Shearman & Sterling’s Emmanuel Gaillard and Yas Banifatemi. (Photo by Stephane Remael)

The hoodie that Shearman & Sterling’s Yas Banifatemi wore as she prepared for trial in October 2012 had the Russian word for “Victory” on the back. On the front was the logo of a shirtless Vladimir Putin riding on the wings of a raptor.

Banifatemi was about to second-seat a $114 billion arbitration brought by the majority shareholders of OAO Yukos Oil Company against the Russian Federation. To keep up the spirits of the Shearman team, padding around a hotel in The Hague as they prepped their case, she had sponsored a contest for joke T-shirts and sweatshirts. Some of the other lawyers wore T-shirts displaying Putin as Uncle Sam, pointing his finger and declaring candidly: “I want Yukos!”

That Putin coveted their company was long obvious to Yukos’ majority shareholders. In fall 2003, Russia arrested Yukos chair Mikhail Khodorkovsky. In spring 2004, Russia hit the company with a wave of punitive tax fines. By the end of that year, Yukos’ core asset was in the hands of the state. Following Shearman’s advice, the men who controlled Yukos filed an investor-state arbitration under the Energy Charter Treaty before a panel administered by the Permanent Court of Arbitration. Now, based on a hearing in October and November 2012 at the Peace Palace in The Hague, a panel of three arbitrators headed by L. Yves Fortier would decide whether Putin had truly wanted Yukos—and had violated international law to get it.

In her flying Putin hoodie, the 45-year-old Banifatemi talked trial strategy with her mentor, Emmanuel Gaillard. At 60, the silver-helmeted Gaillard thought he had seen everything in arbitration. A few months earlier he had helped to set a new record for arbitration damages, by winning an award of over $2 billion for Dow Chemical Company against Kuwait. But this was a case on the scale of oligarchical wealth, a fight for the heights of the hydrocarbon economy.

Read our full coverage of Yukos’ $50 billion victory against Russia.

Shearman’s problem was that oligarchs are not very likable plaintiffs. The man who stood to gain most from the award was Leonid Nevzlin, who owned about half of Yukos after he was gifted the shares of company chair Mikhail Khodorkovsky. Aside from being Yukos’ head of public relations, Russia said, he was the company’s enforcer, and in 2008 he was convicted in absentia of five murders. Nevzlin, who had already fled to Israel, regards the charge as another facet of Russia’s mendacious vendetta against Yukos. The Israeli courts have refused to extradite him.

Gaillard and Banifatemi reviewed the trial strategy they had agreed upon years earlier. They would obtain immunity for Nevzlin to testify—and let the panel judge for itself if he was a murderer. Shearman believed they had nothing to hide, and everything to show. They resolved to call a long list of fact witnesses and to reconstruct Russia’s historical record in incriminating detail.

Somewhere in the Kremlin, or perhaps in the conference room of its lawyers at Baker Botts or Cleary Gottlieb Steen & Hamilton, Russia made the opposite decision. For better or worse, they would call no fact witnesses.

That left the Yukos fact witnesses free to mold the narrative. And so they did.

The trial convened Oct. 10 in the Peace Palace, a neo-Renaissance landmark that houses both the World Court and the Permanent Court of Arbitration. Unintimidated by her grand surroundings, Banifatemi wore a T-shirt with the flying Putin logo under her suit jacket on the first day of trial. The following trial account is based on an exclusive review of the trial transcript and the award.

The fallen oligarchs’ star witness was Andrei Ilarionov, who served as Putin’s chief economic adviser from 2000 until he resigned in protest over the Yukos affair in Dec. 2005. Ilarianov’s remarkable testimony has appeal for both the serious historian and the Hollywood screenwriter.

In his testimony, Ilarionov traced the start of the Yukos affair to Feb. 19, 2003, when Putin held a public meeting at the Kremlin with business leaders, including Yukos’ Mikhail Khodorkovsky. In a presentation on corruption, Khodorkovsky criticized state-owned OAO Rosneft for mysteriously buying a little oil company called Severnaya Neft for three to five times what it was worth. Khodorkovsky was raising questions about a government oil deal that smelled of corruption. Yet he himself had acquired Yukos under controversial circumstances, as part of Boris Yeltsin’s 1995-96 “loans for shares” program.

Near the meeting’s end, Putin turned to Khodorkovsky and remarked that everyone knew how and at what price Yukos had been acquired. “I return the ball in your corner,” said Putin.

“The tone became steely and menacing,” Ilarionov testified. “Later, it became clear that this was a sign to the governing elites that Mr. Khodorkovsky could be attacked and that he was no longer tolerated. The gloves were off.”

This meeting was captured on videotape, which the tribunal later saw. The arbitrators picked up on another remark by Putin, which in the award they called “seemingly prescient.” Rosneft, Putin pointed out at the meeting, “is a state-owned company. It has insufficient reserves and should increase them. Some other oil companies, such as Yukos, have a surplus of reserves.”

Ilarionov testified that in April 2003 “a special unit was set up at the general prosecutor’s office, composed of approximately 50 people and working exclusively on fabricating evidence against Mr. Khodokovsky and Yukos.” The unit’s mission, Ilarionov said, was to “zanyatsa” or “take care of” Khodorkovsky.

The anti-Yukos unit thought of many pretexts for its assault, Ilarionov said, and then field-tested them with the public. The litany recalled by Ilarionov reads like a sort of KGB version of a David Letterman list: Top 10 Reasons We Should Dismantle Yukos. As Ilarionov recalled them in his testimony, they were:

(i) Yukos’ intention to sell oil to China.
(ii) Yukos’ intention to build a pipeline to China.
(iii) Yukos’ intention to sell oil to the U.S.
(iv) Mr. Khodorkovsky’s alleged intention to form a political alliance with Gennady Zuganov, the leader of Russia’s Communist Party.
(v) The allegation that during his last visit to the U.S. in September 2003, Mr. Khodorkovsky suggested that should he be elected president of Russia, he would immediately abandon Russian nuclear weapons.
(vi) The use of hydro-fracturing, and other Western technologies, viewed as “barbaric.”
(vii) The alleged bribery of Russian Duma deputies.
(viii) The alleged intention to establish control over the Russian Federation State Duma.
(ix) The alleged participation in a projected coup d’état.
(x) Tax evasion schemes, allegedly set up either for Mr. Khodorkovsky’s personal benefit or for the benefit of Yukos.

After field-testing all these theories with the public, Ilarionov said, the Russian prosecutors chose to run with number 10: tax evasion schemes.

On Oct. 23, 2003, masked commandoes stormed Khodorkovsky’s private jet on a Siberian tarmac and arrested him on charges of tax fraud. Ilarionov testified that about a week later, he visited Putin in the presidential office in the Kremlin and heard the real motives for the attack.

By Ilarionov’s account, Putin told him that he had long protected Kholdorovsky from attack by Putin’s friends in the security services, but now Khodorkovsky was “behav[ing] badly.” Specifically, Putin felt Khodorkovsky was double-crossing him by supporting the opposition in Russia’s Duma—and by negotiating a U.S. oil merger.

At the time, Yukos was deep in deal talks with both Exxon Mobil Corporation and, in particular, ChevronTexaco Corporation. Yukos was an attractive deal partner. Before its merger with OAO Sibneft was unwound in Dec. 2003, it claimed to have the largest proved oil reserves of any world oil major. The claimants aver in their briefs that at the time of Khodorkovsky’s arrest in October 2003, YukosSibneft and Chevron had ironed out an “almost final” definitive memorandum of understanding for a full merger, envisioning a final agreement by the end of 2003.

Ilarionov testified that he remembers Putin’s words almost exactly.

“I decided and I stepped aside to allow Mr. Khodorkovsky to solve his problems with the boys by himself,” Putin allegedly said. As Ilarionov recalls, Putin went on to say that Khodorkovsky thinks he’s a “muzhik”—roughly a “tough guy” in Russian slang. “Okay,” continued Putin, “if he has chose to fight, let him to fight and we’ll see what will happen.”

On April 14, 2004, the Russian tax service gave Yukos 48 hours to pay a new assessment of $3.5 billion, and didn’t even wait a day before it started freezing assets. By the end of that year, Yukos’ main production unit was in the hands of Rosneft. By November 2007, Khodorkovsky’s company had been completely dismembered—and mostly reassembled as part of Rosneft. Khodorkovsky was convicted of tax fraud and sent to prison in Siberia until his pardon in December 2013.

In its award, the tribunal found Ilarionov to be both credible and convincing.

After the Russian adviser’s account, Nevzlin’s own testimony was anticlimactic. Its main highlight was Nevzlin’s description of a conversation between himself and the Kremlin-friendly oligarch Roman Abramovich: Putin allegedly told Abramovich in late fall 2003 that he’d “like to see Mr. Khodorkovsky’s bottom on a prison bench.”

Perhaps more importantly, Russia did not even bother to ask Nevzlin about the alleged murders in its cross-examination. And the arbitrators did not bring up the allegations in their award. They found Nevzlin too to be credible.

In its trial defense, Russia argued that its tax fines were justified. Aside from relying on expert witnesses in tax law, Russia noted that in 2007, Yukos auditor PricewaterhouseCoopers retrospectively withdrew its seal of approval for the years in question.

In response, Yukos shareholder Vladimir Dubov testified that he personally okayed Yukos’ tax arrangements in advance with Russian finance minister Alexei Kudrin. As for PwC, Shearman introduced Wikileaks cables to show that the auditors’ leaders privately agreed that Russia’s tax prosecution of Yukos was politically motivated. Yukos’ auditor from PwC—Douglas Miller—was merely acting under the pressure of a goonish investigation that threatened its license to practice in Russia, Shearman argued. And that investigation conveniently went away after PwC withdrew its approval of the audit. PwC’s “late and spectacular volte-face”—to use the claimants’ phrase at trial—gave Russia cover for its tax grabs.

Shearman’s arguments were bolstered by the absence of Kudrin and Miller. Throughout the trial, Gaillard repeatedly cited what he called the “empty chairs” on Russia’s side of the courtroom. Why didn’t Russia want Kudrin or Miller to speak under oath? (On the flip side of the T-shirt Banifatemi wore under her jacket on the first day of trial, the slogan read, “We want Miller!”)

Presiding arbitrator L. Yves Fortier picked up on Shearman’s metaphor. In his first question on the closing day of the monthlong trial, Fortier prodded Russia to explain the empty chairs—as “it continues to be of significant importance to us.”

“I think you will be convinced that the furniture is more occupied on our side of the room than the other,” said Russia’s lead trial lawyer, Lawrence Friedman of Cleary’s New York office. Friedman argued that Russia’s potential witnesses were intimidated by Nevzlin’s reputation for violence. Then he said that the missing witnesses had nothing material to add.

“We don’t agree with that,” responded Fortier, “and we find this litany somewhat—it rings hollow, to tell you the truth, Mr. Friedman.”

Of Miller, Fortier said, “That is an empty chair that, to us, says a lot.”

Arguably, Russia blundered by sending a lawyer who is not an investment arbitration specialist to do much of the oral argument. At one point, Friedman objected acerbically to Gaillard’s questioning. The French Canadian Fortier overruled Friedman and responded, “May I remind the parties—both parties—we are not in a Texas court here. This is an international arbitration.” Fortier’s rebuke was delivered neutrally, but it did not seem aimed at the Frenchman Gaillard, who chairs the International Arbitration Institute, cofounded the International Academy for Arbitration Law and lectures on arbitration theory at Sciences Po Law School in Paris.

In fairness, lawyers on both sides were getting testy, and international arbitration bears an increasing resemblance to Texas litigation. Both forums are prone to the occasional lapse in decorum—and the occasional jackpot award. Friedman has long and deep experience in commercial arbitration, to go with an amazingly broad litigation practice, highlighted by intellectual property and financial disputes. Gaillard praises the performance of both Friedman and Cleary as world-class.

What’s clear is that Russia’s decision to call no fact witnesses backfired. Perhaps it would have made no difference, but the arbitrators’ annoyance showed in the final award: “The tribunal notes again that the Russian Federation called no fact witnesses of their own to contradict or weaken the testimony of claimants’ fact witnesses.” On the validity of Russia’s tax policies, on the purity of PwC’s motives—on just about every disputed point of testimony—the Fortier panel saw things Gaillard’s way.

Having framed the factual narrative, the claimants faced two other challenges. They needed to show that these facts amounted to expropriation under international law. And they needed to get the arbitrators comfortable with declaring monetary damages at least an order of magnitude larger than any arbitral award in history.

Partly by design and partly by accident, the claimants benefited from a series of prior legal holdings based on the same facts. The majority shareholders of Yukos were not the only parties with a bone to pick with Russia over Yukos—although only they stand to gain from the arbitration at the Peace Palace. The oligarchs were able to file their case—known most simply as Yukos Majority Shareholders v. Russian Federation—because they own their shares through offshore companies that qualify for investment protection in Russia through an agreement called the Energy Charter Treaty.

Most of the minority shareholders who own the other 30 percent of Yukos are out of luck. But a few are based in nations, like Spain, that have their own investment treaties with Russia. So the fallen oligarchs paid for a test arbitration by a handful of Spanish funds that owned a tiny sliver of the company. The arbitrators in the ensuing case referred tongue-in-cheek to the oligarchs’ in-house counsel as a “Good Samaritan” (a jab that would later be immortalized in another of Banifatemi’s joke T-shirts).

The result—Quasar de Valores v. Russian Federation—was a July 2012 award for a mere $2.6 million. It nevertheless validated every legal theory needed for Khodorkovsky’s friends to eventually win 20,000 times that amount. Arbitration legend Jan Paulsson chaired the Quasar tribunal, giving its opinion added heft.

The other claims, each fascinating in their own right, were not in the oligarchs’ control. The distressed debt investor Elliott Associates snapped up some Yukos stock through a subsidiary called RosinvestCo U.K. Ltd. and filed its own minority shareholder arbitration. In September 2010 the RosinvestCo tribunal denied Elliott a windfall. But without the pressure of a 12-digit claim, yet another set of top arbitrators ratified all the legal conclusions that would lead ineluctably to the biggest award in history.

Finally, Yukos’ former management filed a case in the European Court of Human Rights on behalf of the whole company. The ECHR rendered a rendered a mixed verdict in July 2012. The court concluded that Russia’s actions were disproportionate, but not aimed at destroying the company. (A modest damages award is expected later this week, on July 31.)

The ECHR ruling didn’t hurt in the main event. Yukos Majority Shareholders scarcely referred to the human rights case. And on the central question of tax discrimination, it went so far as to mock the ECHR’s benign conclusion. “Far from not receiving ‘any adverse treatment,’” wrote the arbitrators, “Yukos received some $13 billion worth of adverse treatment.” On this point, the arbitrators seemed to regard the human rights judges as either politically craven or commercially naïve.

The two minority arbitration cases helped the oligarchs tremendously. These cases framed the legal narrative, and fortified the panel that was playing with real money. At least three times, the Yukos Majority Shareholders panel echoed the question posed by O. Thomas Johnson, then of Covington & Burling, on behalf of the Spanish minority shareholders: “Why would Russia have treated Yukos as it did if its purpose was to collect tax?” The oligarchs thus benefited from their own precedent. The $15 million in fees paid by the “Good Samaritan” for the Spanish arbitration was money well spent.

On its ultimate conclusions, the Yukos Majority Shareholders panel invoked Rosinvestco and Quasar nonstop. All nine arbitrators agreed that Russia’s “extremely formalistic” interpretation of tax law was confiscatory, that the forced sale of the company’s crown jewel was “rigged” and that the bankruptcy aimed to “destroy” Yukos. In sum, Russia had expropriated Yukos through tax policy as surely as if it had invaded the oil fields with tanks. It was all over but the shouting.

The Yukos award was set to be released to the lawyers on the morning of Friday, July 18. On that day, Gaillard was called away on a personal matter. Yas Banifatemi waited at her home in Paris, nervous lest she miss the delivery.

When the case began in 2004, Banifatemi was still an associate. Investment arbitration, too, was still in its early stages of professional growth. Proof of concept on a large scale—in the form of the $350 million CME v. Czech Republic award—dates only to March 2003. Banifatemi reflected on the arc of her career and the Yukos case. From the outset, she shared with Gaillard an acute sense of making history. To their minds, it was a triumph for the rule of law to have an international and impartial tribunal assess the legality of a major power’s disgraceful mistreatment of a major company, as well as its managers and lawyers.

She also wondered where the damages number would come in.

At 11:20 a.m. the package arrived. Banifatemi’s hands shook. Between zero and $114 billion is a lot of room. She tore open the package and rifled for the headline number. It wasn’t easy. The award came in three parts, corresponding to the claimants’ three investment vehicles, and the grand total was buried in paragraph 1827. Banifatemi did it the hard way. She found the figure in the back of each opinion, and totaled them up.

$50 billion.

Banifatemi gulped. She went into work, hugged the two colleagues who were in on the secret and then tried desperately to keep a poker face.

On the wall in her office was a Putin joke poster. It dated from early in the case, December 2006. As a gift on the first anniversary of her making partner, Banifatemi’s team had given her a mock cover of The Economist about the Yukos arbitration. The cover blurbed stories like “Lifetime of Litigation.” The issue date read: “3 February 2004 – Indefinite.” The price of the issue?

$50 billion.

“It’s been under my nose for eight years,” says Banifatemi. “Like in a Hitchcock movie!”