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25 August 2004: FSA fines Shell £17,000,000 for market abuse

By John Donovan

Since there is a discussion taking place on our Live Chat facility about who was responsible for the Shell reserves fraud, I thought it might assist the debate to republish the findings of the FSA. Just in case anyone has forgotten, apart from the “market abuse” finding there was a documented cover-up involving attempted destruction of evidence (as revealed in the Davis Polk & Wardwell Report). The SEC findings were blunter and the fine imposed more substantial: $120 million. The Chairman of the SEC has publicly described the affair as corporate fraud. It is my view that Watts and van de Vijver were responsible for the fraud which ruined Shell’s reputation. Others are entitled to take a different view but all of the evidence points mainly towards those two individuals. Links to the SEC and FSA Reports are available at the foot of this article.

PRESS STATEMENT BY FINANCIAL SERVICES AUTHORITY: FSA fines Shell £17,000,000 for market abuse  

FSA/PN/074/2004
24 August 2004

Posted 25 August 04

The FSA has today fined the Shell Transport and Trading Company (“STT”), Royal Dutch Petroleum Company (“RDP”) and the Royal Dutch/Shell Group of Companies (“Shell”) £17 million for committing market abuse and breaching the listing rules.

This fine was imposed on Shell as a result of unprecedented misconduct in relation to misstatements of its proved reserves. When Shell first publicly revealed on 9 January 2004 that it had misstated its reserves, STT’s share price fell from 401p to 371p (7.5%) reducing its market capitalisation on that day by approximately £2.9 billion.

A number of factors made Shell’s abuse of the market particularly serious:

Shell made false or misleading announcements in relation to its hydrocarbon reserves and reserves replacement ratios between 1998 and 2003;
Shell’s false or misleading announcements of proved reserves were made despite indications and warnings from 2000 to 2003 that its proved reserves as announced to the market were false or misleading; and
Shell did not correct the false or misleading reserves information it had disclosed until the period 9 January to 24 May 2004 when Shell announced the recategorisation of 4,470 million barrels of oil equivalent (approximately 25% of Shell’s proved reserves).
Andrew Procter, Director of Enforcement at the FSA, said:

“The FSA views timely and accurate disclosure to shareholders and markets as fundamental to maintaining the integrity of the UK’s financial markets. The size of the penalty in this case reflects the seriousness of Shell’s misconduct and the impact it had on markets and shareholders.

“The swift resolution of this case was made possible by the excellent co-operation the FSA has enjoyed with the Securities and Exchange Commission.”

Shell has co-operated fully with the FSA’s investigation and this is reflected in the size of the penalty which would have been significantly higher were it not for the company’s efforts.

Although the FSA’s investigation into the Shell’s misconduct is now closed, investigations into other aspects of this matter are ongoing.

Notes for editors

The full text of the Final Notice dated 24 August 2004 is available on the FSA website. This includes the background to the case, the relevant statutory provisions and the regulatory requirements contravened and the factors taken into account by the RDC when setting the level of the fine.

Financial penalties are not treated as income by the FSA. They are applied for the benefit of authorised persons (or the issuers of securities admitted to the official list) as appropriate, and so given back to the industry in subsequent years.

The SEC has authority under US law to have its penalties placed in court for the benefit of investors who may have suffered a loss.

The market abuse regime was first introduced by the Financial Services and Markets Act and applies to conduct on or after 1 December 2001. Under the Act the FSA has power to impose financial penalties for market abuse, which is defined as one of three types of behaviour.
Misuse of information
Misleading statements and impressions
Market distortion

The proceedings in this case relate to the second category of behaviour – misleading statements and impressions – which involves making improper use of information that other investors would regard as significant in advance of that information being announced to the market as a whole. The provision protects investment markets, such as the equity markets, that rely on the timely provision of information to all market participants on an equal basis.

Where a listed company’s misconduct is particularly serious the FSA will take action under the market abuse regime as well as the Listing Rules.

The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; securing the appropriate degree of protection of consumers; and fighting financial crime.

The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal. 

http://www.fsa.gov.uk/

CLICK ON LINK BELOW TO READ SECURITIES & EXCHANGE COMMISSION REPORT ON THE SHELL RESERVES SCANDAL:

http://www.sec.gov/litigation/admin/34-50233.pdf (August 2004)

CLICK ON THIS LINK TO READ FINANCIAL SERVICES AUTHORITY REPORT ON SHELL RESERVES SCANDAL:

http://www.fsa.gov.uk/pubs/final/shell_24aug04.pdf

(August 2004 – £17 MILLION FINE FOR “MARKET ABUSE”)

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