UNITED STATES DISTRICT COURT DISTRICT OF NEW JERSEY
Civil Action No. 04-374(JAP): ROYAL DUTCH/SHELL TRANSPORT SECURITIES LITIGATION
LEAD PLANTIFFS: Pennsylvania State Employees Retirement System and the Pennsylvania Public School Employees Retirement System
DEFENDANTS: Royal Dutch Petroleum Company and The “Shell” Transport and Trading Company p.l.c.
Article by John Donovan
This is an updated version of an article we published in June 2007. It has been revised to include developments which have taken place over the last few days. The most recent motion was filed with the above court on 15 October 2007 by attorneys’ acting for Shell.
The stakes in the class action against Shell which arise from the oil and gas reserves scandal revealed to an astonished world in 2204 are huge, ranging from hundreds of millions of dollars to potentially billions of dollars. Shell has already set aside $500 million to settle the case.
If you wondered what was going on, this article in association with linked documents, will bring you right up to date.
It appears from the legal documents that the Lead Plaintiff is claiming $13.84 billion on behalf of U.S. and non-U.S. Shell investors and has received more than two million pages of discovery from the defendants and non-parties.
The original U.S. class action against Shell, its officers and also against Shell’s auditors, KPMG NV and PwC UK, commenced on 13 February 2004. The litigation arose from an alleged fraudulent overstatement of proven hydrocarbon reserves by Shell in Form F20 returns filed with the U.S. Securities & Exchange Commission. The SEC declared that Shell had violated United States law by issuing “false and misleading statements regarding its reserves”. Shell paid a $120 million fine to settle the SEC claims. The UK Financial Services Authority fined Shell £17 million ($34 million) for “market abuse”.
On 30 June 2004, all of the U.S. claims were consolidated into a single class action with the New York law firm of Bernstein Liebhard & Lifshitz LLP acting as Lead Counsel for the Lead Plaintiffs.
On 9 August 2005, Chief Judge John Bissell (now retired) of the United States District Court District of New Jersey, denied motions to dismiss by Shell, KPMG and PwC UK, having concluded that the Lead Plaintiff, the Pennsylvania State Employees Retirement System and the Pennsylvania Public School Employees Retirement System, had provided factual support for its allegations that Shell “engaged in material and substantial fraudulent conduct in the United States”.
In 2006 the case was expanded to include non-American shareholders with Peter M. Wood, a UK citizen (a Petroleum Engineer) granted permission by the court to represent all non-U.S. qualified holders of stock. Mr Wood was recruited in this capacity following an appeal on the royaldutchshellplc.com website, described by the Financial Times as being an anti-Shell website (owned by the author of this article). Shell insiders, via the same website, had previously supplied evidence to support the class action.
In response to the expansion of the U.S. case into a global action, Royal Dutch Shell secretly entered into discussions with other non-U.S. purchasers of Shell stock including Dutch pension funds and on 11 April 2007, advised the U.S. court of a proposed settlement agreement with all reserves related litigation and claims between Shell and non-U.S. investors. The settlement offer was $359 million plus legal fees. Since there is no litigation underway against Shell in The Netherlands, the move by Shell was clearly designed to substitute and pre-empt the non-U.S. investors litigation brought as part of the U.S. based action.
As part of the proposed Dutch settlement route, Shell sought and received a statement from the SEC’s Staff that it intends to recommend that the fines paid to settle the United States’ lawsuit be used to reimburse damages to investors worldwide.
The Wall Street Journal revealed in an article published on 22 June 2007 that “Royal Dutch Shell recently amended its charter to provide for certain shareholder disputes to be handled outside of the court system”. The purpose was apparently to change the rules (as well as using recent changes in Dutch law) after the fact, to allow for arbitration to replace trial in disputes with shareholders.
As a consequence the litigation is now focussed on the issue of whether the expanded U.S. action can proceed with Peter M. Wood representing non-US Shell investors, or if the U.S. case would revert to being a claim solely representing U.S. investors. In that event, Shell would be able to proceed with the settlement of non U.S. investors already agreed in principle with Dutch pension funds. This could save Shell billions in compensation.
A four week mini-trial was due to commence in the U.S. Courts on Monday 18 June 2007 to resolve the issue.
Shell contended that the move by the Lead Plaintiff to block the Dutch settlement was “a desperate attempt to preserve ‘the potentially lucrative lead role’ in a U.S. class action”.
Shell also argued that “intervening plaintiff (also represented by Lead Counsel) Peter M. Wood, who purchased a mere 1,519 shares during the alleged class period and was brought in by Lead Counsel several years after the initial complaints were filed to serve as a peremptory class representative for non-U.S. investors, could never adequately represent the interests of the sophisticated non-U.S. investors, who purchased more than one billion shares and who have declared their desire to participate in the Settlement rather to litigate in this Court”.
The reference by the law firm representing Shell, Robertson, Freilich, Bruno & Cohen, LLC, to Mr Peter M. Wood, as a stockholder owning “a mere 1,519 shares” betrayed a contempt by Shell for non-institutional investors.
In its closing arguments to the Court, Shell said: “Continuing the effort to discredit the Settlement, Lead Plaintiffs insinuate… that Shell is colluding in the Settlement with counsel for the individual plaintiffs… Instead they ask this court to impose the will and judgement of two Pennsylvania Funds – ultimately assisted by a single individual investor from Andorra with 1,500 shares – on some of the most sophisticated investors and shareholder advocates in Europe and elsewhere outside the U.S. The Court should see this for the desperate ploy that it is”.
The Lead Plaintiff objected to the proposed Dutch settlement of non-U.S. claims and insists on proceeding with Peter M. Wood acting as the representative of all non-U.S. claims, arguing that “A prepared remedy, pre-arranged by Shell and a limited group of investors simply is not an adequate alternative to litigation”.
In concluding comments, the Lead Plaintiff said: –
Finally, this Court has already determined that Shell “engaged in material and substantial fraudulent conduct in the United States.”
“…this Court already determined that it has jurisdiction over the Foreign Purchasers claims.”
“Shell is openly attempting to evade U.S. policy regarding the conduct of class actions.”
The stakes are high bearing in mind that an American professor of law has speculated that Shell could be in danger of insolvency if the worldwide litigation led by the Lead Plaintiff proceeds to a successful conclusion.
It was eventually agreed that the mini trial be delayed in favour of the Court appointing Judge Politan, a retired Judge, as a Special Master so that he could consider and review evidence and report to the Court his findings and recommendations limited to a single issue: subject matter jurisdiction i.e. whether non-US Shell investors could be included in an expanded case brought in the US courts. Chief Judge John Bissell (now retired) had ruled that they could.
On 18 September 2007, the Special Master, Judge Nicholas H. Politan completed his Report and Recommendation and took a contrary view to Chief Judge Bissell. He stated in his recommendation:
“Having carefully reviewed the parties’ voluminous submissions concerning the issue presented to me and having held a hearing on this matter on July 9, 2007, I find that the Plaintiffs have not satisfied the “conduct test” under the operative analysis and, accordingly, recommend that the District Judge decline to exercise subject matter jurisdiction over the Non-US. Purchasers and exclude them from any class potentially certified in this action.”
As could be anticipated, the Lead Plaintiffs do not accept the report or the recommendations and filed an objection on 11 October 2007 demanding that it be rejected. They stated:
“Although the Special Master repeatedly concluded that Lead Plaintiff had presented “no evidence” in support of its arguments, Lead Plaintiff’s submission, which the Special Master himself described as “voluminous”, speaks for itself to the contrary. The issue before the court, therefore, is not whether Lead Plaintiff has submitted any evidence of U.A.-based conduct – for indeed Lead Plaintiff has submitted abundant such evidence – but whether that evidence is sufficient under the Third Circuit’s articulation of the conduct test.”
The submission filed by the Lead Plaintiff on 11 October includes a copy of the Report and Recommendation of the Special Master.
Attorneys’ acting for Shell filed a response on 16 October 2007, arguing that the Report and Recommendation of the Special Master was correct.
If the trial Judge Joel A. Pisano accepts the Report & Recommendation and reverses the decision already made by Chief Judge John Bissell, the Plaintiffs will undoubtedly appeal and the case could drag on for years with appeals to successively higher Courts. In view of the fact that Shell would obviously like to consign the scandal to history ASAP, the most likely outcome will be a settlement. In fact discussions have already taken place.
Many passages in this article have been taken verbatim from legal documents filed with the Court.
Click on this link to read the Court documents