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. Because 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.”

The complaint alleges that from 2000 through 2003, Yukos grossly underpaid its taxes to the Russian Federation by illegally taking advantage of the ZATOs’ preferential tax treatment. According to the complaint, Yukos booked oil sales at “well below” market prices to seventeen 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 low-tax market-price sales.

The complaint alleges that the regional trading companies 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 risk was not disclosed in any of the Yuko’s filings with the SEC. Also, what was filed with the SEC was allegedly not prepared in conformity with U.S. GAAP or other standards of financial reporting.