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Shell Won’t Face Criminal Charges In Reserves Probe

THE WALL STREET JOURNAL: Shell Won’t Face Criminal Charges In Reserves Probe

Thursday 30 June 2005

By KARA SCANNELL

Staff Reporter of THE WALL STREET JOURNAL

June 30, 2005; Page B2

Federal prosecutors said they won’t criminally charge Royal Dutch/Shell Group in a probe of its overstatement of energy reserves, citing the oil titan’s cooperation.

“Because Shell has cooperated fully with the government’s investigation, has implemented substantial remedial efforts to enhance its reserves reporting and compliance, and has paid a $120 million civil penalty to the [Securities and Exchange Commission], the public interest has been sufficiently vindicated,” David Kelley, U.S. attorney for the Southern District of New York, said in a statement yesterday. “Moreover, criminal prosecution would likely have a severe and unintended disproportionate economic impact upon thousands of innocent Shell employees.”

However, the role of individuals in the accounting scandal at Shell, one of the world’s biggest public oil companies, is still being investigated. In an interview, Mr. Kelley said, “We’re continuing to evaluate the case against the individuals.”

The decision not to prosecute the company comes amid a wave of legal action involving alleged corporate fraud that came to light with the 2001 collapse of Enron Corp. Given the intensity of the government’s crackdown, companies that might formerly have resisted investigation now often scramble to cooperate to avoid prosecution; that, however, can lead to prosecution of individual executives. At the same time, authorities have grown increasingly mindful of the damage that can occur when companies are indicted.

In 2004, Shell reported it has misstated oil and natural-gas reserves for 2002 and other years. Reserves are a key indicator of an oil company’s health and are closely watched by industry analysts. The oil company’s audit committee produced an extensive report that placed blame on senior executives, uncovering emails that showed that some employees had raised red flags over the accounting of the reserves.

Shell subsequently fired the chairman of its committee of managing directors and the chief executive of its exploration-and-production unit, and it removed 4.47 billion barrels of oil equivalent from its books, about 23% of the total. Last summer, in addition to settling with the SEC in the matter, Shell also settled with British regulators.

In yesterday’s statement, Mr. Kelley said Shell had turned over documents and made employees based outside the U.S. available for interviews in this country, both factors in the decision not to prosecute.

Ralph Ferrara, a lawyer for Shell, said the company is “thankful and appreciative” for the decision.

Some companies have been held accountable for the conduct of their employees. These include the now-defunct Arthur Andersen LLP, which was convicted in 2002 of obstruction of justice tied to its Enron audits; the Supreme Court recently overturned the conviction. The Justice Department currently is considering whether to indict accounting firm KPMG LLP for its promotion of allegedly abusive tax shelters.

Write to Kara Scannell at [email protected]

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