JUSTICE UNDER PRESSURE ― THE KHODORKOVSKY-LEBEDEV TRIAL OF 2009-2010 EXECUTIVE SUMMARY THE VERDICT ― Prepared by Defense

Counsel of Mikhail B. Khodorkovsky & Platon L. Lebedev

This document has been prepared by defense counsel of Mikhail B. Khodorkovsky, former Yukos Oil Company CEO, and of his business partner and friend Platon L. Lebedev. From March 2009 to December 2010 Khodorkovsky and Lebedev were put on trial on allegations that they had embezzled the entire oil production of Yukos over the six-year period from 1998 to 2003. The purpose of this document is to provide an overview of the December 27, 2010 decision delivered by Judge Viktor N. Danilkin, pronouncing Khodorkovsky and Lebedev guilty. Additional information on the trial is available in a series of legal summaries issued by defense counsel as the case unfolded.1 Certain elements of the analysis herein may be impacted by the appeal process that is currently underway. A more detailed and definitive report on this case, to be issued following the appeal, will supersede this document. For further information, the legal defense team may be contacted via the Khodorkovsky & Lebedev Communications Center.2

BACKGROUND In 2007, former Yukos Oil Company CEO Mikhail B. Khodorkovsky and his business partner and friend Platon L. Lebedev became eligible for release on parole under Russian law, having served half of their 8-year sentences since being arrested in 2003 and convicted in a politically-driven first trial that ended in 2005—while Yukos was destroyed through bogus tax reassessments, forced bankruptcy proceedings and rigged auctions.3 Given their eligibility for release on parole in 2007, or at the latest upon completion of their 8-year sentences in 2011, new charges were sloppily manufactured and proceedings were instigated against Khodorkovsky and Lebedev to prolong their incarceration. The new charges, announced in February 2007 and brought to Moscow’s Khamovnichesky Court in a second trial that started in March 2009, were intended to keep Khodorkovsky and Lebedev isolated from Russian political and economic spheres, to stain their reputations and to whitewash and distract attention from corrupt and criminal actions committed by high-ranking Russian officials, many of whom are believed to have personally benefitted from the destruction of Yukos. In the pre-trial investigatory phase, the defense catalogued a series of severe abuses of the Russian criminal justice system in the new case, and asserted that these abuses were so numerous and so severe as to be irremediable. Facing charges that were both factually and legally untenable, on March 6, 2009 the defendants petitioned to terminate the proceedings. On March 17, 2009, the presiding judge, Viktor N. Danilkin, rejected the petition and scheduled opening hearings for a new trial to commence on March 31, 2009.4 Khodorkovsky and Lebedev were accused of embezzling 350 million metric tons of oil worth over $25.4 billion and “laundering” over $21.4 billion, and embezzling $102 million in shares held by Eastern Oil Company (“VNK”, a Yukos subsidiary) and “laundering” the allegedly embezzled shares. In the prosecution’s closing arguments, the volume of oil allegedly embezzled was suddenly reduced by approximately one third, to 219 million metric tons valued at approximately $13.4 billion. By either measure, the allegations had no credible grounding either in the facts described or in the legal

A summary of due process violations that occurred in the investigation of the current case is available at: http://www.khodorkovskycenter.com/content/defense-stay-motion-summary. Summaries of trial proceedings periodically issued by the defense are available at: http://www.khodorkovskycenter.com/mediacenter/ongoing-persecution-second-trial. 2 Contact information is available under “Media Center” at: www.khodorkovskycenter.com. 3 Comprehensive information about the Yukos Affair, and about the case currently being pursued by Yukos before the European Court of Human Rights, is available at: www.theyukoslibrary.com. 4 See courtroom reports available at: http://www.khodorkovskycenter.com/news-resources/from-thecourtroom.
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terms invoked by prosecutors. On April 21, 2009, Khodorkovsky and Lebedev pleaded not guilty, while emphasizing that the charges remained incomprehensible and unexplained.5 The prosecution’s presentation of its case, which ran from April 21, 2009 to March 29, 2010, resembled a poorly-organized and unsuccessful fishing expedition rather than logically structured proceedings actually proving the occurrence of any elements of crime. Despite filling time by reading from a 188-volume case file, and parading numerous witnesses into court, prosecutors were unable (and did not even try) to prove how it was possible that Yukos covered its operating costs, invested heavily in capital expenditures and acquisitions and paid taxes and dividends when the entire oil production of Yukos over a six-year period was being stolen, as alleged in the indictment. The prosecution’s witnesses proffered either no testimony germane to the accusations, or testimony that actually contradicted the accusations. Despite having over 11 months to read documents and question witnesses in court, the prosecutors plainly failed to prove their charges. This did not prevent prosecutors from proclaiming in their closing arguments that they had proven the guilt of the defendants—while being unable to sum up precisely how they supposedly did so. In the face of official misconduct and due process violations, as the trial unfolded the defense presented highly substantiated motions for the recusal of prosecutors and of the judge—to no avail. Appearances of an adversarial trial were for the most part cosmetic efforts by the authorities to portray the process as legitimate. The defendants were permitted to speak in court almost without restrictions, but the judge blocked their lawyers from introducing exculpatory documentary evidence and refused to hear many witnesses and experts. The defense was allowed to file motions and objections, but the vast majority of these motions and objections were routinely denied or ignored. These motions and other defense pleadings were posted online by the defense, along with English translations, illustrating the absurdities of the process that was unfolding. The “case-closed” mentality of the prosecutors ultimately reigned in the courtroom, given the judge’s biased handling of the multitude of due process violations that marked the proceedings. The defense’s protestations over the contradictions and outright irrationality of the case were brushed aside by prosecutors and the judge, who refused to address these issues directly. Independent observers visiting the trial described the proceedings as evocative of the works of Kafka and Gogol and an embarrassment to Russia. Nevertheless, despite each successive setback, the defendants made every effort to engage with prosecutors and the court, and they presented a vigorous, methodical, and meticulously substantiated defense from April 5 to September 22, 2010. Irrespective of the efforts of the defense, which were notably bolstered by the candor of former and current government officials who supported the defendants through in-court testimony, the proceedings continued to be undermined by unfair and unlawful decisions and maneuvers that irreparably frustrated Khodorkovsky’s and Lebedev’s rights to a fair trial. A feeling of futility reigned in the courtroom as the defense presented its closing arguments in what had become a mock judicial process devoid of meaningful adversarial engagement on the substance of the case. The reading of the verdict was initially scheduled for December 15, 2010 but a note posted on the courtroom door that day announced a postponement to December 27, 2010. The next day, December 16, 2010, Prime Minister Vladimir Putin publicly intervened in the case during his annual nationallytelevised question-and-answer session. With the judge still deliberating on the verdict, the Prime Minister directly mentioned the current charges and stated that Khodorkovsky’s guilt had been proven in court and that he must stay in jail.
See: http://www.khodorkovskycenter.com/news-resources/stories/khodorkovsky-statement-attitudetowards-charges. See also: http://www.khodorkovskycenter.com/sites/khodorkovskycenter.com/files/21%20April%202009_PLL%20State ment%20Legalisation.pdf. In prepared testimony which Khodorkovsky was not allowed to read in court, and which was later published in Newsweek, the defendant stated that he did not understand how the term “laundering” could be applied to oil. See: http://www.khodorkovskycenter.com/sites/khodorkovskycenter.com/files/MBKFactSheetKafkaesque%2014%20 09%202009.pdf.
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On December 27, 2010, Khodorkovsky and Lebedev were declared guilty of embezzling and laundering the proceeds of all oil produced by Yukos subsidiaries over a six-year period.6 The court found the defendants guilty of having embezzled even more oil than prosecutors had alleged, ignoring the prosecution’s reduction during closing arguments of the volume of oil allegedly embezzled.7 On December 30, 2010, with less than a year remaining before completion of their existing prison terms, Khodorkovsky and Lebedev were sentenced to an overall total of 14 years in captivity. Counting time already served they are now expected to remain in jail at least until 2017. In an interview with Gazeta.ru released on February 14, 2011, Natalia P. Vasilyeva, an aide to Judge Danilkin and press secretary of the Khamovnichesky Court, spoke out about the verdict. Vasilyeva stated that Judge Danilkin’s first draft of the verdict had been reviewed and rejected by outside judicial officials, who replaced the text with their own, and that Judge Danilkin had to consult with those officials throughout the two-year trial. The Economist described Vasilyeva’s widely-reported comments as “explosive”, and quoted her as saying that “everyone in the judicial community understands perfectly that this is a rigged case, a fixed trial.”8 In a surprising departure from norms of judicial behavior, Judge Danilkin publicly engaged in the controversy through media interviews, denying Vasilyeva’s account and threatening legal action against her. On April 15, 2011, a second official who worked at the court during the trial corroborated Vasilyeva’s account. Igor Kravchenko, a former court administrator, stated in an interview with Novaya Gazeta that Judge Danilkin, speaking about the Khodorkovsky-Lebedev case, had admitted: “I don’t decide this.” Referring to outside judicial officials who had no lawful basis to interfere in the trial outcome, the judge was quoted by Kravchenko as having said: “Whatever they say, that’s what will be.” Kravchenko also stated that Judge Danilkin consulted with the Moscow City Court when questions arose on how to handle the case. To date, the statements by Vasilyeva and Kravchenko have triggered no official investigation.9 The defense initiated appeal procedures on December 31, 2010. The appeals are expected to be heard by the Moscow City Court—and rapidly dispensed with—by the end of May 2011.

A full English translation of the 689-page verdict is available at: http://www.khodorkovskycenter.com/sites/khodorkovskycenter.com/files/2010%2012%2027%20%20MBKPLL%20Verdict-en.pdf. The original Russian text is available at: http://khodorkovsky.ru/files/_docs_/20ac84a43628a035f172b334f4f60bd4/2010.12.27._Prigovor_MBHPLL.doc. Regarding the VNK share allegations, a separate 189-page guilty verdict was issued on December 27, 2010. The court prepared this verdict in violation of Russian law, because the statutory time limit for bringing the charges had expired in 1998—ten years after the now-disputed VNK share swap agreements had been executed. In the trial’s closing arguments, the prosecution had finally agreed with the defense that the VNK charges were time-barred, but nevertheless asked the court to find defendants guilty on those charges without any sentence. The court did precisely as asked, ignoring the legality of the VNK share transactions, which had followed appropriate company procedures, were endorsed by the Russian Minister of State Property and cleared investigatory scrutiny between 1999 and 2001. A full English translation of the VNK verdict is available at: http://www.khodorkovskycenter.com/sites/khodorkovskycenter.com/files/2010%2012%2027%20%20MBKPLL%20Judgment%20on%20VNK-en%20(2)_0.pdf. The original Russian text is available at: http://khodorkovsky.ru/files/_docs_/20ac84a43628a035f172b334f4f60bd4/2010.12.27._Post._o_prekr.ug.dela_ MBH-PLL_v_chasti_VNK.doc. 7 In the trial’s closing arguments the prosecution, citing arithmetic errors and lack of evidence, had suddenly reduced the volume of oil allegedly embezzled by approximately one third, to 219 million metric tons valued at approximately $13.4 billion. The judge nevertheless disregarded the prosecution’s belated bid for a modicum of credibility, and convicted the defendants of embezzling the volume of oil originally alleged in the indictment: 350 million metric tons worth over $25.4 billion—irrespective of the arithmetic errors and lack of evidence that even the prosecution conceded. 8 See: http://www.economist.com/blogs/easternapproaches/2011/02/khodorkovsky_case. 9 Of particular note, senior Russian presidential adviser Veniamin F. Yakovlev, formerly Chair of the Russian Supreme Arbitrazh Court, called for Vasilyeva’s account to be thoroughly examined by judicial authorities. See: http://en.rian.ru/russia/20110224/162743489.html.
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Although the trial hearings ended in November 2010, the court did not make the complete official record of the proceedings available to the defense until March 2011, well after the December 2010 verdict and sentencing. This long delay casts into doubt whether the official record had been completed before the end of the trial, or whether it was really even needed by the judge in the preparation of a preordained verdict. On April 25, 2011, the defense filed 1,060 pages of objections cataloguing the extensive inaccuracies and omissions in the official record of the proceedings. Among the objections: important motions by the defense were omitted from the trial transcripts; the numerous admonitions and criticisms the judge directed to the prosecution throughout the trial were wiped from the record; all defense allegations that the prosecutors were criminally liable for their pursuit and handling of the case were also absent from the record; words were attributed to the defense when in fact they were spoken by the prosecution; and non-objections by the prosecution were converted into objections. Judge Danilkin apparently breezed through and dismissed these defense objections in less than one day, standing by his official record of the proceedings and sending the case to the Moscow City Court for scheduling of the appeals. On April 27, 2011, Russian media reported—before any official notice to this effect had been received by the defense—that the Moscow City Court had scheduled the appeal hearing for May 17, 2011.

THE VERDICT The 689-page decision is a hodgepodge of texts setting forth unsupported factual and legal assertions that fail to validate the finding of guilt. The document is marked by obvious errors of fact and of law, unsupported leaps of logic, internal incoherencies, and major inconsistencies with the findings of other cases adjudicated by the Russian courts. Despite the closely-watched nature of the case surrounding the most high-profile prosecution in Russia, in the decision the court openly ignores applicable procedural and substantive laws as well as fundamental tenets of economics, established facts and common sense. Indeed, the nature of the document is inconsistent with the positive professional reputation of its signatory, Judge Danilkin, who evidently could not contravene the diktat of the instigators of the trial, or mask the enormous lacunae and sloppiness of the prosecution’s case. The verdict is an embarrassment to the Russian judiciary and to those state officials who seek to portray it as a valid act of justice.

Khodorkovsky and Lebedev Supposedly Embezzled all Yukos Oil over a Six-Year Period The core theory of the prosecution’s case is that, between 1998 and 2003, Khodorkovsky and Lebedev, as leaders of an “organized criminal group”10, (1) embezzled on a grand scale by taking into their possession underpriced oil from Yukos production subsidiaries; and (2) “laundered” the supposedly criminally-obtained oil through re-sales and other transactions. Khodorkovsky and his associates are determined on page 72 of the verdict to have taken possession of all of the oil produced by Yukos from 1998 to 2003, and on page 74 to have distributed this “stolen and legalized property” amongst the co-conspirators. These determinations are made notwithstanding: (1) the physical impossibility of taking into possession and distributing such quantities of oil; (2) proof to the contrary in the records of Transneft, the state-owned monopoly that tightly controls the movement of oil through Russia’s pipeline network, showing that the allegedly embezzled oil was in
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Under Russian law, the charge of acting through an “organized criminal group” extends the statue of limitations for the charges and increases potential penalties upon conviction. Furthermore, by labeling Khodorkovsky and Lebedev as leaders of an “organized criminal group”, the acts of others are imputed to them regardless of whether the others are charged. There is also a stigmatism attached to being a member of an “organized criminal group”, thus promoting the prosecution’s goal of portraying Khodorkovsky and Lebedev as pernicious criminals.
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fact sold by Yukos and transported through the state pipeline network; and (3) that not a single incident of oil disappearance or of the defendants taking possession of the oil was presented to the court by prosecutors or otherwise discovered by the judge. The credibility of the verdict is further undermined by simultaneously asserting on page 13 that Yukos was “factually not the purchaser of the oil” from the production subsidiaries, and on page 660 that the “oil transferred into the factual ownership of [Yukos]”.

Yukos was Supposedly a Sham To sustain the legal fiction that embezzlement occurred, in the verdict the judge subscribes to the audacious, untenable and unproven prosecution theory that the entire corporate structure of Yukos was a criminal sham organized by a group led by Khodorkovsky and Lebedev to embezzle oil from Yukos production subsidiaries. The verdict is in effect describing the greatest success story of Russia’s oil industry as if it had been nothing better than a petroleum Ponzi scheme. Routine and legal management decisions and corporate procedures, including, in particular, allocation of profits within a major vertically-integrated oil company, are characterized as embezzlement committed by an “organized criminal group” led by Khodorkovsky, Lebedev and others. On page 300 of the verdict, the judge asserts: “The commission by the defendants of theft by way of embezzlement…is confirmed by oil sale-and-purchase agreements…” Yet he does not explain how an embezzlement conviction can be based upon oil sale-and-purchase agreements that involved appropriate exchange for value, without injury sustained by the seller. In reality, Yukos’s vertically-integrated structure was planned and approved not by an imagined rogue or criminal group, but rather by the Russian government itself, with support from the Kremlin, through a deliberate policy aimed at rescuing and developing Russia’s moribund oil industry in the 1990s. Official government records prove this—but were ignored by the court. Instead, according to the verdict, on page 133: “The guilt [of the defendants in the theft of the oil] is confirmed by data demonstrating that [they] took active part in building up the vertically-integrated structure of [Yukos], establishing control over the activity of the company and distributing its capital…”; and, on page 140: “The court connects the building up of the vertically-integrated structure of management of [Yukos] with the intent of the defendants to…[commit] theft of the oil…” On page 78, the verdict admits that production costs were covered from proceeds of sales, even though those sales transactions supposedly constituted theft. The judge theorizes that the defendants compensated the subsidiaries for production costs only to continue stealing from them, yet he does not identify any theft that actually occurred: “With the objective of concealing the committed theft... [Khodorkovsky and Lebedev] accounted [the proceeds from the stolen oil] on the accounts of Russian companies, so as to ensure compensation of the cost of production of expenses [sic] by enterprises and organizations [producing oil], the payment of taxes on their behalf on account of these monetary funds, having in so doing the objective of ensuring replacement of the oil production for its further theft…” On page 669, the verdict states that expenditures on acquisitions of “operational assets, field development and modernization of operational capacities were imperative to Khodorkovsky and Lebedev to ensure the production and refining of the oil being stolen by them” because “increasing the company’s production volumes…corresponded to their mercenary aspirations to receive ever greater profit…”, while page 670 continues with the assessment that through “the payment of dividends, to which a very insignificant part of the profit received was directed, Khodorkovsky and Lebedev concealed the committed theft of [all] the oil [produced]…” (The “insignificant” dividends in fact amounted to 16.6% of profits, or some $2.8 billion.) Meanwhile, on page 674 of the verdict, the judge asserts that the acquisition of oil from Yukos subsidiaries “was covered up by the introduction of the term ‘output’, under the guise of which the oil produced by the subsidiary enterprises was acquired…”

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As far as the court is concerned, the development of a Russian and global oil major is in and of itself obvious evidence of criminal intent. Such cynicism and presumed guilt undermine the credibility of the court and reflect poorly upon the Russian judiciary. The verdict in effect establishes a judicial assumption that criminal intent exists in the Russian entrepreneurial DNA.11

Regulatory Compliance is Supposedly Indicative of Criminal Activity On page 612 of the verdict, the court asserts: “Dual-entry bookkeeping was maintained at [Yukos] for accounting profit received: the first, under RSBU [Russian Accounting Standards]—for the shareholders, the tax and regulatory agencies, in which a minimum amount of profit was accounted; the second—for the auditors and foreign investors, in which the profit received as the result of the theft of the oil was also accounted…” First, the judge appears to have erroneously used the standard accounting term “dual-entry bookkeeping”, when from the context it is clear he means to assert that “two sets of books were maintained”. Second, it is naïve to assert that the co-existence of RSBU reporting and US GAAP reporting is somehow improper or indicative of criminal activity; on the contrary, the judge seems to be unaware that in order to comply with rules of the Russian Ministry of Finance and Russian taxation authorities, both sets of reports were required. Third, the court’s admission of “profit received as the result of the theft of oil” exposes the recurring theme of the trial: that no harm was proven to ground the allegations of embezzlement. Shortly thereafter, on page 613 the verdict states: “Khodorkovsky and Lebedev maintained dual financial accounting [under RSBU and US GAAP] and concealed the consolidated financial statements from shareholders, for which they published it exclusively in the English language…” Along with the assertion on page 612 that meeting multiple reporting requirements is somehow improper or indicative of criminal activity, the court reveals not only naïveté but also incompetence to hear a case requiring an understanding of the basics of legal and regulatory compliance for large corporations. Adding to the absurdity, just four pages later, on page 617, the verdict concedes the exact opposite of what is stated on page 613: “In order to safeguard interests of shareholders, a bilingual version of the Yukos.ru website was created on which that information [consolidated statements] was posted in accordance with international standards.” In a further artificial criminalization of legitimate business practices, on page 616, the verdict states that “the sale price for oil sold by [Yukos] production enterprises indicated in sale-and-purchase agreements was not a transfer price, but an internal corporate price of [Yukos]…” The verdict plays with words to obfuscate reality—denying that Yukos engaged in the same transfer pricing that was and is lawfully practiced by other Russian and international energy majors, including state-controlled

The impact of the artificial criminalization of legitimate business activity is an increasingly prominent issue raised by advocates of a new push for legal and economic reforms in Russia. From 2000 to 2009 some 15% of Russia’s registered businesses faced criminal charges, with a significant proportion of these cases resulting from corrupted officials abusing the law to facilitate unlawful seizures of property. The repression of legitimate business in Russia through fabricated criminal cases has become a serious obstacle to Russia’s modernization. See: http://www.novayagazeta.ru/data/2011/044/14.html and http://www.novayagazeta.ru/data/2011/044/13.html. The issue was highlighted by Mikhail Khodorkovsky in his last words to the Khamovnichesky Court on November 2, 2010, available in English at: http://www.khodorkovskycenter.com/sites/khodorkovskycenter.com/files/Last%2520Word%2520of%2520MBK %2520-%2520Final%2520%2528English%2529%25202nd%2520November%25202010.pdf and in the original Russian at: http://www.khodorkovskycenter.com/sites/khodorkovskycenter.com/files/MBK%20Last%20Word%20RUSSIA N.pdf.
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Rosneft.12 Furthermore, because the “internal corporate price” does not compare to inappropriatelyapplied global benchmark prices for oil, the court finds proof of a “wrongful seizure” by the defendants “not involving exchange for value” (as stated on page 72 of the verdict).

Court Fails to Identify Harm Inflicted by Khodorkovsky or Lebedev In asserting massive embezzlement, the court notably ignores both the profitability data of Yukos production subsidiaries, and the true market prices of oil in Russia. The court thus avoids proof of the absence of the harm that would have had to have been suffered for the embezzlement charges to have any validity. Prosecutors invented “injured parties”—Yukos production subsidiaries—alleging the theft of oil from them as a means of sustaining the charges against Khodorkovsky and Lebedev, despite the subsidiaries’ profitability and full compensation of their production costs. The judge disregarded responses the court received to enquiries it sent to production subsidiaries, which demonstrated their profitability with data for proceeds of the sales against costs of production. Indeed, the verdict contradicts itself by admitting on page 132 and on page 674 that from 2000 to 2003, production subsidiaries received proceeds of 297.7 billion rubles and profits of 50.5 billion rubles. No one challenged the historic data submitted by production subsidiaries to the court in 2010—including data from state-controlled Rosneft reporting on Yukos production assets it acquired through the forced bankruptcy auctions—that clearly report the data for proceeds of sales against costs of production. The court itself included documentary proof of these data in the case file, while not taking such information into account. Though declaring that massive embezzlement occurred, neither at trial nor in the verdict was the harm of an injured party established. Sales of oil by the subsidiaries to Yukos trading companies are deemed to constitute embezzlement simply insofar as the oil was sold at a price less than the export spot price. This concocted theory of embezzlement ignores market pricing in Russia as well as industry-standard, lawful procedures for corporate functioning undertaken by Yukos, involving a legitimate and transparent downstream and upstream structure of production subsidiaries and domestic and foreign operating companies. Extensive defense evidence demonstrating the legality of Yukos operations was rejected by the court, and numerous witnesses and experts were blocked from testifying on behalf of the defendants. Meanwhile, rather than referring to openly-verifiable historic domestic prices for Siberian oil, the verdict ascribes the Rotterdam price to domestic transactions, in order to argue that the much higher Western price ought to have been applied. This ignores transport costs, customs duties and other expenditures that make up the difference between the price of oil in Siberia and the price of oil in Rotterdam. The verdict simply brushes away these realities and states on page 616 that it does not agree that oil prices differ on domestic and global markets.

Verdict Contradicts Prior Yukos cases in Russian Domestic Courts and Russian Federation’s Defense at the European Court of Human Rights The punitive taxes that bankrupted Yukos were validated in Russia by numerous rulings in cases brought before the courts. In those cases the structuring of Yukos transactions with production subsidiaries was scrutinized and judicially approved. The determination of who owned Yukos oil was also recognized by the courts: according to all other courts in Russia, Yukos owned and sold that oil, and Yukos was therefore subject to taxation of its resulting revenues. Leaving aside arguments over the unfair and irrational punitive taxation of Yukos, these court decisions nevertheless stand today as
Rosneft, meanwhile, has not been attacked by the authorities for not selling oil internally or domestically at Rotterdam prices. This reveals not only the artificial nature of the criminalization of Yukos’s operations, but also the discriminatory and unlawful treatment of Yukos compared to other oil companies in Russia.
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Russian jurisprudence that cannot, under Russian law, be contradicted by inverse logic in other court rulings. The new criminal allegations against Khodorkovsky and Lebedev therefore created a juridical Catch-22: either Yukos owned the oil, a legally settled fact under Russian law as determined by all previous courts; or Khodorkovsky and his alleged co-conspirators embezzled the oil, in which case it could not have also been sold and taxed by Yukos. In finding Khodorkovsky and Lebedev guilty, the court has created a massive and irreconcilable contradiction in Russian jurisprudence. Even elemental findings of fact made by the court contradict those of other courts. On page 458 the verdict states: “It has been established by the court that practically the entire volume of the [stolen] oil was sold by [Yukos] on its own behalf to the benefit of Routhenhold [Holdings Ltd.], which was under the control of the members of the organized group…” Yet, in a parallel Yukos case dealing with many of the same germane facts, the court’s verdict stated: “…Routhenhold was created and operated exclusively for the benefit of [Yukos]…” (as stated on page 100 of the Moscow Basmanny Court verdict of March 1, 2007 in the case against former Yukos executives Vladimir G. Malakhovsky and Vladimir I. Pereverzin). These contradictory findings do not prevent Judge Danilkin from relying on the very same parallel ruling to assert on page 630 of his verdict that the “unsustainability of the defense counsel’s arguments is also corroborated by the verdict of the Basmanny District Court of the City of Moscow…regarding V.G. Malakhovsky and V.I. Pereverzin.” Other standing court rulings that contradict Judge Danilkin’s findings on Yukos oil ownership and sales include the decisions of the Moscow Commercial Court of May 26, 2004, October 11, 2004 and December 16, 2004. A decision of the Moscow Commercial Court of April 21, 2005 that confirmed the massive Sibneft acquisition by Yukos is likewise incompatible with Judge Danilkin’s findings. At the European Court of Human Rights (ECHR), the Russian Federation is currently fighting individual appeals from Khodorkovsky and Lebedev concerning their first criminal conviction in 2005. In a separate case before the ECHR, a $98 billion unlawful expropriation claim has been brought against the Russian Federation by former executives of Yukos, not involving Khodorkovsky or Lebedev. That claim alleges that Yukos was taxed unlawfully in respect of liabilities asserted against no other taxpayer in Russia and which were wholly unknown to Russian law before the Yukos case; that this taxation and its enforcement amounted to the disguised expropriation of the company and its assets; and that these measures singled the company out in discriminatory and abusive ways. In these cases before the ECHR, the Russian authorities are defending the legality of punitive taxes on oil they assert was owned and sold by Yukos, claiming that its tax authorities made punitive reassessments of Yukos on the basis that Yukos trading companies were mere shams, and the oil which they bought and subsequently re-sold “in fact” belonged to Yukos. As a result, Yukos was assessed to corporate profit tax as if it, and not the trading companies, had made the trading companies’ profits. Because of the tax authorities’ assertion that Yukos was the owner of the oil produced by Yukos production subsidiaries, the company was further charged value added tax on export sales which would have normally been exempt. Simultaneously however, in the current criminal proceedings against Khodorkovsky and Lebedev, the verdict concluded that the same oil was not owned by Yukos but rather stolen from the company’s production subsidiaries by the defendants. The incompatible positions—one version for the ECHR and a different version for the Khamovnichesky Court—are each absurd in their own right and doubly absurd when argued concurrently on behalf of the Russian Federation in major parallel proceedings.

Court Refuses to Give Reasoned Assessment of Trial Testimony that Favored Defendants The prosecution paraded 51 witnesses into the courtroom who proffered either no testimony germane to the accusations or testimony that actually contradicted the accusations. Of 93 individuals summoned to appear pursuant to requests from the defense, only 13 of them attended the proceedings pursuant to a summons, and the court made no efforts to compel the others to appear. For those who did appear, any testimony that supported the defendants was in the end disregarded by the judge on flimsy or nonsensical grounds.

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The judge’s treatment of the testimony of witness Viktor V. Gerashchenko and of expert S. Wesley Haun is illustrative of the methods he employed to filter out information that favored the defendants. On page 623, the verdict states: “The testimony of V.G. [sic] Gerashchenko [former Soviet and Russian Central Bank chief and former chair of the Yukos board of directors, asserting the absence and impossibility of embezzlement as charged]…is assessed by the court as untrue because…[he] was not an eyewitness of the commission of the embezzlement and laundering of the oil…” On this same basis, however, the judge would have had to dismiss the testimony of every witness who testified at the trial, including those called by the prosecution, because none of them were eyewitnesses of the alleged embezzlement and laundering of oil. Gerashchenko testified in court as a witness in June 2010. The judge does not address Gerashchenko’s statement that if the charges had any validity, Yukos could never have grown to preeminence in the Russian oil industry, and foreign oil majors such as Exxon which exhaustively examined Yukos would not have made multi-billion-dollar offers for significant stakes in the company. Nor does the judge address Gerashchenko’s statement that none of the companies that acquired Yukos assets through forced bankruptcy auctions—including Rosneft—ever complained about alleged large-scale embezzlement, and that no one in government ever suggested that massive amounts of crude oil had disappeared or been embezzled. Rather, the judge avoids such difficult indictment-deflating realities by branding Gerashchenko’s testimony “untrue”, on the grounds that Gerashchenko was not an eyewitness to alleged embezzlement that was in fact witnessed by no one at all. Out of eight experts that the defense sought to bring to the court, the sole expert permitted to testify in the trial proceedings was Wesley Haun, a U.S. specialist in energy industry management who came to the stand in May 2010. After Haun challenged fundamental aspects of the prosecution’s case, he became not only the first but also the last defense expert the court allowed in this trial. Judge Danilkin subsequently shut out all other defense experts in an apparent bid to avoid the spectacle of numerous credible independent experts publicly dismantling the prosecution’s case.13 Unsurprisingly, the prosecution successfully motioned to have Haun’s expert report excluded from the evidentiary record. Avoiding any substantive consideration of Haun’s in-court testimony, on page 618 of the verdict Judge Danilkin simply echoes arguments prosecutors presented at trial, stating that the court believes that Haun is not a specialist in Russian law14; that Haun did not work at Yukos; and that he obtained information about the company from publicly-available sources. Haun’s testimony is therefore deemed “untenable” by Judge Danilkin. Haun had testified that Yukos was comparable with other Russian and international verticallyintegrated oil companies, and that Khodorkovsky’s actions were consistent with company leadership intent on building a model of sustained growth and long term profitability. Having examined the structure and operating procedures of Yukos, Haun stated that Khodorkovsky’s reorganization and management of the company benefited all shareholders, the production subsidiaries, as well as the Russian Federation, and was consistent with industry standards, custom and practice. He stated that the charges brought against the defendants are disproved by the commercial achievements of Yukos: the company’s performance statistics and growth would have been impossible had crude oil been embezzled as charged. He further noted that the prosecutors erred in comparing the price of wellhead liquid to the end user price of crude oil. Yet the Khamovnichesky Court’s way of dealing with these assertions was in effect to rule that independent foreign experts could have nothing to contribute to this trial, if their conclusions supported the defendants.

For more information about the court’s exclusion of defense experts, see: “Justice under Pressure – Executive Summary: The Defense Phase of the Trial”, pages 13-14, available at: http://www.khodorkovskycenter.com/sites/khodorkovskycenter.com/files/MBK_PLL_defense_summary.pdf. 14 Meanwhile, a nationally renowned Russian criminal law specialist, Professor Natalya A. Lopashenko, was not allowed to testify either, as was the case with several other Russian specialists in law and economics.
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As with the examples of Gerashchenko and Haun, the verdict lacks plausible or reasoned assessments of any other trial testimony that favored the defendants. Facts and views presented by witnesses are simply brushed away without thorough consideration, usually by challenging the credibility of people even after they were approved to appear in court, and sometimes adding suggestions of perjury motivated by past employment relationships: on page 620 of the verdict, Judge Danilkin states that “the court has a critical attitude toward the testimony of the above witnesses [Tagirzyan R. Gilmanov and Pavel A. Anisimov] assuming that they were unable to give truthful evidence against the defendants who paid them high remunerations.” Not a single prosecution witness was subjected by the judge to the credibility tests that he so vigorously applied to defense witnesses. The verdict also obfuscates and misrepresents testimony delivered in court by German O. Gref, Chief Executive of Sberbank and Russia’s economic development and trade minister from 2000 to 2007, and Viktor B. Khristenko, Russia’s Industry and Trade Minister since 2008. Gref had testified that as minister he would have been aware if massive crude oil embezzlement at Yukos had been taking place as charged, in the vicinity of 20% of Russia’s annual production; and that the prosecution’s assertion that Russia’s domestic pricing of crude oil is comparable to international market prices is “impossible.” Khristenko, who chaired Transneft from 2000 to 2008, testified that none of the allegedly injured parties had ever reported large-scale embezzlement. Khristenko further testified that Yukos’s transfer pricing practices were neither mysterious nor illegal. Ignoring the foregoing, in multiple passages of the verdict15 Judge Danilkin cites both Gref and Khristenko to support misguided and misapplied judicial ruminations about corporate transfer pricing practices of vertically-integrated oil companies.16

DECISION ENSHRINES OFFICIAL MISCONDUCT AND DUE PROCESS VIOLATIONS Marred by due process violations and incidents of official misconduct, the proceedings failed to comply with fundamental norms of fairness and justice.17 These due process violations and incidents of official misconduct were committed either by the prosecution or the court, or by both in tandem. For the vast majority of instances of prosecutorial abuses and misconduct, the court passively or actively condoned the ongoing miscarriage of justice. This raised doubts as to the judge’s capacity to render a verdict independent of pressure from the prosecutors and, behind the prosecutors, the powerful instigators of the case. As broadly expected, in his verdict the judge failed to cure or even to take into consideration these legal transgressions. This prompted Khodorkovsky’s lead defense lawyer Vadim Klyuvgant to affirm on December 27, 2010 that the trial had been “a charade of justice”. By his acts and omissions in the handling of the case, Judge Danilkin became complicit in and responsible for the official misconduct and due process violations that the prosecutors brought to the trial. Any independent court would have dismissed the case and terminated the trial on the basis of the gross prosecutorial misconduct that occurred, or on the basis of the plain facts and legal reasoning advanced by the defense. Furthermore, a credible guilty verdict cannot be built upon the deficient legal and evidentiary grounds provided by the prosecution. The prosecution failed to connect any acts of the defendants with anything whatsoever that is proscribed in Russian criminal law. Nor did the prosecution elaborate any plausible theory of criminal liability. Unable to explain or offer any proof,

Pages 285, 610, 615-16, 649-50 and 675. It should be noted that the indictment includes no charges of unlawful transfer pricing, and that Yukos’s tax optimization strategies were in compliance with evolving transfer pricing rules. 17 For a summary of the extensive due process violations and official misconduct, see: “Justice under Pressure – Pre-Verdict Executive Summary”, pages 12-22, available at: http://www.khodorkovskycenter.com/sites/khodorkovskycenter.com/files/MBK_PLL_pre_verdict_trial_exec_su mmary.pdf.
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the guilty verdict is not anchored in properly applied law and facts, and clearly is motivated by reasons alien to justice.18 In assessing the Khodorkovsky-Lebedev proceedings against international standards outlined in the Trial Observation Manual for Criminal Proceedings of the International Commission of Jurists, the overwhelming extent of the due process violations is readily apparent.19 In nineteen categories assessed for compliance vs. breach, the Khodorkovsky-Lebedev proceedings were marred by breaches in at least fifteen of the categories: right to a fair hearing; presumption of innocence; right to be informed promptly of the charge; right to defense, including access to documents or counsel and lack of interference with counsel; right to an interpreter and to accurate translations; right to equality of arms; right to call and examine witnesses; exclusion of evidence elicited by illegal means, including torture or ill-treatment; right to be tried without undue delay; principle of legality of criminal offences; prohibition of the retroactivity of criminal law; prohibition of double jeopardy; right to a public and reasoned judgment; right not to suffer a heavier penalty than the one applicable at the time the criminal offence was committed and right to benefit from a lighter sentence subsequently introduced by law; and right not to be punished otherwise than in accordance with international standards. In the four remaining categories—right to a public hearing; right to be present at trial; right not to be compelled to confess guilt or to testify; and right to appeal—minimal requirements were satisfied—yet evidently only misleadingly to create the appearance of a legitimate trial. For instance, the defendants were permitted to speak in court almost without restrictions; but the judge ignored the substance of their statements, blocked their lawyers from introducing exculpatory documentary evidence and refused to hear many witnesses and experts. Likewise, illusions of adversarial process and legitimacy were created by allowing the defense to file motions and objections to serious procedural violations; however the judge routinely quashed or simply failed to react to the defense pleadings. Considering the futility created by the preponderance of due process violations, the few fair trial rights that the defendants did enjoy were gutted of meaning.

IMPLICATIONS FOR RUSSIA Three predominant themes emerge from the verdict, transcending this case to be of systemic importance to Russia: (1) Legitimate entrepreneurial activity is subject to artificial criminalization by corrupt state officials; Application of the law is non-uniform and contradictory; Property rights, contract rights and human rights are not protected from political diktat and raiders acting with the collusion or complicity of law enforcement and judicial authorities.

(2) (3)

Incidentally, it is telling that in the verdict the judge failed to address numerous factual errors made by investigators and prosecutors about the most elementary of facts. These errors could have been corrected in reference to the evidentiary record, repeated submissions from the defense, and obvious or publicly verifiable information. From erroneous statements of key dates in the corporate development of Yukos to the purported existence of a “Gibraltar Island”, where prosecutors presumably meant to refer to the U.K. overseas territory firmly attached to Europe, the numerous examples of such errors undermine the judge’s credibility and are indicative of his deference to the prosecution, lack of independence—and pure sloppiness. 19 See appended chart: “International Commission of Jurists Standards on Judicial Proceedings— Khodorkovsky-Lebedev Trial 2009-2010”.
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The artificial criminalization of legitimate entrepreneurial activity by corrupt state officials constitutes a major restraint on economic growth and modernization in Russia. Since 2003, a group of powerful and corrupt figures in Russia have developed and honed corporate raiding methodologies in the course of their treatment of Khodorkovsky and Lebedev and the forced bankruptcy of Yukos. These methodologies are now being replicated throughout Russia by other state officials who take their cues from the very public handling of the Yukos Affair. The Russian judiciary is legally required to ensure the uniform application of Russian law. Uniformity in the application of the law is a fundamental tenet of the rule of law and prerequisite for justice, as well as a driver of economic development, particularly in countries with legal systems transitioning towards reliability and stability. The Khodorkovsky-Lebedev verdict, however, is a showcase of nonuniform and contradictory application of the law. The verdict is not only irreconcilable with an entire corpus of previous judgments of the Russian judiciary, but also itself internally contradictory. In addition, the prosecution of Khodorkovsky and Lebedev and the campaign against Yukos were selective and discriminatory. The Khodorkovsky-Lebedev case and the broader Yukos Affair have underlined the ongoing vulnerability of property rights, contract rights and human rights in Russia. These rights are tenuous and may be revoked by others acting with the collusion or complicity—whether passive or active—of law enforcement and judicial authorities. The potential emptiness of legal guarantees, even constitutional guarantees, undermines economic development, political stability and social peace in Russia. In light of the significant national implications of the case, the Presidential Council of the Russian Federation for Civil Society and Human Rights announced on February 1, 2011 that it will proceed with an independent expert working group assessment of the second Khodorkovsky-Lebedev verdict.20 The participants in the assessment, expected to include foreign experts, will examine compliance with Russian and international norms and the legal and economic impact of the court’s decision. The Council seeks to identify trends in judicial practice and to inform recommended changes to legislation on economic crimes. The observations and conclusions of the expert working group, which will have no legally binding effect, will be submitted to President Dmitry A. Medvedev after the verdict comes into force.

CONCLUSION In his initial reaction to the verdict, Khodorkovsky juxtaposed a series of assertions that illustrate core absurdities of the verdict, noting that the Khamovnichesky Court makes all of the following contradictory findings in a single judgment: • Yukos bought the oil, but Yukos did not buy the oil because Khodorkovsky and Lebedev embezzled it. The sellers gave that oil away without payment, but the sellers gave that oil away in exchange for money. The sellers gained profits from those oil sales and thereby suffered direct harm from the embezzlement of that oil. Yukos published its profits, thereby concealing those profits from shareholders. Yukos did not have profits, but it spent its profits on dividends, taxes and investments.

• •

See statement by Tamara G. Morshchakova, available in Russian at: http://news.kremlin.ru/transcripts/10194. See also: http://www.themoscowtimes.com/news/article/foreignersconsidered-for-yukos-review/430576.html.
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Khodorkovsky offers a final juxtaposition: “Our judiciary is independent…” (Vladimir V. Putin and Dmitry A. Medvedev), “…from the law and common sense.” (Mikhail B. Khodorkovsky). Indeed, an examination of the text of the Khamovnichesky Court judgment of December 27, 2010 reveals it to be a monumental embarrassment to the Russian judiciary, and to any Russian political figures who assert that the verdict has any credibility or that it is the outcome of a proper judicial process. Politically it is notable that in the most high-profile trial in Russia, closely-watched by legal experts, entrepreneurs, investors, the general public and media all over the world, the court could so openly ignore applicable procedural and substantive laws as well as basic notions of fairness.21 This is testament to the power of those corrupt officials who zealously seek to justify their seizure, control and ownership of Yukos assets and to isolate Khodorkovsky and Lebedev from Russia’s business and public spheres—and to keep them in jail as long as possible to achieve these goals. The trial and its verdict are an open challenge and indeed an affront to President Medvedev’s highlypublicized efforts to develop the rule of law, to reform Russia’s criminal justice system and to fight government corruption. If upheld on appeal, this verdict shall be a triumph of corrupt officials controlling Russia’s law enforcement and judicial bodies, and a setback for an entire country that aspires yet continually fails to modernize.

A collection of the reaction of world leaders is available at: http://www.khodorkovskycenter.com/supporters-around-world/global-leaders
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APPENDIX

INTERNATIONAL COMMISSION OF JURISTS S T A N D A R D S O N J U D I C I A L P R O C E E D I N G S 22 — KHODORKOVSKY-LEBEDEV TRIAL 2009-2010

STANDARD
Right to a fair hearing

COMPLIANCE

BREACH
X

SOURCE
ICCPR Art. 14(1); ECHR Art. 6(1); UDHR Arts. 10,11; BPIJ Prin. 5,6 ICCPR Art. 14(1); ECHR Art. 6(1); UDHR Arts. 10,11 ICCPR Art. 14(2); ECHR Art. 6(2); UDHR Art. 11(1); GP Guid. 13(b),14; SMR R. 84(2); BPD Prin. 36; Rec. R Prin. 26,27,30 ICCPR Art. 14(3)(a); ECHR Art. 6(3)(a); BPD Prin. 10 ICCPR Art. 14(3)(b); ECHR Art. 6(3)(b), 6(3)(c); UDHR Art. 11(1); BPL Prin. 1,5-8; SMR R. 93; BPD Prin. 18; Rec. 2000 Prin. I(5)(7) ICCPR Art. 14(3)(f); ECHR Art. 6(3)(e) ICCPR Art. 14(3)(d); ECHR Art. 6(3)(c) ICCPR Art. 14(3), 14(3)(e); ECHR Art. 6(3)(d); UDHR Art. 10; BPIJ Prin. 6; Rec. R Prin. 29 ICCPR Art. 14(3)(e); ECHR Art. 6(3)(d) ICCPR Art. 14(3)(g); BPD Prin. 21; CAT Arts. 13,16 GP Guid. 15,16; BPD Prin. 27; Rec. R Prin. 28; CAT Arts. 15,16 ICCPR Art. 14(3)(c); ECHR Art. 6(1); BPD Prin. 38; Rec. R Prin. 24(c)

Right to a public hearing

X

Presumption of innocence

X

Right to be informed promptly of the charge Right to defense, including access to documents or counsel and lack of interference with counsel Right to an interpreter and to accurate translations Right to be present at trial

X

X

X X

Right to equality of arms

X

Right to call and examine witnesses Right not to be compelled to confess guilt or to testify Exclusion of evidence elicited by illegal means, including torture or ill-treatment Right to be tried without undue delay

X X

X

X

International standards applicable to trial proceedings as listed in Trial Observation Manual for Criminal Proceedings – Practitioners Guide No. 5, International Commission of Jurists, Geneva, 2009.
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Principle of legality of criminal offences (nullum crimen sine lege) Prohibition of the retroactivity of criminal law Prohibition of double jeopardy (ne bis in idem) Right to a public and reasoned judgment Right not to suffer a heavier penalty than the one applicable at the time the criminal offence was committed and right to benefit from a lighter sentence subsequently introduced by law

X

ICCPR Art. 15; ECHR Art. 7(1); UDHR Art. 11(2) ICCPR Art. 15(1); ECHR Art. 7(1); UDHR Art. 11(2) ICCPR Art. 14(7); ECHR Art. 4, Protocol 7 ICCPR Art. 14(1); ECHR Art. 6(1); UDHR Art. 10

X X X

X

ICCPR Art. 15(1); ECHR Art. 7(1); UDHR Art. 11(2)

Right not to be punished otherwise than in accordance with international standards

X

ICCPR Arts. 6,7,10,11; ECHR Art. 3; UDHR Arts. 3,5,9; SMR R. 8,33,56-83; BPTP Prin. 7; BPD Prin. 1,3,6; CC 5,6,8; CAT Arts. 1,2,16 ICCPR Art. 14(5); ECHR Art. 2, Protocol 7; UDHR Art. 8

Right to appeal

X

Acronyms used: United Nations and Regional Treaty Standards ICCPR – International Covenant on Civil and Political Rights ECHR – European Convention for the Protection of Human Rights and Fundamental Freedoms and its Protocols CAT – Convention against Torture and other Cruel, Inhuman or Degrading Treatment or Punishment United Nations Declaratory Instruments Standards UDHR – Universal Declaration of Human Rights BPL – Basic Principles on the Role of Lawyers GP – Guidelines on the Role of Prosecutors SMR – Standard Minimum Rules for the Treatment of Prisoners BPTP – Basic Principles for the Treatment of Prisoners BPD – Body of Principles for the Protection of All Persons under Any Form of Detention or Imprisonment CC – Code of Conduct for Law Enforcement Officials Regional Declaratory Instruments Standards Rec. 2000 – Recommendation 2000 (21) on the Freedom of exercise of the profession of lawyer of the Committee of Ministers to Member States of the Council of Europe Rec. R. – Recommendation No. R (2000) 19 of the Committee of Ministers to Member States of the Council of Europe on the role of public prosecutors in the criminal justice system

April 27, 2011

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