Weekly Report of Trial Proceedings: August 23 - August 27, 2010
On Monday, the trial resumed with Judge Danilkin offering Mr. Lebedev to start presenting testimony in connection with the charges he was facing. Mr. Lebedev began his testimony, using a slide show presentation a copy of which he promised to the court so that it could be entered into record. The first slide read "Welcome to the Big World of Multinational Business. Platon L. Lebedev, director, ‘Group MENATEP,' (1998-2003). Testimony 2010 ©"
In the prologue to his testimony, Mr. Lebedev discussed various risks of conflicts that any "big business" had to consider. According to Mr. Lebedev, the most difficult conflicts to solve were conflicts between corporations and governments, or "between business and power."
"In our case, in the YUKOS case, when the power and her puppeteers chose for the role of ‘the arbiter' [Birukov and Karimov], i.e. used ‘blunt force unrelated to the law' (MBK's terminology), it was the worst option to resolve any, potential or existing, conflicts between business and power... According to the ‘domino effect' theory, many potential risks to the powers from the YUKOS case will multiply (and quickly) into real and sharp conflicts....."
Mr. Lebedev began his testimony by providing a geography lesson to the government which, as represented by investigators and the prosecutors, continues to insist that Group MENATEP Ltd. (GML), with whose history he would begin his testimony, was incorporated on "the island of Gibraltar." While explaining the reasons on why it was beneficial to incorporate a company in Gibraltar - easily understood rules for incorporating a company, professional administrative services by licensed secretary companies, and a jurisdiction with developed legal and judicial systems, Mr. Lebedev, using maps and references to the Big Soviet Encyclopedia, read passages from the indictment where the government insisted that GML was incorporated by Mr. Lebedev on "the island of Gibraltar" on September 5, 1997.
Mr. Lebedev explained that Gibraltar was picked for the aforementioned reasons and, also, because Menatep Ltd., incorporated there, successfully conducted its activities there, as well. Mr. Khodorkovsky agreed with the choice of Gibraltar. Mr. Lebedev explained, also, why Russian Federation was not a good place to register a multi-national business - no convertible currency, strict regulation and restrictions on foreign currency transactions and no legislation or signed treaties on protection of investment, double taxation and others. The risks were many and unpredictable - as was proved by the 1998 default. Mr. Lebedev noted the fortuitous choice of incorporating in Gibraltar - there were no issues with managing assets in the United States, Western and Eastern Europe, and Russia - at least until the YUKOS case. And, even in 2010, GML continues to function as a multi-national holding company, in spite of provocations from the "organized prosecutorial group" in the YUKOS case.
Mr. Lebedev went over the holding's history of the important dates and the shareholder structure as of 1998, 2002 and March 2003. He discussed the latest change in the shareholder structure prior to his arrest, explaining that it was prompted by a proposed legislation which Mr. Khodorkovsky presented to Prime Minster Kasyanov on behalf of the Russian Union of Industrialists and Businessmen. Mr. Lebedev explained that the business union proposed a one-time $20 billion USD payment into the federal budget, in view of the fact that companies privatized 7-8 years prior had their capitalization increase several times. Many years later, Mr. Lebedev found out - reading Kommersant Vlast - that President Putin, after receiving the proposed legislation, "swept it under the rug."
Mr. Lebedev explained how investigators, including Messrs. Karimov, Alyshev and Ms. Rusanova among them, sought to falsify laundering charges, by trying to connect GML, Nassaubridge Management Ltd. and Open Russia Foundation. Mr. Lebedev explained that GML was exclusively involved in investment activity through its wholly-owned subsidiaries, a list of which was found in the case materials. The only income that GML had came from dividend payments from its "daughters" or from interest payments from subsidized loans made to the same. The banks where GML maintained its accounts were prohibited from and would not accept any deposits except those from GML's wholly-owned subsidiaries. This "special regime" prevented the risk of "suspicious" funds being deposited or transactions with "suspicious" firms.
Mr. Lebedev told the court that Messrs. Birukov and Karimov, without being aware of this "know-how," fell into a trap when they, amongst other things, attempted to attribute to Mr. Lebedev disposing of laundered funds by asserting that YUL and Hulley Enterprises were involved in crude oil sales, as well as transactions with the Open Russia Foundation (ORF). Before turning to the ORF episode, Mr. Lebedev asked the court to note that the indictment was full of assertions that YUL sold crude oil and petroleum products - but not even a single contract in support of this falsification.
Mr. Lebedev described how Mr. Karimov, in his attempts to get anything from the Swiss and Cypriot authorities, insisted that Mr. Lebedev moved "dirty funds" from Barclay's Bank in Cyprus to UBS Bank in Switzerland. However, although the mutual legal assistance requests were sent pursuant to a case opened to investigate the ORF episode, no mentioned of ORF was made. Instead, Mr. Karimov described how Messrs. Khodorkovsky and Lebedev "embezzled approximately $8 billion USD in revenues from crude oil sales by [YUKOS production subsidiaries]." Mr. Lebedev asked the court to note that he found out about these specific mutual legal assistance requests more than two and half years after the investigation was opened. So, ORF was missing, but Messrs. Birukov and Karimov insisted that Nassaubridge transferred funds directly to GML.
Mr. Lebedev digressed from the slide show testimony and asked the court to note that while the ORF episode simply disappeared, the millions of dollars in accounts under arrest in Russian banks remained so to this very day. So for more than 5 years those funds are sitting there, while the interest keeps accumulating and, as Mr. Lebedev told the court, it wasn't difficult to figure out who kept benefiting from it. "At least they could have bought Lakhtin better technical equipment!" Mr. Lebedev exclaimed in mock outrage, causing an outburst of laughter from the gallery.
Mr. Lebedev shared with the court some of the assertions Messrs. Khatypov and Karimov made when testifying in Cyprus court. Mr. Lebedev described the confusion when the aforementioned gentlemen attempted to convince the judges that YUKOS intra-company crude oil transactions were actually "embezzlement," while payments made, including tax payments, were "money laundering."
He described this exchange between a judge and Mr. Karimov, discussing YUKOS operations as a vertically-integrated holding:
Judge - Isn't it normal for consolidated companies to have common results?
Karimov - I don't understand [the question].
On Tuesday, the trial resumed with Mr. Lebedev showing the court Mr. Karimov's order from December 02, 2004, pursuant to which a criminal case against Messrs. Khodorkovsky, Lebedev and others, was separated from case #18/41-03. Mr. Lebedev read those portions of the order containing allegations of laundering the Open Russia Foundation funds and asked the court to note that Mr. Karimov, while alleging "money laundering," managed to forget to state what the predicate crime was and, more importantly, managed to accuse Messrs. Khodorkovsky and Lebedev of laundering Open Russia Foundation's funds almost a full year before the alleged bank transfers even took place. According to Mr. Lebedev, "the mysterious origin" of the ORF episode and its "mysterious disappearance" were a clear sign of the political motives behind the charges.
Mr. Lebedev turned to the slide presentation and continued to explain how investigator Karimov and Co. sought to convince everyone that Yukos Universal Limited, with Mr. Lebedev serving as its Director, was involved in money laundering. To do this, investigators insisted that YUL was involved in crude oil and petroleum products trading, which allowed Mr. Lebedev to launder the proceeds.
Mr. Lebedev noted that both the documents that investigators did and did not add to the case file exposed this falsification. Mr. Lebedev testified that none of the companies within GML holding structure traded crude oil or petroleum products and it was not surprising that the government did not include a single contract involving YUL, Hulley Enterprises or any other GML subsidiary. What the government included were audited financial reports of GML and its subsidiaries. Mr. Lebedev read from a GML financial report, where YUL's sole activity was described as "trading transactions with shares of OAO NK YUKOS." Same information, under Mr. Lebedev's signature, appeared in an application to be filed with the SEC in connection with the proposed issuance of YUKOS ADRs.
In the slides being projected on the courtroom's wall, Mr. Lebedev showed the court information about some of YUL's banking and investment partners, UBS, Morgan Stanley, Credit Suisse First Boston, ING and HSBC among them. Mr. Lebedev assured the court that these banks were not inexperienced players on the world banking scene and would have caught even a whiff of "money laundering" at its partner.
Mr. Lebedev noted that during that from October 2000 through January 2002 transactions with YUKOS shares brought in close to $1 billion USD, while investigator Karimov accused Mr. Khodorkovsky and him of laundering $1 million in intended donations to the ORF. "What, he thought we had nothing better to do?" Mr. Lebedev posed a rhetorical question.
Mr. Lebedev turned to the next portion of his testimony, concerning the VNK subsidiaries' shares exchange episode of the indictment. After reading some of the assertions contained on pages 6 through 17 of the complaint and highlighting some of the company names, directors and contracts mentioned there, he summarized it with a simple statement "I know nothing of the transactions appearing on pages 6 through 17 [of the complaint]."
The transactions described on those pages took place between November 6 and November 12, 1998. Mr. Lebedev reminded the court that the government had a year and a half to try to find and to present evidence to support the assertions that he was in Moscow on those dates, that he used his official position of Deputy Executive Director of Rosprom, that he converted Tomskneft's shares for his personal use, or how Tomskneft's minority shareholders suffered any harm when VNK exchanged its Tomskneft shares for YUKOS shares. Mr. Lebedev told the court that the case file did not contain a single piece of evidence to support any of these assertions.
Mr. Lebedev reminded the court that he was asking for and was still waiting for an explanation as to why the government swapped Mr. Golubovich's name for Mr. Lebedev's during the timeframe from November 6 through November 12, 1998. Mr. Lebedev explained that the swap was one of investigator Karimov's trademarks, but Mr. Golubovich testified already and, thanking Mr. Golubovich, Mr. Lebedev assumed his testimony was entered into the official trial record.
Mr. Lebedev explained to the court that on October 13, 1998, Tomskneft's share purchase quote was one penny and sell quote was $1.20 USD. Furthermore, through October 30, 1998, there wasn't a single transaction made with Tomskneft's shares. Mr. Lebedev told the court that the RTS data proved investigator Karimov lied when he wrote in the indictment that the exchange quotes for Tomskneft's shares were effectively $10 USD per share. "The maximum someone was offering to sell their shares for was $1.20. There were no other offers," Mr. Lebedev described what was happening on the RTS.
Mr. Lebedev reminded the court that Mr. Golubovich and other witnesses did not utter a single word about any alleged orders he gave them. He reminded the court that Mr. Khodorkovsky testified that he did not give any orders to Mr. Lebedev about the share exchanges, either.
Mr. Lebedev told the court that as a shareholder he understood and fully supported the management of YUKOS on the steps it took to protect YUKOS and VNK from the harm they were facing. In addition, he noted that if in 1998 Messrs. Avalishvili and Rybin agreed to exchange their assets for YUKOS shares, in 2002-2003, they would have had the $400 million USD they were hoping to obtain through fraudulent means. Instead, they chose a fight and got only what the arbitration courts gave them - nothing.
On Thursday, the trial resumed with Mr. Rivkin informing the court that defense will call to the witness stand Mr. Tagirzyan Gilmanov, former Executive Director of Yuganskneftegaz.
[In the afternoon, prosecutor Ibragimova attempted to have the court remove Mr. Lebedev from the courtroom until the end of the closing arguments stage of the trial. Her motion was retaliation for Mr. Lebedev's showing the court that the prosecutor continued to blatantly distort the evidence and to mislead the court. -Eds.]
Mr. Gilmanov testified that YUKOS-EP was Yuganskneftegaz's executive. Although he acted pursuant to a power of attorney issued by YUKOS-EP, he retained most of his previous functions, except for being limited into not entering into financial transactions of over a million USD without pre-approval and he did not remember an instance where any such request was denied. Otherwise, he and his team of professionals continued to be responsible for and implemented all company level decisions. According to Mr. Gilmanov, the executive functions transfer agreement in question was logical within a vertically integrated crude oil company.
Mr. Gilmanov testified that that Yuganskneftegaz functioned based on annual and monthly budgets. In addition to traditional costs - salaries, electricity and others - Mr. Gilmanov explained that Yuganskneftegaz required a lot of capital investment. The result was an annual crude oil production growth rate of between 16-18%. Mr. Gilmanov testified that the price at which Yuganskneftegaz sold crude oil covered the production costs. He confirmed that Yuganskneftegaz was profitable during 1998-2003.
Mr. Gilmanov explained "wellhead liquid." On average, a ton of liquid extracted by Yuganskneftegaz had about 65% water content and about 68 cubic meters of gas. According to Mr. Gilmanov, whatever it was that was extracted could not be called "market grade oil." Mr. Gilmanov explained that a strategy was implemented to protect the oil from arrest, which included YUKOS becoming the owner of "wellhead liquid." Mr. Gilmanov explained that the strategy was openly discussed with the government's representatives, with the emphasis on the fact that what was coming out of the ground was not a market grade product.
Mr. Gilmanov testified that he never had to implement orders which asked him to act outside his functions. He explained that there was too much respect to even consider asking someone to do something unlawful or inappropriate. He confirmed that no one physically and psychologically pressured him; otherwise he would have found another place to work. He knew nothing about an informal parallel management system, telling the court that it would have been impossible to keep it secret. He told the court that he had no idea how Mr. Khodorkovsky would have concealed his role at the company and he never heard of an organized criminal group within YUKOS.
Mr. Lebedev asked Mr. Gilmanov to explain why through 1996 Yugansk managed to dig itself a $1 billion USD "hole." Mr. Gilmanov explained that there was the drop in crude oil production rate and no one wanted to pay taxes. Yuganskneftegaz did not have a staff of tax professional. No one was asking for audited financial statements. The lack of understanding of the application of tax laws resulted in 70-75% tax rates and while no one was paying, the tax arrears were not going away, but continued to grow. Mr. Gilmanov, using the term "red directors" to describe the Soviet guard running the oil industry at the time, testified that oil company management simply did not consider tax payments a priority. Mr. Gilmanov made a note of telling the court that by 2001 all tax arrears were paid for and even described how a deputy of his came to his office to show a letter from the tax authorities informing Yuganskneftegaz that it had no tax arrears.
Mr. Khodorkovsky asked Mr. Gilmanov to remember whether during the criminal cases involving alleged tax law violations the authorities ever argued that crude oil was not sold and no taxes should be paid. Mr. Gilmanov explained that he was convicted for causing a legal entity to underpay profit tax. The argument being put forth by the government was that Yuganskneftegaz sold all of its crude oil - but for less than it could have, thus minimizing the taxes it paid. According to Mr. Gilmanov, the investigators and the prosecutors insisted that he was selling crude oil at too low of a price, but when he asked what price he was supposed to have sold the crude oil for he never got an answer. Even the price comparison sheet that investigators showed him had Yuganskneftegaz in the middle of the pack of 12 companies in price comparison, with price difference between the companies being insignificant. Mr. Gilmanov described how investigators tried to compare his average price to one shipment from a company for an unusually high price. But when he asked them to weigh a million ton shipment against a 50 million average, the investigators refused. Mr. Gilmanov told the court that with methods like these, he never admitted guilt, despite being convicted. Regardless, investigators concluded that all of the crude oil was purchased.
Mr. Lebedev asked whether the tax authorities knew that Yuganskneftegaz was paying taxes based on the profits. "Of course! That's what they told us we had to pay!" Mr. Gilmanov laughed.
Ms. Ibragimova asked Mr. Gilmanov to tell the court what section of the Criminal Code he was convicted under and what his sentence was. Mr. Gilmanov told the court that he received 2 years probation for violating Section 199 of the Criminal Code. Ms. Ibragimova wanted to know if the sentence made Mr. Gilmanov bitter and biased against law enforcement. Mr. Gilmanov assured the court that this was not the case and he was testifying objectively. "Look, when "the YUKOS case" started, we understood that directors will not be left on the sidelines... one way or another we'll be dragged in. Now, [after serving probation] my record is expunged and I prefer not to remember the whole episode," Mr. Gilmanov explained.
Ms. Ibragimova began asking questions about a Yuganskneftegaz annual shareholders meeting, reading from the minutes. "Concerning approval of transactions between Yuganskneftegaz and Tomskneft...," Ms. Ibragimova read. Mr. Lebedev commented that the text mentioned YUKOS, not Tomskneft. "If that's what you think I said - you better clean your ears, I said YUKOS," Ms. Ibragimova shot back, while the entire courtroom heard otherwise. Judge Danilkin urged calm.
Mr. Lakhtin accused Mr. Gilmanov of not looking out after the interests of Yuganskneftegaz's shareholders. He insisted that Mr. Gilmanov failed in his duties which were enumerated in the Yuganskneftegaz company by-laws. Defense objected, demanding the prosecutor produce the by-laws where these duties were allegedly enumerated. Judge Danilkin, who seemed to be growing impatient with the prosecutor, told Mr. Lakhtin to refer to the by-laws, but Mr. Lakhtin pretended not to hear the judge.
Mr. Lebedev attempted to have Mr. Kupreichenko play back a portion of today's hearing where Ms. Ibragimova incorrectly stated Tomskneft instead of YUKOS when she was reading from a document being presented to Mr. Gilmanov. Judge Danilkin prevented Mr. Lebedev from initiating the play back and told him to move on with his statement.
Mr. Lebedev explained that he wanted the court to hear on the audio recording Ms. Ibragimova's falsification. Mr. Lebedev objected to the actions of the presiding judge, explaining that he stated on numerous occasions that the prosecution will insult witnesses before the court. Mr. Lebedev told Judge Danilkin that today the latter allowed the prosecution to continue to insult another witness. Mr. Lebedev told the court that he fully understood the court's attempts to cut short the prosecution's questions in order to allow the witness to depart as soon as possible. What he did not understand was why the court would allow a Russian citizen to be insulted in a Russian courtroom in the first place.
Mr. Lebedev barely had a chance to sit down when Ms. Ibragimova stood up, telling the court that she had a statement to make. She told the court that Mr. Lebedev's statements towards the prosecution have reached "a critical mass." She told the court that for the duration of today's hearing Mr. Lebedev directed insults at the prosecution. In addition, Ms. Ibragimova insisted to Judge Danilkin, promising to look up all of the instances in the trial protocol, that Mr. Lebedev continuously insulted the court throughout the duration of this trial. She explained that she previously warned Mr. Lebedev that, should he make one more insult, the prosecution will motion to have him removed from the courtroom. Telling the court that she thought everyone had enough, Ms. Ibragimova motioned to have Mr. Lebedev removed from the courtroom until the conclusion of the closing arguments stage of the trial.
After a round of arguments, Judge Danilkin denied Ms. Ibragimova's motion, but warned the parties and Mr. Lebedev specifically to behave correctly. According to Judge Danilkin, Mr. Lebedev showed disrespect to the court and the prosecution by his earlier behavior. [Somehow, prosecutors Ibragimova and Lakhtin were not included in the warning. -Eds.]
On Friday, Mr. Lebedev explained that in 1997 Mr. Khodorkovsky invited him to come to work at YUKOS. Mr. Lebedev told the court that he took some time to think about it, because he was involved in interesting multi-national projects and knew what YUKOS was in 1997, and it wasn't pretty. He asked Mr. Khodorkovsky to give him access to important company documents - financial reports, balance sheets and so on. He was not happy with what he saw. According to Mr. Lebedev, the accumulated losses at the beginning of 1997 were about $2.5 billion USD. The most difficult issue was that the figure was not even final. The difficulty was that oilmen had an aversion to accuracy - things like penalties and interest on unpaid taxes were not even included in the financial reports. Mr. Lebedev admitted that it took him about 3 months to make a decision. The final push came from Mr. Yuri Golubev, a YUKOS Board Member whom Mr. Lebedev knew for a long time. Mr. Lebedev explained that he told Mr. Golubev that the company would require some radical breaking and was told in return that whatever Mr. Lebedev decided to do, he will have the necessary support. That was the reason why, when he joined, he was put in charge of all trading and financial issues.
Mr. Lebedev explained that history of the first merger attempt between YUKOS and Sibneft, with YukSi being created as the executive company for the joined entity. Mr. Lebedev testified that in June of 1998 OOO YukSi was renamed OOO YUKOS, and in September-October of 1998 was renamed to OOO YUKOS-Moscow. Mr. Lebedev explained that it made sense to ensure there weren't two companies with similar sounding names. According to Mr. Lebedev, there are instances in the indictment where the government does not distinguish between various legal entities - like YUKOS and OOO YUKOS, causing plenty of confusion.
Around that time, upon the advice of foreign consulting firms Arthur D. Little and McKinsey, YUKOS management structure was reorganized. YUKOS-Moscow came to function as the corporate center and strategic planner for the holding, YUKOS-RM handled downstream and YUKOS-EP upstream. From June of 1998 through May of 1999, but actually through February 1999, he headed YUKOS-RM. Mr. Lebedev reiterated that from 1999 he did not work at YUKOS or at any other Russian company.
Mr. Lebedev explained that Cost Plus and Net Back were the principal methods for price calculation during his time in the company from 1997 to 1999. During that time period Russian Tax Code had no criteria for calculating market price. In 1999, Net Back and Cost Plus were codified in Russia's Tax Code. That, however, did not lead to a system of publically published domestic crude oil prices.
Mr. Lebedev explained that YUKOS-EP calculated the price at which production subsidiaries would sell their crude oil using "cost plus," while YUKOS-RM calculated the purchase price using "net back." After internal analysis, resulting price was used in the purchase agreements for a specific period - usually a month. Mr. Lebedev, after describing in more detail the steps involved, noted that the recommendation for this type of price determination was made by YUKOS consultants, PwC among them.
Mr. Lebedev explained that Yuganskneftegaz, in the late 1998 and early 1999, was getting "real" 250 rubles per ton, while the competitors may have listed higher prices, but paid their companies in "candy wrappers." So what was better - real cash or worthless "candy wrappers" of higher face value? Mr. Lebedev reminded the court about people being paid through barter - cereal, matches and so on. "Those people stood on the side of the road trying to sell that stuff to get some cash." According to Mr. Lebedev, that was the problem YUKOS encountered at Tomskneft - previous management made various agreements to trade crude oil for products, not sell it for cash.
Mr. Lebedev told the court that the prosecution was acting in bad faith when they were accusing him of hiding price manipulations. Mr. Lebedev explained that anyone could open the financial reports of a company like Yuganskneftegaz and, by dividing revenue by the total tonnage, calculate the sales price and the cost. He reminded the court that PwC never withdrew its certification of the financial reporting of any of the YUKOS production subsidiaries. He told the court that the government did not even make an effort to do things right - if they wanted to discredit the alleged embezzler they should have cast doubt on the financial reporting of the alleged victim, not the other way around. Mr. Lebedev noted, once again, the absurdity of the prosecution asking about the amount of profitability of the alleged embezzlement victims, how that profit was allocated and why weren't dividends being paid. Indeed, Yuganskneftegaz's sales profitability in 1997 - 1999 averaged over 16%. Mr. Lebedev explained that while production subsidiaries were turning a profit, YUKOS was suffering losses. Most of those came from the corporate center and from refining/sales segments.
Mr. Lebedev explained that YUKOS was crediting the Russian Federation's use of petroleum products by going deeper into debt on a holding level. Mr. Lebedev remembered that YUKOS was actually robbed by regional governors, who used local law enforcement to break into petroleum products storage facilities to take the diesel fuel, because the farmers needed it for their farm equipment but could not pay.
The trial will resume on Monday, August 30, 10:30 Moscow Time.