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Stanford Law School: Royal Dutch Petroleum Company (Shell)

Stanford Law School: Royal Dutch Petroleum Company (Shell)

According to a press release dated September 2, 2005, Shell is to pay out $9.2 million and has agreed to make changes to its corporate governance in order to settle four lawsuits brought against it by disgruntled shareholders. However, the agreement is likely to be just the start of a new round of reserve scandal induced headaches for the company.”

September 2005

SECURITIES CLASS ACTION CLEARING HOUSE

Summary: According to a press release dated September 2, 2005, Shell is to pay out $9.2 million and has agreed to make changes to its corporate governance in order to settle four lawsuits brought against it by disgruntled shareholders. However, the agreement is likely to be just the start of a new round of reserve scandal induced headaches for the company. The $9 million agreement and commitment to corporate changes will settle a case currently pending in New York and New Jersey courts.

In a press release dated August 17, 2005, a US federal judge has ruled that a class action lawsuit for securities fraud against the Royal Dutch Shell PLC can now proceed. In his 147-page decision, US district court chief judge John Bissell said the plaintiffs ‘adequately’ provided reason for the court to look at the claims. Bissell also said that Shell, even if it is headquartered in the Netherlands, does not exempt it from being accountable in the US.

The complaint alleges defendants violated sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder by the Securities and Exchange Commission, and all amendments thereto by issuing a series of material misrepresentations to the market during the Class Period.

The complaint alleges that defendants’ deliberately violated accounting rules and guidelines relating to oil and gas reserves which resulted in a shocking and unprecedented overstatement of oil and gas reserves, the eventual disclosure of which damaged purchasers of Royal Dutch and Shell Transport securities and rocked the investment community.

Specifically, the complaint alleges that Royal Dutch and Shell Transport had classified and reported, in SEC filings and other public documents, certain reserves as “proved reserves” from a project off the western coast of Australia called the Gorgon Joint Venture, and various projects in Nigeria. In fact, unbeknownst to investors, the reserves did not meet SEC and industry requirements necessary to be classified as “proved,” and were improperly reported as proved reserves in Royal Dutch’s and Shell Transport’s financial reports, thereby materially artificially inflating a key measure of the companies’ financial position and competitive standing. As a result of these material misrepresentations, Royal Dutch and Shell Transport’s true value in the marketplace was severely overstated and misunderstood.

The complaint further alleges that on January 9, 2004, Royal Dutch announced that it was going to write-down its proved oil and gas reserves by 20%, or 3.9 billion barrels, from 19.5 billion barrels to 15.6 billion barrels. The write-down: (a) cut Shell’s reserve life from 13.4 years to 10.6 years; (b) increased its worldwide 5-year average reserve replacement cost per barrel from $5.49 to $12.57 — $7.06, or 128% greater than the industry average of $5.51; (c) increased Shell’s finding and development costs to $7.90 per barrel — well above the costs of its competitors; and (d) reduced Shell’s Appraised Net Worth downward by up to 7.1%, or $9.6 billion. Following the announcement, Royal Dutch ADRs fell 7.87% from $52.76 to $48.61 on the NYSE and Royal Dutch ordinary shares fell by 7.10% from the U.S. equivalent of $52.91 to $49.15 on the Amsterdam exchange. Shell Transport ADRs were down 6.96% from $44.81 to $41.69 on the NYSE and Shell Transport ordinary shares were down 6.84% on the London exchange from the U.S. equivalent of $7.36 to $6.86.

In addition, Moody’s placed the Aaa rating of Royal Dutch and Shell Transport under review for possible downgrade because the write-down materially and adversely affected the companies’ reserves-to-debt ratio. Following the belated disclosure, most analysts and commentators concluded that, because of the magnitude of the write-down and the clear SEC and industry guidelines relating to reserve classification, the reserve overstatements could not have been a result of error or accident, but rather, that the reserves were knowingly overstated to preserve the companies’ credit rating and to shore up their competitive position.

INDUSTRY CLASSIFICATION:

SIC Code: 2911

Sector: Energy

Industry: Oil & Gas – Integrated

royaldutchshellplc.com and its sister websites royaldutchshellgroup.com, shellenergy.website, shellnazihistory.com, royaldutchshell.website, johndonovan.website, shellnews.net and shell2004.com are all owned by John Donovan. There is also a Wikipedia article.

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