Khodorkovsky & Lebedev Communications Center

On Monday, the trial resumed with prosecutor Lakhtin replying to the two defense motions pending from two weeks ago. First, on the Moscow's Arbitration Court decision from one of the YUKOS tax cases, the prosecutor told the court that the copy of the court decision was not verified by the court, but by YUKOS, which had no right to verify anything. Next, Mr. Lakhtin told the court that defense motion to enter into evidence and to examine additional YUKOS US GAAP financial reporting documents should be denied, also. According to the prosecutor, Messrs. Khodorkovsky and Lebedev created two parallel accounting systems within YUKOS: First set of financial reporting, drafted according to Russian Accounting Standards, did not show "the real operations with crude oil" and was provided to YUKOS shareholders and tax authorities. The second, drafted according to US GAAP, to conceal the crimes and to keep the profits to themselves. According to the prosecutor, Messrs. Khodorkovsky and Lebedev showed the US GAAP reporting to foreign investors, only, in order to sell more of their shares of YUKOS in an effort to further enrich themselves. Mr. Lakhtin insisted that with these "facts" now made known to the court, the US GAAP reporting in question can not be considered evidence of the lack of embezzlement and money laundering. Mr. Lakhtin found invidious motives for the defense attempting to add these documents to the case file. According to the prosecutor, should the court grant defense's motion, defense attorneys will start reading these documents into the record - thus impermissibly delaying the trial further.

After the prosecutor was finished, Judge Danilkin DENIED both motions. According to Judge Danilkin, the copy of the Arbitration Court decision defense offered into evidence was not verified appropriately. Concerning the YUKOS US GAAP reporting, Judge Danilkin ruled there were no legal grounds based on the arguments offered by defense to allow the court to add these documents to the case materials.

Mr. Dyatlev told the court that defense will continue to present documentary evidence. For the rest of the hearing Mr. Dyatlev read into record the rest of the repeat tax audit of YUKOS for 2001, which he began reading last Wednesday.

At the end of the hearing, defense filed two motions. In their first motion, read by Mr. Rivkin, defense asked the court to enter into evidence deposition of Mr. Andrey Leonovich, former YUKOS Treasurer. Mr. Rivkin explained that the government alleges Mr. Leonovich to be an organized group member, tasked with conducting financial operations with embezzled funds which were accumulated in bank accounts of fictitious Russian companies. In addition, Mr. Leonovich's indictment, issued in absentia, alleges that he was a member of an organized group, headed by Messrs. Khodorkovsky and Lebedev, which was involved in embezzlement and laundering of property entrusted to it. Mr. Rivkin told the court that Mr. Leonovich was interrogated on several occasions, but none of the interrogation transcripts were found in the case file.

Mr. Klyuvgant filed another motion which was directly connected to Mr. Leonovich's criminal case. On June 18, 2010, investigator Rusanova, in denying Mr. Leonovich's defense attorney's motion to terminate the criminal investigation against his client, wrote that "embezzlement and non-payment of taxes were not mutually exclusive," and went on to explain how the same actions which resulted in Messrs. Khodorkovsky and Lebedev's convictions for tax evasion were now being qualified as embezzlement. According to Mr. Klyuvgant, the explanation offered by Ms. Rusanova in denying Mr. Dudnik's motion to terminate the criminal case against Mr. Leonovich, admitted that the facts examined during the first trial against Messrs. Khodorkovsky and Lebedev were identical to the ones being examined in the criminal case against Messrs. Khodorkovsky and Lebedev, as well as in Mr. Leonovich's case, with the government attempting to hold the defendants criminally liable for the same actions twice. Mr. Klyuvgant argued that Ms. Rusanova's order showed the illegality of the charges of crude oil embezzlement and money laundering. In addition, Mr. Klyuvgant argued that Ms. Rusanova's order contained proof of the actual position being carried by the government in this case. Mr. Klyuvgant motioned the court to send a documents production request to the Investigative Committee for a verified copy of Ms. Rusanova's order denying Mr. Dudnik's motion to terminate the criminal case against Mr. Leonovich.

Finally, Mr. Dyatlev returned to the Arbitration Court decision motion which the court denied earlier in the hearing. Mr. Dyatlev restated the court's language concerning the improperly verified copy being offered by the defense, noted that neither the court nor the prosecution cast doubt on the relevance of the decision to the current proceeding, and motioned the court to send a documents production request to the Moscow Arbitration Court for a verified copy of the aforementioned decision.

On Tuesday, the defense presented the court with another witness. Mr. Igor Vasiliadis, who, after working closely with YUKOS for over 5 years, joined Sibintek as First Vice President in 2001. The focus of his work was improvement and maintenance of information gathering and monitoring in areas of crude oil production, refining, transportation, logistics and others. The goal was to be able to deliver most complete and objective information to YUKOS and its shareholders.

Mr. Vasiliadis explained that one of the key goals for Sibintek was to fix the shortcomings and to optimize the information flow within YUKOS, anything which could allow the company to eradicate theft and fraud within its subsidiaries. In addition, Sibintek implemented the electronic document system within YUKOS. According to Mr. Vasiliadis, Sibintek was actively involved in developing and implementing YUKOS corporate standards on information gathering, storage and reporting.

Mr. Vasiliadis described for the court what he saw as some of the key aspects of YUKOS being a VIOGC. According to Mr. Vasiliadis, vertical integration meant only positive aspects for the company and each of its parts. Mr. Vasiliadis explained that vertical integration with a unified corporate center meant predictability for investors and no intra-company competition between the company's divisions. Vertical integration allowed YUKOS to optimize shareholders' profits, while minimizing risks for production subsidiaries.

Mr. Vasiliadis testified that he personally worked on development and improvement of company standards for YUKOS-EP and YUKOS-RM. Asked to explain what, if any impact, occurred after the three-prong management restructuring, Mr. Vasiliadis testified that the most obvious indicator of the positive impact was the increase in the crude oil production rate. According to Mr. Vasiliadis, centralized management of all divisions within the company allowed to hedge against the risk that production costs will not be covered for production companies.

According to Mr. Vasiliadis, YUKOS crude oil was transferred to Transneft. The crude oil was delivered to refineries, or was exported. Mr. Vasiliadis noted that Transneft assumed the risk once the crude oil was transferred into its pipelines. Mr. Vasiliadis confirmed that various government agencies, including security services, monitored the company. According to Mr. Vasiliadis, internal and external monitoring as well as the technical advancements in monitoring measuring technologies meant that a "three liter glass jar could have been carried out, but nothing much bigger than that."

Mr. Vasiliadis was asked about intra-company pricing. According to him, intra-company pricing was one of the methods used to minimize the risk for crude oil production subsidiaries. He explained that production subsidiaries were guaranteed a payment based on a crude oil contract, regardless of the price situation on the market. Having secured a payment based on a contract price, crude oil companies did not have to concern themselves with all other costs - logistics, insurance, marketing and others. Mr. Vasiliadis testified that crude oil production companies were always "a number one priority" within the holding and he did not know of an instance when they did not receive payments pursuant to the contracts.

Mr. Vasiliadis testified that PwC auditors had all necessary access to obtain audit data. He testified that there were - as expected - minor discrepancies in crude oil being transferred to Transneft, but he described those as "insignificant," noting that PwC certainly knew of any such discrepancies being uncovered.

Prosecutor Lakhtin, after "warning" the witness that all questions will focus on circumstances relevant case, asked Mr. Vasiliadis about his motivation for coming to Khamovnicheskiy Court. Mr. Vasiliadis explained that he saw Mr. Khodorkovsky's request for former YUKOS employees to come forward, got in touch with the defense team - specifically Mr. Miroshnichenko - and, after meeting Mr. Miroshnichenko at a café to discuss what he knew, came to court. "Did you just talk at the café?" the prosecutor asked. The courtroom broke out in laughter.

Mr. Lakhtin turned to convincing Mr. Vasiliadis that, because the latter did not read the indictment, he did not know "the mechanism of embezzlement that took place." Mr. Klyuvgant objected and demanded the court strike this type of questions - the fact of embezzlement wasn't established by any court. Mr. Lakhtin accused the defense attorney of being "illiterate" when it came to criminal law. Mr. Klyuvgant noted that of all the people Mr. Lakhtin should be the last one to talk about jurisprudential illiteracy. Judge Danilkin asked the defense attorney and the prosecutor to drop the discussion. "They usually work against the government's interests," Mr. Lakhtin ignored the court.

Mr. Lakhtin wanted to know why, if all of the information for financial reporting was disclosed and was correct, PwC recalled its auditor's reports and conclusions. Mr. Vasiliadis told the court that PwC should be asked why they decided to do what they did - the information he provided to PwC was objective and complete.

On Thursday, the defense questioned Ms. Inessa Dobrodeeva, Mr. Lebedev's secretary from MFO MENATEP. She was asked to come and to testify at Khamovnicheskiy Court by Mr. Rivkin, as she never received the summons.

Ms. Dobrodeeva joined Bank MENATEP in 1993 as a secretary, worked at Trust and Investment Bank, Bank Menatep SPb, and became Mr. Lebedev's secretary at MFO MENATEP in August 2001.

Mr. Rivkin asked Ms. Dobrodeeva to examine the copies of daily planners found in the case materials. Ms. Dobrodeeva examined materials found in Volume 128, confirmed that these looked like the copies of the daily planners she worked with, and went over some of the entries in the daily planners.

Ms. Dobrodeeva testified that Mr. Lebedev traveled quite often. Some of the countries he traveled to included Germany, France, Cyprus and Switzerland. Ms. Dobrodeeva testified that the last time she saw Mr. Lebedev's passports was during the search and seizure on July 01, 2003. Mr. Rivkin asked the court for Mr. Lebedev's passports, to present them to the witness. Judge Danilkin unsealed the evidence envelope with Mr. Lebedev's passports. Ms. Dobrodeeva looked them over and confirmed that these were the passports she remembered. She explained that one of them was already expired at the time of the search, but was kept because it contained previously issued visas.

Ms. Dobrodeeva described the July 01, 2003 search and seizure. She described it as the first search which was followed by numerous others, most within YUKOS. According to Ms. Dobrodeeva, no one presented her with any search orders or any other documents. Mr. Lebedev's office had several rooms, but the people conducting the search kept her in the reception area. She was present when the investigators took Mr. Lebedev's daily planners.

Prosecutor Lakhtin asked Ms. Dobrodeeva to confirm that she and another secretary made entries into the daily planners. He was intent on finding out whether any of the entries were made by Messrs. Lebedev or Khodorkovsky. Ms. Dobrodeeva testified that only her colleague and she made entries in the daily planner.

Mr. Lakhtin insisted on Ms. Dobrodeeva explaining the subject of the meetings, but she told the court that unless the subject was written down in the planner she did not know what it was, because she did not attend the meeting. Mr. Lakhtin continued to go over the names written down in the planner and Judge Danilkin asked whether the prosecutor intended to go over every page in every daily planner. Mr. Lakhtin told the court that he will go over all of the pages he thought were necessary and continued going over the entries in the daily planners page by page.

Mr. Lakhtin would pick out entries, demanding to know what the meeting was about or who invited the participants. Ms. Dobrodeeva continued to explain that either it was someone asking to meet with Mr. Lebedev or Mr. Lebedev inviting someone for a meeting. Mr. Lakhtin kept looking for group meetings, often conflating separate appointments to present a larger group of persons than there actually was. Ms. Dobrodeeva corrected the prosecutor more than once when such "interpretations" were presented to her.

After Ms. Dobrodeeva left, the prosecution responded to the defense motions pending from last week - to enter into evidence Ms. Sarah Carey's deposition, to enter into evidence the Arbitration Court decision in the Samara regional prosecutor's complaint concerning the YUKOS/Samaraneftegaz General Agreement and to obtain from the Anti-Monopoly Service a list of intra-company prices within Rosneft and Sibneft, between the parent company and the production subsidiary.

In quick succession, Judge Danilkin DENIED all three motions. According to the judge, he found no legal grounds to recognize Ms. Carey's deposition as "material evidence." He refused to enter into evidence the Arbitration Court decision in the form of "an incomplete excerpt." Finally, Judge Danilkin reasoned that the motion concerning the documents production request should not be granted, because "Rosneft and Sibneft prices were not the general oil price standard."

Ms. Liptser went on to file a motion, in which defense asked the court to send an official request to the German authorities asking them to help facilitate questioning of Mr. Rieger by means of a video-conference. In addition, defense motioned to add to the case file and to enter into evidence Mr. Rieger's deposition.

On Friday, the trial resumed with Judge Danilkin looking over a reedy smoke haze filling his courtroom. The effects of Moscow's peat fires have finally reached Courtroom #7 of Khamovnicheskiy Court. Mercifully, the air conditioners were working at full capacity making the courtroom just bearable.

Mr. Gruzd told Judge Danilkin that defense was ready to question Mr. Farid Khamidullin, former General Manager of the Tatarstan branch office of Trading House YUKOS-M. Mr. Khamidullin testified that he came to Moscow on his own initiative, after learning of Mr. Khodorkovsky's open letter to former employees of YUKOS. He explained that he felt deep respect for Mr. Khodorkovsky, thought that he had some information that may be useful for the court to hear and considered it his civic duty to appear.

Mr. Khamidullin testified that he joined YUKOS in 1999, when TH YUKOS-M opened a branch office in Kazan, the capital of Tatarstan, to sell petroleum products there. Mr. Khamidullin explained that TH YUKOS-M had 43 branch offices throughout Russia and identified some of the largest ones as being in Moscow, Samara and Tomsk. Mr. Khamidullin explained that as a General Manager he acted pursuant to a power of attorney issued by TH YUKOS-M.

Mr. Khamidullin testified that on a weekly basis his branch submitted a price report on the regional petroleum prices to the head office in Moscow. There, his report was compared with other sources on regional petroleum products prices, and petroleum products prices were adjusted accordingly. According to Mr. Khamidullin, there wasn't a significant price difference between YUKOS and its main competitors in the region.

Mr. Khamidullin testified that the Tatarstan branch office was comparatively small, with an annual sales volume around 300-400 million Rubles. Nonetheless, there were strict controls in place to ensure accurate reporting and compliance with all government and company regulations. Mr. Khamidullin explained that some tax payments were made by the branch office, while others were made by the head office. There were times, based on the way the tax laws were applied, that tax payments exceeded the branch office's revenue. Transportation and storage fees were paid by the branch office, as well.

Mr. Khamidullin testified that he never received any orders from Messrs. Khodorkovsky and Lebedev. He was never pressured, physically or mentally, to act against his will. He never heard anything about a parallel management system within YUKOS. Mr. Khamidullin testified that he never heard anything about the embezzlement of 350 million tons of oil, and could not even imagine this happening. "Where is he going to keep it? At his dacha, in barrels?" Mr. Khamidullin wondered. He told the court that there couldn't even be a question about the proceeds from the sale of petroleum products being embezzled - the funds were transferred to TH YUKOS-M's bank accounts. Mr. Khamidullin explained that YUKOS employed so many foreigners who were "crazy" about making sure that even minor violations did not happen, he had a hard time imagining embezzlement happening under their noses.

Answering prosecutor Lakhtin's questions, Mr. Khamidullin confirmed that he never read the indictment. Prosecutor Lakhtin, in the now common fashion of asking questions without waiting for the answers, rattled of several assertions concluding with "You don't know anything!" being thrown at the witness. Mr. Khamidullin attempted to explain that he read some indictment excerpts on Vedomosti.ru, but was told by Mr. Lakhtin that no one read the indictment.

The trial will resume on Monday, August 09, 10:30 Moscow Time.