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ShellNews.net: Global Floodgates Open on Shell Reserves Fraud Class Action

By Alfred Donovan

On Friday 20 January, we exclusively broke the news that the global floodgates are now open for qualifying non-US Shell shareholders to join a US class action lawsuit which has already been given permission to go ahead by a US District Chief Judge.

The Judge has ruled that Shell has a case to answer for alleged securities fraud and has decided that for the first time in US legal history, non-US shareholders can join a US class action. The lead plaintiffs are the Pennsylvania State Employee Retirement System and the Pennsylvania Public School Employees Retirement System. The class action seeks to recover damages on behalf of all investors worldwide, no matter where they bought shares.

However, the Court has set a 1 March 2006 deadline for a non-U.S. purchaser of RDS securities to seek to serve as a representative of all non-U.S. purchasers to help pursue the claims in the action. The lead plaintiff lawyers pursuing the case are working entirely on a contingent fee basis.

January has seen a number of other significant developments in relation to Shell and its tattered reputation.

On 4th January 2006, news broke of the latest Shell scandal, this time involving Shell being fined for bogus oil trades. Once again terms such as “fictitious”, “bogus” and “fake” were being used by the media in relation to Shell’s business transactions/dealings. Once again, Shell has settled with a regulator (in this case the US Commodity Futures Trading Commission) without admitting or denying any wrongdoing.

It is also no surprise that Nigel Catterall, the head futures trader at Shell Trading U.S., who the commission said was engaged in three of the trades, is still apparently employed by Shell. This is not the first time that Shell management has given its backing to a Shell manager who has engaged in illegal activity in direct contravention of Shell’s own Statement of General Business Principles which pledges honesty, integrity and openness in all of Shell’s dealings.

On Monday 9th January 2006 came a flood of more negative news headlines, revealing that Dutch pension funds have launched a massive claim against Royal Dutch Shell Plc and named current and former Shell directors including Sir Mark Moody-Stuart, Sir Philip Watts and Jeroen van der Veer, the CEO of Royal Dutch Shell Plc.

One of the headings in the 150 page Complaint lodged in the United States District Court for the District of New Jersey states: “SHELL’S FRAUDULENT SCHEME TO MANIPULATE RESERVES”: (see extracts in the attached Annex A)

On 24 January 2006, the Washington DC based U.S. Public Interest Research Group (U.S. PIRG) used our website, RoyalDutchShellPlc.com, to make an appeal to Shell investors in connection with a resolution it wishes to put on the agenda at the first AGM of Royal Dutch Shell Plc. The resolution relates to a campaign targeting oil companies that have expressed interest in drilling in the coastal plain of the Arctic National Wildlife Refuge.

We will also be publishing within the next 24 hours an appeal by The Ecumenical Council for Corporate Responsibility (UK) which is also seeking support to bring a shareholder resolution to Royal Dutch Shell’s AGM on 16 May 2006. ECCR believes that Shell’s impacts on `frontline’ communities and the environment in County Mayo, Ireland, the Niger Delta, and at Sakhalin II in Russia merit urgent attention.

Our unique website is focused on Shell management misdeeds. It now contains over 7,000 web pages containing news about Shell, leaked Shell documents and Shell insider articles – see below. It is now recognized as being the most practical way of reaching Shell stakeholders (at least one other organization will soon be using it to make an appeal to Shell employees).

The website was launched on 1st January 2004. The timing turned out to be fortuitous for us and disastrous for Shell management which has subsequently attempted, without success, to seize our Royal Dutch Shell Plc dotcom domain name. (Management made a spectacular blunder by neglecting to register the domain name when the unified $223 Billion USD company was born – but that’s another story)
Just over two years ago, on 9 January 2004 the bombshell news of the Shell reserves fraud broke on an unsuspecting world e.g. “How Shell blew a hole in a 100-year reputation” (The Times); “Investors howl for Shell’s blood” (The West Australian) and “Lies, cover-ups, fat cats and an oil giant in crisis” (The Independent).

Negative news about the scandal subsequently inundated the media with the sackings of senior executives including Group Chairman, Sir Philip Watts, followed by regulatory and criminal investigations, class action law suits, and eventually by multimillion dollar fines and settlements in which Shell neither admits nor denies liability. Other litigation is still in progress e.g. the Bernstein Liebhard & Lifshitz Class Action case cited above.

Two years on, Shell’s reputation continues to be demonised as a result of the continuing repercussions from the reserves fraud and other scandals e.g. Nigeria; the Sakhalin2 $16 BILLION cost overrun; the Cairn fiasco; the Rossport Five debacle and the record fine imposed on Shell in respect of the Brent Bravo tragedy.

The term “fraud” is used in this article because that is precisely the term used recently to describe the Shell reserves scandal by Mr. Christopher Cox, the Chairman of the US Securities & Exchange Commission.

SHELL’S REPUTATION DESTROYED

Few major companies have sustained such a long barrage of negative publicity and because of on-going litigation it looks set to continue for a long time. It has already had a huge and possibly permanent impact on Shell’s reputation.

On 4 July 2004, The Sunday Observer published the results of a company reputation ranking carried out by Thomson Intermedia. The survey and article were based on monitoring company news in every UK national newspaper on a daily basis. It ranked the top ten brands/companies with the highest reputation and at the other extreme, the 10 “Worst”. No prizes for guessing Shell’s ranking; the Worst of the Worst.

The publication of the Thomas Intermedia survey happened to coincide, almost to the day, with the launch by Shell of a defamation suit against Shell whistleblower Dr John Huong, a Shell geologist who had worked diligently for the company for 29 years. Dr Huong’s falling out with Shell management stemmed back to his decision to place on record, in a Shell internal document, his conscience driven concerns about important safety and moral issues, including for example the safety of Shell’s helicopter fleet, the fabrication of reserves volume and other development issues in the Kinabalu oil field, where he was the production geologist. Shell internal documents in our possession prove that management/employee bonus payments were, as suspected, a contributory factor in the reserves fraud.

The concerns which Dr Huong prophetically expressed in internal Shell documents regarding the maintenance (and safety) of Shell helicopters, when such matters fell within his responsibility, also turned out to be 100% correct. One of the same helicopters crashed into the sea off Sarawak in June 2005.

Dr Huong blew the whistle internally at Shell at a time when such deceit in regards to reserves reporting had only just started. That was in 1997 – the year in which the seeds of the reserves scandal were first sown. History might have been very different if Shell management had listened. Instead EIGHT Royal Dutch Shell companies ganged together and sued Dr Huong for libel in respect of articles published by me under his name on my website, Royal Dutch Shell Plc dotcom. Not so much a case of David vs. Goliath as David vs. King Kong.

The New York Times published a report last month under the headline: “New Surveys Show That Big Business Has a P.R. Problem”. John D. Hofmeister, who runs the United States operations of Shell Oil Company, is quoted as saying: “This is a challenging time for big corporations”. The modern feeling, he said, is “big is bad.” That certainly appears to be the overwhelming public and stakeholder perception of Royal Dutch Shell.

DON’T TELLSHELL

This incidentally is the same John Hofmeister who posted a message on the “TellShell Forum” a few years ago applauding and encouraging its policy of open uncensored debate. I wonder what his thinking is now, after the facility has been suspended following exposure by me and other “TellShell” contributors of Shell’s secret censorship of Internet postings by Shell employees. An innovative medium to encourage feedback has been ruined because Shell senior management does not want to hear the truth.

Shell General Counsel Richard Wiseman confirmed to me by email in November 2005 that Shell has been censoring stakeholder postings on the site. It seems that the discussion forum should have been called “Don’t TellShell” (because Shell management does not want to hear the truth).

My website, ROYAL DUTCH SHELL PLC Dotcom, has provided an alternative outlet for Shell insiders to vent their feelings about Shell management. Please see annex C below.

On 6 December 2005, The Wall Street Journal published the results of a corporate reputation study of 60 major companies by Harris Interactive. They confirm that Shell’s reputation remains in the corporate gutter literally ranked alongside the likes of Enron.

A BLIND EYE CULTURE

Instead of dealing properly with the reserves volume, Asset integrity and safety issues exposed by Dr Huong, Shell management preferred to turn a blind eye. Shell did the same in respect of other misdeeds happening elsewhere, including the theft of intellectual property, health and safety shortcuts (resulting in the death of Shell employees/contractors) and a rigged tendering process.

In the latter case, companies were deliberately cheated by Shell in accordance with a cunning premeditated plan to deceive participants in the tender who were officially notified that they had reached a final short list stage, when in fact, management had already decided to eject them.

This is of course another very serious charge, but as Shell management is aware, we are in possession of documents providing irrefutable evidence of the plan and every step of the way it was ruthlessly carried out. The contract was subsequently awarded to a company – Option One – which never even participated in the tendering process.

Mr. Malcolm Brinded (currently Executive Director of Shell E & P) and Sir Mark Moody-Stuart, the then Group Chairman of Royal Dutch Shell were both aware of what happened, but inexplicably gave their full backing to the Shell manager who masterminded the deception, which was carried out for commercial and possibly personal gain.

Shell shareholders and Shell dealers have also been adversely affected by Shell management misdeeds. The same applies to North American consumers who purchased tainted Shell gasoline and people living in many locations in the world which have been polluted by Shell’s operations e.g. Port Arthur in Texas and the Nigerian Delta.

The consequences of such a blatantly unscrupulous corporate culture brought about by a Shell management famed for its arrogance and denial has inflicted incalculable lasting damage to Shell’s reputation, as the surveys confirm.

Is there any real prospect of a turnaround when many of the same management figures tainted by the reserves fraud and other scandals and debacles are still at the helm of Royal Dutch Shell Plc?

With regards to Sakhalin, we have on the one hand President Putin slamming Shell for letting the costs spiral out of control and on the other, an eminent scientist, Professor Richard Steiner from the University of Alaska marine advisory programme, resigning from the mega-project after branding Shell management as “clever, stubborn rascals”.

Does Shell really need a loan of a few hundred million dollars from the European Bank for Reconstruction & Development when it is awash with cash generated from the high oil price? The real reason for the loan application is because Shell wanted a “greenwash“ it knows that the endorsement of a bank known for its commitment to take environmental considerations into account would in turn attract billions of dollars of financing from other banks and public institutions, thereby spreading the considerable risk involved in the Sakhalin II venture.

Any regular reader visitor to this website will probably be astonished at our candid commentary about Shell and perhaps wonder why Shell management has not taken action against us in the libel courts, but instead has preferred to sue Dr John Huong. The reason is that we have a mass of documentary evidence which confirms the deeply ingrained culture of cover-up and deceit which resulted in the reserves fraud and other scandals which have destroyed Shell reputation. There is no libel if what is stated is the truth.

There is no prospect of Shell acting in accordance with its Statement of General Business Principles while the current discredited management with discredited hard-nosed policies remains in place. It follows that Shell’s reputation is likely to remain in the corporate gutter.

Unfortunately Shell management still appears to exist in a fantasy land where logic, fact and basic human decency are perverted. It prefers hype, spin, deceit, intimidation, victimization and turning a blind eye to wrongdoing.

ANNEX A – SHELL’S FRAUDULENT SCHEME TO MANIPULATE RESERVES
This is not my description but a heading from the Legal Complaint against Royal Dutch Shell Plc and other named Defendants which was filed in the US District Court for the District of New Jersey on 6 January 2006 by US lawyers Grant & Eisenhofer. They act for 26 Dutch pension funds led by ABP, Europe’s largest retirement fund.

The following are EXTRACTS from the Complaint: –

Entire Paragraph 10
Shell’s wholly fraudulent reserve reporting, in addition to causing substantial declines in its share price in the wake of the disclosures of this fraud, has caused the impairment of its corporate credit ratings, the restatement of its reported financial results, and the termination of Watts, van de Vijver and Boynton from their senior executive positions within the Companies.

Extracts from Paragraph 17.
In his message to shareholders, Lord Ron Oxburgh – who at the time was chairman of Shell Transport “apologized unreservedly” for the Companies’ “control weaknesses and inappropriate departure from [its] Business Principles,” and promised to rebuild Shell’s business and reputation based upon “the lessons learned” from the reclassification.

Extract from Paragraph 24.
As this Court recognized in its August 9, 2005 decision, Shell engaged in conduct in the United States that played some part in the securities fraud alleged herein.

Entire Paragraph 27.
Anton Barendregt, a Shell employee, made numerous trips to the Deepwater Group in Houston to either audit operating units located outside the United States or to contribute to the booking of reserves. Mr. Barendregt’s actions in the United States assisted Defendants in their false bookings and served as a component of Defendants’ fraudulent scheme.

Entire Paragraph 73.
Defendant Jeroen van der Veer (“van der Veer”) is a citizen of The Netherlands. Van der Veer was, at all relevant times, a Director of the Royal Dutch Board of Management and has served as a Shell Managing Director since 1997. Van der Veer has served as President of Royal Dutch since 2000, and was promoted to Chairman of the CMD in March 2004, He is the first Chairman of the reorganized and unified company Royal Dutch Shell, plc. Van der Veer joined Shell in 1971, and held a number of senior management positions around the world. Van der Veer served as the Vice-Chairman of the CMD during 1997-2003 and, as such, personally participated in the misconduct alleged herein. Van der Veer signed the false and misleading annual reports on Form 20-F for the years 2000 through 2002, and falsely certified the 2002 Form 20-F under the Sarbanes-Oxley Act. Van der Veer also reviewed and authorized the filing of the 1998 and 1999 annual reports on Form 20-F. Van der Veer knew these reports to be materially false and/or recklessly and/or negligently disregarded their truth or falsity, and thus was an active and knowing participant in the wrongdoing.

Section “V”, page 38: SHELL’S FRAUDULENT SCHEME TO MANIPULATE RESERVES

Entire Paragraph 114.
Faced with the inability to actually find the new gas and oil it needed to shore up its reserves and thereby to ensure its ongoing profitability, Shell turned to the accounting fraud discussed herein to bolster the Companies’ fading credibility with the investing public.

B. THE FRAUDULENT MECHANISMS SHELL USED TO OVERSTATE ITS RESERVES

Extract from Paragraph 115.
In response to this failure to find new reserves, senior management, including the Individual Defendants, chose to manipulate Shell’s reserve figures.

Extract from Paragraph 116.
As reported in the New York Times on March 12, 2004, in 1997 senior executives of Shell instructed the leadership and performance group (“LEAP”) to “create value through entrepreneurial management of hydrocarbon resources volumes”. LEAP sought ways to change the Companies’ guidelines with respect to classifying reserves.

Extract from Paragraph 117.
In 1998, following up on LEAP’s work, Shell created five Value Creation Team’s (VCT) to improve the EP units profitability.

Entire Paragraph 121.
The guideline changes recommended by LEAP and the VCTs allowed Shell to increase its oil and gas reserves not by discovering major new sources, but by changing its accounting to add reserves it was uncertain could ever be produced.

Entire Paragraph 166.
On November 9. 2003, after receiving what he considered an unfairly critical performance review from Watts, van de Vijver e-mailed Watts and stated that he was “becoming sick and tired about lying about the extent of our reserves issues and the downward revisions that need to be done because of far too aggressive//optimistic booking”

Extract from Paragraph 171.
On December 2, 2003 the EP staff prepared a memorandum entitled “Script for Walter [van de Vijver) on the proved reserves position. The script assumed that approximately 2.3 billion boe of proved reserves were non-compliant and that this was material to the market¦

Entire Paragraph 172.
On the same day the script was provided to Defendant van de Vijver, he e-mailed one of its authors, EP unit head of finance Frank Coopman, and demanded that the e-mail be destroyed: “This is absolute dynamite, not at all what I expected and needs to be destroyed”

Extracts from Paragraph 186.
A separate civil action was filed: In that action, SEC v Royal Dutch Petroleum Co and the “Shell” Transport and Trading Company, plc, No. H-04-3359, 2004 WL 2195811 (SD. Tex Aug. 24, 2004), Royal Dutch and Shell Transport consented to the entry of a judgment by the United States District Court for the Southern District of Texas, Houston Division, pursuant to Section 21(d) of the Exchange Act ordering the Companies, together, to pay a SI disgorgement and a $120 million civil penalty.

Entire Paragraph 187.
The Financial Services Authority also issued a Final Notice to Shell Transport and Royal Dutch to Take Action in which it imposed a penalty of £17 million for “market abuse” and breaches of the Financial Services Authority’s Listing Rules.

Extract from Paragraph 327.
Defendants fraudulent scheme and their fraudulent and/or negligent misrepresentations and omissions concerning Shell’s oil and gas reserves caused the price of Shell’s securities to be inflated artificially when Plaintiffs purchased these securities.

Entire Paragraph 343.
At all times relevant hereto, the Shell Defendants, individually and in concert, directly engaged in a common plan, scheme, and unlawful course of conduct, pursuant to which they knowingly or with recklessness engaged in acts, transactions, practices, and courses of business that operated as fraud and deceit upon Plaintiffs; made various deceptive and untrue statements of material facts and omitted to state material facts necessary to make the statements made, in light of the circumstances under which they were made, not misleading; and employed devices, schemes and artifices to defraud in connection with the purchase and sale of securities. The purpose and effect of said scheme, plan, and unlawful course of conduct were, among other things, to: (a) conceal the adverse facts concerning the Companies’ operations, particularly with respect to its reported classification of proved oil and gas reserves; (b) artificially inflate and maintain the market price of Royal Dutch and Shell Transport securities; and (c) cause Plaintiffs to purchase Royal Dutch and Shell Transport securities at inflated prices.

ANNEX B Selection of related newspapers articles

THE WALL STREET JOURNAL: Ranking Corporate Reputations: Bottom 10 (Worst Reputations): At 54. Royal Dutch Shell: 55: Tyco International: 57: Halliburton: 60: Enron: Tuesday 6 December 2005: READ

Corporate Reputation Survey: “Companies with the best and worst reputations”

PUBLIC PERCEPTIONS: Royal Dutch Shell – No 54 out of 60

SINCERITY OF CORPORATE COMMUNICATIONS: Lowest Percentage of Positive Ratings for Sincerity: Royal Dutch Shell – Grouped with Tyco, Halliburton, Enron etc

CORPORATE WEB SITE RECALL: Under “Lowest Recall”: Royal Dutch Shell grouped with MCl-WorldCom, Enron etc

Selection of newspaper headlines from the early months of 2004:

The Times: How Shell blew a hole in a 100-year reputation

The West Australian: Investors howl for Shell’s blood

The Independent: Lies, cover-ups, fat cats and an oil giant in crisis

Daily Telegraph: Shell drops ‘bombshell’ on reserves

The Sunday Times: Shareholders can no longer be sure of Shell

Financial Times: Observer Column: Shell-shocked

(Corporate slogans consigned to the dustbin of history no. 94: “You can be sure of Shell.”)

Daily Telegraph: Memos expose Shell’s years of lying

Minneapolis Star Tribune: Dutch/Shell Group exec was ‘sick and tired’ of lying

Mail on Sunday: Chairman Jeroen van der Veer in frame over Shell scandal – could lead to 20 years in jail

The Independent: Bribery and corruption put fresh dent in tarnished image of Shell

CNN.com: Shell admits blame in Nigeria: “Royal Dutch/Shell has taken responsibility for contributing to the fighting and corruption in oil-rich Nigeria”.
Reuters: “Leaked” Report says Shell actions feed Nigeria violence: “corporate behaviour of Royal Dutch/Shell in Nigeria feeds a vicious cycle of violence and corruption”

London Evening Standard: Shell ‘has lied for 10 years’

ANNEX C – SHELL INSIDER COMMENTS
ShellNews.net: Shell alienates and defrauds almost an entire country
Tuesday 10 January 2006: 10.40am EST

By a Shell Insider (Headline solely by ShellNews.net)

The litigation announced yesterday may well have a significant effect on the wider perception of Shell in the Netherlands.

The fact that a large proportion of the Dutch population is now involved in litigation against Shell will not be lost on the Dutch government. The Dutch government are unlikely to provide their customary support for a company which has uniquely managed to alienate and allegedly defraud almost the entire country. The Dutch populace are renowned for their fiscal prudence, and may not be amused to hear that their pension funds have been defrauded by Shell.

A BP takeover of Shell will require EU approval. A few months ago BP requested clarification from the EU of the EU’s historical requirement that two EU based oil companies of international standing were required to ensure the wider interests of the EU. This was seen as blocking any possible merger of Shell and BP. BP cited the growth of Total as creating a third EU oil company of international standing. I wonder what the EU is thinking now? BP publicised their request to the EU for the clarification, but I have never seen a response…

Ends

ShellNews.net: The latest embarrassment to Shell
Updated Wednesday 11 January 2006

(“I had to get this long story off my chest, I am glad there is a forum where this can get published/discussed without being killed off.”: “Freedom of speech is great, it should be encouraged within Shell too.)

By a Shell Insider (name and address supplied)

Hello Alfred

I would appreciate if you could place this story on your site. I could not contain myself any longer and look forward to the time I will retire.

SHELL INSIDER ARTICLE

Just imagine, several pension funds are suing your company. This is in a different league than some American shysters who want to make a quick buck in a country where it pays to sue. Spill some hot coffee while gobbling down a burger and you can claim a large sum of money. But these are decent companies with long term focus that look after the investment of old people, widows and orphans. It is these people that have put their trust in companies like Shell and have now been let down.

And the comment from Shell? “We will fight these charges with vigour”. There is no doubt at all in my mind that it will make a lot of lawyers rich and in the end there will be a generous settlement, because Shell does not know what to do with their money anyhow. The cashflows have become so large only because of the high oil price, the quality of the business is actually very poor (Sakhalin, Bonga, Kashagan, Pearl, Sorush & Noruz, Mukhaizna, etc etc). Occasionally there even is a good project. Had the oil price remained around 20$, Shell would most likely not exist anymore and some (ex-)directors would be in jail. Now it is a cashcow to be milked.

But what disturbs me most as an employee of this once great company is that the self appointed leaders are not “walking the talk” as they want everyone else to do and preach the latest gospel “enterprise first” and “more upstream and better downstream”. They keep giving nice upbeat stories and using the shareholders money to keep themselves out of trouble. A settlement here, a settlement there, a fine here, a fine there. But no consequences for the responsible managers. Always someone else to blame or a little guy at the coalface. The current top has been around in very senior positions for quite a while and is responsible for the mess with the reserves and very poor project management. How come nobody has been fired (or made redundant with a bag of cash)? Only messengers who bring bad news are removed. And with a smart workforce you only have to do this very few times to quench all dissent or criticism. But it festers below the surface, everyone is now mainly protecting his or her own turf and making sure you do nothing for which you maybe held accountable later. There is a complete reliance on processes. Just tick off the various steps and all is well. State bureaucracies of poorly governed countries are very similar.

The weak arguments on the various failed projects are disgusting. The workforce largely knows what has gone wrong and why it has gone wrong. With a good and honest quality structure, this could help improve things and avoid the same problems in the future. But if messengers get killed off time and again, there is no quality improvement and we all muddle along. Led by clever but spineless self appointed “leaders”.

Why do I not resign? I have been worn down and found a way to survive and get on with my own life. The reward is actually very good and I balance the need for the family and work. Resigning now would be very costly, uproot my family and cause great stress. And why would I walk away if the fat cats are staying put? But the heart is not in it anymore, and if asked to go work in a non desirable place, I will find excuses, well worded of course, why I would be delighted to go, but alas not for now. And so you end up with people in difficult areas that are not up to scratch and merely are there for the money. People who work in large corporations only for their love of money are the wrong people. You need people who get rewarded fairly and then put their heart in it because they are proud of their work and their company. That type of loyalty has completely disappeared. Maybe still around a bit with some youngsters who do not know any better, but no more around with people over 35!

Herkstroter started it all by stating “we don’t offer a career for life anymore”. He also said “we do not need petroleum engineers, we have Schlumberger”. Only a coincidence his son worked for Schlumberger. But we cannot blame it on Herkstroter alone (-the moment he retired, he did not know how fast to run away from the oil business and go back to his book-keeping friends-) but there was a whole succession of clever but naive and/or greedy people who preached “we need change” and they lost the grip on the transformation. These people are still largely around in the top of Shell and doing financially very well. So, I do not know where the buck stops anymore. The top has closed ranks, I suspect because they all know something bad of each other, and when one falls, there maybe a domino effect!

I had to get this long story off my chest, I am glad there is a forum where this can get published/discussed without being killed off. So I add a photograph of someone I find really evil and who was in my view instrumental for the current mess. I am not saying he is, I am only expressing my view. Hopefully some people smile for a second and some others get really mad. Freedom of speech is great, it should be encouraged within Shell too.

ENDS

Disclaimer: ‘The author (Alfred Donovan) ShellNews.net and the web site RoyalDutchShellplc.com are not endorsed by Royal Dutch Shell plc or affiliated with them in any way.’
© 2004/5/6 ShellNews.net

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