24 Jul Week 5 Case Analysis? Case 7.1 In re Yukos Oil Company Securities Litigation 2006 WL 3026024 (S.D.N.Y.) (Pages 233-235 in the textbook) Address in detail all three questions. You

Week 5 Case Analysis

Case 7.1 In re Yukos Oil Company Securities Litigation 2006 WL 3026024 (S.D.N.Y.) – (Pages 233-235 in the textbook)

Address in detail all three questions.

You must be able to apply the material learned. Legal doctrines and principles must not only be remembered but also used to solve specific concrete problems. Your grasp of the material will be measured through your application of legal doctrines and principles to a case.

Case Analysis Guide (Use the Case Analysis Format Provided in the Course Resources – Case Brief, Issue, Holdings, and Legal Conflict) plus the below:

1. You must give quality answers that show mastery of the case, using clear logic, and supporting facts. Also, the answers must directly address the case.

2. Case Analyses test the understanding of key elements of Legal and Ethical Environments of Business therefore they must be thoroughly addressed.

3. You must use citations with references to document information obtained from sources. The key elements of Legal and Ethical Environments of Business are found in the sources listed in the syllabus (it is your duty to search for them, read, analyze, evaluate, summarize, paraphrase in your answers, and cite the authors who wrote the articles, books, term papers, memoirs, studies, etc. What it means is that you will have  not less than 4 references from the listed sources.

4. Grammatically correct paper, no typos, and must have obviously been proofread for logic.

5. Questions must be typed out as headings, with follow-up answers in paragraph format, and a summary or conclusion at the end of the paper as set in the outline to be provided by the professor.

This Case Analysis must be in APA format

Case 7.1. When Putin Affects the Value of Oil Stock In re Yukos Oil Company Securities Litigation 2006 WL 3026024 (S.D.N.Y.)

Facts

Yukos is a Moscow-based joint-stock company whose shares trade on the Russian stock exchange. Yukos shares also trade indirectly on multiple European exchanges and over-the-counter in the United States.

Allegedly, Khodorkovsky was part of a select group of Russian business leaders known as “oligarchs” who supported former Russian President Boris N. Yeltsin but were politically opposed to current Russian President Vladimir V. Putin.

The Tax Code of the Russian Federation prescribed a maximum income tax rate that incorporated two components: a tax payable to the federal budget and a tax payable to the budget of the taxpayer’s local region. For example, in 2004, the statutory maximum rate was 24%, of which up to 6.5% could be collected by the federal government and up to 17.5% by regional governments. The Tax Code also prescribed a minimum rate for taxes payable to regional governments. In 2004, that rate was 13.5%. However, the regional governments could offer tax benefits to reduce or even eliminate the regional budget liability of certain categories of taxpayers. As a result of this regional variance in the effective income tax rate, taxpayers in the metropolitan regions of the Russian Federation, such as Moscow, paid higher taxes than taxpayers in remote regions, or “ZATOs.”

From 2000 through 2003, Yukos allegedly grossly underpaid its taxes to the Russian Federation by illegally taking advantage of the ZATOs’ preferential tax treatment. Yukos allegedly booked oil sales at “well below” market prices to 17 trading companies, all of which were registered within ZATOs. Without taking physical possession, the trading companies sold the oil to customers at market prices and claimed the tax benefits of their ZATOs. However, the profits were “funneled … back to Yukos and Yukos paid taxes only on the initial below-market sales while reaping substantial profits from the [actual] market-price sales.”

The regional trading companies may have received the benefits of ZATO registration illegitimately because “[n]o business was actually conducted by the sham companies in the ZATOs.” This Yukos tax strategy presented enormous risk because it violated Russian law and because the Russian Federation had prosecuted other companies that had acted similarly. Nonetheless, the tax risk was not disclosed in any of the Yuko’s filings with the SEC. Also, what was filed with the SEC was not prepared in conformity with U.S. GAAP or other standards of financial reporting.

At a secret meeting with Khodorkovsky and other oligarchs in 2000, Putin promised not to investigate potential wrongdoing at their companies if the oligarchs refrained from opposing Putin. Nearly three years later, at another such meeting, Khodorkovsky was said to have voiced his opinion that high-level officials in Putin’s government should be ousted. According to the shareholders (plaintiffs), Putin reacted negatively and intimated to Khodorkovsky that the Russian Federation might investigate Yukos’ methods of acquiring oil reserves. Despite Putin’s warnings, Khodorkovsky publicly criticized Putin and financed opposition parties.

On October 25, 2003, Russian Federation authorities arrested Khodorkovsky and charged him with fraud, embezzlement and evasion of personal income taxes. Days later, the Russian Government seized control of Khodorkovsky’s 44% interest in Yukos as security against the approximately $1 billion he owed in taxes. The Tax Ministry then revealed that it had been investigating Yukos’ tax strategies. The Department of Information and Public Relations of the General Prosecutors Office then announced charges that it had accused Khodorkovsky and others of fraudulently operating an illegal scheme at Yukos to avoid tax liability through shell company transactions.

On December 29, 2003, the Tax Ministry concluded its audit of Yukos for tax year 2000 and issued a report that Yukos had illegally obtained the benefit of the ZATOs’ preferential tax treatment and owed $3.4 billion to the Russian Federation in back taxes, interest, and penalties for tax year 2000.

As a result, Yukos defaulted on a $1 billion loan from private lenders, and the Russian government confiscated Yukos’ assets, including its main production facility and billions of dollars from its bank accounts. The price of Yukos securities “plummeted” in response to these events.

Yukos shareholders (plaintiffs) filed consolidated class actions against Khodorkovsky and others (defendants) on July 2, 2004. The U.S. plaintiffs had purchased Yukos securities between January 22, 2003, and October 25, 2003. They allege that Yukos, its outside auditor, and certain of its executives and controlling shareholders knowingly concealed the risk that the Russian Federation would take action against Yukos by failing to disclose:

(1) that Yukos had employed an illegal tax evasion scheme since 2000 and

(2) that Khodorkovsky’s political activity exposed the company to retribution from the current Russian government.

The plaintiffs based their claims on the fraud provision, Section 10(b), of the Securities Exchange Act.

Judicial Opinion

PAULEY, District Judge

Defendants contend that that this Court must abstain under the act of state doctrine.

Firmly entrenched as a principle of jurisprudence, the act of state doctrine prevents the courts of the United States from “question[ing] the validity of public acts (acts jure imperii) performed by other sovereigns within their own borders.” The doctrine “has its roots, not in the Constitution, but in the notion of comity between independent sovereigns.” It also venerates the separation of powers within the federal Government by precluding the judiciary from deciding matters of foreign policy that are properly the province of the executive and legislative branches.

Defendants urge this Court to abstain under the act of state doctrine because “[t]he adjudication of this dispute inevitably will require this Court to inquire into the actions and motives of the Russian Government in imposing confiscatory tax levies, penalties and interest on Yukos.” Implicit in their argument and resplendent in other portions of their motion papers is the notion that the Russian Federation targeted Yukos unforeseeably and that the Tax Ministry’s interpretation of the Russian Federation Tax Code was without precedent. Defendants have not cited any precedent invoking the act of state doctrine to abstain from adjudicating a securities fraud action. Under the arguments advanced by Defendants, the doctrine would mandate abstention from any action in which a foreign corporation is alleged to have concealed conduct deemed illegal by its home country upon a defendant’s mere assertion that the sovereign’s determination was in error. Such an application of the act of state doctrine would effectively insulate foreign corporations from a large swath of securities fraud claims by United States investors.

The act of state doctrine does not preclude a court from deciding a case that implicates the motives or justifications of a foreign sovereign’s official act but does not seek to invalidate or circumvent that act. Rather, the doctrine applies only “when a court must decide—that is, when the outcome of the case turns upon—the effect of official action by a foreign sovereign.” The act of state doctrine does not compel abstention from “cases and controversies that may embarrass foreign governments, but merely requires that, in the process of deciding, the acts of foreign sovereigns taken within their own jurisdiction shall be deemed valid.”

The Yukos Defendants contend that “any defense by Yukos beyond the pleadings stage necessarily will involve its claims that it was denied due process, and that it never would have suffered the consequences of having its business confiscated, had the Russian government properly applied Russian law.” However, whether Yukos received due process in Russia is irrelevant. Neither party in this action seeks to enforce or disturb the actions taken by the Russian Federation. Moreover, in this action, the pertinent loss-causation inquiry concerns Defendants’ alleged misstatements or omissions and the losses suffered by Yukos investors—not the propriety of the Russian Federation’s tax enforcement and penal actions. The central question is whether Defendants acted with fraudulent intent in withholding information from the investing public. Even if Defendants prevail with their arguments that the Russian Federation’s interpretation of Russian law was untenable, the validity of the Russian Federation’s acts would be unaffected.

Under the act-of-state doctrine, the assessment of the validity of a foreign law is limited to its application within the sovereign’s territory; under the revenue rule, United States courts avoid the application of a foreign sovereign’s tax laws in the United States. Both approaches enable courts to avoid entanglement with questions about the underlying validity of a foreign sovereign’s laws.

Because Plaintiffs here are not asking this Court to enforce the Russian tax judgments, this Court need not evaluate the policies behind the Russian Federation’s tax legislation or the regional variance among effective federal income tax rates which Yukos is alleged to have exploited.

In sum, this Court is not being called on to either invalidate or enforce the Russian Federation’s measures, nor will the validity of those sovereign acts have any bearing on Defendants’ motions to dismiss or on questions likely to affect the merits of this litigation. As such, the act of state doctrine does not warrant abstention. The case was dismissed on grounds other than the act of state doctrine.

Case Questions

Describe how Yukos is alleged to have saved significant amounts in taxes.

Explain what act of the Russian Federation is in question.

What are the plaintiffs asking the court to decide? Does that decision require revisiting what the Russian Federation did, and why or why not?