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SEC, FSA Fine Shell For Reserves Overstatements

THE WALL STREET JOURNAL: SEC, FSA Fine Shell For Reserves Overstatements

“The SEC can still bring civil charges against individuals. Prosecutors at the U.S. Justice Department – who can bring criminal and civil charges – are continuing their own probe into the reserves issue”


August 24, 2004 2:25 p.m.

By Mark Long


LONDON — U.S. and British listing authorities Tuesday formally announced they are fining embattled oil giant Royal Dutch/Shell Group (RD, SC) around $150 million for overstating its tally of oil and natural gas reserves.

The fines – announced simultaneously by the U.S. Securities and Exchange Commission and the U.K.’s Financial Services Authority – are in line with fines Shell said last month it had agreed to pay the agencies in a preliminary agreement.

“Shell ‘s overstatements of its oil reserves, which occurred over an extended period, mandate a strong enforcement response…to deter Shell and others from engaging in similar misconduct,” said Harold F. Degenhardt, the administrator of the SEC’s Fort Worth office.

Degenhardt added that the agency’s investigation continues, with a focus on the individuals “responsible for Shell ‘s failures.”

Shell was fined $120 million by the SEC, and the company agreed with the agency to commit an additional $5 million to overhauling its internal compliance procedures.

The SEC can still bring civil charges against individuals. Prosecutors at the U.S. Justice Department – who can bring criminal and civil charges – are continuing their own probe into the reserves issue and Shell and its executives still could face costly civil settlements.

In the Netherlands, the Dutch financial-markets regulator, the AFM, is still investigating whether Shell officials violated rules against insider trading, an AFM spokesman said. Euronext Amsterdam, which investigates any suggestions of market abuse, has “asked questions of Shell ,” a spokesman for the exchange said.

Though Shell has consented to pay the fines to the SEC and FSA, the company again refused to admit or deny the agencies’ findings.

The company’s Chairman, Jeroen van der Veer, said the conclusion of these investigations “represents another significant step for Shell in putting the reserves issues behind us.”

Shell ‘s former chairman, Philip Watts, and the company’s head of exploration and production, Walter van de Vijver, were both forced out of their jobs this spring following the first disclosure that oil and gas reserves had been overstated. The Anglo-Dutch company eventually reduced its tally by more than a fifth, or 4.47 billion barrels.

Both agencies blasted Shell for, as the SEC put it, filing “materially inaccurate” annual reports for several years up through 2002 and for waiting until January of this year to start correcting the false reserves reports.

The SEC also said the reserves overstatements led the company to overstate its future cash flows by $6.6 billion in its 2002 annual report filed to the agency, called a 20-F. All the overstatements were corrected in an amended 20-F filed in July.

The FSA said Shell ‘s swift and thorough cooperation since the reserves overstatements were disclosed saved the company from a much higher fine than the GBP17 million it levied against the company.

The SEC’s Degenhardt concurred.

“The cooperation certainly did play a role in the amount of the fine. They (Shell ), at an early stage determined they wanted to do the right thing,” Degenhardt said in a telephone interview.

Shell spent months trying to right its relationship with the regulators. It turned over troves of documents and shared the full findings of an internal investigation of the reserves overstatements.

The FSA’s fine, while far smaller than that levied by the SEC, is more than four times the size of its previous record, a GBP4 million levy against a unit of Credit Suisse First Boston in December 2002 for attempting to mislead Japanese regulators about the extent of its business in Japan.

In its statement, the FSA said that the agency continues to investigate “other aspects of this matter.” An FSA spokesman declined to elaborate. The spokesman also declined to comment on whether the FSA is investigating any individuals in connection with the case; its fine against the company did not single out any individuals. He also declined to comment on whether any aspect of the case had been referred to U.K. prosecutors.

Ousted executives Watts and van de Vijver were handed generous severance packages of GBP1.06 million and EUR3.8 million, respectively, which angered some investors concerned about rewards for failure.

While the SEC’s Degenhardt declined to name any individuals under investigation, he said seizure of severance packages remained an option for the SEC if wrongdoing is found.

“Certainly going after monies, including money paid to departing individuals, is a weapon…that the commission can use to right what it views as a wrong,” he said.

Degenhardt said the money collected from the SEC’s fine would ultimately be disbursed to Shell shareholders who lost money because of the overstatements, though it hasn’t been decided yet exactly how this will be done.

Company Web site:

-By Mark Long; Dow Jones Newswires; +44 (0)20 7842 9356; [email protected]

(Silvia Ascarelli in London contributed to this article.)

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