UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
In re YUKOS OIL COMPANY
SECURITIES LITIGATION
This Document Relates To:
ALL ACTIONS.
x
: Civil Action No. 04-CV-5243 (WHP)
:
: CLASS ACTION
:
: CONSOLIDATED AMENDED
: COMPLAINT FOR VIOLATIONS OF THE
: FEDERAL SECURITIES LAWS
:
DEMAND FOR JURY TRIAL
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 Lead Plaintiffs, Roxwell Holdings Limited (“Roxwell”), Mykola Buinyckyi, and Parsimony

Ltd. (“Parsimony”) (collectively, “Lead Plaintiffs”), individually and on behalf of all other persons

similarly situated, by their undersigned attorneys, allege upon personal knowledge as to themselves

and their own acts, and as to all other matters, based upon an investigation made by their attorneys

that included, among other things: (i) review and analysis of the public filings of Yukos, including

its filings with the Securities and Exchange Commission (“SEC”); (ii) review and analysis of the

findings of the Russian taxing authorities and the rulings of the board of arbitration; and (iii) review

and analysis of news articles, press releases, and analysts reports by or relating to Yukos.

Based upon the evidence already developed, Plaintiffs believe that further substantial

evidentiary support will exist for the allegations in this Consolidated Amended Class Action

Complaint after a reasonable opportunity for discovery. Most of the facts supporting the allegations

set forth herein are known only to the defendants or are exclusively within their custody and/or

control.

NATURE OF THE ACTION

1. This is a securities fraud class action on behalf of purchasers of the common stock

of Yukos Oil Company (“Yukos” or the “Company”); Yukos American Depository Shares; and

Yukos equity linked convertible bonds (collectively, “Yukos Securities”), between January 22,

2003 and October 25, 2003, inclusive (the “Class Period”), seeking to pursue remedies under the

Securities Exchange Act of 1934 (the “Exchange Act”).

2. Yukos describes itself as the “number one oil producer in Russia.” Yukos was

created in 1995 when defendant Mikhail Khodorkovsky acquired the controlling stake in certain oil

producing assets of the former Soviet Union for $309 million, in an auction run by his bank, the

predecessor of defendant Menatep Ltd (“Menatep”). In 1999, Yukos had been accused of quashing

minority shareholders, diverting profits and evading taxes by using a “transfer pricing scheme”

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similar to that described below. At that time, Defendants were able to use their close relationship

with the government led by Boris Yeltsin to quash multiple governmental crackdowns on their

activities.

3. After the March 2000 election of Vladimir V. Putin as Russia’s president, Yukos

claimed in its public filings and press releases that, in order to attract Western capital, it would

change its business practices by adopting new corporate governance standards. In that regard, “to

enhance the transparency and user friendliness of the Company’s financial statements, YUKOS

officially changed its reporting currency to U.S. dollars with the release of its first quarter earnings

in 2002.” In its public filings, Yukos asserted that it “is proud of the leadership role it has played in

building confidence in a new Russian economy.”

4. Despite its self-proclaimed “transparency,” Yukos provided purchasers of Yukos

Securities with anything but a clear picture of the risks that they faced by investing in Yukos.

5. At the start of the Class Period, Yukos and the defendants represented, among other

things: (i) that the Company’s third quarter 2002 net profits had increased 6.6% to US $850

million; (ii) that those profits were “pushed down” as a result of the Company’s recognition of

certain taxes; (iii) that the tax payments were a “one time event”; and (iv) that Yukos was

reviewing its tax accounting and expense policies so as to assure accuracy and compliance.

6. Unbeknownst to investors, however, the Company’s claimed net profits were the

result of an expansive tax evasion scheme pursuant to which Yukos failed to pay tens of billions of

dollars in taxes due and owing to the Russian government.

7. As described below, under Yukos’ tax evasion scheme, Yukos created at least

seventeen sham, alter-ego companies in jurisdictions where those companies would be required to

pay little or no taxes. Rather than admitting that Yukos sold oil to purchasers at market prices,

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Yukos made bookkeeping entries that indicated that it sold oil to those sham companies at well

below-market prices. Yukos paid taxes only on those below market sales. Yukos then would

report that the sham companies, in turn, sold the oil to ultimate purchasers at market prices. The

sham companies failed to pay taxes to the Russian government for profits earned on those sales.

Defendants then funneled those profits back to Yukos through defendant Menatep and its

subsidiaries.

8. Although defendants knew both that this tax evasion scheme violated Russian law

and that the Russian government had been prosecuting other companies, including oil companies,

that engaged in similar schemes, Yukos never adequately disclosed the risks associated with the

scheme to investors.

9. Moreover, Yukos never adequately disclosed the risks that investors faced as a result

of defendant Khodorkovsky’s political activities. Russian President Vladimir Putin expressly

warned Khodorkovsky in March 2000 that if he did not “stay out of politics,” Khodorkovsky and

Yukos (and, therefore, Yukos’ investors) would face dire consequences. Despite this warning,

defendant Khodorkovsky began a political assault on Putin and the Russian government.

Regardless of whether Khodorkovsky had a right to engage in his political activities, investors

clearly had a right to know the risks that they faced as a result of these activities. However, Yukos

never adequately disclosed these material risks to investors.

10. Indeed, the seeds sown by Yukos’ tax evasion scheme and Khodorkovsky’s political

activities were realized, on October 25, 2003, Russian authorities arrested Khodorkovsky, the

Company’s largest shareholder and CEO, and charged him with fraud, embezzlement, and evading

taxes on hundreds of millions of dollars that were owed to the government. At that time, the

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investigation into Yukos’ tax evasion scheme by the Russian Ministry of Taxation (the “Tax

Ministry”) also became public.

11. Days later, the seriousness of the Yukos situation worsened for investors after it was

also reported that Russian authorities had seized control of defendant Khodorkovsky’s 44% interest

in Yukos. By that time, Russian authorities estimated that Yukos and defendant Khodorkovsky had

failed to pay at least $1 billion in taxes, and that the seized shares would be held as “security

against material damage.” According to at least one analyst at a Russian brokerage firm, this asset

seizure was “in line with our worst-case scenario for Yukos.” In addition, it was also reported that

London bankers, upon hearing of this asset seizure, speculated that this event could threaten at least

$1 billion in loans to the Company.

12. Shortly thereafter, the Department of Information and Public Relations of the

General Prosecutors Office of the Russian Federation completed a 30-page report which accused

defendant Khodorkovsky and defendant Platon Lebedev, both major shareholders of the Company,

of multiple fraud, tax evasion, and criminal activities dating back to the early 1990s, including:

• That Khodorkovsky had acted in concert with other members of the Company and
members of Menatep Bank (a bank founded by defendant Khodorkovsky and owned
by defendant Menatep), to operate a host of shell companies, the sole purpose of
which was to assist the Company in illegally avoiding the payment of taxes – the US
equivalent of an illegal tax shelter scheme;

• That Khodorkovsky and the other defendants, together with the sham general
directors of the shell companies under their control, fraudulently engaged in the
transference of huge amounts of funds through such companies for the sole purpose
of avoiding the payment of taxes in violation of Russian law;

• That Khodorkovsky and Lebedev engaged in various fraudulent schemes involving a

host of companies while at the same time they falsely projected that they were “new”
Russian managers who no longer conducted themselves as they did in the 1990’s;
and

• That Khodorkovsky and Lebedev were accused of stealing tens or hundreds of

millions of dollars directly from the Company and its subsidiaries.

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 13. Defendants Khodorkovsky and Lebedev subsequently were indicted as the creators

and main beneficiaries of the tax evasion scheme described in ¶¶60-84 below.

14. In December 2003, the Tax Ministry, after conducting a field tax audit for the tax

year 2000, served Yukos with a tax bill for $3.4 billion for back taxes – $1.6 billion for unpaid

taxes for the year and $1.8 billion for interest and penalties. According to the 126-page audit report

issued on April 16, 2004, the Tax Ministry found that defendants created a complex network of

seventeen “front companies” or “shell companies” to evade taxes on the production, refining and

sale of oil and oil products. These “front companies” were registered in regions with preferential

tax treatment to enable these companies to receive special tax exemptions, which would minimize

Yukos’ tax liability. As these shell companies were not separate legal entities but rather controlled

by Yukos, Yukos was required to recognize the full amount of the receipts associated with these

transactions for its own taxes purposes. Further it was not entitled to the preferential tax treatment

these shell organizations were granted. Accordingly, Yukos’ net income was materially overstated

and its tax liability was materially understated during the Class Period in violation of Generally

Accepted Accounting Principals in the United States of America (“U.S. GAAP”).

15. As a result of these findings, among other things, Yukos’ credit rating was severely

downgraded by Standard & Poor’s and Moody’s.

16. Shortly thereafter, in a series of rulings, the Moscow Arbitration Court found in

favor of the Tax Ministry in connection with Yukos’ tax payments and ordered Yukos to pay its

back taxes and penalties. As a result of Yukos’ massive tax fraud, the Tax Ministry found that

Yukos had used the illegal transfer pricing scheme in 2000, 2001, 2002, and 2003. In connection

with those findings, the Tax Ministry charged Yukos with additional taxes of $1.646 billion, $3.105

billion, $4.094 billion, and $3.963 billion for 2000, 2001, 2002, and 2003, respectively, and

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assessed penalties of $1.997 billion, $4.054 billion, $4.735 billion, and $3.944 billion for each of

those years. The total harm caused by Yukos’ illegal tax scheme was $27.538 billion.

17. On July 6, 2004, Yukos announced that a consortium of lenders led by Société

Générale and CitiGroup had declared Yukos in default of a $1 billion loan.

18. In an attempt to satisfy Yukos’ tax obligations, the Ministry of Justice announced

that the Russian government would confiscate Yukos’ assets, including its main production

subsidiary, Yuganskneftegaz, and billions of dollars from Yukos’ bank accounts.

19. On December 15, 2004, Yukos filed for Chapter 11 bankruptcy protection in the

United States Bankruptcy Court for the Southern District of Texas. On February 25, 2005, the

United States Bankruptcy Court for the Southern District of Texas dismissed the Yukos bankruptcy

for lack of jurisdiction.

20. On December 20, 2004, the Russian government conducted the auctions of

Yuganskneftegaz, selling it for $9.3 billion to an entity named BaikalFinansGroup.

21. As a result of the revelation of defendants’ wrongdoing, investors have suffered

massive damages as the prices of their Yukos Securities have plummeted, which has also affected

equity lined Yukos bonds. In addition to the foregoing, defendants have also now jeopardized the

continued financial and operational well-being of Yukos.

JURISDICTION AND VENUE

22. The claims asserted herein arise under and pursuant to Sections 10(b) and 20(a) of

the Exchange Act [15 U.S.C. §§78j(b) and 78t(a)] and Rule 10b-5 promulgated thereunder by the

United States Securities and Exchange Commission (“SEC”) [17 C.F.R. §240.10b-5].

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 23. This Court has jurisdiction over the subject matter of this action pursuant to 28

U.S.C. §§1331 and 1337, and Section 27 of the Exchange Act [15 U.S.C. §78aa].

24. Venue is proper in this District pursuant to Section 27 of the Exchange Act, and 28

U.S.C. §1391(b). Many of the acts and practices complained of herein occurred in substantial part

in this District.

25. In addition, pursuant to the provisions of the Agreement governing Yukos’

American Depositary Receipts (“ADR”)1, Yukos has consented to personal jurisdiction for claims

arising from violation of the federal securities laws in the federal district court located in Manhattan

and has agreed to waive various objections to litigation in this court, including forum non

conveniens.

26. In connection with the acts alleged in this complaint, defendants, directly or

indirectly, used the means and instrumentalities of interstate commerce, including, but not limited

to, the mails, interstate telephone communications and the facilities of the national securities

markets.

PARTIES

27. Plaintiff ROXWELL HOLDINGS LIMITED (“Roxwell”), as set forth in the

certification previously filed in this litigation and incorporated by reference herein, purchased

Yukos Securities at artificially inflated prices during the Class Period and has been damaged

thereby.

1
In order to sell its stock on U.S. exchanges, Yukos entered into an agreement with Deutsche Bank
Trust Company Americas whereby for every four ordinary shares of Yukos stock deposited, the bank
would issue one ADR for trading in the U.S.

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 28. Plaintiff MYKOLA BUINYCKYI (“Buinyckyi”), as set forth in the certification

previously filed in this litigation and incorporated by reference herein, purchased Yukos Securities

at artificially inflated prices during the Class Period and has been damaged thereby.

29. Plaintiff PARSIMONY LTD (“Parsimony”), a New York based corporation, as set

forth in the certification previously filed in this litigation and incorporated by reference herein,

purchased Yukos Securities at artificially inflated prices during the Class Period and has been

damaged thereby.

30. By an Order dated November 1, 2004, the Court appointed Roxwell, Buinyckyi, and

Parsimony as Lead Plaintiffs.

31. Defendant YUKOS OIL COMPANY (“Yukos”) is a joint stock company organized

under the laws of the Russian Federation. In addition to trading on the Russian stock exchange and

certain other European exchanges, Yukos ADRs trade on the Over-the-Counter Exchange (“OTC”).

Each ADR unit represents four shares of Yukos common stock. Yukos is a leading Russian

vertically integrated oil company. On December 11, 2004, Yukos filed for bankruptcy protection

under 11 U.S.C. §101, et seq. in the United States Bankruptcy Court for the Southern District of

Texas. On February 21, 2005, the court dismissed the Yukos bankruptcy.

32. Defendant MENATEP LIMITED, together with its subsidiaries and or successors,

(“Menatep”) is a limited liability company organized under the laws of Gibraltar. During the Class

Period, defendant Khodorkovsky owned 28% of defendant Menatep and defendant Lebedev owned

7% of defendant Menatep. In turn defendant Menatep owned and/or controlled 100% of Yukos

Universal Ltd (“Yukos Universal”), which in turn owned and/or controlled 61% of defendant

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 Yukos.2 In addition, defendant Menatep owned and controlled each of the seventeen sham entities

involved in Yukos’ tax evasion scheme, as described in ¶¶60-84, below. Yukos, in a supplemental

report filed with the SEC on October 23, 2003, identified four of the sham companies, Yuksar,

Ratmir, Yukos-M and Alta-trade, as being owned by Menatep. Moreover, Menatep owned, in

combination with Yukos, the main bank for the tax scheme, Bank Menatep- Sankt-Peterbourg.

33. Defendant PRICEWATERHOUSE COOPERS RUSSIA, located at

Kosmodamianskaya Nab.52, Bld.5 115054, Moscow, Russia (“PwC”), is part of

PricewaterhouseCoopers International Limited (“PwC International”). Prior to and throughout the

Class Period defendant PwC served as the Company’s independent, outside auditors. Also, during

the Class Period, defendant PwC certified the Company’s 2002 year-end financial statement,

opined on the validity of Yukos’ interim financial results, and regularly provided reports to the

Board of Directors of Yukos and its shareholders.

34. Defendant MIKHAIL B. KHODORKOVSKY (“Khodorkovsky”) was, during the

relevant period, President and Chief Executive Officer of the Company as well as Chairman of the

Executive Committee of the Board of Directors and Chairman of the Management Committee of

the Board of Directors of the Company. Defendant Khodorkovsky served in these positions as

head of Yukos until November 4, 2003, at which time he was arrested for fraud, tax evasion, and

other crimes.

35. Defendant PLATON LEBEDEV (“Lebedev”) was, during the relevant period, a

direct and/or beneficial owner of 7% of Menatep, and was Menatep’s Chief Executive Officer.

2
Although Yukos Universal was named as a defendant in the original complaint in this action, on
December 15, 2004, Yukos Universal filed for bankruptcy protection under 11 U.S.C. §101, et seq.
in the United States Bankruptcy Court for the Southern District of Texas. Yukos Universal’s
bankruptcy proceeding was not dismissed by the bankruptcy court and continues.

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Defendant Lebedev maintained dominance and control over Menatep, along with defendant

Khodorkovsky. In turn defendant Menatep owned and/or controlled 100% of Yukos Universal Ltd

(“Yukos Universal”), which in turn owned and/or controlled 61% of defendant Yukos. In addition,

defendant Menatep owned and controlled each of the seventeen sham entities involved in Yukos’

tax evasion scheme, as described in ¶¶60-84, below. Yukos, in a supplemental report filed with the

SEC on October 23, 2003, identified four of the sham companies, Yuksar, Ratmir, Yukos-M and

Alta-trade, as being owned by Menatep. Moreover, Menatep owned, in combination with Yukos,

the main bank for the tax scheme, Bank Menatep- Sankt-Peterbourg. Defendant Lebedev, like

defendant Khodorkovsky, currently awaits trial in prison in Russia. Defendant Lebedev is liable as

a participant in a fraudulent scheme and course of business that operated as a fraud or deceit on

purchasers of Yukos Securities by disseminating materially false and misleading statements and/or

concealing material adverse facts.

36. Defendant BRUCE K. MISAMORE (“Misamore”) was, during the Class Period,

Chief Financial Officer and Principal Accounting Officer for the Company. According to the

Company’s Annual Report, distributed to shareholders on May 19, 2003 and published on the

Company web site, “[a]s Chief Financial Officer, one of Bruce Misamore’s most important

responsibilities is to ensure that YUKOS’ strategy, business position and financial performance are

well understood by our shareholders and other market participants. Thanks to investors’ increased

recognition of YUKOS’ strengths and achievements, our share price increased 81.7 percent 2002,

making YUKOS Russia’s largest Company by market capitalization.” During the Class Period,

defendant Misamore signed the Company’s SEC filings and/or made other false and materially

misleading statements concerning the financial and operational condition of the Company.

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 37. Khodorkovsky and Misamore are referred to herein collectively as the “Individual

Defendants.”

38. Because of the Individual Defendants’ positions with the Company, they had access

to the adverse undisclosed information about its business, operations, products, operational trends,

financial statements, markets, and present and future business prospects via access to internal

corporate documents (including the Company’s operating plans, budgets and forecasts, and reports

of actual operations compared thereto), conversations and connections with other corporate officers

and employees, attendance at management and Board of Directors’ meetings (and committees

thereof) and via reports and other information provided to them in connection therewith.

39. It is appropriate to treat the Individual Defendants as a group for pleading purposes

and to presume that the false, misleading, and incomplete information conveyed in the Company’s

public filings, press releases, and other publications as alleged herein are the collective actions of

the narrowly defined group of defendants identified above. Each of the above officers of Yukos, by

virtue of their high-level positions with the Company, directly participated in the management of

the Company.

40. Each of the Individual Defendants was also directly involved in the day-to-day

operations of the Company at the highest levels and was privy to confidential proprietary

information concerning the Company and its business, operations, products, growth, financial

statements, and financial condition, as alleged herein. The Individual Defendants were involved in

drafting, producing, reviewing and/or disseminating the false and misleading statements and

information alleged herein, were aware, or recklessly disregarded, that the false and misleading

statements were being issued regarding the Company, and approved or ratified these statements, in

violation of the federal securities laws.

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 41. As officers and/or controlling persons of a publicly held company whose securities

were, and are, registered with the SEC pursuant to the Exchange Act, and was traded on the OTC,

and governed by the provisions of the federal securities laws, the Individual Defendants each had a

duty to disseminate promptly accurate and truthful information with respect to the Company’s

financial condition and performance, growth, operations, financial statements, business, products,

markets, management, earnings, and present and future business prospects, and to correct any

previously issued statements that had become materially misleading or untrue, so that the market

price of the Company’s publicly traded securities would be based upon truthful and accurate

information. The Individual Defendants’ misrepresentations and omissions during the Class Period

violated these specific requirements and obligations.

42. The Individual Defendants participated in the drafting, preparation, and/or approval

of the various public and shareholder and investor reports and other communications complained of

herein and were aware of, or recklessly disregarded, the misstatements contained therein and

omissions therefrom, and were aware of their materially false and misleading nature. Because of

their Board membership and/or executive and managerial positions with Yukos, each of the

Individual Defendants had access to the adverse undisclosed information about Yukos’ business

prospects and financial condition and performance as particularized herein and knew (or recklessly

disregarded) that these adverse facts rendered the positive representations made by or about Yukos

and its business issued or adopted by the Company materially false and misleading.

43. The Individual Defendants, because of their positions of control and authority as

officers and/or directors of the Company, were able to and did control the content of the various

financial statements issued, press releases and other public statements pertaining to the Company

during the Class Period. Each Individual Defendant was provided with copies of the documents

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 alleged herein to be misleading prior to or shortly after their issuance and/or had the ability and/or

opportunity to prevent their issuance or cause them to be corrected. Accordingly, each of the

Individual Defendants is responsible for the accuracy of the public reports and releases detailed

herein and is therefore primarily liable for the representations contained therein.

44. Defendants Menatep’s, Khodorkovsky’s, and Lebedev’s scienter is demonstrated, in

part, by the enormous dividends they received as a result of the illegal tax scheme (literally billions

of dollars before and during the Class Period).

45. Each of the defendants is liable as a participant in a fraudulent scheme and course of

business that operated as a fraud or deceit on purchasers of Yukos Securities by disseminating

materially false and misleading statements and/or concealing material adverse facts. The scheme:

(i) deceived the investing public regarding Yukos’ business, operations, management and the

intrinsic value of Yukos Securities; (ii) allowed defendants to falsify Yukos’ financial statements

by under-reporting billions of dollars in Company taxes, which also allowed defendant

Khodorkovsky to also under-report millions or tens of millions of dollars of his personal taxes, and

(iii) caused plaintiffs and other members of the Class to purchase Yukos Securities at artificially

inflated prices.

SUBSTANTIVE ALLEGATIONS

The Company and Its Business

46. Khodorkovsky created the predecessor to defendant Menatep in 1987, at a time

when Khodorkovsky had been acting as the deputy chief of the Young Communist League,

Komsomol. Using government connections, Menatep initially traded computer equipment, but

shortly after its founding, with further government assistance, Khodorkovsky converted it into a

bank. In the early 1990s, Khodorkovksy and Menatep made huge profits by purportedly engaging

in currency speculation.

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 47. In December 1995, Yeltsin’s government put Khodorkovsky’s Bank Menatep in

charge of the auction of Yukos. After disqualifying a rival higher bid on “technical” grounds,

Khodorkovsky acquired Yukos for just $309 million. The transaction was part of the widely

criticized loans-for-shares auction, in which a few privileged entrepreneurs, who promised to

support the Yeltsin regime (a group that came to be known as the “oligarchs”) won some of

Russia’s most valuable industrial jewels at cut-rate prices. A history of the rise of the oligarchs and

the questionable means by which they acquired the assets of the former Soviet Union is well-

documented. See, e.g., Ira W. Lieberman and Rogi Veimetra, “The Rush for State Shares in the

‘Klondyk’ of Wild East Capitalism: Loans-for-Shares Transactions in Russia,” George Washington

Journal of International Law and Economics, vol. 29, no. 3, 1996, p. 773.

48. Prior to the Class Period, Yukos and the Individual Defendants had gained a

reputation for squeezing out Yukos’ minority shareholders and stripping cash out of the Company

by using transfer-pricing schemes.

49. Transfer pricing occurs when an entity (or it subsidiary) sells a product at below

market prices to an affiliated entity either to avoid taxes or strip profits from one entity to another.

In 1999, as part of a continuing Russian tax reform process, significant regulations on transfer

pricing were put in place in Article 40 of the Tax Code. Under Article 40, the tax authorities have

the right to challenge transactions between related persons, foreign trade transactions, and

transactions with significant fluctuations in price within a short period.

50. As described in detail in an article entitled Putin’s Plutocrat Problem, published in

the April 2000 edition of Foreign Affairs, and an article entitled The Oligarch Who Came in from

the Cold, published in Forbes on March 18, 2002 (the “March 18, 2002 Forbes Article”), in the first

nine months of 1999, Yukos engaged in a massive transfer pricing scheme by forcing its three

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partially owned subsidiaries (subsidiaries with substantial minority investors, many of whom were

workers and pensioners in the Tomsk region) to sell it approximately 240 million barrels of oil at

approximately $1.70 per barrel to Yukos – at a time when the average market price was about $15.

Yukos then exported nearly a quarter of that oil to world markets. As a result of this transaction,

Yukos managed to strip $800 million in profits from its subsidiaries for itself in a matter of thirty-

six weeks.

51. In 1997 and 1998, Yukos forced its subsidiaries to transfer substantial assets to new

companies – notwithstanding a conflicting February 1998 order by the Russian Federal Securities

Commission. In 1999, Menatep’s predecessor entered into bankruptcy and defaulted on nearly a $1

billion in loans from Western banks. Following the default, Daiwa Bank (“Daiwa”) and West

Merchant Bank (a subsidiary of Westdeutsche Landesbank) (“West Merchant”) acquired 30 percent

of Yukos from Menatep’s predecessor. Rather than recognize Daiwa and West Merchant as

minority shareholders with rights, Khodorkovsky sought to turn Yukos into an empty shell.

52. In that regard, Khodorkovsky forced Yukos to sell its most significant asset – its

controlling position in oil production subsidiaries – to unknown offshore entities. At the same

time, he attempted to substantially dilute the shares of Yukos held by the banks by transferring a

massive number of new shares to offshore entities that he controlled. Under Khodorkovsky’s plan,

Menatep’s interest in Yukos’ oil production companies would have increased by as much as 240

percent – virtually wiping out the holdings of Daiwa and West Merchant. Recognizing that they

were powerless to stop Khodorkovsky from diluting their interest in Yukos, Daiwa and West

Merchant sold the majority of their stake in Yukos to Khodorkovsky and his partners. Although

the sale price has not been made public, it is estimated that the two banks recovered only a fraction

of the value of their loans. Once the Daiwa and West Merchant sold their interest in Yukos, the

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 share offerings were canceled and whatever assets had been moved offshore were returned to

Yukos in Russia.

53. Although Yukos was clearly taking advantage of its minority shareholders, Russian

regulators were powerless to stop Khodorkovsky due to his close relationship with the Yeltsin

government. In fact, in October 1999, Dmitri Vasiliev, the head of the Federal Commission for the

Securities Market, Russia’s regulatory watchdog for listed companies, resigned in protest over his

inability to stop Yukos’ offshore share transactions.

Yukos Has Sought Investors in the United States and Registered with the SEC

54. Yukos has engaged in substantial activity in the United States to attract investors

and lenders. Defendants solicited investments in Yukos from, among others, oil and gas industry

participants in Houston and in the United States.

55. In 2002, defendant Khodorkovsky was a keynote speaker at the Baker Institute in

Houston where he urged people to invest in Yukos. In addition, defendant Khodorkovsky was a

regular keynote speaker at the largest oil and gas conference in the world, which was sponsored

annually in Houston by Cambridge Energy Research Associates.

56. Defendant Misamore and Alexander Gladyshev, Yukos’ Manager of Investor

Relations, were regular participants and speakers at various oil, gas and emerging markets investor

conferences in the United States. Defendant Misamore and Gladyshev regularly met in the United

States with investors, including investment managers at major United States investment banking

firms, large asset management firms, and major institutional investors.

Yukos Claims Corporate Governance Changes

57. On or about May 19, 2003, the Company issued its Annual Report for the year

ended December 31, 2002 (the “2002 Annual Report”), distributed the 2002 Annual Report to

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 shareholders and posted it on the Company’s web site. According to the 2002 Annual Report,

Yukos claimed that it has sought greater “transparency” by:

• adopting “strong corporate governance policies and financial transparency

standards”;

• becoming “the first Russian oil company to report its quarterly financial statements
in accordance with” U.S. GAAP in 2001;

• changing its reporting currency to U.S. dollars with its release of first quarter 2002
earnings; and

• disclosing the identity and stock holdings of the core shareholders of Menatep – the
company that held 61% of Yukos in 2002.

58. According to the Company, Khodorkovsky, and press reports, the Company’s newly

proclaimed “transparency” was necessary to attract Western investors and capital. In the March 18,

2002 Forbes Article, Khodorkovsky stated:

By now we understand how business is done in the West. As a shareholder, I

earn money in dividends and with the increase in the market capitalization of
my company. Previously we were all focused only on the cash revenues of
our business, since no one believed that the situation would last. Now that
things are stabilizing, people are more interested in increasing the value of
their property.

59. However, as described below, Yukos did not change its methods, but rather adapted

them to a new situation.

Defendants’ Fraudulent Scheme and Course of Conduct

60. Both before and throughout the Class Period, Yukos used the transfer pricing

methods that it had perfected in the 1990s to engage in a blatant tax evasion scheme.

61. Yukos, the Individual Defendants, and Menatep created seventeen sham companies

in special low-tax or no-tax zones within the Russian Federation (also known as ZATOs and free

economic zones (“FEZs”)). Each of the sham companies was an empty shell and an alter ego of

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Yukos and Menatep. The seventeen sham companies applied for and received permission from

each of the ZATOs to take advantage of the low corporate tax rates.

62. Once the seventeen sham entities obtained tax exempt status, other subsidiaries of

Yukos “sold” oil and oil products at substantially below-market prices to the seventeen sham

companies. After the “sale” was complete, Yukos would report the sales and profits to the relevant

taxing authorities based on the greatly reduced sales prices.

63. Yukos would then claim that the seventeen sham companies “sold” oil and oil

products at market prices, through the mediation of Yukos and Menatep, obtaining substantial

profits. Those profits would then be subject to no taxes or only minimal taxes required under the

relevant ZATO agreements. Despite the purported transfer of ownership of the oil and oil products

to the seventeen sham companies, Yukos, with PwC’s approval, consolidated those sham entities’

profits with the profits from the selling subsidiaries for the purposes of Yukos’ interim and year-

end financial statements. Indeed, these profits would form part of the basis for the enormous

dividends paid to Menatep, Khodorkovsky, and Lebedev.

64. In essence, the sales of oil and oil products were merely “paper transactions.” Each

“transaction” was simply the matter of book-keeping in Moscow, where accounting personnel of

Yukos and Menatep created an intermediary transaction for tax purposes interposed between the oil

producing subsidiary and the end user. No business was actually conducted by the sham companies

in the ZATOs and no transactions or agreements were entered into in the ZATOs. The seventeen

sham companies did not process, store, or transport any oil or oil products in the ZATOs.

65. The allegations of the tax evasion scheme created and implemented by Yukos,

Menatep, and the Individual Defendants described in ¶¶60-64, above, has been confirmed by the

Russian government’s investigation and post-Class Period Report. On April 14, 2004, the Tax

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Ministry issued Resolution # 14-3-05/1609-1 (the “April 2004 Resolution”), which sets forth in 126

pages the findings of its audit of Yukos’ tax return for 2000, the underpaid tax amounts due, and

the penalties Yukos owed. In the April 2004 Resolution, the Tax Ministry establishes, through

reference to documents and interviews with certain officers and employees of the seventeen sham

companies, that:

• Yukos, Menatep, and the Individual Defendants had created seventeen sham entities
to take advantage of the ZATO tax presences;

• Yukos, Menatep, and the Individual Defendants and the sham entities were related
parties;

• Yukos, Menatep, and the Individual Defendants had “control” over the sham entities;

• Yukos, or its subsidiaries, had sold oil and other services at well below market prices
to the sham entities;

• The sham entities had sold the oil and other services to foreign or domestic
consumers, in deals mediated by Yukos and Menatep, at significantly higher market
prices;

• Yukos only paid taxes based on the sales prices to the sham entities;

• The sham entities did not meet the basic requirements for tax exempt status under
Russian law; and

• As a result, Yukos owed the Russian Federation approximately $3.4 billion dollars in
taxes and penalties for the year 2000.

66. According to the April 2004 Resolution:

The field tax audit showed that [Yukos] did not reflect the receipts from the
sales of products (work, services) as a result of using an illegal tax evasion
scheme by means of artificially founding fake organizations in the oil and
after-product movement chain and registering them in territories with
preferential tax treatment.

The scheme was aimed at non-payment of profit tax, value-added tax,

motorway user tax, tax on the sales of petroleum, oils and lubricants (“POL”)
and housing stock and social amenities maintenance tax on the amount of
receipts (income) from oil and after-product sales. For this purpose [Yukos]
created fake dependent organizations to be oil and after-product owners
(hereinafter referred to as “owners”). These organizations were registered in

- 20 -
 territories with preferential tax treatment (closed administrative and territorial
formations, Russian Federation constituent entities giving tax preferences on
investments). [Yukos] retained control over the oil and after-product
operations performed by the “owners” by means of participating in the deals
as mediator itself or involving its other dependent organizations to act as
mediators in the deals.

The materials submitted by the taxpayer lead us to conclude that the

“owners” concluded commission agreements to buy commodity crude oil
with [Yukos]. [Yukos] in its turn on the instructions of the “owners”
registered in tax preferential territories bought oil from producing
subsidiaries of [Yukos] (OAO Yuganskneftegaz, OAO Tomskneft, OAO
Samaraneftegaz) or from fake organizations. In these deals [Yukos]
purchased oil at undercut prices to lower the tax basis of the producers. The
payments for the oil purchased were made by the “owners”, usually of
[Yukos] bills or bills of related organizations (OOO YUKOS-FRC, OOO
YUKOS-Moscow), as well as by mutual claim clearing.

Then the commodity crude oil purchased by the “owners” through [Yukos] as
commission agent was sold to customers (both Russian and foreign ones)
through [Yukos] again or was sent for processing to oil refineries being
[Yukos] subsidiaries. This oil transfer for processing purposes also went
through [Yukos] as commission agent or on agency agreements with fake
unprofitable organizations (OOO Kvadrat, OOO Staf). After processing the
resulting products were sold to customers through the same commission
agent - [Yukos]. The amount of fees paid to [Yukos] under mediation
agreements was nominal –0.01-0.5% of the contract amount, and the
“owners” performed no other activities, save for those delegated by [Yukos].
[Emphasis added.]

67. In connection with determining that the sham entities and Yukos were related parties

and that Yukos controlled the sham entities, the Tax Ministry found that Yukos and a subsidiary

were in charge of record keeping and document storage for all the transactions (including

accounting records) by the “owners.” All the sham companies had their accounts in the same

banks: OAO AKB “Doveritelny I Investitsionny Bank,” OAO KB “Menatep Sankt-Peterbourg”

and AKB “Solidarnost.” All the banks used in the scheme were dependent on Yukos and Menatep.

The Tax Ministry further stated:

- 21 -
 As a result of this oil and after-product sales illusion the sales revenues
(income) belonged to the mentioned fake organizations. Thus, as per their
records, it was the “owners” who registered tax obligations. At the same
time, as these organizations illegally used tax preferences, the budget did not
receive the related profit tax, motorway user tax, property tax and housing
stock and social amenities maintenance tax. The audit found, that the true
owner of the oil and after-products was [Yukos]. It was [Yukos], which
purchased the oil, transferred it for processing and sold the oil and after-
products, and this is to be proved by the actual oil and after-products
movement from the producers to the refineries or to the oil tank farms
related to [Yukos] (supported by transportation documents), as well as by
the fact of [Yukos] direct participation in all the deals. Besides, the
following evidence testifies to the effect that it was [Yukos], which really
owned the oil and after-products and, consequently, that it used an illegal
scheme of tax evasion:

− The entities participating in the deals were all under [Yukos] control;

− The “owners” were registered in tax preferential territories;

− The “owners” performed no activities in the place of their registration;

− The commissions for [Yukos] were facetious, as the commission amounts

were materially lower than the usual commission amount practiced in the
commission services market;

− The prices of oil purchased from the producers and other fake companies
were lowered;

− Accounting records were kept in all organizations by OOO YUKOS-Invest

or OOO YUKOS-FBC dependent on [Yukos];

− All the organizations opened their bank accounts in the same banks,
dependent on [Yukos];

− The organizations practiced settlements by bills or clearing settlements

[through Yukos]. [Emphasis added.]

68. An illustration of Yukos’ misuse and abuse of the Russian tax system is its

relationship with the Business Oil Limited Liability Company (“Business Oil”). Business Oil was

founded in 1997 in the ZATO Lesnoye, Sverdlovsk region of the Russian Federation (“ZATO

Lesnoye”). On January 28, 2000, Business Oil applied for and executed with ZATO Lesnoye an

agreement to obtain tax benefits. In order to take advantage of the tax benefits associated with this

- 22 -
agreement, Business Oil had to maintain 90% of its fixed assets and 70% of its operations within

ZATO Lesnoye, at least 70% of its employees were required to work in ZATO Lesnoye, and at

least 70% of the total payroll had to be paid to employees in ZATO Lesnoye.

69. In violation of these requirements, the Tax Ministry found that the Business Oil’s

fixed assets in ZATO Lesnoye amounted to only 4 computers. Moreover, Business Oil’s true asset

(its cash) was maintained in three accounts at banks in Moscow, owned or controlled by Yukos,

including Yukos and Menatep’s bank Menatep Sankt-Peterbourg.

70. In connection with Business Oil’s employees, the Tax Ministry found that while

Business Oil identified five employees living in ZATO Lesnoye, they either did not perform any

work or only performed minimal book keeping functions at the directions of Yukos personnel in

Moscow. Indeed the Tax Ministry found that the employee who performed nearly all of Business

Oil’s functions (i.e., the purported purchase and sale of oil) was its Director-General and Chief

Accountant, who resided and worked in Moscow.

71. In addition, the Tax Ministry found that, based on an interview with Business Oil’s

Executive Director, Business Oil did not actually perform any activities, including the purported

sale of oil and oil products in ZATO Lesnoye necessary to support its tax exempt status. Indeed,

Business Oil lacked the production facilities which would enable it to store and sell oil and oil

products in ZATO Lesnoye. Moreover, none of the oil purchased from the Yukos subsidiaries and

sold on the open market ever traveled to, from, or through ZATO Lesnoye.

72. Based on the transactions conducted between Business Oil and Alta-trade (one of

the seventeen sham companies involved in the oil “sales,” and a company which Yukos identified

as being owned by Menatep) alone, the Tax Ministry found that the Company had avoided paying

nearly $500 million in taxes.

- 23 -
 73. In addition to owning and controlling one of the key banks involved in the illegal tax

scheme (Menatep- Sankt-Peterbourg), Lebedev’s and Menatep’s participation in the tax evasion

scheme is evidenced by the use of four of Menatep’s subsidiaries in that scheme. In a supplemental

filing by Yukos with the SEC, filed on November 3, 2003, Yukos identified four of the seventeen

sham companies as being owned and/or controlled by Menatep: Yuksar, Alta trade, Ratmir, and

Yukos-M.

74. In 2000, according to the April 2004 Resolution, Yuksar, Alta trade, Ratmir, and

Yukos-M executed transactions for millions of tons of oil and oil products. These transactions

were entered into by defendants principally to evade income tax liabilities. In connection

therewith, Yuksar evaded approximately $33.5 million in taxes; Alta trade evaded approximately

$4.1 million in taxes; Ratmir evaded approximately $213 million in taxes; and Yukos-M removed

approximately $844 million in taxes.

75. Based on its investigation and findings similar to those of Business Oil, Yuksar, Alta

trade, Ratmir and Yukos-M, the Tax Ministry charged Yukos approximately $3.5 billion for 2000

($1.646 billion in taxes due and $1.997 billion in penalties imposed). The following chart, created

by Yukos and published on its web page, identifies the seventeen sham entities and the amounts of

tax underpaid by Yukos (in Russian Rubles (“RUR”)).

- 24 -
 Utilization of tax allowances (RUR)3
Housing stock
Entity and social
Tax on POL Property Motorway
VAT Profits Tax amenities TOTAL
Sales Tax users tax
maintenance
tax

Virtus - - 2 359 700 - - - 2 359 700

Kverkus - 2 314 934 306 484 015 000 9 799 460 55 165 845 167 507 627 3 031 422 238

Muskron - 951 345 3 643 219 70 220 1 598 221 1 138 334 7 401 339

Trace - - 20 240 687 5 305 706 503 20 247 201

Nortex - 2 796 357 124 181 859 687 680 343 101 410 627 72 229 791 3 152 537 572

Vald-Oil - 985 969 309 162 154 920 857 000 96 289 488 59 161 000 1 304 431 717

Mitra - 12 074 163 15 049 253 - - - 27 123 416

Business Oil - 1 398 732 926 93 644 890 233 000 56 982 037 35 174 097 1 584 766 950

Sibirskaya
Transportnaya - - 209 404 407 - 14 105 803 16 926 964 240 437 174
Companya

Petroleum Trading - - 22 385 271 13 076 935 018 - 23 333 365

YUKSAR 36 839 637 - 54 030 054 592 5 004 848 - 95 875 131

Ratmir 1 770 245 037 - 2 611 705 520 45 854 745 959 228 281 719 421 211 6 106 454 794

U-Mordovia 2 045 653 454 - 1 829 048 807 3 814 829 215 510 832 161 633 124 4 255 661 046

YUKOS-M 9 697 309 558 - 11 981 693 000 4 901 419 1 411 406 247 1 058 554 685 24 153 864 909

Alta-trade 467 486 102 - 2 491 817 840 16 883 484 644 587 568 483 440 676 4 104 215 670

Interneft - - 13 736 204 500 6 406 - 224 642

Mars XXII - - 3 597 652 - 8 167 306 6 125 479 17 890 437

Total Under-paid
14 043 369 356 7 509 019 173 20 001 319 996 83 820 701 3 570 399 235 2 781 313 492 47 989 241 953
taxes

3
On April 14, 2004, the conversion rate for the Russian Ruble to U.S. Dollars averaged 0.034930.

- 25 -
 76. Although the Tax Ministry has conducted audits of and imposed further tax bills and

penalties upon Yukos for the years 2001 ($3.105 billion in taxes, $4.054 billion in penalties), 2002

($4.094 billion in taxes, $4.735 billion in penalties), and 2003 ($3.963 in taxes, $3.944 billion in

penalties), Yukos has neither translated nor posted any resolutions of the Tax Ministry.

77. Yukos and the Defendants, including PwC, knew or were reckless in not knowing

that the tax avoidance scheme was directly contrary to Russian law. As reported in an article

entitled Why Russia is still playing catch up, published in the December 2001/January 2002

International Tax Review, in 1998, the Russian government instituted new laws barring transfer

pricing schemes, particularly those to related parties with the intent to minimize taxes.

78. Similarly, the Russian government significantly limited the availability of the

ZATOs in 1999. Thus, in 1999, the legislators amended the ZATO Law to substantially curtail the

rights of ZATO administrations to grant tax privileges. In order to be eligible for tax benefits, the

ZATO Law now required companies registered within a ZATO to locate at least 90% of their fixed

assets and 70% of their operations within the ZATO; at least 70% of the employees on payroll in

such entities had to be permanent residents of the ZATO; and at least 70% of the total payroll had

to be paid to employees who were permanent residents of the ZATO. The sham companies created

by Yukos and Menatep did not comply with these requirements.

79. As set forth in the April 2004 Resolution, both the transfer pricing scheme and the

tax-free status of the sham entities violated Russian law.

80. Moreover, since 1999, the Tax Ministry and the Russian Courts had been cracking

down on similar schemes.

81. Indeed, in 2000, the Tax Ministry investigated a similar transfer pricing scheme

engaged in by Yukos’ competitor Lukoil. In that case, Lukoil entered into agreements leasing

- 26 -
 production capacities for the processing of oil and production of oil products to a subsidiary in a

ZATO. In fact, however, the entire production cycle was carried out by Lukoil. The Tax Ministry

charged that the leasing agreements were concluded solely for the purpose of tax avoidance by

Lukoil. In the Federal Commercial Court of the Ural District decision of December 10, 2002, case

no. F09-1307/02-GK, the court invalidated the subsidiary’s tax exempt status. Lukoil settled the

Tax Ministry’s claims for $200 million.

82. On December 26, 2001, the Supreme Court of the Russian Federation, in its decision

no. GKPI2001-1758, upholding the 1999 limits on ZATOs, stated: “[i]n recent years, on the

territory of the Baykonur space city complex, the practice of registering organizations[sic] carrying

out their activities outside that territory has become widespread. The city authorities, in breach of

current legislation, are offering taxpaying entities registered on the territory of Baykonur individual

privileges regarding the payment of regulatory federal taxes.”

83. Any doubt concerning the legality of Yukos transfer pricing scheme was put to rest

in February 2002. At that time, the Supreme Court confirmed a ruling of Russia’s Tax Court, the

Chamber of Cassation, and stated: “the current legislation of the Russian Federation does not entitle

local authorities, including cities of federal significance, to establish and grant privileges regarding

federal taxes.”

84. Despite knowing the risks that investors and the business and assets of Yukos faced

as a result of Yukos’ tax evasion scheme, defendants failed to adequately disclose those risks to

investors.

Defendant Khodorkovsky’s Political Risk

85. From 1988 until the election of Vladimir Putin in 2000, defendant Khodorkovsky

wielded enormous political clout. From 1988 until to the fall of Soviet Union, and through the first

- 27 -
term of Yeltsin’s presidency, Khodorkovsky, through Menatep, had acted as one of the few sources

for hard currency in the Soviet Union and in the early years of the Russian Federation.

86. However, much of the defendants’ power arose from their strong financial assistance

to the re-election campaign of Boris Yeltsin in 1994. Indeed, it was through these strong ties that

Khodorkovsky was able to acquire Yukos and a number of other Soviet Union assets at well below

market prices in the early days of Russian privatization.

87. However, with the election of Putin in March 2000, the closeness between the

oligarchs and the government changed radically. Since the arrest of Khodorkovsky in October

2003, press reports have revealed Khodorkovsky made substantial political challenges against

Putin, including challenging the Putin government’s honesty, funding opposition parties and their

candidates for parliamentary and presidential elections, suggesting Khodorkovsky’s own possible

candidacy for president in 2008, and purchasing a newspaper to challenge Putin directly.

88. Unbeknownst to investors, upon Putin’s election in March 2000, he reached an

agreement with Khodorkovsky and the other oligarchs to withhold any investigation of companies

acquired in the loans-for-shares privatizations (despite having “files” on each of the transactions

including Yukos), if those oligarchs “stayed out of politics.”

89. That Putin considered this agreement binding is well established by the fates of two

oligarchs who challenged Putin’s policies – “Press Barons” Boris Berezovsky and Vladimir

Gusinsky. Shortly after Putin’s election, both Berezovsky and Gusinsky used their media outlets to

openly criticize Putin and the war in Chechnya.

90. In June 2000, Gusinsky was arrested and jailed briefly on charges of embezzlement.

The charges were dropped in July 2000, but only after Gusinsky signed a deal transferring Media-

Most, his conglomerate of newspaper and broadcasting properties, to Gazprom, the government-

- 28 -
dominated energy company, for $300 million. Shortly after he signed the sale agreement, Gusinsky

fled to Spain. In November 2000, the Russian Prosecutor General issued an arrest warrant against

Gusinsky and initiated extradition proceedings.

91. Putin initially attempted to negotiate with Berezovsky for the sale of Berezovsky’s

49% interest in the ORT television network. As those negotiations stalled, the prosecutor general

launched an investigation into allegations of Berezovsky’s embezzlement of assets from the

Russian airline Aeroflot. In November 2000, Berezovsky fled Russia.

92. Berezovsky, who played a major role in bringing Putin to power, is particularly

exercised. “The first thing Putin did was to consolidate political power,” he said during a recent

swing through the United States to rally political support. “Next, it will be the media. When he has

economic problems, then he will think he has to control oil companies, gas companies.”

93. At the beginning of the Class Period, without disclosing the risks Yukos’ investors

would face if Khodorkovsky challenged Putin and his policies, Khodorkovsky began to criticize

Putin.

94. On February 19, 2003, Putin met with twenty-five representatives of the Union of

Industrialists and Entrepreneurs (the “RSSP”), including defendant Khodorkovsky. This was the

first meeting between Putin and the oligarchs since May 2002. During a course of discussion

regarding the government’s coming priorities, defendant Khodorkovsky said the government “must

be willing to show its readiness to get rid of some odious figures” in the government to prove its

readiness to combat corruption, “even though corruption is one of the hardest crimes to prove.” As

an example of corruption, Khodorkovsky pointed to Putin’s Economic Development and Trade

Minister, who was also chairman of the state-owned oil company Rosneft, and demanded that the

minister reveal details about Rosneft’s acquisition of a medium-sized crude producer from a

- 29 -
 member of the Duma. In response to this demand, Putin noted that Yukos owned vast oil supplies

and that the issue of the means by which such large reserves were acquired by Yukos and the other

large private oil companies was “a big question.”

95. Moreover, Khodorkovsky was making substantial efforts to strengthen two parties

with a long history of opposing Putin and his policies: Yabloko (a liberal democratic party) and the

Union of Rightist Forces (former communists). It is reported that Khodorkovsky was a significant

participant in the negotiations to form a coalition between the two parties to strengthen their

chances in the upcoming parliamentary elections. Khodorkovsky reportedly gave these two parties

$10 million in order to assist them in providing a united front against Putin and certain of Putin’s

policies.

96. Besides funding these opposition parties, Khodorkovsky openly and publicly

clashed with Putin regarding the American led invasion of Iraq. In addition, despite Putin’s clear

dictum to the contrary, Khodorkovsky openly advocated the building of an oil pipeline to China.

97. Finally, just a little more than a month before his arrest, on September 4, 2003,

Yukos bought the liberal weekly paper Moskoskie Nowosti and published multiple articles directly

criticizing Putin and the government’s arrest of Lebedev, among other things.

98. Despite knowing the risks investors and the business and assets of Yukos faced as a

result of Khodorkovsky’s political activities, defendants failed to adequately disclose those risks to

investors.

Defendants’ Materially False and Misleading Statements

Made During the Class Period

99. The Class Period begins on January 22, 2003. On that date Yukos issued a press

release stating:

- 30 -
 YUKOS Oil Company wishes to make the following statement in response to the
appearance in a number of irresponsible media outlets of disinformation alleging that
the Company provides financial support to a number of Russian political parties:

While YUKOS Oil Company respects the various political views of its employees
and shareholders, it does not participate in the financing of any political parties or
movements, in strict keeping with its principle of non-involvement in political
activities.

While they are at work, Company employees are prohibited from engaging in
political activities, or in any other activity that is not directly job-related. Any
professional political activity is incompatible with work at the Company.

100. On February 13, 2003, Yukos reported its financial results for the third quarter 2002

(the “February 13 Earnings Release”). According to the February 13 Earnings Release, Yukos

reported EBITDA of $1.3 billion and net profit of just above $850 million. According to the

February 13 Earnings Release, Yukos had a “strong operating profit” driven by “soaring export

volumes” for its fiscal third quarter of 2002. According to a Dow Jones article of the same date,

while EBITDA was 9.5% higher than consensus forecasts of $1.26 billion for the third quarter of

2002, net profits were significantly below the analysts’ consensus estimates of $971 million.

According to the Company, Yukos profits were “pushed down” in the quarter as a result of the

Company being forced to recognize certain taxes which defendants had previously “deferred”

during the consolidation of certain production subsidiaries.

101. In order to reassure investors and avoid a collapse in the price of Yukos Securities,

these tax issues were described by the Company’s CFO, defendant Misamore, as one time events.

Moreover, defendant Misamore assured investors that Yukos was reviewing its tax accounting and

expense policies so as to assure accuracy and compliance, stating that, “[w]e are revisiting those tax

figures to make sure we’re not accruing too much. We’re also taking another look at (sales, general

and administrative costs) to see if there are some areas we need to pay attention to there.”

- 31 -
 102. On or about April 3, 2003, Individual Defendants Khodorkovsky and Misamore

made a lengthy presentation to investors in London, England. A copy of the presentation materials

used during the presentation was posted on the Company’s web site shortly thereafter. During the

course of the presentation, the Individual Defendants reiterated the financial results discussed in

¶100 above. In addition, defendant Misamore made a detailed presentation on the current Russian

tax structure and the potential risks from proposed changes to the tax laws. In particular, defendant

Misamore noted the potential risk of Yukos’ taxes increasing if “[r]egional income tax benefits”

were eliminated.

103. Unbeknownst to investors, however, the statements described in ¶¶99-102, above,

were each materially false and misleading when they were made because they failed to disclose and

misrepresented the following adverse facts, among others:

(a) that defendant Khodorkovsky was actively engaged in “professional political

activities” as described in ¶¶85-98, above, while at work at Yukos;

(b) that Yukos failed to disclose the material risk to Yukos shareholders caused

by the political actions taken by defendant Khodorkovsky, as described in ¶¶85-98, above;

(c) that the Company had materially inflated its net profit and diminished its tax

obligations through the illegal tax scheme described in ¶¶60-84, above.

(d) that the Company’s financial statements were not prepared in conformity with

U.S. GAAP or with any fair or accepted statements of reporting because, throughout the Class

Period, defendants failed to report billions of dollars due in taxes as described in ¶¶60-84, above,

which if paid would have wiped out much of the Company’s earnings during this time period;

- 32 -
 (e) that the Company was not abiding by Russia’s tax laws (as amended in 1999

to eliminate tax evasion schemes using ZATOs, such as Yukos’ scheme), which enabled Yukos to

illegally evade an estimated $17 billion in taxes;

(f) that the Company was not “reviewing its tax accounting and expense policies

so as to assure accuracy and compliance,” as it was knowingly violating Russia’s tax laws since at

least 1999;

(g) that, because defendants failed to properly pay billions of dollars in taxes on

its income and operations, it was not foreseeable at any time that Yukos would be able to achieve the

profitability claimed by defendants;

(h) that the risk of elimination of “regional income tax benefits” had already

occurred in 1999 and that Yukos was claiming benefits to which it knew, or should have known it

was not entitled since that time; and

(i) that as a result of the foregoing, the Company’s financial statements and

reported financial results were materially false and misleading.

104. On April 24, 2003, Yukos issued a press release announcing that it would pay a

$700 million total dividend for the year ended December 31, 2002 (the “April 24 Dividend

Release”). According to the April 24 Dividend Release, Yukos’ Board of Directors approved a

decision to pay a total dividend of about RUR 22.12 billion (approximately $700 million) for the

year 2002. The April 24 Dividend Release quotes defendant Khodorkovsky as stating: “The 40%

increase in dividends is the result of what our Company has achieved both operationally and

financially, culminating in our becoming the leader in the Russian oil industry. As we consistently

work to increase shareholder value, we regard YUKOS’ improved competitive position as part and

- 33 -
 parcel of our commitment to all of our stakeholders, who have a direct interest in the successful

development of our business.”

105. Unbeknownst to investors, however, defendant Khodorkovsky’s statements

described in ¶104, above were each materially false and misleading when they were made for the

reasons set forth in ¶103, above, and because they failed to disclose and misrepresented the

following adverse facts, among others:

(a) that the Company’s financial “achievements” were due, in whole, or in part, to

the massive tax fraud, as described in ¶¶60-84, above;

(b) that the Company was not in a position to pay a dividend, much less increase

its dividend by 40%; and

(c) that Yukos had not improved its competitive position but was instead in a

perilous position due to the tax scheme and Khodorkovsky’s political activities.

106. On May 19, 2003, Yukos reported its financial results for the fourth quarter and full

year 2002 (the “May 19 Earnings Release”). According to the May 19 Earnings release, the

financial statements were purportedly reviewed by PwC, the Company’s “independent” auditors

and conformed to U.S. GAAP. According to the Company’s release, Yukos reported that net

income and earnings per share for the fourth quarter of 2002 reached $988 million and $0.46 per

share, respectively, compared to $423 million and $0.20 per share, respectively, for the fourth

quarter of 2001. In addition to the foregoing, the May 19 Earnings Release also stated that for

2002, Yukos reported net income and earnings per share for 2002 reportedly reached $3.058 billion

and $1.42 per share, respectively, compared to $3.156 billion and $1.47 per share, respectively, for

the prior year.

- 34 -
 107. On the or about the same date, the Company issued its Annual Report for 2002 (the

“2002 Annual Report”) and posted it on the Company’s web site. In the 2002 Annual Report,

defendant Khodorkovsky stated:

The achievements reflected in this annual report are the result of a long-term
strategy that we have been successfully implementing for several years. This
strategy has focused investments, resources, technology, skills training and
performance objectives where they would provide the greatest returns for our
shareholders, our customers and our employees. I invite you to read on and
learn more about us. I am sure you will agree that YUKOS - as a Company
and a community – is building for the future on a strong foundation, and, in
doing so, building value for our shareholders.

108. On the same day the Company issued its Annual Financial Report for 2002 (“2002

Financial Report”), which was also posted on the Company’s web site. The 2002 Financial Report

was filed with the SEC on or about June 8, 2003, and signed by defendant Misamore. The 2002

Financial Report contained the following statement regarding taxes:

We provide for taxes on unremitted earnings of our foreign subsidiaries that

are payable upon distribution to the parent company through our existing
legal structure if the retained earnings of our subsidiaries are not considered
permanently invested. Such provisions are adjusted from time to time based
upon changes in our legal structure, changes in tax rates or changes in
intended methods of remitting the earnings available to us under enacted tax
legislation. In the fourth quarter of 2002, we recorded a USD 368 million
reduction in deferred tax liabilities, which resulted from our revised estimate
of the applicable tax rates associated with the expected remittance of earnings
from certain subsidiaries. In conjunction with our ongoing review of tax
strategy we believe that we can reduce the Company’s effective tax rate on
such remittances by 5 percent.

* * *

Our effective income tax rate in 2002 was 19.6 percent. This rate is lower
than the statutory maximum rate for the Russian Federation primarily
because of the lower tax rates for certain subsidiaries in several tax
jurisdictions both within Russia and internationally and the reduction in
deferred tax liabilities discussed above, offset by deferred taxes on
unremitted earnings of our subsidiaries. Our effective income tax rate in
2001 was 18.2 percent. In 2001, we recognized a USD 525 million deferred
tax credit resulting from a change in the tax code of the Russian Federation.
This change, combined with the lower tax rates for certain subsidiaries and

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 offset by deferred taxes on unremitted earnings contributed to the variance
from the statutory maximum rate. (Emphasis added.)

109. Regarding related party transactions and accounting procedures, the 2002 Financial

Report stated:

Conducting all transactions with related parties on an arm’s-length basis and

disclosing such transactions when applicable; Adhering to the highest
standards of financial reporting in accordance with established international
accounting principles and practices; Adopting and maintaining a formal
dividend policy; and Maintaining a Board of Directors and committees of the
Board composed primarily of members who are independent from the
management of the Company and having independent directors as chairs of
the Corporate Governance and Nominating, Audit, Finance and
Compensation committees.

* * *

Since its creation in June 2000, the Audit Committee has witnessed
significant progress in such areas as preparation of consolidated accounts,
information to shareholders, internal controls and information systems. We
shall continue to work closely with external auditors and with the
management team in order to bring YUKOS to world-class practice in these
areas.

110. In connection with corporate governance, the 2002 Financial Report stated:

YUKOS is committed to international principles of good corporate

governance. The Company will strive continuously to be a leader in
implementing and promoting the highest standards of corporate governance
in all aspects of its business both in Russia and in all other areas where the
Company conducts its operations. YUKOS recognizes that good corporate
governance is essential to the continued development of the Company and for
the creation of long-term, stable value for its shareholders and other
stakeholders. Specifically, the Company is committed to:

* Implementing and maintaining good corporate governance principles and

practices on the basis of generally recognized best international practices (to
the extent that such practices do not conflict with the laws governing
YUKOS’ operations);

* Complying with all laws and regulations applicable to the Company and its
governing bodies;

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 * Striving to create long-term increased shareholder value of the Company
through the application of good corporate governance practices;

* Treating all of its shareholders equally, including providing timely,

accurate and easy access to all material information about the Company and
its operations;

* Conducting all transactions with related parties on an arm’s-length basis

and disclosing such transactions when applicable; [and];

* Adhering to the highest standards of financial reporting in accordance with

established international accounting principles and practices;

111. Unbeknownst to investors, however, the statements described in ¶¶106-110, above,

were each materially false and misleading when they were made for the reasons set forth in ¶103,

above, and because they failed to disclose and misrepresented the following adverse facts, among

others:

(a) that the Company had materially inflated its net profit and diminished its tax

obligations through the illegal tax scheme described in ¶¶60-84, above;

(b) that the financial results were not the result of a long-term strategy that was

being successfully implemented,” but was the result of the illegal tax scheme described in ¶¶60-84,

above;

(c) that the Company had not actually recorded a $368 million reduction in

deferred tax liabilities, but instead was massively understating its tax liabilities;

(d) that the Company could not reduce the Company’s tax rate through an

“ongoing review of tax strategy” because the Company had substantially reduced its tax rate through

the illegal tax scheme described in ¶¶60-84, above, and could not further reduce that rate without

further, extensive illegal activity;

- 37 -
 (e) that Yukos’ effective tax rates of 19.6 percent for 2002 and 18.2 percent for

2001 were based on illegally claiming the benefits of “certain subsidiaries in several tax

jurisdictions . . . within Russia”, as described in ¶¶60-84, above;

(f) that Yukos was not “[c]onducting all transactions with related parties on an

arm’s-length basis” but rather engaging in paper transactions pursuant to which Yukos claimed to

sell oil and oil products at substantially reduced prices to effectuate the illegal tax scheme, as

described in ¶¶60-84, above;

(g) that Yukos was not “disclosing [related party] transactions” nor “[a]dhering to

the highest standards of financial reporting in accordance with established international accounting

principles and practices”;

(h) that the Company was not “[c]omplying with all laws and regulations

applicable to the Company and its governing bodies,” but was in clear violation of Russian tax laws,

which caused Yukos to illegally evade an estimated $17 billion in taxes, as described in ¶¶60-84,

above;

(i) that defendant Khodorkovsky had full control of the Company and that the

Company’s Board of Directors, and the Board of Directors were not truly independent;

(j) that the Audit Committee did not properly ensure that “significant progress”

had been made in the preparation of the consolidated accounts, because Yukos kept the accounts of

the seventeen sham companies separate to effectuate the illegal tax scheme described in ¶¶60-84,

above;

(k) that Yukos was not “[i]mplementing” or “maintaining good corporate

governance principles and practices on the basis of generally recognized best international

- 38 -
practices,” but rather was engaging in highly unethical and illegal tax scheme, as described in ¶¶60-

84, above; and

(l) that Yukos failed to disclose the material risk to Yukos shareholders caused

by the political actions taken by defendant Khodorkovsky, as described in ¶¶85-98, above.

112. Incorporated into the Company’s 2002 Financial Report was a Report of

Independent Accountants, dated May 3, 2003 and signed by Yukos’ auditors, PwC, which stated:

In our opinion, the accompanying consolidated balance sheets, related

statements of income financial statements, of cash flows, and of changes of
shareholders’ equity present fairly, in all material respects, the financial
position of YUKOS Oil Company and its subsidiaries at December 31, 2002
and 2001, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States of America.
We conducted our audits of these statements in accordance with auditing
standards generally accepted in the United States of America, which require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

113. Unbeknownst to investors, however, the statements described in ¶112, above, were

each materially false and misleading when they were made because they failed to disclose and

misrepresented the following adverse facts, among others:

(a) that the consolidated balance sheets and related financial statements did not

represent the financial position of Yukos because defendants failed to report billions of dollars in

taxes as described in ¶¶60-84, above, which if paid would have wiped out much of the Company’s

earnings during this time period;

(b) that the Company’s financial statements were not prepared in conformity with

U.S. GAAP or with any fair or accepted statements of reporting because defendants failed to report

- 39 -
billions of dollars in taxes as described in ¶¶60-84, above, and ¶¶140-158, below, which if paid

would have wiped out much of the Company’s earnings during this time period; and

(c) that the audits conducted by PwC were not conducted in accordance with

auditing standards generally accepted in the United States of America as described in ¶¶159-179,

below.

114. On July 7, 2003, Yukos reported its financial results for the first quarter 2003 (the

“July 7 Earnings Release”). According to the July 7 Earnings Release, the Company’s first quarter

of 2003 financial results were purportedly prepared in accordance with U.S. GAAP and reviewed

by PwC. According to the July 7 Earning Release, for the first quarter of 2003, Yukos reported net

earnings and earnings per share reached $1.267 billion and $0.59, respectively, compared to $0.462

billion and $0.21 per share, respectively, for the same period in the prior year.

115. Unbeknownst to investors, however, the statements described in ¶114, above, were

each materially false and misleading when they were made for the reasons set forth in ¶103, above,

and because they failed to disclose and misrepresented the following adverse facts, among others:

(a) that Yukos failed to disclose the material risk to Yukos shareholders caused

by the political actions taken by defendant Khodorkovsky, as described in ¶¶85-98, above;

(b) that the Company had materially inflated its net profits and diminished its tax

obligations through the illegal tax scheme described in ¶¶60-84, above;

(c) that the Company had no profits for the period; and

(d) that the Company’s financial statements were not prepared in conformity with

U.S. GAAP or with any fair or accepted statements of reporting because defendants failed to report

billions of dollars due in taxes as described in ¶¶60-84, above, which, if paid, would have wiped out

much of the Company’s earnings during this time period.

- 40 -
 116. On October 20, 2003, Yukos reported its financial results for the second quarter

2002 (the “October 20 Earnings Release”). According to the October 20 Earnings Release, the

Company’s second quarter of 2003 financial results were purportedly prepared in accordance with

U.S. GAAP and reviewed by PwC. According to the October 20 Earnings Release, Yukos

announced stellar results for the second quarter 2003, beating forecasts. According to the

Company, for the second quarter 2003 net profit rose 25% to $955 million, compared to the same

period the prior year – easily beating consensus forecasts of $871 million. According to defendant

Khodorkovsky, who appeared on a conference call that day, “profitability remains fairly high…

and we are not expecting it to deteriorate, especially since oil prices in the second quarter were

lower than in the first and third quarters.”

117. Unbeknownst to investors, however, the statements described in ¶116, above, were

each materially false and misleading when they were made for the reasons set forth in ¶103, above,

and because they failed to disclose and misrepresented the following adverse facts, among others:

(a) that Yukos expected profitability to deteriorate as a result of the substantial

and impending risk to Yukos caused by the political actions taken by defendant Khodorkovsky as

described in paragraphs 85-98, above;

(b) that defendant Khodorkovsky’s statement that “profitability remains fairly

high . . . especially since oil prices in the second quarter were lower than in the first and third

quarters” was materially false and misleading when made, because Khodorkovsky and the other

defendants knew, or recklessly disregarded, that the Company’s profitability was driven by the

illegal tax scheme described in ¶¶60-84, above; and

(c) that the Company’s financial statements were not prepared in conformity with

U.S. GAAP or with any fair or accepted statements of reporting defendants failed to report billions

- 41 -
of dollars due in taxes as described in ¶¶60-84, above, which, if paid, would have wiped out much of

the Company’s earnings during this time period.

THE TRUE ILLEGAL ACTIVITIES OF THE

INDIVIDUAL DEFENDANTS BEGIN TO BE BELATEDLY DISCLOSED

118. Khodorkovsky Arrested. On October 25, 2003, the international press reported

that Russian authorities had arrested defendant Khodorkovsky and charged him with fraud,

embezzlement, and evading taxes on hundreds of millions of dollars of income taxes.

119. Russian news source Interfax, quoting a representative of the Russian Prosecutors

General, and reprinted by Dow Jones, stated that “The head of Yukos is charged with committing

a series of crimes, including theft by fraud on a large scale, the failure to pay taxes as an

organization and as an individual.” In addition, according to Dow Jones, defendant

Khodorkovsky was also charged with fraud, forgery, embezzlement and contempt of court, after

failing to appear for questioning concerning “theft and tax evasion by structures controlled by

Yukos.” At this time, the Russian authorities announced that they would also pursue criminal

prosecutions against other senior Yukos officials.

120. The news of Khodorkovsky’s arrest immediately impacted the price of Yukos’

ADRs, falling 11% on October 27, 2003 over the previous business day’s close on nearly four

times the volume.

121. Russian Seizure. In late October 2003, Russian authorities seized control of

defendant Khodorkovsky’s 44% interest in the Company. By this time, Russian authorities

estimated that defendant Khodorkovsky had failed to pay at least $1 billion in taxes, and that the

seized shares would be held as “security against material damage.” According to at least one

analyst at a Russian brokerage firm, this asset seizure was “in line with our worst-case scenario for

Yukos.”

- 42 -
 122. The revelations about Khodorkovsky and Lebedev had a severe and dramatic effect

on Yukos Securities, and following these belated revelations, prices for the Company’s securities

fell precipitously – losing over 31% of their value by late October of 2003 from the Class Period

high set on October 8, 2003.

123. By the end of 2003, investors were further shocked to learn that Yukos and

defendant Khodorkovsky were being charged with evasion of taxes of at least $5 billion and

possibly as much as $10 billion. According to Dow Jones International News service, Russian tax

authorities had sent the details of the alleged tax violations, committed over the period 1998 to

2003 to the General Prosecutor’s Office. According to analysts familiar with Yukos and the

Russian oil and gas markets, a withdrawal of even the $5 billion would push the Company to the

brink of bankruptcy. Thereafter, defendants’ misconduct was further confirmed as the public was

advised:

April 16, 2004 BBC Monitoring International Reports

RUSSIAN COURT PLACES RESTRICTIONS ON YUKOS PROPERTY. On

15 April the Moscow Arbitration Court banned Yukos from disposing of any assets,
including shares, in order to expedite the suit by the Russian Federation Ministry of
Taxes and Levies to recover taxes, liens and fines to a total value of
R99,375,538,234. The court also granted the Tax Ministry’s request to take
measures to enforce its demands. The court banned Yukos’ registrars from carrying
out any operations making any changes to the register regarding stock transfers
carried out by Yukos, the press service said.

124. On April 15, 2004, the General Prosecutor’s office began the trial of defendant

Lebedev in the Moscow.

125. On April 20, 2004, Standard & Poor’s rating agency downgraded Yukos’ long-term

credit rating, which used to be one of highest in Russia, by five points from ‘BB-’ to ‘CCC’ with a

negative outlook. There is only one rating below ‘CCC.’ S&P assigns the CCC rating to

companies on the verge of bankruptcy. On the same day, Moody’s agency downgraded Yukos’

- 43 -
major rating from Ba1 to B1 and borrower’s rating from Ba2 to B2. Moody’s stated that it would

look into the possibility of further downgrading the oil company’s rating.

126. Thereafter, on July 6, 2004, Yukos announced that a consortium of lenders led by

Société Générale and CitiGroup had declared Yukos in default of a $1 billion loan.

127. On August 10, 2004, the Ministry of Justice announced that it seized Yukos’ main

oil production subsidiary, which the government announced that it intended to auction off. On

December 20, 2004, the Russian government conducted the auction of Yuganskneftegaz, selling it

for $9.3 billion to an entity named BaikalFinansGroup. On December 31, 2004,

BaikalFinansGroup sold Yuganskneftegaz to Rosneft.

128. As of the filing of this Complaint, the Tax Ministry had completed tax audits for

2000, 2001, 2002, and 2003. The Tax Ministry found that Yukos had used the illegal taxing

scheme described in ¶¶60-84. The Tax Ministry charged Yukos with taxes of $1.646 billion,

$3.105 billion, $4.094 billion, and $3.963 billion for 2000, 2001, 2002, and 2003, respectively, and

assessed penalties of $1.997 billion, $4.054 billion, $4.735 billion and $3.944 billion for each of

those years. The total harm caused by Yukos’ illegal tax scheme was $27.538 billion.

129. The market for Yukos Securities was open, well-developed, and efficient at all

relevant times. As a result of these materially false and misleading statements and failures to

disclose material information, Yukos Securities traded at artificially inflated prices during the Class

Period. Plaintiffs and other members of the Class purchased or otherwise acquired Yukos

Securities relying upon the integrity of the market price of Yukos Securities and market

information relating to Yukos, and have been damaged thereby when, inter alia, the price for

Yukos Securities fell upon revelation of the fraud.

- 44 -
 130. During the Class Period, defendants materially misled the investing public, thereby

inflating the price of Yukos Securities by publicly issuing false and misleading statements and

omitting to disclose material facts necessary to make defendants’ statements, as set forth herein, not

false and misleading. Said statements and omissions were materially false and misleading in that

they failed to disclose material adverse information and misrepresented the truth about the

Company, its business and operations, as alleged herein.

131. At all relevant times, the material misrepresentations and omissions particularized in

this Complaint directly or proximately caused or were a substantial contributing cause of the

damages sustained by plaintiffs and other members of the Class. As described herein, during the

Class Period, defendants made or caused to be made a series of materially false or misleading

statements about Yukos’ business, prospects, and operations. These material misstatements and

omissions had the cause and effect of creating in the market an unrealistically positive assessment

of Yukos and its business, prospects, and operations, thus causing the Company’s securities to be

overvalued and artificially inflated at all relevant times and to lose value when the truth was

revealed. Defendants’ materially false and misleading statements during the Class Period resulted

in plaintiffs and other members of the Class purchasing the Company’s securities at artificially

inflated prices, thus causing the damages complained of herein when the artificial inflation was

removed from the price of the Yukos Securities upon revelation of the fraud.

ADDITIONAL SCIENTER ALLEGATIONS

132. As alleged herein, defendants acted with scienter in that each defendant knew that

the public documents and statements issued or disseminated in the name of the Company were

materially false and misleading. In addition, at all times throughout the Class Period, defendants

also knew that such statements or documents would be issued or disseminated to the investing

- 45 -
 public and knowingly and substantially participated or acquiesced in the issuance or dissemination

of such statements or documents as primary violations of the federal securities laws.

133. As set forth elsewhere herein in detail, defendants, by virtue of their receipt of

information reflecting the true facts regarding Yukos, their control over, and/or receipt and/or

modification of Yukos’ allegedly materially misleading misstatements and/or their associations

with the Company which made them privy to confidential proprietary information concerning

Yukos, participated in the fraudulent scheme alleged herein.

Yukos Used Artificially Inflated Stock to Fund Its Class

Period Acquisition of Sibneft

134. Through the material misrepresentations and omissions alleged herein, defendants

were able to use the Company’s artificially inflated stock as currency to acquire Sibneft, the fifth

largest Russian oil company, during the Class Period.

135. On April 22, 2003, in a joint press release (the “April 22 Joint Release”), Yukos and

Sibneft announced the merger. According to the April 22 Joint Release, the terms of the merger

were that Sibneft shareholders will sell 20% of their company for $3 billion. The remaining 80%

of Sibneft would be purchased through an exchange of shares whereby for each one share of

Sibneft stock they would acquire .0325% of the newly formed entity. At the end of the transaction,

Yukos shareholders would retain approximately 70-71% of the combined company.

136. Thus, by taking full advantage of the artificial inflation in the price of Yukos stock

caused by the publication of defendants’ false and materially misleading statements, defendants

acquired the controlling interest in the undisputed leader in Russian oil production and the fourth-

largest oil company in the world.

137. Menatep and the Individual Defendants were highly motivated to artificially inflate

the price of Yukos’ stock through the illegal tax scheme described herein, in order to make the

- 46 -
 above-referenced Class Period acquisition of Sibneft using fewer shares of Yukos stock, thus

preventing dilution of the Company’s stock.

The Massive Dividends Paid to Defendants

Menatep, Khodorkovsky, and Lebedev

138. Defendants Menatep’s, Khodorkovsky’s, and Lebedev’s scienter is further

demonstrated, in part, by the enormous dividends they received as a result of the illegal tax scheme

(literally billions of dollars before and during the Class Period). During the existence of the tax

evasion scheme, Yukos paid dividends of:

(a) RUR 59.9 billion (approximately $2 billion) for the first nine months of 2003;

of which Menatep’s share was $1,220,000,000;

(b) RUR 22.079 billion (approximately $700 million) for 2002; of which

Menatep’s share was $427,000,000;

(c) RUR 15.25 billion (approximately $500 million) for 2001; of which

Menatep’s share was $305,000,000; and

(d) RUR 8.59 billion (approximately $300 million) for 2000; of which Menatep’s

share was $183,000,000.

139. In total, Menatep received dividends of $2,135,000,000, which it distributed to

Lebedev and Khodorkovsky. Menatep, Khodorkovsky and Lebedev were highly motivated to

artificially inflate Yukos’ net income and diminish Yukos’ tax liability through the illegal tax

scheme described herein, in order to receive the massive dividends. As Khodorkovsky stated in the

March 18 Forbes Article, “I earn money in dividends and with the increase in the market

capitalization of my company.”

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 YUKOS’ VIOLATIONS OF U.S. GAAP

140. Prior to and during the Class period, defendants materially misled the investing

public, thereby inflating the price of the Company’s securities, in that they failed to disclose

material adverse information and misrepresented the truth about the Company, its financial

performance, accounting, reporting, and financial condition in violation of the federal securities

laws and U.S. GAAP.

141. During the Class Period, Yukos disseminated its fiscal 2002 and interim 2003 results

in press releases and financial statements to the investing public. These filings, as defendants knew

or recklessly ignored, falsely represented that the financial information contained therein fairly

stated the Company’s financial results and that such results were prepared in accordance with U.S.

GAAP.

142. GAAP are those principles recognized by the accounting profession as the

conventions, rules and procedures necessary to define accepted accounting practice at a particular

time. As set forth in Financial Accounting Standards Board (“FASB”) Statement of Concepts

(“Concepts Statement”) No. 1:

Financial reporting should provide information about an enterprise’s financial

performance during a period. Investors and creditors often use information
about the past to help in assessing the prospects of an enterprise. Thus,
although investment and credit decisions reflect investors’ and creditors’
expectations about future enterprise performance, those expectations are
commonly based at least partly on evaluations of past enterprise
performance.

143. Regulation S-X (17 C.F.R. §210.4-01(a)(1)) states that financial statements filed

with the SEC which are not prepared in compliance with U.S. GAAP are presumed to be

misleading and inaccurate. Regulation S-X requires that interim financial statements must also

comply with U.S. GAAP, 17 C.F.R. §210.10-01(a).

- 48 -
 144. During the Class Period, defendants caused Yukos to issue financial statements in

violation of U.S. GAAP and SEC rules and regulations by failing to properly account and report its

results for fiscal year 2002 and the first and second quarter of 2003 in the following respects:

(a) Yukos understated its tax liability through the use of the illegal tax scheme

described in ¶¶60-84, thereby overstating net income;

(b) defendants falsely proclaimed that Yukos effective tax rate of 19.6 percent for

2002 when that rate was based on illegally claiming the benefits of “certain subsidiaries in several

tax jurisdictions . . . within Russia”, as described in ¶¶60-84, above;

(c) defendants falsely proclaimed that Yukos effective tax rate of 19.6 percent for

2002 when that rate was based on illegally claiming the benefits of “certain subsidiaries in several

tax jurisdictions . . . within Russia”, as described in ¶¶60-84, above;

(d) defendants falsely proclaimed that Yukos’ effective tax rate of 18.2 percent in

2001 when that rate was based on illegally claiming the benefits of “certain subsidiaries in several

tax jurisdictions . . . within Russia,” as described in ¶¶60-84, above, and not the recognition of

deferred tax credits; and

(e) Yukos failed to properly disclose the potential losses ensuing from the illegal

tax scheme described in ¶¶60-84, thereby materially understating the contingent losses.

Yukos’ Improper Reporting of Its Tax Liabilities

145. Generally GAAP provides that the “objectives for accounting for income taxes are

to recognize the amount of taxes payable or refundable for the current year and deferred tax

liabilities and assets associated with events that have been recognized in an enterprise’s financial

statements or tax returns.” FASB Statement No. 109, Accounting for Income Taxes (“FASB

109”) (February 1992). FASB 109 provides that the following basic principals are to be applied in

accounting for income taxes:

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 (a) a current tax liability or asset is recognized for the estimated taxes payable or

refundable on tax returns for the current year;

(b) a deferred tax liability or asset is recognized for the estimated future tax

effects attributable to temporary differences and carry forwards;

(c) the measurement of current and deferred tax liabilities and assets is based on

provisions of the enacted tax law; the effects of future changes in tax laws or rates are not

anticipated; and

(d) the measurement of deferred tax assets is reduced, if necessary, by the amount

of any tax benefits that, based on available evidence, are not expected to be realized.

146. Also, FASB 109 provides that financial statements disclose income tax expense

attributable to continuing operations and adjustments of a tax liability or asset because of enacted

changes in tax laws or rates. FASB 109, ¶45. Moreover, deferred tax liabilities and assets are to be

adjusted to account for an enacted change in the tax laws or rates. The effect shall be disclosed in

continuing operations for the period that includes the enactment date. FASB 109, ¶27.

147. As noted above, the Russian Government enacted two key changes to its tax laws in

1998 and 1999 that essentially converted Yukos’ questionable tax scheme to an outright illegal

scheme.

148. For the reasons stated in ¶¶60-84, above, Yukos and the Defendants, including PwC,

knew or were reckless in not knowing that the tax avoidance scheme was directly contrary to

Russian law.

149. Despite such changes to Russian Tax Law, Yukos continued to overstate its earnings

and to understate its tax liability both prior to and during the Class Period. Indeed, Yukos engaged

in an illegal tax evasion scheme by shifting profits to shell organizations that the individual

- 50 -
 defendants caused to be created and registered in territories with preferential tax treatment.

Ultimately, Yukos, which has been audited by the Tax Ministry for its fiscal years 2000, 2001,

2002 and 2003 tax returns, will be required to pay additional taxes and penalties of approximately

$27.538 billion.

Yukos Failed to Properly Record and Disclose

Related Party Transactions

150. GAAP, in FASB’s SFAS No. 57, provides guidance on disclosures of transactions

between related parties.4 SFAS No. 57 indicates that “enterprise’s financial statements may not be

complete without additional explanations of and information about related party transactions and

thus may not be reliable.” Accordingly, SFAS No. 57, requires that financial statements identify

material related party transactions and disclose: (a) the nature of the relationship(s), (b) a

description of the transaction, (c) the dollar amount of transactions for each period for which an

income statement is presented, and (d) the amounts due from or to the related parties as of the date

of each balance sheet.

151. In addition, GAAP, as noted the SEC’s SAB Topic 4E, provides that:

[I]n some cases, the significance of an amount may be independent of the amount
involved. For example, amounts due to and from officers and directors, because of
their special nature and origin, ought generally to be set forth separately [in financial
statements] even though the dollar amounts involved are relatively small.

152. As noted in detail above, Yukos, prior to and during the Class Period, engaged in

literally hundreds of material related party and self-dealing transactions worth billions of dollars

that were not disclosed in its financial statements in violation of U.S. GAAP.

4
Pursuant to SFAS No. 57, related party transactions include transactions between an enterprise and
its affiliates (a party that, directly or indirectly, controls, is controlled or is in common control with
an enterprise), Directors of the Board, CEO, COO, Vice Presidents in charge of principal business
functions and other persons who perform similar policy making functions.

- 51 -
Yukos’ Improper Failure to Disclose Contingent
Liabilities and Significant Risks and Uncertainties

153. Defendants attempt to deceive investors during the Class Period is otherwise

evidenced by the failure of Yukos’ financial statements to disclose its contingent liabilities in

conformity with GAAP.

154. GAAP requires that financial statements disclose contingencies when it is at least

reasonably possible (e.g., a greater than slight chance) that a loss may have been incurred. SFAS

No. 5, ¶10. The disclosure shall indicate the nature of the contingency and shall give an estimate of

the possible loss, a range of loss, or state that such an estimate cannot be made. Id.

155. The SEC considers the disclosure of loss contingencies to be so important to an

informed investment decision that it issued Article 10-01 of Regulation S-X [17 C.F.R. §210.10-

01], which provides that disclosures in interim period financial statements may be abbreviated and

need not duplicate the disclosure contained in the most recent audited financial statements, except

that “where material contingencies exist, disclosure of such matters shall be provided even though a

significant change since year end may not have occurred.”

156. In addition, GAAP requires that financial statements disclose significant risks and

uncertainties associated with associated with an entity’s business. American Institute of Certified

Public Accountant’s Statement of Position No. 94-6.

157. In violation of GAAP, Yukos’ financial statements during the Class period

improperly failed to disclose the risks and uncertainties associated with defendants’ tax avoidance

practices. Indeed, defendants’ scheme improperly understated Yukos’ income tax liabilities by

more than a billion dollars. Nonetheless, the Company’s financial statements during the Class

Period failed to disclose that it engaged in illegal practices which defendants knew or recklessly

ignored contingently subjected Yukos to civil and criminal tax liabilities.

- 52 -
Additional GAAP Violations

158. In addition to the violations of GAAP noted above, the Company presented its

financial results and statements in a manner that also violated the following fundamental

accounting principles:

(a) The principle that interim financial reporting should be based upon
the same accounting principles and practices used to prepare annual financial
statements (APB No. 28, 12);

(b) The concept that financial reporting should provide information that
is useful to present and potential investors and creditors and other users in
making rational investment, credit, and similar decisions (Concepts
Statement No. 1, ¶34);

(c) The concept that financial reporting should provide information about
the economic resources of an enterprise, the claims to those resources, and
effects of transactions, events, and circumstances that change resources and
claims to those resources (Concepts Statement No. 1, ¶40);

(d) The concept that financial reporting should provide information about
how management of an enterprise has discharged its stewardship
responsibility to owners (stockholders) for the use of enterprise resources
entrusted to it. To the extent that management offers securities of the
enterprise to the public, it voluntarily accepts wider responsibilities for
accountability to prospective investors and to the public in general (Concepts
Statement No. 1, ¶50);

(e) The concept that financial reporting should provide information about
an enterprise’s financial performance during a period. Investors and creditors
often use information about the past to help in assessing the prospects of an
enterprise. Thus, although investment and credit decisions reflect investors’
expectations about future enterprise performance, those expectations are
commonly based at least partly on evaluations of past enterprise performance
(Concepts Statement No. 1, ¶42);

(f) The concept that financial reporting should be reliable in that it

represents what it purports to represent. That information should be reliable
as well as relevant is a notion that is central to accounting (Concepts
Statement No. 2, ¶¶58-59);

(g) The concept of completeness, which means that nothing is left out of
the information that may be necessary to insure that it validly represents
underlying events and conditions (Concepts Statement No. 2, ¶79); and

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 (h) The concept that conservatism be used as a prudent reaction to
uncertainty to try to ensure that uncertainties and risks inherent in business
situation are adequately considered. The best way to avoid injury to
investors is to try to ensure that what is reported represents what it purports to
represent (Concepts Statement No. 2, ¶¶95, 97).

PWC VIOLATED THE RELEVANT

ACCOUNTING AND AUDITING STANDARDS

159. Defendant PwC is a worldwide firm of certified public accountants, auditors and

consultants. Through its Moscow, Russia office, PwC served as Yukos’ auditor and principal

accounting firm throughout the Class Period. PwC was required to audit the Company’s financial

statements in accordance with Generally Accepted Auditing Standards (“GAAS”) in the U.S., and

to report the audit results to Yukos and the members of the investing public, including plaintiffs

and the other members of the Class. With knowledge of Yukos’ true financial condition, or in

reckless disregard thereof, PwC issued the following unqualified audit report on Yukos’ 2002

annual financial statements which was filed by the Company with the SEC:

To the Board of Directors and

Shareholders of YUKOS Oil Company

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of cash flows, and of changes in shareholders’
equity present fairly, in all material respects, the financial position of YUKOS Oil
Company and its subsidiaries at December 31, 2002, and 2001, and the results of
their operations and their cash flows for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles generally accepted in
the United States of America. These financial statements are the responsibility of the
Company’s management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the United
States of America, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

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 160. PwC’s audit opinion on Yukos’ financial statements falsely represented that such

financial statements were presented in conformity with U.S. GAAP when, as noted above, they

failed to conform with U.S. GAAP in numerous respects. In fact, during the Class Period, Yukos

engaged in illegal tax evasion schemes, which have now subjected the Company to tax liabilities

and penalties totaling approximately $27.5 billion.

161. PwC’s audit report was also materially false and misleading in that PwC’s audit was

not conducted in accordance with U.S. GAAS. For example, U.S. GAAS, in AU §9326 provides

• Concern over [taxing authorities] access to tax accrual working papers might
cause some clients to not prepare or maintain appropriate documentation of the
calculation or contents of the accrual for income taxes included in the financial
statements, or to deny the independent auditor access to such information. What
effect does this situation have on the auditor’s opinion on the financial statements?

Interpretation - The client is responsible for its tax accrual, the underlying support for
the accrual, and the related disclosures. Limitations on the auditor’s access to
information considered necessary to audit the tax accrual will affect the auditor’s
ability to issue an unqualified opinion on the financial statements. Thus, if the
client does not have appropriate documentation of the calculation or contents of the
accrual for income taxes and denies the auditor access to client personnel responsible
for making the judgments and estimates relating to the accrual, the auditor should
assess the importance of that inadequacy in the accounting records and the client
imposed limitation on his or her ability to form an opinion on the financial
statements. Also, if the client has appropriate documentation but denies the auditor
access to it and to client personnel who possess the information, the auditor should
assess the importance of the client-imposed scope limitation on his or her ability to
form an opinion.

• The auditor’s documentation of the results of auditing procedures directed at

the tax accounts and related disclosures also should include sufficient competent
evidential matter about the significant elements of the client’s tax liability
contingency analysis. This documentation should include copies of the client’s
documents, schedules, or analyses (or auditor-prepared summaries thereof) to enable
the auditor to support his or her conclusions regarding the appropriateness of the
client’s accounting and disclosure of significant tax-related contingency matters.
The audit documentation should reflect the procedures performed and conclusions
reached by the auditor and, for significant matters, include the client’s documentary
support for its financial statement amounts and disclosures.

The audit documentation should include the significant elements of the client’s
analysis of tax contingencies or reserves, including roll-forward of material changes

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to such reserves. In addition, the documentation should provide the client’s position
and support for income tax related disclosures, such as its effective tax rate
reconciliation, and support for its intra-period allocation of income tax expense or
benefit to continuing operations and to items other than continuing operations.
Where applicable, the documentation also should include the client’s basis for
assessing deferred tax assets and related valuation allowances and its support for
applying the “indefinite reversal criteria” in APB Opinion No. 23, Accounting for
Income Taxes-Special Areas, including its specific plans for reinvestment of
undistributed foreign earnings.

• Question - In some situations, a client may furnish its outside legal counsel or
in-house legal or tax counsel with information concerning the tax contingencies
covered by the accrual for income taxes included in the financial statements and ask
counsel to provide the auditor an opinion on the adequacy of the accrual for those
contingencies. In such circumstances, rather than inspecting and obtaining
documentary evidence of the client’s tax liability contingency analysis and making
inquiries of the client, may the auditor consider the counsel as a specialist within the
meaning of section 336, Using the Work of a Specialist, and rely solely on counsel’s
opinion as an appropriate procedure for obtaining evidential matter to support his or
her opinion on the financial statements?

Interpretation - No. The opinion of legal counsel in this situation would not provide
sufficient competent evidential matter to afford a reasonable basis for an opinion on
the financial statements. Section 336.01 defines a specialist as “a person (or firm)
possessing special skill or knowledge in a particular field other than accounting or
auditing.” It is intended to apply to situations requiring special knowledge of matters
about which the auditor does not have adequate technical training and proficiency.
The auditor’s education, training, and experience, on the other hand, do enable him
or her to be knowledgeable concerning income tax matters and competent to assess
their presentation in the financial statements. The opinion of legal counsel on
specific tax issues that he or she is asked to address and to which he or she has
devoted substantive attention, as contemplated by section 337, Inquiry of a Client’s
Lawyer Concerning Litigation, Claims, and Assessments, can be useful to the auditor
in forming his or her own opinion. However, the audit of income tax accounts
requires a combination of tax expertise and knowledge about the client’s business
that is accumulated during all aspects of an audit. Therefore, as stated above, it is not
appropriate for the auditor to rely solely on such legal opinion.

• Question - A client may have obtained the advice or opinion of an outside tax
adviser related to the tax accrual or matters affecting it, including tax contingencies,
and further may attempt to limit the auditor’s access to such advice or opinion, or
limit the auditor’s documentation of such advice or opinion. This limitation on the
auditor’s access may be proposed on the basis that such information is privileged.
Can the auditor rely solely on the conclusions of third party tax advisers? What
evidential matter should the auditor obtain and include in the audit documentation?

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 Interpretation - As discussed …above, the auditor cannot accept a client’s or a third
party’s analysis or opinion with respect to tax matters without careful consideration
and application of the auditor’s tax expertise and knowledge about the client’s
business. As a result of applying such knowledge to the facts, the auditor may
encounter situations in which the auditor either disagrees with the position taken by
the client, or its advisers, or does not have sufficient competent evidential matter to
support his or her opinion. If the client’s support for the tax accrual or matters
affecting it, including tax contingencies, is based upon an opinion issued by an
outside adviser with respect to a potentially material matter, the auditor should obtain
access to the opinion, notwithstanding potential concerns regarding attorney-client or
other forms of privilege. The audit documentation should include either the actual
advice or opinions rendered by an outside adviser, or other sufficient documentation
or abstracts supporting both the transactions or facts addressed as well as the analysis
and conclusions reached by the client and adviser. Alternatives such as redacted or
modified opinions may be considered, but must nonetheless include sufficient
content to articulate and document the client’s position so that the auditor can
formulate his or her conclusion. Similarly, it may be possible to accept a client’s
analysis summarizing an outside adviser’s opinion, but the client’s analysis must
provide sufficient competent evidential matter for the auditor to formulate his or her
conclusion. In addition, client representations may be obtained stating that the client
has not received any advice or opinions that are contradictory to the client’s support
for the tax accrual. If the auditor is unable to accumulate sufficient competent
evidence about whether there is a supported and reasonable basis for the client’s
position, the auditor should consider the effect of this scope limitation on his or her
report.

162. Accordingly, GAAS required PwC to obtain audit evidence sufficient to support

Yukos’ income tax expense and liability in its 2002 financial statements. Had PwC done so, it

would have determined, if it did not already know, that such income tax amounts were materially

false and misleading.

163. In addition, at all times relevant hereto, Yukos exhibited significant internal control

weaknesses, including a lack of appropriate formal policies and procedures, which subjected the

Company to significant risk of material financial statement misstatements. GAAS requires an

auditor to determine three initial risk factors in order to obtain an understanding of internal controls

sufficient to plan an audit. An auditor must evaluate (i) “control risk,” or whether a misstatement

will be prevented or detected on a timely basis by the entity’s internal controls; (ii) “inherent risk,”

or whether the possibility exists that there will be a misstatement due to lack of internal controls;

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and (iii) “detection risk,” or whether the auditor will detect the material misstatement.

AU §319.46.

164. GAAS required PwC to study Yukos’ internal controls before issuing an opinion on

financial statements. With respect to internal controls, GAAS requires that:

AU §319, Consideration of Internal Control in a Financial Statement Audit

In all audits, the auditor should obtain an understanding of internal controls

sufficient to plan the audit by performing procedures to understand the design
of controls relevant to an audit of financial statements, and whether they have
been placed in operation. [319.02]

In all audits, the auditor should obtain an understanding of each of the five
components of internal control sufficient to plan the audit by performing
procedures to understand the design of controls relevant to an audit of
financial statements, and whether they have been placed in operation. In
planning the audit, such knowledge should be used to

• Identify types of potential misstatement.

• Consider factors that affect the risk of material misstatement.

• Design substantive tests. [319.19]

The auditor should obtain sufficient knowledge of the control environment to

understand management’s and the board of directors’ attitude, awareness, and
actions concerning the control environment, considering both the substance
of controls and their collective effect. The auditor should concentrate on the
substance of controls rather than their form, because controls may be
established but not acted upon. For example, management may establish a
formal code of conduct but act in a manner that condones violations of that
code. [319.26]

The auditor should obtain sufficient knowledge of the entity’s risk

assessment process to understand how management considers risks relevant
to financial reporting objectives and decides about actions to address those
risks. This knowledge might include understanding how management
identifies risks, estimates the significance of the risks, assesses the likelihood
of their occurrence, and relates them to financial reporting. [319.30]

165. GAAS, as set forth in AU §326, Evidential Matter, also requires auditors to obtain

sufficient, competent, evidential matter through inspection, observation, inquiries, and

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confirmations to afford a reasonable basis for an opinion regarding the financial statements under

audit:

In evaluating evidential matter, the auditor considers whether specific audit

objectives have been achieved. The independent auditor should be thorough
in his or her search for evidential matter and unbiased in its evaluation. In
designing audit procedures to obtain competent evidential matter, he or she
should recognize the possibility that the financial statements may not be
fairly presented in conformity with generally accepted accounting principles
or a comprehensive basis of accounting other than generally accepted
accounting principles. In developing his or her opinion, the auditor should
consider relevant evidential matter regardless of whether it appears to
corroborate or to contradict the assertions in the financial statements. To the
extent the auditor remains in substantial doubt about any assertion of material
significance, he or she must refrain from forming an opinion until he or she
has obtained sufficient competent evidential matter to remove such
substantial doubt, or the auditor must express a qualified opinion or a
disclaimer of opinion. AU §326.25 (footnotes omitted).

166. PwC violated GAAS in that:

• First, auditing tax statements and an examination of the documentation would

have revealed Yukos’ illegal tax scheme and the improper reporting of the
effective tax rate and tax liabilities. It would also have revealed that Yukos
failed to disclose the extent and nature of its tax scheme in its SEC filings;

• Second, a determination of the tax provision in the income statement and the
documentation supporting it would have revealed Yukos’ illegal tax scheme
and the improper reporting of the effective tax rate and tax liabilities. It
would also have revealed that Yukos failed to disclose the extent and nature
of its tax scheme in its SEC filings;

• Third, a determination of the timing of tax payments would have revealed

Yukos’ illegal tax scheme and the improper reporting of the effective tax rate
and tax liabilities. It would also have revealed that Yukos failed to disclose
the extent and nature of its tax scheme in its SEC filings;

• Fourth, the obtaining of a reasonable assurance that all tax liabilities (or
refunds receivable), tax provisions, and deferred tax accounts (including the
valuation allowance) are included in the financial statements; that they are
properly measured, classified, and described; and that all necessary
disclosures are made in the financial statements would have revealed Yukos’
illegal tax scheme and the improper reporting of the effective tax rate and tax
liabilities. It would also have revealed that Yukos failed to disclose the
extent and nature of its tax scheme in its SEC filings;

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 • Fifth, the basic auditing procedures to test the accuracy of the computation of
the current and deferred tax liability would have revealed Yukos’ illegal tax
scheme and the improper reporting of the effective tax rate and tax liabilities.
It would also have revealed that Yukos failed to disclose the extent and
nature of its tax scheme in its SEC filings; and

• Sixth, the requirement that the auditor should determine that the entity has
provided for probable loss contingencies that are reasonably estimable
particularly, those contingencies that result from existing disagreements with
taxing authorities or from the possibility that future disagreements may arise
over positions an entity takes in its current tax return would have revealed
Yukos’ illegal tax scheme and the improper reporting of the effective tax rate
and tax liabilities. It would also have revealed that Yukos failed to disclose
the extent and nature of its tax scheme in its SEC filings.

167. PwC’s responsibility, as Yukos’ independent auditor, was to obtain “sufficient

competent evidential matter . . . to afford a reasonable basis for an opinion regarding the financial

statements under audit” as to “the fairness with which they present, in all material respects,

financial position, results of operations, and its cash flows in conformity with generally accepted

accounting principles.” AU §§110, 150.

168. In violation of GAAS, and contrary to the representations in its report on Yukos’

financial statements, PwC did not obtain sufficient, competent, evidential matter to support Yukos’

assertions regarding its net income and tax liability.

169. In certifying Yukos’ 2002 year-end financial statements, PwC represented that its

audits had been made in accordance with GAAS. This statement was false and misleading in that

PwC knew or recklessly ignored that Yukos’ financial statements were not prepared in conformity

with GAAP and that PwC’s audit was not performed in accordance with GAAS.

170. During the Class Period, as a result of its relationship with Yukos and its duties as

Yukos’ auditors, PwC personnel were regularly present at Yukos corporate headquarters. PwC had

continual access to and knowledge of Yukos’ confidential corporate financial and business

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information through conversations with employees of Yukos and through review of Yukos’ non-

public documents.

171. In addition, PwC personnel had the opportunity and duty to observe and review the

Company’s business and accounting practices and to test the Company’s internal and publicly

reported financial statements, as well as the Company’s internal controls and structures.

172. PwC knowingly and/or recklessly permitted Yukos to use improper accounting

practices and to make misleading and inadequate disclosures, all in violation of U.S. GAAP (and

SEC reporting requirements), to falsely inflate Yukos’ reported net income and understate Yukos’

tax liability during the Class Period.

173. In fact, PwC refers to its expertise in its website as follows:

PwC has the knowledge and expertise necessary to help you with complex
financial accounting issues related to matters such as valuations, pensions
and share plans, listings, IFRS conversions, and corporate treasury and
company secretarial functions. To improve your financial accounting and
keep you abreast of new developments in corporate reporting, our
experienced professionals will provide you with a combination of technical
advice, support tools, and training of in-house accounting staff.

174. PwC specifically touts its expertise in Russian tax issues:

PwC Tax Services in Russia

PricewaterhouseCoopers Tax Services is the largest practice in Russia,

staffed with over 140 Russian and Western specialists with a wide range of
experience. These specialists work closely with Russian officials to provide
the most current and accurate information on new legislative developments in
all areas of taxation of pertinent interest to foreign investors and Russian
enterprises.

The Department, established in 1989, has experience in assisting both

Russian and multinational clients plan, structure, operate and expand their
business in the Russian Federation.

OUR SKILLS AND SERVICES

Tax Services Department has client teams working in industry and technical
specialists. For example, there are 15 full time VAT and Customs experts.

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 Another group of 23 professionals provides expert advice on International
Assignment and Personal Tax Services. Part of it is the Global Human
Resources Solutions group implementing consulting services in the HR area.
The Department is set to provide professional services to the companies
engaged in the following industry sectors:

* * *

Energy and Mining

The Department has established a reputation for providing practical business

solutions, not just technical services. Solutions can be found using the
expertise and experience of our people in the following areas:

International Tax Planning for Russian businesses

Transfer Pricing Planning

* * *

Russian Corporate Tax Planning - ranging from initial structuring and day to
day operations to expansion into the Regions

Financial Tax Services

* * *

Value Added Tax Advice and Consulting - (specialised VAT planning

reviews, VAT consultancy advice on any transaction, and staff training on
VAT issues)

Tax Advice and Planning Opportunities for Corporate E-Business projects.

175. GAAS also requires the auditor to assess the risk that financial statements are

materially misstated and provides the auditor with specific factors to be considered in connection

with the auditor’s assessment. In this regard, PwC knew or flagrantly ignored the following during

the class period:

(a) PwC knew, or was reckless in not knowing, that Yukos was engaging in a

massive transfer pricing scheme, whereby its subsidiaries “sold” oil and oil products to seventeen

shell companies at substantially below-market prices, who, in turn “sold” the oil and oil products,

through the mediation of Yukos and Menatep, on the open market;

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 (b) PwC knew, or was reckless in not knowing, that the transactions described

immediately above were undertaken for the sole purpose of taking advantage of certain Russian tax

exemptions;

(c) PwC knew, or was reckless in not knowing, that that the seventeen shell

companies did not meet the basic requirements to obtain the tax free status claimed;

(d) PwC knew, or was reckless in not knowing, that that the below-market

transactions with the seventeen shell companies violated Russian law; and

(e) Yukos’ GAAP violations were apparent on their face and were not complex

accounting issues.

176. PwC abandoned its role as independent auditor by turning a blind eye to each of the

above indications of improper accounting. Despite this knowledge, PwC did not insist upon

adjustments to Yukos’ audited financial statements. Pursuant to GAAS, PwC should have issued a

qualified or adverse report, or it should have insisted that Yukos comply with U.S. GAAP.

177. Moreover, Symbol 10A of the Securities Exchange Act required PwC to

“determine” whether, in the course of its audits, an illegal act occurred and to notify the SEC if it

became aware of information indicating that an illegal act occurred if Yukos’ management or

Board of Directors failed to take appropriate remedial action with respect to the illegal acts. PwC

knew, or recklessly ignored, that it violated 10A of the Securities Exchange Act in the performance

of its “audits” of Yukos’ 2002 year end financial statements.

178. In addition to issuing the audit report referred to above, PwC performed reviews of

Yukos’ 2003 interim financial statements and reviewed, discussed and improperly approved

Yukos’ press releases on Yukos’ interim 2003 financial results.

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 179. PwC’s failure to qualify, modify, or abstain from issuing its audit opinion on Yukos’

2002 financial statements, as well as PwC’s work in connection with Yukos’ interim information,

when it knew or deliberately turned a blind eye to numerous facts that showed that those financial

statements were materially false and misleading. In addition to violations of GAAS noted above,

PwC also violated at least the following provisions of GAAS:

• PwC violated the second general standard, which provides that “[i]n all
matters relating to the assignment, an independence in mental attitude is to be
maintained by the auditor or auditors.”

• PwC violated the third general standard, which provides that “[d]ue
professional care is to be exercised in the performance of the audit and the
preparation of the report.”

• PwC violated the second standard of field work, which provides that “[a]
sufficient understanding of internal control is to be obtained to plan the audit
and to determine the nature, timing, and extent of tests to be performed.” This
standard requires the auditor to make a proper study of existing internal
controls, including accounting, financial and managerial controls, to
determine whether reliance thereon was justified, and if such controls are not
reliable, to expand the nature and scope of the auditing procedures to be
applied. In the course of auditing Yukos’ financial statements, PwC either
knew or recklessly disregarded facts that evidenced that it failed to
sufficiently understand Yukos’ internal control structure and/or it disregarded
weaknesses and deficiencies in Yukos’ internal control structure, and failed
to adequately plan its audit or expand its auditing procedures.

• PwC violated the third standard of field work, which provides that
“[s]ufficient competent evidential matter is to be obtained through inspection,
observation, inquiries, and confirmations to afford, a reasonable basis- for an
opinion regarding the financial statements under audit.”

• PwC violated the first standard of reporting, which provides that “[t]he report
shall state whether the financial statements are presented in accordance with
generally accepted accounting principles.”

• PwC violated the second standard of reporting, which provides that “[t]he
report shall identify those circumstances in which such principles have not
been consistently observed in the current period in relation to the preceding
period.”

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 • PwC violated the third standard of reporting, which provides that
“[i]nformative disclosures in the financial statements are to be regarded as
reasonably adequate unless otherwise stated in the report.”

• PwC violated the fourth standard of reporting, which provides that “[t]he
report shall either contain an expression of opinion regarding the financial
statements, taken as a whole, or an assertion to the effect that an opinion
cannot be expressed. When an overall opinion cannot be expressed, the
reasons therefore should be stated. In all cases where an auditor’s name is
associated with financial statements, the report should contain a clear-cut
indication of the character of the auditor’s work, if any, and the degree of
responsibility the auditor is taking.” This standard requires that when an
opinion on the financial statements taken as a whole cannot be expressed, the
reasons therefore must be stated. PwC should have stated that it could issue
only a qualified opinion on Yukos’ 2002 financial statement.

• PwC violated AU §319.18, which provides that “when the presence of

management incentives creates an environment that could result in material
misstatement of financial statements, the effectiveness of control activities
may be reduced.”

• PwC violated AU §319.22, which provides that “[t]he auditor’s

understanding of internal control may sometimes, raise doubts about the
auditability of an entity’s financial statements.” Indeed, “[c]oncerns about the
integrity of the entity’s management may be so serious as to cause the auditor
to conclude that the risk of management misrepresentation in the financial
statements is such that an audit cannot be conducted.” Moreover, “[c]oncerns
about the nature and extent of an entity’s records may cause the auditor to
conclude that it is unlikely that sufficient competent evidential matter will be
available to support an opinion on the financial statements.”

• PwC violated AU §380.09, which states that “[t]he auditor should inform the
audit committee about adjustments arising from the audit that could, in his
judgment, either individually or in the aggregate, have a significant effect on
the entity’s financial reporting process.” For purposes of this section, “an
audit adjustment, whether or not recorded by the entity, is a proposed
correction of the financial statements that, in the auditor’s judgment, may not
have been detected except through the auditing procedures performed.”
Indeed, “[m]atters underlying adjustments proposed by the auditor but not
recorded by the entity could potentially cause future financial statements to
be materially misstated, even though the auditor has concluded that the
adjustments are not material to the current financial statements.”

180. As one of the largest audit firms in the world, PwC was well aware of the strategies,

methods and procedures required by GAAS to conduct a proper audit. Also, PwC knew of the

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audit risks inherent at Yukos and in the industries in which Yukos operated because of the

comprehensive services it provided to Yukos over the years and its experience in the oil and gas

industry. Indeed, PwC touts its expertise in auditing oil and gas producers like Yukos.

Accordingly, PwC knew, or recklessly ignored, that it failed to conduct its audit on Yukos’ 2002

financial statements in accordance with GAAS.

NO SAFE HARBOR

181. The statutory safe harbor provided for forward-looking statements under certain

circumstances does not apply to any of the allegedly false statements pleaded in this complaint.

Many of the specific statements pleaded herein were not identified as “forward-looking statements”

when made. To the extent there were any forward-looking statements, there were no meaningful

cautionary statements identifying important factors that could cause actual results to differ

materially from those in the purportedly forward-looking statements. Alternatively, to the extent

that the statutory safe harbor does apply to any forward-looking statements pleaded herein,

defendants are liable for those false forward-looking statements because at the time each of those

forward-looking statements was made, the particular speaker knew that the particular forward-

looking statement was false, and/or the forward-looking statement was authorized and/or approved

by an executive officer of Yukos who knew that those statements were false when made.

PLAINTIFFS’ CLASS ACTION ALLEGATIONS

182. Plaintiffs bring this action as a class action pursuant to Federal Rule of Civil

Procedure 23(a) and (b)(3) on behalf of a Class, consisting of all those who purchased or otherwise

acquired the Yukos Securities between January 22, 2003 and October 25, 2003, inclusive (the

“Class”) and who were damaged thereby. Excluded from the Class are defendants, the officers and

directors of the Company, at all relevant times, members of their immediate families and their legal

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 representatives, heirs, successors or assigns and any entity in which defendants have or had a

controlling interest.

183. The members of the Class are so numerous that joinder of all members is

impracticable. Throughout the Class Period, Yukos Securities were actively traded over-the-

counter in the U.S., on the Russian Trading System (RTS) and the Moscow Interbank Currency

Exchange (MICEX) in Russia, as well as on worldwide markets on the following international

exchanges: Frankfurt, Munich, Stuttgart and Berlin Stock Exchanges and the London Stock

Exchange International Order Book. While the exact number of Class members is unknown to

plaintiff at this time and can only be ascertained through appropriate discovery, plaintiff believes

that there are tens of thousands of members in the proposed Class. Record owners and other

members of the Class may be identified from records maintained by Yukos or its transfer agent and

may be notified of the pendency of this action by mail, using the form of notice similar to that

customarily used in securities class actions.

184. Plaintiffs’ claims are typical of the claims of the members of the Class as all

members of the Class are similarly affected by defendants’ wrongful conduct in violation of federal

law that is complained of herein. Plaintiffs will fairly and adequately protect the interests of the

members of the Class and have retained counsel competent and experienced in class and securities

litigation.

185. Common questions of law and fact exist as to all members of the Class and

predominate over any questions solely affecting individual members of the Class. Among the

questions of law and fact common to the Class are:

(a) whether the federal securities laws were violated by defendants’ acts as

alleged herein;

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 (b) whether statements made by defendants to the investing public during the

Class Period misrepresented material facts about the business, operations, and management of

Yukos; and

(c) to what extent the members of the Class have sustained damages and the

proper measure of damages.

186. A class action is superior to all other available methods for the fair and efficient

adjudication of this controversy since joinder of all members is impracticable. Furthermore, as the

damages suffered by individual Class members may be relatively small, the expense and burden of

individual litigation make it impossible for members of the Class to individually redress the wrongs

done to them. There will be no difficulty in the management of this action as a class action.

COUNT I

Violation of Section 10(b) of

the Exchange Act and Rule 10b-5
Promulgated Thereunder Against All Defendants

187. Plaintiffs repeat and reallege each and every allegation contained above as if fully

set forth herein.

188. During the Class Period, defendants carried out a plan, scheme and course of

conduct which was intended to and, throughout the Class Period, did: (i) deceive the investing

public, including plaintiffs and other Class members, as alleged herein; and (ii) cause plaintiffs and

other members of the Class to purchase Yukos Securities at artificially inflated prices. In

furtherance of this unlawful scheme, plan and course of conduct, defendants, jointly and

individually (and each of them) took the actions set forth herein.

189. Defendants (a) employed devices, schemes, and artifices to defraud; (b) made untrue

statements of material fact and/or omitted to state material facts necessary to make the statements

not misleading; and (c) engaged in acts, practices, and a course of business which operated as a

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fraud and deceit upon the purchasers of the Company’s securities in an effort to maintain

artificially high market prices for Yukos Securities in violation of Section 10(b) of the Exchange

Act and Rule 10b 5. All defendants are sued either as primary participants in the wrongful and

illegal conduct charged herein or as controlling persons as alleged below.

190. Defendants, individually and in concert, directly and indirectly, by the use, means or

instrumentalities of interstate commerce and/or of the mails, engaged and participated in a

continuous course of conduct to conceal adverse material information about the business,

operations and future prospects of Yukos as specified herein.

191. These defendants employed devices, schemes and artifices to defraud, while in

possession of material adverse non-public information and engaged in acts, practices, and a course

of conduct as alleged herein in an effort to assure investors of Yukos’ value and performance and

continued substantial growth, which included the making of, or the participation in the making of,

untrue statements of material facts and omitting to state material facts necessary in order to make

the statements made about Yukos and its business operations and future prospects in the light of the

circumstances under which they were made, not misleading, as set forth more particularly herein,

and engaged in transactions, practices and a course of business which operated as a fraud and deceit

upon the purchasers of Yukos Securities during the Class Period.

192. Each of the Individual Defendants’ primary liability, and controlling person liability,

arises from the following facts: (i) the Individual Defendants were high-level executives and/or

directors at the Company during the Class Period and members of the Company’s management

team or had control thereof; (ii) each of these defendants, by virtue of his responsibilities and

activities as a senior officer and/or director of the Company was privy to and participated in the

creation, development and reporting of the Company’s internal budgets, plans, projections and/or

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reports; (iii) each of these defendants enjoyed significant personal contact and familiarity with the

other defendants and was advised of and had access to other members of the Company’s

management team, internal reports and other data and information about the Company’s finances,

operations, and sales at all relevant times; and (iv) each of these defendants was aware of the

Company’s dissemination of information to the investing public which they knew or recklessly

disregarded was materially false and misleading.

193. The defendants had actual knowledge of the misrepresentations and omissions of

material facts set forth herein, or acted with reckless disregard for the truth in that they failed to

ascertain and to disclose such facts. Such defendants’ material misrepresentations and/or omissions

were done knowingly or recklessly and for the purpose and effect of concealing Yukos’ operating

condition and future business prospects from the investing public and supporting the artificially

inflated price of its securities. As demonstrated by defendants’ overstatements and misstatements

of the Company’s business, operations and earnings throughout the Class Period, defendants, if

they did not have actual knowledge of the misrepresentations and omissions alleged, were reckless

in failing to obtain such knowledge by deliberately refraining from taking those steps necessary to

discover whether those statements were false or misleading.

194. As a result of the dissemination of the materially false and misleading information

and failure to disclose material facts, as set forth above, the market price of Yukos Securities was

artificially inflated during the Class Period. In ignorance of the fact that market prices of Yukos’

publicly-traded securities were artificially inflated, and relying directly or indirectly on the false

and misleading statements made by defendants, or upon the integrity of the market in which the

securities trade, and/or on the absence of material adverse information that was known to or

recklessly disregarded by defendants but not disclosed in public statements by defendants during

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the Class Period, plaintiffs and the other members of the Class acquired Yukos Securities during

the Class Period at artificially high prices and were damaged thereby.

195. At the time of said misrepresentations and omissions, plaintiffs and other members

of the Class were ignorant of their falsity, and believed them to be true. Had plaintiffs and the

other members of the Class and the marketplace known the truth regarding the problems that Yukos

was experiencing, which were not disclosed by defendants, plaintiffs and other members of the

Class would not have purchased or otherwise acquired their Yukos Securities, or, if they had

acquired such securities during the Class Period, they would not have done so at the artificially

inflated prices which they paid.

196. By virtue of the foregoing, defendants have violated Section 10(b) of the Exchange

Act, and Rule 10b-5 promulgated thereunder.

197. As a direct and proximate result of defendants’ wrongful conduct, plaintiffs and the

other members of the Class suffered damages in connection with their respective purchases and

sales of the Company’s securities during the Class Period.

COUNT II

Violation of Section 20(a) of the Exchange Act

Against the Individual Defendants, Menatep & Lebedev

198. Plaintiff repeats and realleges each and every allegation contained above as if fully

set forth herein.

199. The Individual Defendants, Menatep & Lebedev acted as controlling persons of

Yukos within the meaning of Section 20(a) of the Exchange Act as alleged herein. By virtue of

their high-level positions, and their ownership and contractual rights, participation in and/or

awareness of the Company’s operations and/or intimate knowledge of the false financial statements

filed by the Company with the SEC and disseminated to the investing public, the Individual

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Defendants, Menatep and Lebedev had the power to influence and control and did influence and

control, directly or indirectly, the decision-making of the Company, including the content and

dissemination of the various statements which plaintiff contends are false and misleading. The

Individual Defendants, Menatep, and Lebedev were provided with or had unlimited access to

copies of the Company’s reports, press releases, public filings and other statements alleged by

plaintiffs to be misleading prior to and/or shortly after these statements were issued and had the

ability to prevent the issuance of the statements or cause the statements to be corrected.

200. In particular, the Individual Defendants had direct and supervisory involvement in

the day-to-day operations of the Company and, therefore, are presumed to have had the power to

control or influence the particular transactions giving rise to the securities violations as alleged

herein, and exercised the same.

201. In particular, Menatep and Lebedev, through their ownership and/or control of

Yukos and the Individual Defendants, and their direct participation in the alleged tax evasion

scheme are presumed to have had the power to control or influence the particular transactions

giving rise to the securities violations as alleged herein, and exercised the same.

202. As set forth above, Yukos, the Individual Defendants, Menatep and Lebedev each

violated Section 10(b) and Rule 10b-5 by their acts and omissions as alleged in this Complaint. By

virtue of their positions as controlling persons, the Individual Defendants, Menatep and Lebedev

are liable pursuant to Section 20(a) of the Exchange Act. As a direct and proximate result of

defendants’ wrongful conduct, plaintiffs and other members of the Class suffered damages in

connection with their purchases of the Company’s securities during the Class Period.

WHEREFORE, plaintiff prays for relief and judgment, as follows:

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 A. Determining that this action is a proper class action and certifying plaintiffs as a class

representatives under Rule 23 of the Federal Rules of Civil Procedure;

B. Awarding compensatory damages in favor of plaintiffs and the other Class members

against all defendants, jointly and severally, for all damages sustained as a result of defendants’

wrongdoing, in an amount to be proven at trial, including interest thereon;

C. Awarding plaintiffs and the Class their reasonable costs and expenses incurred in this

action, including counsel fees and expert fees;

D. Awarding extraordinary, equitable and/or injunctive relief as permitted by law, equity

and the federal statutory provisions sued hereunder, pursuant to Rules 64 and 65 and any appropriate

state law remedies to assure that the Class has an effective remedy; and

E. Such other and further relief as the Court may deem just and proper.

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 JURY TRIAL DEMANDED

Plaintiffs hereby demand a trial by jury.

DATED: March 9, 2005 LERACH COUGHLIN STOIA GELLER

RUDMAN & ROBBINS LLP
SAMUEL H. RUDMAN (SR-7957)
ROBERT M. ROTHMAN (RR-6090)

s/SAMUEL H. RUDMAN

200 Broadhollow Road, Suite 406

Melville, NY 11747
Telephone: 631/367-7100
631/367-1173 (fax)

LERACH COUGHLIN STOIA GELLER

RUDMAN & ROBBINS LLP
WILLIAM S. LERACH
DARREN J. ROBBINS
401 B Street, Suite 1700
San Diego, CA 92101
Telephone: 619/231-1058
619/231-7423 (fax)

MURRAY, FRANK & SAILER LLP

BRIAN P. MURRAY (BM-9954)
ERIC J. BELFI (EB-8895)
275 Madison Avenue
8th Floor
New York, NY 10016
Telephone: 212/682-1818
212/682-1892619/231-7423 (fax)

LEAD PLAINTIFFS’ CO-LEAD COUNSEL

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