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The Guardian: Shell’s shame: FSA spells out abuse

The Guardian: Shell’s shame: FSA spells out abuse

“Fadel Gheit, an oil analyst at broker Oppenheimer & Co in New York, said the latest revelations from the regulators proved this was a corporate scandal of “historic proportions”. He added: “Short of Enron… I have not seen anything like this in 30 years of covering the market.”

Regulator confirms £17m fine and accuses group of ‘unprecedented misconduct’ in oil and gas reserves scandal

Terry Macalister

Wednesday August 25, 2004

The Financial Services Authority yesterday accused Shell of “unprecedented misconduct” for misleading the markets over the reporting of oil and gas reserves.

The searing criticism came alongside confirmation of a £17m fine for “market abuse” from the FSA plus a further $120m (£67m) from the Securities and Exchange Commission in the United States.

The main part of the two regulatory inquiries is now over, but the FSA said a review “into other aspects of this matter” was continuing.

The SEC made clear it is also still investigating the behaviour of key individuals, presumably including former Shell chairman Sir Philip Watts.

The Anglo-Dutch group, which controls 1,000 UK petrol stations and 23% of North Sea production, shocked the stock market in January by announcing it had to downgrade its oil reserves by 20% to meet SEC guidelines.

Shell later downgraded these figures a further 5% and then ousted chairman Sir Philip and exploration director Walter van de Vijver after revealing what appeared to be a reserves cover-up.

Shell, which still faces legal action from angry investors and is the subject of takeover speculation, said it would pay all the fines. But it insisted it was making the settlements “without admitting or denying the findings and conclusions”.

Fadel Gheit, an oil analyst at broker Oppenheimer & Co in New York, said the latest revelations from the regulators proved this was a corporate scandal of “historic proportions”. He added: “Short of Enron, which involved criminality, I have not seen anything like this in 30 years of covering the market.”

Harold Degenhardt, the administrator of the SEC’s Fort Worth office, which has been dealing with the scandal, said significant civil penalties were necessary “to deter Shell and others from engaging in similar misconduct”. Future investigations would “focus on, among other things, the people responsible for Shell’s failures”.

Shell shares closed down 5p at 396.75p yesterday, having taken a pounding since the first reserves announcements were made. Some £3bn was wiped off its value on one day alone in January.

The £17m penalty in Britain, revealed by Shell last month, is small for a firm that makes £1bn in profits every six weeks. But it is still the biggest ever imposed on a UK firm and four times larger than any previous fine. A spokesman for the regulator insisted it was a suitable punishment, even for a company as big as Shell.

“We believe this will send a clear message to others that we will not tolerate this kind of behaviour,” he said.

The FSA accused Shell in a formal statement of making “false and misleading announcements” in relation to its reserves. A 17-page statement from the regulator gave graphic detail based on internal memoranda regarding how executives were aware of the problems they faced at least four years before. The regulator details the way in which an internal group reserves auditor’s report for 2001 expressed concerns that the company’s reserve figures were being artificially ramped up to help secure better financial bonuses for staff.

“The widespread use of reserves targets in score cards affecting variable pay is seen to affect the objectivity of staff in some [operating units] when proposing reserves additions”, according to the internal group reserves auditor’s report quoted in the regulator’s document.

A year earlier the auditor had suggested that proved reserves figures for Nigeria could only be supported through “significant aspirational upturns in future offtake levels in order to justify their proved reserves figures”.

The FSA report says the auditor raised these issues in each of the next two annual reports without the company doing anything about it.

The regulator concludes: “By mid-2000, Shell had information indicating that the proved reserves figures reported to the market for at least the previous three years may have been overstated.”

Yesterday Jeroen van der Veer, a Shell board member for many years but now the company’s chairman, said Shell had worked hard over the past months to improve its systems to prevent any recurrence.

The oil company wanted to put these issues behind it now “and continue our efforts to regain and maintain the confidence and trust of our investors, partners, customers and employees”.

http://www.guardian.co.uk/business/story/0,,1290141,00.html

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