he had no doubts about being able to help the court understand the transactions he was asked to analyze.

Mr. Romanelli concluded by telling the court that he traveled a long way to help the court. He did not have any doubts that his professional knowledge will help the court with understanding relevant issues before it.

After recapping the general substance of the arguments and counter arguments offered by the parties and Mr. Romanelli, Judge Danilkin disqualified Mr. Romanelli. According to Judge Danilkin, the court did not engage Mr. Romanelli and did not provide him with the case materials. Judge Danilkin decided that Mr. Romanelli "did not possess the requisite special knowledge, which excludes the possibility of [him] participating as a specialist."

Afterwards, Mr. Rivkin informed the court that defense intended to question Ms. Laura Hardin, a specialist in economic consulting. Ms. Russell was invited to explain economic purposes behind several promissory notes transactions described in the indictment.

Ms. Hardin testified that she was asked to examine certain transactions which prosecution identified as money laundering: intra company loans, promissory notes transactions and dividend payments. She was asked to evaluate the economic rationale and the purpose behind these transactions. She was asked to analyze the dividend payments and to examine what the funds were used for.

A round of insinuations and insults, and prosecutor Lakhtin motioned to disqualify Ms. Hardin. The courtroom heard absolutely nothing original - prosecutor Lakhtin argued that Ms. Hardin did not know Russian law, did not work for an oil company and was interested in the outcome of the case because she was invited to testify by the defense.

In her response, Ms. Hardin was baffled that the prosecutor came up with reasons for disqualification without asking her any questions related to knowledge and experience. Ms. Hardin reminded the court that already described her extensive experience in working with Russian and CIS companies, her extensive oil and gas experience, as well as her extensive financial and accounting experience. Ms. Hardin reminded the court that she had general experience with Russian laws and extensive familiarity with Russian business practices.

Furthermore, prosecutor decided that she was incompetent without having her even attempt to answer the questions she was asked to answer during the analysis. Ms. Hardin told the court that it was her desire to assist the court, prosecutors and defense in helping to examine some of the charges and to analyze the transactions which are standard for a large vertical company, in Russian and abroad. Ms. Hardin told the court that the results she came up with could be of great help to the court.

On Wednesday, after a detailed summary of arguments from both sides, as well as of Ms. Hardin's personal statement, Judge Danilkin granted prosecutor Lakhtin's motion and disqualified Ms. Hardin. Judge Danilkin reasoned that Ms. Hardin was not engaged by the court or by the investigators. "She did not examine the materials of the current criminal case, which prevents this court from establishing the objectivity of her testimony as a specialist. This circumstance allows the court to doubt Ms. Hardin's professional competence as a specialist. The court considers that Ms. Hardin does not have the required special knowledge to [help] decide questions in this criminal matter, which precludes her from participating as a specialist," Judge Danilkin found grounds to disqualify this specialist, as well. [We would like to take our readers back to about two and a half months ago, to show how Judge Danilkin is always able to find requisite grounds to deny defense an opportunity to question a specialist they engaged. Aptly, this involves Mr. Kevin Dages as well. The wrangling around Mr. Dages' ability to testify continued over June 3rd and June 4th. Finally, on June 7rd, Judge Danilkin issued his ruling, disqualifying Mr. Dages and, effectively, launching a string of disqualifications of both Russian and foreign specialists. Unlike Mr. Dages, Ms. Hardin testified that she worked for a Russian corporation, was knowledgeable in Russian Accounting Standards (RSBU), worked with and consulted Russian and CIS companies for most of her career, had close familiarity with Russian corporate law and more than a close familiarity with Russian business practices. In addition, she consulted the Russian government on implementation of certain accounting rules and practices. However, this seemingly unassailable set of skills and expertise lost its value in two and a half months since Mr. Dages was disqualified for lacking precisely in these attributes. Thus, with the court's latest ruling, it became abundantly clear that, regardless of what kind of educational background, work experience and skills a specialist posses, he or she will not be able to testify in Khamovnicheskiy Court if engaged by the defense. -Eds.]

Mr. Vladimir Malahovsky took the witness stand. Mr. Malahovsky testified that Mr. Khodorkovsky did not incorporate Energotrade and he had no knowledge of Mr. Khodorkovsky having any influence over the companies he worked for during his tenure at YUKOS. The witness confirmed that crude oil his companies purchased was transferred to refineries or was shipped directly to the ultimate purchasers. Mr. Malahovsky testified that crude oil purchase and sales transactions happened pursuant to a mutual agreement by both parties.

Discussing service agreements entered into between the aforementioned companies and YUKOS-Moscow, YUKOS-FBC and YUKOS-RM, Mr. Malahovsky, after examining several copies of the agreements from the case materials, confirmed his signature and explained the purpose of the services arrangements. He explained that the agreements were necessary to allow for normal business functioning of the companies he managed. The treasury, accounting and crude oil counter party services were provided by the three YUKOS subsidiaries, which allowed his companies to get professional services while operating with a small staff.

Mr. Malahovsky testified when he was hired to manage Alta-Trade he was provided with assurances that this and any other company he may manage will be completely legitimate. Mr. Malahovsky explained that in addition to the aforementioned assurances he learned for himself that it was indeed so.

Mr. Miroshnichenko asked Mr. Malahovsky whether he was ever aware of any laws, regulations, or business practices, stating that trading companies had to store and to ship the crude oil they purchase by using their own resources. Mr. Malahovsky replied that the first time he ever heard such an assertion was from the prosecutor in his criminal case. "If someone wants to travel from one city to another, he does not buy the train and train tracks - he buys a railroad ticket. It would have been unusual for my company to have competing capabilities with Transneft. That would have made no sense," Mr. Malahovsky explained that absurdity of what the government was asserting.

Mr. Malahovsky learned from the materials in his criminal case that crude oil production subsidiaries were profitable. According to Mr. Malahovsky, what these companies received for the crude oil not only covered production costs but allowed these companies to grow.

Mr. Malahovsky explained that crude oil could not have been purchased at world prices from production subsidiaries. "In 2005 I tried to calculate what we would have been paying for gasoline if [purchasing crude oil in the production regions at world prices]. At the time I came up with 35 rubles per liter, instead of 14," Mr. Malahovsky explained the well known, but ignored, economics of the government's assertions.

Finally, Mr. Miroshnichenko asked whether Mr. Malahovsky was ever forced to act against his will, through mental or physical pressure. Mr. Malahovsky confirmed that he never was. "Do you know anything about embezzlement of the entire crude oil produced by YUKOS subsidiaries from 1998 through 2004?" Mr. Miroshnichenko asked the question being asked of all witnesses. "It would be difficult to imagine anything more absurd!" Mr. Malahovsky replied.

After a short break, when Mr. Lebedev took over, the courtroom witnessed a round of introductions. "Good day, Mr. Malahovsky. Just in case, let me introduce myself. I'm Platon Lebedev," Mr. Lebedev began. "Good day. Finally we got introduced. Members of the so-called organized group. We only meet each other in courts. You know, that's how I met Pereverzin!" Mr. Malahovsky explained. The courtroom chuckled, appreciating the irony of Mr. Malahovsky's words.

Mr. Malahovsky testified that neither Ratibor nor Energotrade had any tax-related issues while he managed the companies. As far as he was aware, Energotrade, now part of Rosneft, had none to this very day. He explained he was surprised to discover that while YUKOS was hit with multi-billion dollar tax claims, none of the YUKOS traders were taken to court.

Mr. Malahovsky noted that, to this very day, he was not aware of a single crude oil purchase contract entered into by the companies where he worked being contested by anyone, included the counter-parties, or having been found violating any legislation. Mr. Malahovsky confirmed that he personally signed the tax returns of the companies he headed and knew that the companies paid all taxes.

Majority of the afternoon session was spent by the prosecutors investigating some other criminal case, as barely any questions touched on the subject matter in Messrs. Khodorkovsky and Lebedev's trial. Mr. Smirnov was interested in finding out about a company called Yauza-M and what funds Mr. Malahovsky was paid by this company through his bank account. Without explaining how this was relevant to the current proceeding, Mr. Smirnov questioned Mr. Malahovsky about a Mr. Stepanov who, as it turned out, invited Mr. Malahovsky into a simple partnership and, using an account opened by Mr. Malahovsky at DIB, transferred a little more than 150 million rubles into Mr. Malahovsky's bank account, then asked Mr. Malahovsky to purchase securities. The transaction took place in 2000 and Mr. Malahovsky, after handing over the securities to Mr. Stepanov never heard from him again. However, prosecutor Smirnov demanded to know where the money went and argued that Mr. Malahovsky withdrew the money for personal use.

Mr. Malahovsky testified that he could and did refuse to sign the crude oil purchase contracts when he thought the terms put his company at a disadvantage. He explained that he could send the contract back to YUKOS-RM with notes on the changes he wanted made. One of the more common issues was when the price did not reflect transportation costs, which went against his company's bottom line. According to Mr. Malahovsky, the issue of crude oil pricing almost never came up - domestic prices did not vary significantly and there were strict tax code limitations on the interval of variations. He repeated that he was able to verify domestic average pricing based on KORTES price summary reports. "Unfortunately, I did not have access to them during my own trial," Mr. Malahovsky noted.

Mr. Malahovsky testified that he knew that Mr. Khodorkovsky was the head of YUKOS. Just as with Mr. Lebedev, Mr. Malahovsky testified that he never met Mr. Khodorkovsky.

Mr. Malahovsky confirmed that the companies he managed sold petroleum products and crude oil. Some of the crude oil was being sold for export to China. A moment of laughter followed when Mr. Lebedev asked whether Rotterdam was in some way connected to China, explaining that the government insisted that the crude oil should have been sold at Rotterdam prices. Finally, Mr. Malahovsky testified that no one ever approached him with an offer to purchase the crude oil at Rotterdam prices in Russian regions.

The trial will resume on Monday, August 23, 10:00 Moscow Time.