Case 1:04-cv-05243-WHP Document 4 Filed 08/26/04 Page 1 of 27
UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK
x ROXWELL HOLDINGS LIMITED, : Civil Action No. 04-cv-5243 (WHP) Individually and on Behalf of All Others : Similarly Situated, : CLASS ACTION : Plaintiff, : FIRST AMENDED COMPLAINT FOR : VIOLATIONS OF THE FEDERAL vs. : SECURITIES LAWS
YUKOS OIL COMPANY, GROUP : MENATEP LIMITED, YUKOS : UNIVERSAL LIMITED, : PRICEWATERHOUSE COOPERS LLP, : MIKHAIL KHODORKOVSKY, PLATON : LEBEDEV, BRUCE MISAMORE, VASILY : SHAKNOVSKY AND CURTIS & CO., : Defendants. : : : x DEMAND FOR JURY TRIAL
This writing/publication is a creative work fully protected by all applicable copyright laws, as well as by misappropriation, trade secret, unfair competition and other applicable laws. The authors of this work have added value to the underlying factual materials herein through one or more of the following: unique and original selection, coordination, expression, arrangement, and classification of the information. No copyright is claimed in the text of statutes, regulations, and any excerpts from analysts’ reports or news articles quoted within this work. Copyright© 2004 by William S. Lerach and Lerach Coughlin Stoia & Robbins LLP. William S. Lerach and Lerach Coughlin Stoia & Robbins LLP will vigorously defend all of their rights to this writing/publication. All rights reserved – including the right to reproduce in whole or in part in any form. Any reproduction in any form by anyone of the material contained herein without the permission of William S. Lerach and Lerach Coughlin Stoia & Robbins LLP is prohibited. Case 1:04-cv-05243-WHP Document 4 Filed 08/26/04 Page 2 of 27
INTRODUCTION & OVERVIEW
1. This is a securities fraud class action on behalf of purchasers of the common stock of
Yukos Oil Company’s (“Yukos” or the “Company”) or Yukos American Depository Shares
(collectively, “Yukos’ Securities”), between February 13, 2003 and October 25, 2003, inclusive (the
“Class Period”), seeking to pursue remedies under the Securities Exchange Act of 1934 (the
“Exchange Act”).
2. On October 25, 2003, the market for Yukos’ Securities (one of Russia’s largest publicly-owned oil companies), was crushed after it was revealed that Russian authorities had
arrested the Company’s largest shareholder and CEO, defendant Mikhail Khodorkovsky, and had
charged him with fraud, embezzlement and evading taxes on hundreds of millions of dollars that was
owed to the government. At this time, the Russian authorities also announced that they would also pursue criminal prosecutions against other senior Yukos officials.
3. 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 this time, Russian authorities estimated that Yukos and defendant Khodorkovsky had failed to pay at least US$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.
4. 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
defendants Khodorkovsky and Platon Lebedev, both major shareholders of the Company, with a host
of fraud, tax evasion and criminal activities dating back to the early 1990’s, including:
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• That Khodorkovsky had acted in concert with other members of the Company and members of Menatep Bank (a bank founded by defendant Khodorkovsky), to operate a host of shell companies, the sole purpose of which was to illegally avoid 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 and the same time they falsely projected that they were “new” Russian managers who no longer conducted themselves as they did in the 1990’s.
. That Khodorkovsky and Lebedev were accused of stealing tens or hundreds of millions of dollars directly from the Company and its subsidiaries.
5. Ultimately at year end 2003, the Russian 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. 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 in order to minimize Yukos’ tax liability. As these shell companies were not separate
legal entities but rather Yukos maintained control over the operations of these organizations, Yukos
was required to recognize the full amount of the receipts associated with these transactions for its
own taxes purposes and further it was not entitled to the preferential tax treatment these shell
organizations were granted. Accordingly, Yukos’ tax liability was materially understated and its
earnings were materially overstated for the period in violation of GAAP.
6. It is now projected that through this abusive tax scheme Yukos has avoided the payment of at least US$5 billion and as much as US$10 billion – the minimum amount of which was
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sufficient to push the Company into bankruptcy. By late October, shares of Yukos’ Securities traded
down over 30% from their Class Period high reached only a few weeks earlier.
7. As a result of the revelation of defendants’ wrongdoing, investors have suffered
massive damages as the prices of their Yukos equity shares have plummeted. In addition to the
foregoing, defendants have also now jeopardized the continued financial and operational well being
of Yukos. Billions of dollars in Company debt and pending loans are now in jeopardy, and the
Russian government has stated that it may assume defendant Khodorkovsky’s entire equity share as punishment for failing to pay the billions of dollars in taxes owed to that government.
JURISDICTION AND VENUE
8. 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].
9. 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].
10. 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.
11. In addition, pursuant to the provisions of the Agreement governing the ADSs, 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 .
12. 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.
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PARTIES
13. Plaintiff ROXWELL HOLDINGS LIMITED (“Roxwell”) as set forth in the accompanying certification, incorporated by reference herein, purchased Yukos Securities at artificially inflated prices during the Class Period and has been damaged thereby.
14. 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 Securities shares of the Company also trade as American
Depositary Shares (“ADS”) on the Over the Counter Exchange. Each ADS unit represents 4 shares of Yukos common stock. Yukos is a leading Russian vertically-integrated oil company.
15. Defendant YUKOS UNIVERSAL LIMITED (“Yukos Universal”) is a holding company organized under the laws of the Isle of Man. During the Class Period, Yukos Universal owned and/or controlled at least 61% of the outstanding shares of the Company. Yukos Universal is owned and/or controlled by defendant Khodorkovsky as a result of his ownership and/or control over
Menatep Limited.
16. 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, Menatep owned and/or controlled 100% of Yukos Universal, which in turn was owned and/or controlled by defendant Khodorkovsky.
17. Defendant PRICEWATERHOUSECOOPERS INTERNATIONAL LIMITED, head- quartered in New York City, New York, is a professional services organization with member firms around the world, including members in the United States and New York. Defendants
PricewaterhouseCoopers LLP (U.K.), PricewaterhouseCoopers LLP (U.S.A.) and
PricewaterhouseCoopers Russia are part of PricewaterhouseCoopers International Limited
(collectively with PricewaterhouseCoopers International Limited “PWC”). Prior to and throughout
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the Class Period defendant PWC served as the Company’s independent, outside auditors. Also,
during the Class Period, defendant PWC certified the Company’s year-end financial statements and
also opined on the validity of Yukos’ interim financial results during this period, and regularly provided reports to the Board of Directors of Yukos and its shareholders.
18. 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, after which time he was arrested for fraud, tax evasion and other
crimes and after which his 44% interest in the Company was seized by Russian authorities.
19. Defendant PLATON LEBEDEV (“Lebedev”) was during the relevant period, a direct
and/or beneficial owner of 7% of Menatep. Defendant Lebedev maintained dominance and control
over Menatep, along with defendant Khodorkovsky and Shaknovsky, until such time as defendant
Lebedev was arrested by Russian authorities for fraud, tax evasion and other crimes. Defendant
Lebedev, like defendant Khodorkovsky, currently awaits trial in prison in Russia.
20. Defendant BRUCE K. MISAMORE (“Misamore”) was during the Class Period,
Chief Financial Officer and Principal Accounting Officer for the Company. Thus, 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.
21. Defendant VASILY SHAKNOVSKY (“Shaknovsky”) was during the relevant period, a direct and/or beneficial owner of 7% of Menatep. Defendant Shaknovsky maintained
dominance and control over Menatep, along with defendants Khodorkovsky and Lebedev, until such
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time as defendant Shaknovsky was arrested by Russian authorities for fraud, tax evasion and other
crimes. Defendant Shaknovsky was convicted of tax fraud and served time in prison.
22. Defendant CURTIS & CO. (“Curtis Co.”) is a company organized under the laws of
the United Kingdom. Beginning in the 1990’s, Curtis Co., through its owner, Stephen Curtis, served
as the “corporate mastermind” for organizing a myriad of offshore structures used by Menatep and
its beneficial owners which were used as part of the scheme of embezzlement, tax fraud, and money
laundering described herein. Curtis served as the de facto manager of Menatep and Yukos Universal
during the relevant time period and thus maintained control over Yukos.
23. Khodorkovsky, Lebedev, Shaknovsky and Misamore are referred to herein as the
“Individual Defendants.”
24. 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.
25. 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.
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26. 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. Said 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.
27. As officers and/or controlling persons of a publicly-held company whose common
stock was, and is, registered with the SEC pursuant to the Exchange Act, and was traded on the
Over-the-Counter Market Exchange (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.
28. 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
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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.
29. 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
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.
30. 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 common stock 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 falsifying 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 plaintiff and other members of the Class to purchase Yukos Securities at artificially
inflated prices.
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PLAINTIFF’S CLASS ACTION ALLEGATIONS
31. Plaintiff brings 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 February 13, 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
representatives, heirs, successors or assigns and any entity in which defendants have or had a
controlling interest.
32. 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.
33. Plaintiff’s 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. Plaintiff will fairly and adequately protect the interests of the members of the
Class and has retained counsel competent and experienced in class and securities litigation.
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34. 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;
(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.
35. 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.
SUBSTANTIVE ALLEGATIONS
Defendants’ Materially False and Misleading Statements Made During the Class Period
36. On February 13, 2003, it was announced on the Dow Jones International News
service that Yukos had a “strong operating profit” driven by “soaring export volumes” for its fiscal
third quarter 2002. According to the Dow Jones release, Yukos reported EBITDA of US$1.3 billion,
9.5% higher than consensus forecasts of US$1.26 billion for 3Q:F02, yet with a net profit of just
above US$850 million, significantly below the analysts’ consensus estimates of US$971 million.
According to the Company, Yukos profits were “pushed down” in the quarter as a result of the
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Company being forced to recognize certain taxes which defendants had previously “deferred” during
the consolidation of certain production subsidiaries.
37. In order to reassure investors and avoid a collapse in Yukos’ Securities, these tax
issues were described by the Company’s CFO as one time events and defendant Misamore assured
investors that Yukos was reviewing its tax accounting and expense policies so as to assure accuracy
and compliance, stating that, “We 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.”
38. Unbeknownst to investors, however, the statements contained in Yukos’ February 13,
2003 announcement reported by the press and referenced above, were each materially false and
misleading when made. The true facts which were then known or recklessly disregarded by
defendants were:
(a) That the Company’s financial statements were not prepared in conformity
with U.S. GAAP or with any fair or accepted statements of reporting since, throughout the Class
Period, defendants failed to report billions of dollars in taxes, which if paid would have wiped out
much of the Company’s earnings during this time period;
(b) That the Company was not abiding by or supporting Russia’s tax reform
efforts, and despite defendants’ public support for such laws, defendants caused Yukos to illegally
evade an estimated US$5 – US$10 billion in taxes;
(c) Throughout the Class Period, because defendants failed to properly pay billions of dollars in taxes on its income and operations, that it was also not foreseeable at any time
during the Class Period that Yukos would be able to achieve the profitability claimed by defendants;
and
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(d) As a result of the aforementioned adverse conditions which defendants
concealed throughout the Class Period, defendants lacked any reasonable basis to claim that Yukos
was operating according to plan or that the Company could maintain profitability or even remain a
viable entity in the foreseeable near-term.
39. Sibneft Acquisition . 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 raced to the worldwide markets to announce the huge stock-based acquisition of Sibneft
(a.k.a the “Siberian Oil Company”), one of Russia’s largest oil producers, paying $3 billion in cash plus 26% equity interest in Yukos for a controlling interest in Sibneft and its capital. This
acquisition would have created the undisputed leader in Russian oil production and the fourth-largest
oil company in the world.
40. Unbeknownst to shareholders, however, the statements made by defendants at the
time the Sibneft merger was announced, referenced above, were each materially false and misleading
when made, and were known by defendants to be false or were recklessly disregarded as such
thereby, for the reasons stated herein in ¶38, supra.
41. On May 19, 2003, the Company issued a release which purported to announce U.S.
GAAP results for the fourth quarter and full year 2002, which results were purportedly reviewed by
PricewaterhouseCoopers, the Company’s “independent” auditors. According to the Company’s
release, for 4Q:F02 Yukos reported net income and earnings per share for the fourth quarter reached
US$988 million and US$0.46, respectively, compared to US$423 million and US$0.20 per share,
respectively, for 4Q:F01. In addition to the foregoing, this release also stated that for FY:02 Yukos
reported net income and earnings per share for 2002 reportedly reached US$3.058 billion and
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US$1.42, respectively, compared to US$3.156 billion and US$1.47 per share, respectively, for the prior year.
42. The statements made by defendants and contained in the Company’s May 19, 2003
announcement and the statements contained in the Company’s FY:02 Annual Financial Report, were
each materially false and misleading when made, and were known by defendants to be false or were
recklessly disregarded as such thereby, for the reasons stated herein in ¶38, supra.
43. On July 7, 2003, the Company issued a release which purported to announce a “sharp
increase” in results for the 1Q:F03 – which results were allegedly prepared in accordance with US
GAAP and reviewed by Pricewaterhouse Coopers. According to the Company’s release, for 1Q:F03
Yukos reported net earnings and earnings per share for the quarter purportedly reached US$1.267 billion and US$0.59, respectively, compared to US$0.462 billion and US$0.21 per share,
respectively, for 1Q:F02.
44. The statements made by defendants and contained in the Company’s July 7, 2003
announcement and the statements contained in the Company’s 1Q:F03 Financial Report, were each
materially false and misleading when made, and were known by defendants to be false or were
recklessly disregarded as such thereby, for the reasons stated herein in ¶38, supra.
45. On October 20, 2003, Reuters news service reported that Yukos had announced
stellar results for 2Q:F03, beating forecasts, and raised forecasts for 3Q:F03. According to the
Company, for 2Q:F03 net profit rose 25% to US$955 million, compared to the same period the prior
year – trouncing consensus forecasts of US$871 million. The decline of 25% from the US$1.27 billion reported in 1Q:F03 was also less than expected. According to defendant Khodorkovsky, who
appeared on a conference call that day, “profitability remains fairly high... and we are not
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expecting it to deteriorate, especially since oil prices in the second quarter were lower than in the first and third quarters.”
46. The statements made by defendants and contained in the Company’s October 20,
2003 announcement and the statements contained in the Company’s 2Q:F03 Financial Report, were
each materially false and misleading when made, and were known by defendants to be false or were
recklessly disregarded as such thereby, for the reasons stated herein in ¶38, supra.
THE TRUE ILLEGAL ACTIVITIES OF THE INDIVIDUAL DEFENDANTS BEGIN TO BE BELATEDLY DISCLOSED
47. 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. According to Dow Jones,
defendant Khodorkovsky had been forcibly detained in Siberia and brought back to Moscow in police custody after two busses full of armed and camouflaged Federal Security Services officers boarded defendant Khodorkovsky’s private plane and escorted him from the Siberian airport.
48. Russian news source Interfax, quoting a representative of the Russian prosecutors’
office, 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.
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49. The news of Khodorkovsky’s arrest immediately impacted the price of Yukos’
Securities, falling 11% on October 27, 2003 over the previous business day’s close on nearly four
times the volume.
50. Russian Seizure . In late October of 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 US$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.”
51. 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.
52. By the end of 2003, investors were further shocked and alarmed to learn that Yukos
and defendant Khodorkovsky were now being charged with evasion of taxes of at least US$5 billion
and possibly as much as US$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. Also according to Dow Jones, it was rumored that
the Company’s tax liability could reach as high as US$10 billion. According to analysts familiar
with Yukos and the Russian oil and gas markets, a withdrawal of even the US$5 billion would push
the Company to the brink of bankruptcy. Therefore, 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
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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’s registrars from carrying out any operations making any changes to the register regarding stock transfers carried out by Yukos, the press service said.
53. 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, Yukos common stock traded at artificially inflated prices during the Class Period. Plaintiff
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.
54. 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.
55. 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 plaintiff 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. Defendants’ materially false and misleading
statements during the Class Period resulted in plaintiff and other members of the Class purchasing
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the Company’s securities at artificially inflated prices, thus causing the damages complained of
herein.
ADDITIONAL SCIENTER ALLEGATIONS
56. 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 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.
57. 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.
VIOLATIONS OF GAAP AND SEC REPORTING RULES
58. Prior to and during the Class period, defendants materially misled the investing public, thereby inflating the price of the Company’s securities, by publicly issuing false and
misleading statements about Yukos’ financial results 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 financial performance,
accounting, reporting, and financial condition in violation of the federal securities laws and GAAP.
59. The fiscal 2002 and 2003 results were included in press releases and financial
statements disseminated to the investing public. These filings represented that the financial
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information was a fair statement of the Company’s financial results and that the results were prepared in accordance with GAAP.
60. These representations were false and misleading as to the financial information
reported, as such financial information was not prepared in conformity with GAAP, nor was the
financial information “a fair presentation” of the Company’s operations due to the Company’s
improper accounting for its taxes and its contingent liabilities, causing the financial results to be presented in violation of GAAP.
61. GAAP consists of those principles recognized by the accounting profession as the
conventions, rules, and procedures necessary to define accepted accounting practice at the particular
time.
62. In order to overstate its earnings and to understate its tax liability for the period,
Yukos engaged in an illegal tax evasion scheme by creating fake organizations in the oil and after- product movement chain and further by registering these fake organizations in territories with preferential tax treatment. Defendants’ scheme was designed to avoid payment of the following
types of taxes: profit tax, value-added tax, motorway user tax, tax on the sales of petroleum, and oils
and lubricants and housing stock and social amenities maintenance tax on the amount of receipts
from oil and after-product sales. Ultimately, Yukos, which has been audited by the Tax Ministry of
Russia for its fiscal year 2000 tax returns, will be required to pay approximately $3.4 billion for 2000
alone due to its understatement of its tax liability, including interest and penalties. The Tax Ministry
intends to audit Yukos’ books for 2001-2003 based upon the same charges. Yukos could ultimately be expected to pay upwards of $10 billion to the Tax Ministry for its involvement in its illegal tax
evasion scheme.
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63. Further, the undisclosed adverse information concealed by defendants during the
Class Period is the type of information which, because of standards set by the U.S. accounting profession, regulations of the national stock exchanges and customary business practice, is expected by investors and securities analysts to be disclosed and is known by corporate officials and their
legal and financial advisors to be the type of information which is expected to be and must be
disclosed.
64. In addition to the foregoing, GAAS, as approved and adopted by the American
Institute of Certified Public Accountants (“AICPA”), relate to the conduct of individual audit
engagements. Statements on Auditing Standards (“SAS”) are recognized by the AICPA as the
interpretation of GAAS.
65. PWC’s responsibility, as Yukos’ independent auditor, included determining
“[s]ufficient 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.
66. In certifying Yukos’ 2002 year-end financial statements and 2003 interim statements,
PWC represented that its audit/reviews had been made in accordance with GAAS. These statements
were false and misleading in that PWC knew or was reckless in failing to discover that its
audit/reviews were not performed in accordance with GAAS.
NO SAFE HARBOR
67. 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
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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.
COUNT I
Violation Of Section 10(b) Of The Exchange Act And Rule 10b-5 Promulgated Thereunder Against All Defendants
68. Plaintiff repeats and realleges each and every allegation contained above as if fully set forth herein.
69. 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 plaintiff and other Class members, as alleged herein; and (ii) cause plaintiff 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.
70. 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 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
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5. All defendants are sued either as primary participants in the wrongful and illegal conduct charged
herein or as controlling persons as alleged below.
71. 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.
72. 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.
73. 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 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
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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.
74. 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.
75. 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 the
Class Period, plaintiff and the other members of the Class acquired Yukos Securities during the
Class Period at artificially high prices and were damaged thereby.
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76. At the time of said misrepresentations and omissions, plaintiff and other members of the Class were ignorant of their falsity, and believed them to be true. Had plaintiff 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, plaintiff 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.
77. By virtue of the foregoing, defendants have violated Section 10(b) of the Exchange
Act, and Rule 10b-5 promulgated thereunder.
78. As a direct and proximate result of defendants’ wrongful conduct, plaintiff 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 Individual Defendants
79. Plaintiff repeats and realleges each and every allegation contained above as if fully set forth herein.
80. The Individual Defendants 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 Defendants 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
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are false and misleading. The Individual Defendants were provided with or had unlimited access to
copies of the Company’s reports, press releases, public filings and other statements alleged by plaintiff 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.
81. In particular, each of these defendants had direct and supervisory involvement in the
day-to-day operations of the Company and, therefore, is 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.
82. As set forth above, Yukos and the Individual Defendants 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 are liable pursuant to Section 20(a) of the
Exchange Act. As a direct and proximate result of defendants’ wrongful conduct, plaintiff 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:
A. Determining that this action is a proper class action, designating plaintiff as Lead
Plaintiff and certifying plaintiff as a class representative under Rule 23 of the Federal Rules of Civil
Procedure;
B. Awarding compensatory damages in favor of plaintiff 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 plaintiff and the Class their reasonable costs and expenses incurred in this
action, including counsel fees and expert fees;
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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.
JURY TRIAL DEMANDED
Plaintiff hereby demands a trial by jury.
DATED: August 26, 2004 LERACH COUGHLIN STOIA GELLER RUDMAN & ROBBINS LLP SAMUEL H. RUDMAN (SR-7957) DAVID A. ROSENFELD (DR-7564)
/s/ David A. Rosenfeld DAVID A. ROSENFELD
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)
LAW OFFICES OF MICHAEL A. SWICK, PLLC MICHAEL SWICK (MS - 9970) One William Street, Suite 900 New York, NY 10004 Telephone: 212/584-0770 212/584-0799 (fax)
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SCOTT + SCOTT LLC DAVID R. SCOTT 108 Norwich Avenue Colchester, CT 06415 Telephone: 860/537-5537 860/537-4432 (fax)
Attorneys for Plaintiff
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