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The Guardian: British watchdog catches up with US hare

The Guardian: British watchdog catches up with US hare

“Shell faces the prospect of a string of civil actions from shareholders who feel duped.”

Shell case is a rare example of the FSA applying American-style rapid justice – but why the transatlantic gulf in size of fines?

Edmond Warner

Saturday July 31, 2004

It is not just burgers, buildings and election advertising budgets that are bigger in the United States, it seems. The same is true of fines meted out by financial regulators, and regulatory justice gets administered much more swiftly, too. Those on the receiving end of these fast-track punishment beatings can console themselves that their wounds will be more superficial and swifter to heal than in Britain’s tortuously slow system.

This week oil group Shell announced that it had accepted fines from both America’s securities and exchange commission and Britain’s Financial Services Authority for the same alleged misdemeanour – without, of course, making any admission of guilt to either body. Same charge, two different jurisdictions, and a fourfold greater fine over there than here.

The misdemeanour in question was Shell’s overstatement of its oil reserves, which came to light earlier this year and led to a slump in its share price and the swift departure of its chairman, head of exploration and finance director. To the SEC this was a breach of securities laws warranting a $120m civil penalty and a $5m commitment to developing a better compliance function. In all, a £69m rap on the knuckles. To the FSA, it was market abuse, for which it imposed on Shell a £17m fine.

On a different day and in a different case the FSA would have been able to trumpet the imposition of by far the largest fine in its four-year history. It would also have been able to make much of the speedy resolution of a high profile case against a corporate leader with more than sufficient ability to drag its heels, should it have wished.

As it is, this observer at least is left wondering why it is that the FSA could have allowed the SEC to impose a penalty four times as large for the very same crime. There is also the suspicion that only the traditional crusading zeal of the US authorities has hurried the ending of this second chapter in Shell’s very public penance. Left to its own devices, one can only suspect that the FSA’s aim would have been far lower and its process more drawn-out.

Shell is doubtless grateful to have got this far so quickly; £86m of penalties is, after all, a drop in the ocean for the Anglo-Dutch oil group. It represents only about 0.1% of the group’s market value and 0.5% of its annual profits. Remember that its oil reserves were overstated by more than 20%, and that this exaggeration had persisted for a considerable time with the knowledge of some of its most senior executives.

The administering of corporate justice in the American way will, like a fast food meal, prove of only fleeting satisfaction to some. Although such fines look big to the untutored eye, because they represent only a tiny fraction of corporate worth, they may not have the effect that those feeling damaged may desire. This is no argument for regulators deliberately to go slow, but it does raise the importance of direct retributive action by alleged financial victims.

Shell faces the prospect of a string of civil actions from shareholders who feel duped. This is one reason, presumably, why the company has neither admitted nor denied its guilt in reaching its regulatory settlements – even though this will leave an even more bitter taste in some of its detractors’ mouths. They, though, may yet have criminal actions against individual Shell executives to look forward to, as well as shareholder pursuit of damages.

The FSA’s sprint in the Shell case, however inspired, is not the first evidence that it has discovered an accelerator pedal in its disciplinary steamroller. Market players were recently astonished at the speed with which the regulator cleared Stuart Rose of insider dealing when he purchased shares in Marks & Spencer shortly before Philip Green declared his desire to buy the company.

This astonishment stemmed not from any belief that such swift judgment was inappropriate – if a man is innocent, and embroiled in a hostile takeover, then the sooner that is made clear the better – but that it just never happens like that in the UK. The FSA’s wheels grind notoriously slowly. Can we now expect all future insider dealing cases to proceed at a similar gallop? It seems unlikely.

We are still waiting for the conclusion to the regulator’s broader investigation into dealings in M&S shares. Those innocent of any wrongdoing but whose names have appeared in the press might now be wondering how long they will have to wait to receive the exoneration that has already been secured by Stuart Rose.

The FSA, not short of resources but often unable to corral them effectively, would love all alleged miscreants to cooperate as readily as Shell. The glacial progress of the inquiry into split capital investment trusts demonstrates the worst of the old adversarial ways. A cultural change on both sides of the table is necessary. Given our propensity to adopt American ways, it is also likely too.

·: Edmond Warner is chief executive of IFX Group

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