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Pension funds file suit on behalf of Shell

Financial Times: Pension funds file suit on behalf of Shell

By Sheila McNulty in Houston

26 June 2004

Two US pension funds have filed a lawsuit on behalf of Royal Dutch/Shell, seeking damages from its boards, current and past top executives and its accountants – PwC and KPMG – for overstating the group’s proved reserves.

Numerous lawsuits have been filed against Shell, seeking reparations for investors, but this is the first seeking to disgorge executive compensation back to the company. It also demands increased accountability, a vote on combining the boards and the right to nominate directors.

“This is a vehicle to bring about fundamental corporate governance changes,” said Bill Lerach of Lerach Coughlin Stoia & Robbins, the firm leading the civil prosecution of Enron wrongdoers, on behalf of pension funds with significant holdings in Shell. They are Unite National Retirement Fund and Plumbers and Pipe-Fitters National Pension Fund.

The lawsuit, filed in New Jersey Superior Court, seeks “equitable relief and damages” from defendants it is charging with breach of fiduciary duty, abuse of control, unjust enrichment and constructive fraud. Among the 26 individuals named are current top executives Jeroen van der Veer, Robert Routs and Malcolm Brinded.

The charges stem from Shell’s overnight elimination at the start of the year of almost 4.5bn barrels of proved reserves. That was more than 22 per cent of its previously claimed proved reserves and led the group to restate financial statements for 2002-2003, eliminating hundreds of millions of dollars in previously reported net income.

“To take on a company and force dramatic changes in a company of this size is unprecedented,” said Patrick Daniels, a partner in Lerach Coughlin Stoia & Robbins.

Mr Lerach said the group should not have to bear costs stemming from “intentional or reckless breaches of fiduciary duty”, which have exposed it to massive civil and criminal investigations, billions of dollars in liability for violations of the US securities laws and international law via class-action suits and by impairing their corporate credit ratings and reputation.

Relief for the Shell group, therefore, could easily run into hundreds of millions of dollars, he said.

The lawsuit says Shell executives have admitted the essential allegations, and quotes from the 2003 annual report issued in May, which states there were “deficiencies and material weaknesses in the internal controls”. It also cites positive spin by executives even as e-mails and private notes between them “show they were aware of these serious reserve-accounting abuses for years”.

For example, in a September 2002 personal “Note to File”, marked “Strictly Confidential”, Walter van de Vijver, the deposed head of exploration, admitted “both reserves replacement and production growth were inflated”.

In a note to the management committee, at that same time, the executive outlined ways the market could be “fooled” about reserves, but summed up: “We are struggling on all key criteria.”

The lawsuit faults the group’s accounting firms for issuing unqualified audit reports on 1998-2002 financial statements, even as “the discrepancy between the publicly represented proved reserves and the actual proved reserves increased every year”.

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