Khodorkovsky & Lebedev Communications Center

The major event this week was the government asking to extend Messrs. Khodorkovsky and Lebedev's arrest. [Judge Danilkin will grant the prosecutor's motion the following Monday. -Eds.] Also this week, in an attempt to intimidate all witnesses contemplating appearing at the trial, the government made an attempt to serve a subpoena on Mr. Stephen Wilson, a British citizen who testified for the defense.

However, the marathon week began Monday with defense attempting to present testimony from two specialists who were asked to provide an analysis on the procedures and methodology used in the expert report prepared by Messrs. Migal and Chernikov. First was Ms. Rossinskaya, whose long list of titles, qualifications and award can be found in our daily report. Ms. Rossinskaya was asked to provide her opinion as a specialist in scientific methodology of forensic expert analysis. Also, defense expected that Ms. Rossinskaya will be able to explain to the court what was and what wasn't part of the responsibilities and functions of forensic experts, in general.

Ms. Rossinskaya explained that the Moscow Government Academy of Jurisprudence has a center, called SodEx, formed to provide the services of experts. Mr. Rivkin approached the center and requested for a specialist analysis to be conducted. The object of the analysis was the aforementioned expert report. Mr. Rivkin asked to analyze whether the expert report complied with methodological and scientific requirements applicable for the type of forensic expert analysis that was conducted by Messrs. Migal and Chernikov. Mr. Rivkin provided the center with copies of the expert analysis, accompanying supplements and Mr. Tyutyunnik's order authorizing the expert analysis.

The prosecution moved to disqualify Ms. Rossinskaya. According to prosecutor Lakhtin, Ms. Rossinskaya could not be admitted as a specialist in this case, because defense was attempting to have her provide legal analysis and to weigh the evidence in the case file. The prosecutor insisted that only the court, investigators and the prosecutors were allowed to analyze evidence. Prosecutor Lakhtin found fault in the fact that Ms. Rossinskaya did not work in the crude oil industry, did not work at YUKOS or at any of its subsidiaries. Therefore, the prosecutor argued, "the incompetence of citizen Rossinskaya was obvious to the prosecution and should be obvious to the court." Prosecutor Lakhtin reiterated that Ms. Rossinskaya came to Khamovnicheskiy Court pursuant to an invitation from defense. According to the prosecutor, Ms. Rossinskaya uncovered her own incompetence and dependence on the defense and, therefore, should be disqualified as a specialist.

Despite a point by point refutation of each of the prosecutor's arguments, the decision of the court was predetermined. Judge Danilkin ruled that only the court had the power to weigh the evidence. In addition, if the court had any doubts about the quality of an expert report it could order an additional or a repeat forensic expert analysis. According to Judge Danilkin, Ms. Rossinskaya was invited to cast doubt on the expert report she worked with, which was not a circumstance subject to prove in this proceeding. Because Ms. Rossinskaya wasn't engaged for any other purpose, she was disqualified as a specialist.

Defense motioned to question Mr. Aleksey Savitskiy, Ms. Rossinskaya's colleague who also worked on the specialist report concerning the expert analysis performed by Messrs. Migal and Chernikov. The courtroom heard arguments and counter arguments concerning Mr. Savitskiy's qualifications and the work he performed. Prosecution filed to disqualify him and the hearing was adjourned until Tuesday, with Judge Danilkin being expected to issue his ruling.

On Tuesday, the trial resumed with Judge Danilkin reading his ruling on the prosecution's motion to disqualify Mr. Savitskiy. He disqualified Mr. Savitskiy, ruling that only the court can weigh the evidence, including expert reports. Furthermore, as a specialist, Mr. Savitskiy could not analyze an expert report, particularly since he did not see all of the case materials used by the experts. According to Judge Danilkin, Mr. Savitskiy was not engaged for any other purpose and could not be admitted as a specialist.

Defense informed the court that they were prepared to question Mr. Andrey Konovalov, former General Manager of the Novokuybyshev Refinery.

Mr. Konovalov explained that his responsibilities as the General Manager, which he became in 2000, were outlined in the power of attorney issued by YUKOS-RM and in his employment contract. In addition, Mr. Konovalov explained that his functions and responsibilities complied with laws and regulations.

Mr. Konovalov testified that YUKOS was the majority shareholder of the Novokuybyshev Refinery. Mr. Konovalov testified that YUKOS-RM prepared all documents concerning the crude oil to be refined at Novokuybyshev Refinery. According to Mr. Konovalov, there was never an instance when crude oil was transferred for refining without properly verified paperwork.

Mr. Konovalov testified that the purpose of a vertically integrated company, as it concerned the Novokuybyshev Refinery, was to eliminate the need for refineries to look for traders who will provide the crude oil for refining, keeping the refining capacity at optimum levels. With YUKOS-RM taking care of securing oil shipments for refining, all that he and his staff had to be concerned with was accepting crude oil, refining it and transferring the petroleum products to logistics. Mr. Konovalov noted that after the fall of the Soviet Union, when the refinery had to search for crude oil shipment providers, the refining volume fell from 19 million to 6 million tons.

Mr. Konovalov testified that nothing changed from 2004 through 2007 concerning securing crude oil providers for Novokuybyshev Refinery by YUKOS-RM. As far as he knew, YUKOS-RM was continuing to function to this day as part of Rosneft.

Mr. Khodorkovsky took over. Prior to directing questions to Mr. Konovalov, Mr. Khodorkovsky quoted several passages from the indictment, noting that he would stop asking "stupid questions" if the prosecution dismisses certain portions of the indictment. Mr. Konovalov testified that he knew the crude oil being delivered to the Novokuybyshev Refinery came from the resources of Tomskneft, Yuganskneftegaz and Samaraneftegaz.

Mr. Khodorkovsky explained to Mr. Konovalov that the government alleges that all revenue from crude oil and petroleum products sales should have been diverted to production companies and asked Mr. Konovalov to tell the court about the number of employees working at the refinery. Mr. Konovalov testified there were approximately 8000 workers. Mr. Konovalov explained that the refinery was officially recognized as forming a mono-city, meaning that majority of the Novokuybyshev's residents depended on the refinery for their livelihood.

Mr. Khodorkovsky asked whether Mr. Konovalov knew that crude sold for less domestically than on an open market in Western Europe. Mr. Konovalov testified that he knew that. Furthermore, the witness explained that petroleum products, like gasoline, would have cost considerably more if the crude oil was being imported and sold at Western European prices.

Mr. Konovalov testified that, effectively, it was YUKOS which paid for the refining services. He explained that YUKOS was the only entity which transferred funds for payment of refining services. Such payments never came from any individual's bank account, including Mr. Khodorkovsky's. Mr. Khodorkovsky asked whether Mr. Konovalov knew or heard that YUKOS was a profitable company and, if he did, whether that was followed by mentioning that all of that profit was Mr. Khodorkovsky's personal income. Mr. Konovalov confirmed that the company's profitability was discussed at the expended management meetings and those discussions were about YUKOS profit only, not about Mr. Khodorkovsky's personal income.

On Wednesday, the trial resumed with Judge Danilkin informing the parties that Mr. Peter Zolotarev was present in the courthouse. Mr. Zolotarev testified that he joined YUKOS in 1999, as the head of the newly created Department for Consolidated Financial Reporting at YUKOS-Moscow, later re-organized into Department for Consolidated Reporting and Planning. From 2002 through 2004, Mr. Zolotarev worked at YUKOS-RM, first as the CFO, then Vice-President and Acting President. Mr. Zolotarev explained that YUKOS hired him to put together the consolidated reporting department. The department had separate sections handling YUKOS-EP, YUKOS-RM, analytics, planning and budgeting.

Mr. Khodorkovsky asked whether Mr. Zolotarev, when working on YUKOS consolidated reporting or being YUKOS-RM CFO, ever encountered an instance where revenue from crude oil or petroleum products sales disappeared, was concealed from the Board of Directors or from the public, by not publishing it in consolidated reporting. Mr. Zolotarev testified that he was not aware of such a fact. He explained that it would have been impossible, because of the system of extensive verification controls, as well as internal and external audits. Mr. Zolotarev testified that PricewaterhouseCoopers, the external auditor, was a constant presence within the company and served as another layer of verification. According to Mr. Zolotarev, PwC auditors had unlimited access to all primary documents which were used in reporting. Mr. Zolotarev testified that PwC conducted extensive on-site audits at YUKOS subsidiaries, including the main three YUKOS production subsidiaries. Such on-site visits were conducted by a group of two dozen auditors, on the average. He explained that after YUKOS started publishing quarterly statements, the audits became even more frequent.

Mr. Zolotarev explained that YUKOS profit could not be moved outside of the consolidation perimeter without an explanation and without anyone noticing. Mr. Zolotarev explained that a consolidated system had numerous points of control and verification, including automated reporting.

Mr. Zolotarev explained that under consolidation rules all internal operations were mutually eliminated, only the sale outside of the consolidated perimeter being recognized. The sum of profits at every stage of the transaction will be added up, with the end result of consolidation reporting reflecting the sale to an outside purchaser and the sum of profit (loss) as a result of all transactions.

Mr. Zolotarev explained that at the time he joined YUKOS, the consolidation perimeter already existed. There were company standards and regulations on creating and including legal entities into the consolidation perimeter. When a new legal entity was to be added to the accounting and reporting, his department was informed and took appropriate actions, by placing the new entity into an appropriate section for continuing financial reporting monitoring.

Mr. Zolotarev explained that his department provided lists of consolidated entities to PwC, with the auditor reviewing these on a quarterly basis, including grounds for consolidation. According to Mr. Zolotarev, PwC had full access to legal documents on consolidated companies, which, in his opinion, meant that the auditor had access to all the information it required. Mr. Khodorkovsky asked whether Mr. Zolotarev remembered an instance when a consolidated company was simply excluded from the consolidation perimeter. Mr. Zolotarev did not.

Mr. Khodorkovsky asked Mr. Zolotarev to explain to the court what was meant by adding a company into consolidation perimeter, from the point of view of YUKOS management control. Mr. Zolotarev explained that attributes of "control" were described in the standards and included ownership of 50%+1 share, or ability to appoint the company' managers or an ability to substantially affect the company's day-to-day business. The last factor did not require any legal relationship - actual influence was enough. Mr. Zolotarev explained that if a company was included in YUKOS consolidation perimeter it meant that YUKOS exercised control over the company and that was how YUKOS management presented it to third parties.

During the hearing, Mr. Zolotarev went over the letter issued by PwC, in which the auditor informed YUKOS that it was withdrawing audit certification. Mr. Zolotarev, questioned by Mr. Khodorkovsky, went over each of the grounds provided in the letter, providing testimony which cast doubt on each of the grounds listed.

In the afternoon, after Mr. Zolotarev left the hearing, prosecutor Lakhtin motioned to extend Messrs. Khodorkovsky and Lebedev's arrest until November 17, 2010. Judge Danilkin agreed to postpone defense's response until Friday, so that on Thursday the parties could question Mr. Stephen Wilson.

On Thursday, after Mr. Stephen Wilson's testimony refuted some of the key assertions made by the government and cast additional doubts on PricewaterhouseCoopers' withdrawal of YUKOS audit certification, investigators, in a clear attempt to intimidate this and other potential witnesses, both domestic and foreign, attempted to serve Mr. Wilson, inside the courthouse, with a subpoena to appear on Friday at 10:00 at the office of investigator Tatyana Rusanova.

The trial resumed with Mr. Rivkin informing the court that defense will question British citizen Stephen Wilson, former employee of YUKOS, accompanied by translator Yuri Somov. Mr. Lakhtin objected to Mr. Somov's presence, insisting that he wasn't invited by the court or by the government. Mr. Lakhtin insisted that he had every right to question Mr. Somov's motives for coming to the trial, particularly since he was paid for his previous participation by the defense. Mr. Lakhtin began insisting that he needed to see Mr. Somov's documents. Despite being reminded by the court that the translator was already admitted to participate, after two motions for his disqualification have been denied, the prosecutor insisted that this court never ruled to admit Mr. Somov as a participating translator into this trial. Judge Danilkin warned the prosecutor not to abuse the right to pose questions to the translator. Mr. Lakhtin assured the court that he would not, although it turned out to be a hollow assurance.

The prosecutor argued that Mr. Somov was biased and had direct and indirect interest in the outcome of the case. He insisted that Mr. Somov was the sole translator to have worked for the defense and to translate for people like Messrs. Haun, Kosciusko-Morizet and Misamore. Furthermore, the prosecutor insisted that Mr. Somov knew the testimony of all previous witnesses, because he actively followed the trial. In addition, the prosecutor informed the court that Mr. Somov found his own incompetence when he admitted that he incorrectly translated for Mr. Haun.

Judge Danilkin, clearly agitated at the prosecutor's tactics, denied Mr. Lakhtin's motion without waiting to hear from the defense or going to his chambers to write the ruling. According to Judge Danilkin, the prosecutor failed to present any new grounds for Mr. Somov's disqualification.

Finally, Mr. Wilson was able to take the witness stand. Prosecutor Lakhtin insisted that he had doubts about the witness's identity and demanded to see the original of Mr. Wilson's passport or to be provided with a copy for the prosecution's records. Mr. Lakhtin insisted that Mr. Wilson should not be allowed to be questioned, because he was biased and was directly interested in the outcome of the case, because he was prepared by the defense. Prosecutor Lakhtin was unable to convince the court that Mr. Wilson should not be questioned.

Mr. Wilson testified that he was invited to come to testify by Mr. Rivkin. He worked at YUKOS from May 2002 through September 2006. Mr. Wilson testified that beginning in early 90s he focused on international tax issue and taxes on financial services. From 1998 through 2006 he worked in Moscow. In 1998, he joined Coopers and Lybrand, one of the two firms which later merged to form PricewaterhouseCoopers, where he ran one of the two sections on financial services. Between 1998 and 2002, he began to focus more on oil and gas and manufacturing clients. He provided international tax services to some of the largest Russian energy companies.

Mr. Wilson testified that by early 2002 a structure was put in place to accommodate strategic investment, treasury operations and foreign trading. All of these were accommodated within the wholly owned YUKOS subsidiaries. All companies were regulated by Russia's Central Bank. All companies under these structures were 100% beneficially owned by YUKOS, including the companies in the foreign trading structure based in Switzerland and Cyprus.

Mr. Wilson explained the purpose of the YUKOS foreign trading structure. Also, Mr. Wilson testified on the purpose for which YUKOS Capital S.a.r.l was established, directly refuting one of the key assertions made in the indictment.

Asked about his opinion concerning PricewaterhouseCoopers' withdrawal of the audit certification, Mr. Wilson explained that because of the close collaboration between YUKOS and PwC, he thought PwC would have made an attempt to discuss with YUKOS management any issues that were uncovered. He explained that it was extremely unusual for the auditor to cite misrepresentation from management as the reason for withdrawal, without indicating whether the management made any effort to clear things up and whether there were any financial consequences due to the misrepresentation. According to Mr. Wilson, consolidated reporting indicates the financial well being of the company and, if the undisclosed information would have presented serious financial consequences, PwC should have explained what those consequences were.

On Friday, the trial resumed with Mr. Klyuvgant informing the court that the common position of the defense and their clients he was about to announce was both a response to the prosecutor Lakhtin's motion to extend Messrs. Khodorkovsky and Lebedev's arrest and a report of a crime. Mr. Klyuvgant told Judge Danilkin that, in addition to a reasoned analysis, they expected the court to forward the document to the Office of the General Prosecutor with a recommendation for an appropriate action to be taken against prosecutor Lakhtin. According to Mr. Klyuvgant, the prosecutor should face criminal sanctions for false denunciations, as provided for under Section 306 of the Criminal Code.

Mr. Khodorkovsky told the court that the trial lost all semblance of justice a long time ago. Not the least reason for it was the live participation of Salavat Karimov, who is controlling prosecutor Lakhtin's actions. According to Mr. Khodorkovsky, in 2006 Mr. Karimov promised a quick resolution to the second case, but continues to fail to deliver, along with Colonel Lakhtin.

Mr. Khodorkovsky reminded the court the trial began with the government insisting that "the taking" occurred at "the measurement node." Prosecutor Lakhtin refused "to explain the mechanism" of the illegal uncompensated taking. Although the government refused to explain its position, which runs counter to common sense, the court allowed the trial to continue. It was more than three years since investigator Karimov and prosecutor Lakhtin issued the indictment and they understand that they can't invent the mechanism for crude oil embezzlement and are unable to gloss over the subject.

According to Mr. Khodorkovsky, the government now changed its arguments to allege embezzlement in the fact that YUKOS paid its production subsidiaries less than the price of Urals in Rotterdam. Mr. Khodorkovsky told the court that it was obvious that Messrs. Karimov and Lakhtin came to believe in the falsification they brought to court, but he could not understand how after a year and a half they could not understand the raving absurdity of their product.

Mr. Khodorkovsky ridiculed an idea that Mr. Lebedev and he were not involved in entrepreneurship, as Mr. Lakhtin argued relying on the dubious distinction drawn by the Moscow City Court, when the allegations are that persons were signing contracts for purchase and sale of crude oil. Mr. Khodorkovsky noted that the unnamed jurist who introduced the new reading of the law into Duma could not have been thinking of a distinction drawn between being accused of violating "economic" sections of the Criminal Code, but not of doing something illegal. Mr. Khodorkovsky explained that the current judicial vertical decided that certain laws were simply not to be followed, particularly if there was a reason not to. Mr. Khodorkovsky warned that sooner or later those in power will decide to clean up the mess being made.

Mr. Lebedev told the court the prosecution, to cover their machinations and falsifications, insisted that the case was very complex and difficult. According to Mr. Lebedev, nothing could have been farther from the truth - the case was simple because there wasn't any, and could not have been, embezzlement of 350 million tons of crude oil. Instead, the prosecution continued to have difficulties proving the opposite - and will not be able to, because it will be impossible to prove. Mr. Lebedev asked Judge Danilkin to consider how prosecution could prove embezzlement from YUKOS production subsidiaries, now known as "victims," if everyone knows that these "victims" profited from sales of crude oil.

Next, Mr. Schmidt told the court that, contrary to the prosecutor's arguments, it was not Messrs. Khodorkovsky and Lebedev who discredited the representatives of the Russian business before their international colleagues. Mr. Schmidt told the court that it was the prosecution, particularly prosecutor Lakhtin, who caused severe reputational damage to Russia. According to Mr. Schmidt, the prosecutor provided proof of the latter by citing to numerous extradition cases. What those cases say about the Russian investigation, prosecution and judiciary only adds to the further embarrassment of the Russian government. According to Mr. Schmidt, every monstrous motion like the one before the court and every court ruling granting one, end up at the disposal of international court, adding further discredit.

The trial will resume on Monday, August 16, 11:00 Moscow Time.