Khodorkovsky & Lebedev Communications Center

This week, one witness sought to escape the pressures of the courtroom after his credibility was placed into question by giving contradictory testimony. Arguing a change in personal feelings towards Messrs. Khodorkovsky and Lebedev, Mr. Anilionis convinced the court to postpone his cross-examination until March 15. The other witness, a former member of the PwC team that audited YUKOS, was clear that at no time the alleged embezzlement of the entire YUKOS crude oil production ever came up during his team's audit of the company. In fact, Mr. Zubkov testified using terms like "sales," "revenue" and "profit."

On Monday, Mr. Lebedev began cross-examining Mr. Anilionis. In quick succession, with some prodding from Mr. Lebedev, Mr. Anilionis confirmed that he did not know anything about the exchange of Tomskneft's and other VNK subsidiaries' shares for YUKOS' shares, and that he learned about allegations of crude oil embezzlement from the media. Mr. Anilionis testified that he never received any orders from Mr. Lebedev concerning the share exchange. According to Mr. Anilionis, neither he nor Mr. Gulin received Mr. Lebedev's orders to embezzle crude oil from YUKOS production subsidiaries. He was certain that he never heard Mr. Lebedev or Mr. Lebedev's employees discuss crude oil embezzlement.

Mr. Anilionis, his interrogation transcript before him, could not explain what he meant when using terminology like "real person," "real market" and "real price," when discussing crude oil sales with Mr. Karimov. Mr. Anilionis did not remember seeing any crude oil sales contracts with his signature, while at the Basmanny Court. Mr. Anilionis, looking at the transcript from that hearing, informed the court that he never confirmed he signed any of the contracts he was shown back then. Instead, he insisted that he expressed doubts, as evident by his reply "the signature looks like mine."

Mr. Lebedev turned his questions to two promissory notes purchase contracts, which Mr. Anilionis insisted were nothing more than transactions for the purchase of "candy wrappers," because South Petroleum and Baltic Petroleum were paying Arley Limited for worthless promissory notes. In addition to being exposed for lying about how investigators came into possession of these contracts, which were hand-delivered by Mr. Anilionis, Mr. Anilionis was shown to have wrongly described the substance of each contract during his interrogation by Mr. Karimov and while testifying in court just a few days earlier. Asked to explain the inconsistency, Mr. Anilionis feigned surprise.

On Tuesday, it was time for everyone else who was present in the courtroom to be surprised as Mr. Anilionis, instead of answering Mr. Lebedev's questions upon the hearing's resumption, made a statement. He told the court that he was shaken by the turn of his cross-examination the previous day, which resulted in his no longer being able to state with certainty that he felt no animosity towards Messrs. Khodorkovsky and Lebedev. "When Your Honor asked me on February 24 whether I felt any enmity towards the defendants, and what I say applies to both of them because I understand that they have the same position, I truthfully answered that I did not. However, after yesterday's events I can no longer say the same. Therefore, when I have to answer additional questions, I can no longer guarantee that my testimony would be the same it would have been prior to what was said [by Mr. Lebedev]," Mr. Anilionis told the court. After inquiring of Mr. Anilionis and hearing each side's position, the court postponed further cross-examination of Mr. Anilionis until March 15. [This should give the court sometime to consider how much weight, if any, should be accorded to anything else that Mr. Anilionis will testify about. -Eds.]

On Wednesday, which also marked a one year anniversary from the start of preliminary hearings in Messrs. Khodorkovsky and Lebedev's case, the prosecution called to the witness Mr. Aleksey Zubkov, a former PwC employee and member of the YUKOS audit team. Mr. Zubkov testified that he personally participated in YUKOS' audits in 1996 and 1997, (while working for Price, Waterhouse and Co.) and from 2000 through June 2004. Mr. Zubkov testified that YUKOS drafted consolidated financial statements according to US GAAP, with PWC applying US auditing rules, US GAAS, when auditing those statements. Mr. Zubkov testified that there was an ongoing project to prepare an auditor's report based on YUKOS Universal Ltd.'s US GAAP consolidated statement. One of the subjects on which Mr. Zubkov personally worked on was to examine the privatization cost of YUKOS' shares and to describe all steps leading to YUL's acquisition of those shares. [This testimony was clarified on Thursday, with Mr. Zubkov explaining that his task was to map a series of transactions resulting in YUL's control over YUKOS shares, and not the costs of YUKOS privatization. -Eds.] Later in the hearing, Ms. Kovalihina sought to guide Mr. Zubkov's testimony as if it was a fact that PwC examined YUKOS' privatization costs. Mr. Lebedev objected, telling the court that only the government could determine privatization cost. Ms. Kovalihina told Mr. Zubkov that if he understood her question he was free to correct her, "because we are not specialists in this."

According to Mr. Zubkov, YUKOS consolidated hundreds of domestic and foreign subsidiaries. Among these were crude oil production companies, crude oil refineries, crude oil trading companies and investment companies. According to Mr. Zubkov, the company's management decided which companies to consolidate according to US GAAP, whether it was based on ownership of more than 50%, option agreements, golden shares, trust arrangements or other.

Mr. Zubkov testified that about two-thirds of the profit reflected in consolidated financial statements came from YUKOS' crude oil trading subsidiaries. According to Mr. Zubkov, establishing crude oil traders in zones with preferential tax treatment promoted profit formation. Profit was paid out as dividends to that company's parent(s) or remained on the trading company's balance sheet.

The rest of the hearing was spent going over YUKOS' consolidated financial statements, discussion of foreign subsidiaries' balance sheets and questions about the purchase of Bank MENATEP collection rights. Mr. Zubkov, carefully forming his answers, provided an overview of these topics. More details were forthcoming at the next hearing.

On Thursday, Mr. Lebedev began Mr. Zubkov's cross-examination. Throughout the hearing Mr. Zubkov was presented with various documents, including YUKOS' consolidated statements based on which he had testified the day before. Compared to the day before, Mr. Zubkov's testimony was more detailed and contained important clarifications.

Mr. Zubkov confirmed that PwC, in addition to being the official auditor of YUKOS, audited YUKOS' crude oil production subsidiaries including Yuganskneftegaz. Mr. Zubkov explained that the purpose of an audit is to verify that the company's financial statements were accurate. To do that, a series of tests is performed on selected transactions. Mr. Zubkov testified that YUKOS' financial statements were available through the company's website and were widely discussed in the business press. Furthermore, after the company began coming out with quarterly statements, Mr. Misamore, YUKOS' CFO, participated in quarterly conference calls with investors and journalists.

Mr. Zubkov testified that, although he was never involved in auditing Yuganskneftegaz, he was aware that the company produced and sold crude oil. Answering additional questions, Mr. Zubkov confirmed that, although he was not a member of Yuganskneftegaz' working group, group members would have been required to report any crude oil embezzlement, if uncovered during an audit. As far as Mr. Zubkov was aware, no crude oil embezzlement was discovered during Yuganskneftegaz's audits. Mr. Zubkov testified that if his colleagues saw anything in the media about crude oil embezzlement, a question would have been posed to YUKOS management concerning the issue.

Prompted by Mr. Lebedev's questions, Mr. Zubkov explained that during his work on YUKOS audits, export sales were made through Petroval S.A., based in Geneva, acting as a commission agent for Routhenhold Holdings Ltd. After arranging the sale of crude oil shipment, Petroval transferred the funds, minus commission, to Routhenhold. Mr. Zubkov testified that YUKOS sold crude oil and petroleum products to third parties, with the revenue being reflected in consolidated financial statements.

Mr. Zubkov, when asked whether PwC conducted any analysis to make sure that YUKOS profit ratios did not abnormally exceed that of the industry, testified that part of the audit consisted of an analytical review. He explained that there was a mandatory analysis of the company's balance sheet and export sales.

Mr. Khodorkovsky asked whether PwC found any information which suggested fraud or embezzlement. Mr. Zubkov testified that he could not remember anything specific that came to mind. Furthermore, Mr. Zubkov, examining consolidated statement entries with figures for undistributed profit, testified that he could not recall instances where part of undistributed profit simply disappeared.

The trial will resume on Tuesday, March 9, 11:30 Moscow Time.