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The misreporting scandal: Shell penalties ‘bolster’ “BILLION-DOLLAR” class action lawsuits

The Times: The misreporting scandal

Shell penalties ‘bolster’ “BILLION-DOLLAR” class action lawsuits

“A source close to the SEC told The Times last night that a list of questions had been sent to all Shell executives involved in the inquiry. It is understood that those questions have been passed to, among others, Sir Mark Moody-Stuart”

From James Doran, Wall Street Correspondent

August 26, 2004

BILLION-DOLLAR class action lawsuits against Shell will be bolstered by the company’s settlement with UK and US regulators over its oil reserves misreporting scandal, Wall Street lawyers said last night.

Melvyn Weiss, the senior partner of Milberg Weiss, said that the $150 million (£84 million) in fines imposed on Shell by the Securities and Exchange Commission (SEC) and the Financial Services Authority (FSA) on Tuesday “demonstrate that our allegations are well founded”. The New York law firm is claiming damages from Shell on behalf of the company’s employee pension fund.

Mr Weiss said the regulators’ findings could not be used as evidence in the class action trial against Shell but that they would make it very difficult for the oil major to move to dismiss the action in the early stages. “The settlement certainly bolsters our case,” he said.

The claims came as the SEC threatened to subpoena senior executives who worked for Shell during the late 1990s, if they refused to co-operate with its investigation into the scandal.

A source close to the SEC told The Times last night that a list of questions had been sent to all Shell executives involved in the inquiry. It is understood that those questions have been passed to, among others, Sir Mark Moody-Stuart, the chairman of Shell’s committee of managing directors from 1997 to 2001, and Paul Skinner, a managing directors’ committee member between 2000 and 2003 and the current chairman of Rio Tinto, the resources group.

The source said that a “polite request” for answers to the questions would be sent to legal representatives in England and if the request was ignored then formal legal subpoenas would soon follow.

If the subpoenas are, in turn, ignored, then the matter will be handed over to the FSA, whose investigators will question the directors on behalf of the SEC.

“The wider investigation into Shell directors, the individuals involved in this scandal, has been going on or some time,” the source said.

“One way or the other the SEC will get answers and at some point the regulator will likely be filing charges against certain individuals.”

On Tuesday the SEC and FSA reports accused the oil giant of market abuse by flattering its reserves of oil between 1998 and 2003. The regulators said in their reports that questionable practices surrounding the way the company accounted for its reserves of oil began in 1998, some two years earlier than previously thought.

The SEC fined Shell $120 million for failing to comply with strict rules surrounding the accurate reporting of oil reserves. The SEC declined to comment.

As part of the fine, Shell, which neither admitted nor denied any wrongdoing in the affair, was compelled to sign an agreement with the SEC that it would co-operate fully with any further investigation into the matter — including handing over personal correspondence and files about individual directors either past or present.

“It is very typical for the SEC to sanction a company first, before individuals are held accountable for a matter,” the source said. “If the SEC charges anyone, that comes second. The SEC is there to protect investors first and foremost.”

The reports say Shell executives were under pressure to boost reserves and were “inappropriately incentivised” to achieve results.

In January Shell stunned the world as it revealed it had overstated oil reserves by as much as 4.47 billion barrels.

Stan Bernstein, senior partner with Bernstein Liebhard & Lifshitz, which claims to represent investors who bought stock in the past five years, yesterday downplayed the joint report. “It doesn’t matter what the regulators say,” he said. “We are charged with obtaining the evidence. We are going to find out what happened, when it happened and who’s responsible.”

He criticised the SEC’s fine as “a slap on the wrist” for Shell. “It’s not even a rounding error on their balance sheet,” he said.

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