Yukos faces shareholder lawsuits, assets seizure for taxes

By OGJ editors

HOUSTON, July 19 -- Russia's OAO Yukos will be required to pay about $3.3 billion for payment of 2000 taxes because of a significant understatement of its tax liability, said Connecticut-based law firm Scott & Scott LLC, which last week filed a shareholders' class action lawsuit against the oil giant.

Russia's tax ministry also "intends to audit Yukos for 2001-03 based upon the same [tax evasion] charges," Scott & Scott added. Yukos ultimately could be expected to pay more than $10 billion to the tax ministry for taxes owed as the result of an illegal tax fraud scheme with which Yukos is charged.

Putting a potentially disastrous squeeze on the company, Russian tax collectors have obtained a court order demanding immediate payment of Yukos' back tax bills and approval to seize and sell its assets. Yukos has said it would be forced to shut down if that happened. The company, one of Russia's leading vertically integrated oil companies and one of the world's largest nonstate-owned oil companies, is responsible for about a fifth of Russia's oil production.

In an effort to save the company, Yukos has offered the Russian government a $7.5 billion tax settlement, according to a Reuters report citing the Russian Interfax news service. Under terms of the offer, Yukos would give the government its 35%, $4.7 billion stake in recently acquired OAO Sibneft as a deposit and would make payments over 3 years to cover the remaining 2000-03 back taxes.

Shareholder lawsuits
Meanwhile two class action lawsuits have been filed in the US against Yukos on behalf of shareholders that purchased Yukos securities during Feb. 13-Oct. 25, 2003 and those who acquired Yukos shares through its acquisitions of Sibneft, OOO Geoilbent, and Vostochnaya Neftyanaya Co. of Tomsk, Russia.

The suits, filed in the US District Court for the Southern District of New York, allege that Yukos, certain officers and directors, and its accounting advisors violated the Securities Exchange Act of 1934 by issuing materially false statements and creating a complex network of "shell" companies to evade taxes on the production, refining, and sale of crude oil and its products.

"These shell companies were registered in territories with preferential tax treatment in order to receive special tax exemptions and minimize tax liability," stated Hartford, Conn-based law firm Schatz & Nobel PC, which filed one of the lawsuits. "Since these shell companies were not separate legal entities [because Yukos maintained control over them], Yukos was required to recognize the full amount of the receipts associated with these transactions for its own tax purposes and was not entitled to the preferential tax treatment these shell companies were granted," said Schatz & Nobel. "Accordingly, Yukos' tax liability was understated and its earnings materially overstated in violation of GAAP (generally accepted accounting principles)".

Yukos' main shareholder, former CEO Michael Khordorkovsky was arrested last October and charged with fraud, embezzlement, and tax evasion. Many observers initially blamed the arrest and the company's financial difficulties on the Kremlin's opposition to Khodorkovsky's political ambitions (OGJ Online, Oct. 28, 2003). Khodorkovsky currently is undergoing trial in Russia on the tax evasion and fraud charges.

Following his arrest, authorities announced they also would pursue criminal prosecutions against other senior Yukos officials.

"As a result of the revelation of defendants' wrongdoing, investors have suffered massive damages as the price of Yukos' securities plummeted," said Scott & Scott.