Witness Testimony Summary: Aleksey Zubkov
Testimony Dates:
Bio:
Aleksey Zubkov worked for Price, Waterhouse and Co. before it became ZAO "PricewaterhouseCoopers Audit," where he worked from 1994 through 2008. While at PwC, Mr. Zubkov rose through the ranks, from a consultant to a senior manager in crude oil and gas industry department. Mr. Zubkov personally participated in the YUKOS financial statements audit in 1996, 1997 and from 2000 through June 2004.
Testimony Summary:
As other witnesses before him - Messrs. Golubovich and Anilionis - Mr. Zubkov was questioned about privatization of YUKOS. Prosecution continued to stonewall an explanation of how this was relevant to the charges.
On direct, Mr. Zubkov testified extensively about his work with YUKOS-related matters while at PwC. Mr. Zubkov testified that YUKOS drafted consolidated financial statements according to US GAAP, with PWC applying US auditing rules when auditing those statements. He was asked questions about his work on the audit of YUKOS Universal Limited. Mr. Zubkov testified that there was an ongoing project to prepare an auditor's report based on YUL's US GAAP consolidated statement. One of the subjects on which Mr. Zubkov worked personally was to examine privatization cost of YUKOS shares and to describe all steps leading YUL's acquisition of those shares. He testified that the YUL project was managed by Douglas Miller. According to Mr. Zubkov, Mr. Miller asked him to write a draft report on history of transactions with YUKOS shares, starting with privatization, based on the available documentation. Mr. Zubkov testified that he had access to a memorandum detailing aspects of YUKOS' privatization, but he did not know where the memorandum came from. According to Mr. Zubkov, his attention was focused on transactions with YUKOS shares resulting in YUL's ownership. Mr. Zubkov told the court that, prior to finishing the draft report, he needed to confirm this information and to arrange a meeting with Mr. Lebedev, who was the head of YUKOS Universal Limited. That meeting never happened because Mr. Lebedev was arrested. Mr. Zubkov testified that without meeting with Mr. Lebedev he was unable to finish his draft report.
Mr. Zubkov, calling the term "consolidation perimeter" a type of slang, explained that YUKOS consolidated financial statements were drafted according to US GAAP, which meant that all subsidiaries where the parent company had a controlling financial interest, meaning participation in capital of more than 50%, were consolidated. He added that control of more than 50% was not the only method of determining controlling interest. 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, among others. According to Mr. Zubkov, the company 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 Behles Petroleum, Baltic Petroleum and South Petroleum were not consolidated, speculating that YUKOS management did not consider these to be affiliated with the company.
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. Mr. Zubkov explained that none of crude oil production subsidiaries were set up as parent companies for crude oil trading companies. However, Mr. Zubkov testified that part of the funds was concentrated at the level of YUKOS and was transferred to the production subsidiaries.
On cross-examination, Mr. Zubkov confirmed that he knew of no facts that could contradict information disclosed about ownership structure of YUKOS shares, GML's ownership, and the voting arrangement for YUKOS shares controlled by YUL. Turning to accounting and audit standards, Mr. Zubkov testified that YUKOS used Russian Accounting Standards when drafting mandatory financial statements under Russian laws and US GAAP to draft consolidated financial statements. PricewaterhouseCoopers applied US GAAS (Generally Accepted Accounting Standards) to audit YUKOS' US GAAP consolidated financial statements. Mr. Zubkov confirmed that PwC, in addition to being the official auditor of YUKOS, audited YUKOS' crude oil production subsidiaries, Yuganskneftegaz being one those. 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, although he was never involved in auditing Yuganskneftegaz, he was aware that the company produced and sold crude oil. During interrogations, Mr. Zubkov was not informed of the fact that Yuganskneftegaz was a civil complainant in the case. 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 audits and that Yuganskneftegaz data was contained in YUKOS' consolidated financial statements.
Mr. Zubkov testified that he and his colleagues knew that YUKOS consolidated its statements according to US GAAP. Mr. Zubkov explained that during audit he worked with YUKOS domestic traders, testing certain transactions to make sure the information received from YUKOS was what it was. Other members of the YUKOS audit group tested the treasury group of companies.
Mr. Zubkov testified that PwC was auditing "revenues from sales of crude oil." He went on to explain that the Moscow office did not audit crude oil export sales. Those audit operation were performed by PwC's Geneva office, with the Moscow office using their information.
Mr. Zubkov testified that, while not privy to the exact details of all transactions involved, he did not know of any facts to disprove information contained in a resolution by YUL directors, where over $224 million in Bank MENATEP collection rights, acquired from YUKOS, were being written off. Mr. Zubkov, while examining the draft SEC Form F-1, testified that the information about YUKOS receiving over 89 million of its shares and $30 million USD in cash during sale of Bank MENATEP collection rights was correct.
Mr. Zubkov, who was actively involved in the 2001 audit, testified that during that time period he did not hear anything about Kenneth Dart in the news media or in any lawsuits filed during that year, as alleged in the indictment. In addition to not having heard of anything related to Kenneth Dart during that time period, 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.
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 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. A comparison of average monthly prices at which crude oil was sold to market price data would be made.
Mr. Zubkov testified that approximately $15 billion USD in profits from 1999 through 2003 matched with his recollections. So did dividend payments of over $2 billion USD during the same period. Mr. Zubkov remembered that YUKOS was increasing its share capital in various subsidiaries. Mr. Zubkov testified that YUKOS provided documents detailing ownership of various securities. He added that, on balance, YUKOS was purchasing more assets than it was selling.
Mr. Zubkov confirmed that it was a well known fact that prices in crude oil production regions were considerably lower than those in Rotterdam. Mr. Zubkov explained that PwC disregarded these sales as sales within a group of consolidated companies. According to Mr. Zubkov, an auditor was to provide a neutral opinion on the company, and nothing about the lower prices in production regions was likely considered unusual. Mr. Zubkov testified that based on what he remembered being written in media sources at the time, the public was aware that domestic prices were lower than those on international markets.
Mr. Zubkov testified that, while he did not remember when the reverse exchange and the merger of VNK into YUKOS occurred, Tomskneft was consolidated in 2000, 2001 and 2002. Furthermore, he remembered that, in 2001, remaining Tomskneft minority shareholders sold their shares to YUKOS.
Mr. Zubkov examined an internal PwC memorandum, which discussed Baltic Petroleum and Behles Petroleum as being a related party to YUKOS. PwC, despite the aforementioned conclusion, also concluded that it wasn't necessary to include these companies in YUKOS consolidation perimeter and, furthermore, did not consider the issue to be material. Mr. Zubkov explained that a company could be related, but not consolidated, because it did not meet certain conditions, which he discussed before. Mr. Zubkov did not want to speculate why PwC personnel decided that the issue of Behles and Baltic was not material to the financial statements.
Mr. Zubkov was not aware that YUKOS ever purchased or paid for third party obligations before Bank MENATEP. Instead, Mr. Zubkov reiterated what he testified about before - YUKOS purchased Bank MENATEP collection rights for approximately $191 million USD. Despite being unable, without looking at additional documents, to describe gains or losses on resulting transactions, Mr. Zubkov remembered that one of the outcomes was YUKOS receiving approximately 90 million of its shares.
After examining Fargoil's tax statements, Mr. Zubkov testified that when Fargoil paid out dividends to its parent company, it paid taxes to the federal budget, as well. According to Mr. Zubkov, taxes paid by Fargoil and other traders were accounted for in YUKOS consolidated financial statements. Mr. Zubkov confirmed the same information for Ratibor, another crude oil trader.
While examining financial statements for Baltic Petroleum and South Petroleum, Mr. Zubkov testified that none of the companies listed as shareholders or final beneficial owners were ever consolidated with YUKOS, because there was no information to support their affiliation with the company. Examining a list of South Petroleum's executive directors, Mr. Zubkov recognized Peter Bond's name, but only remembered it as appearing on some of the documents he may have come across while being a member of the YUKOS audit team.
A re-direct and re-cross of Mr. Zubkov revealed that domestic traders purchased crude oil from production subsidiary companies at intra-company prices. Using YUKOS or YUKOS Export Trade as commission agents, domestic trading companies sold crude oil to Routhenhold at prices that could be several times higher than what the crude oil was purchased for. However, the price crude oil was sold to Routhenhold for was an intra-company price, as well, because Routhenhold was consolidated with YUKOS. Mr. Zubkov testified that the price crude oil was sold for was based on a formula and that domestic crude oil trader assumed all expenses once they obtained ownership right over crude oil. Mr. Zubkov admitted that Fargoil and YUKOS-M had an advantage due to tax breaks on the income tax, meaning that the tax breaks had an impact on those companies' bottom line. Finally, Mr. Zubkov was unable to explain why YUKOS was the only company to ever pay VAT on crude oil export sales.