Royal Dutch Shell Group .com

Financial Times: US regulators ready to get to grips with internal report


By Adrian Michaels in New York

Apr 20, 2004


The summary of Shell's internal report reads like a company road map for regulatory actions against Sir Philip Watts and Walter van de Vijver and a long plea, crafted with the help of experienced US lawyers, to treat the company lightly.


All of Shell's latest disclosures will be noted carefully by regulators.


The Securities and Exchange Commission and the Department of Justice, the US's civil and criminal authorities, and the UK's Financial Services Authority are all investigating the company. They do not comment on individual investigations but, in the US at least, sanctions against the whole company - as opposed to individuals - are usually determined by its willingness to co-operate and remedial actions taken. But equally critical is how high up the management ladder the wrongdoing occurred and how long it lasted.


David Becker, a former general counsel at the SEC, and now at the law firm of Cleary Gottlieb Steen & Hamilton in Washington, said: "There is a lot of pressure on companies to give a full account [to regulators and the public] and to deal appropriately with the people who misbehave."


The SEC first has to decide if people at Shell were intent on defrauding investors by manipulating numbers that would affect the share price or financial statements. The SEC has a lower burden of proof in its civil cases than would be needed for any Department of Justice criminal case.


Shell's disclosures yesterday make a compelling read for the SEC. First the report's summary says that the reserve replacement ratio - the rate at which used oil and gas was being replaced by new finds - was central to company announcements as it wrestled with investor sentiment.


Although the bottom line was little affected by reserve downgrades, Shell makes it clear how conscious its executives were of losing investor confidence by lowering the replacement ratio.


Then the report quotes e-mails from both Mr van de Vijver and Sir Philip in which they voice at best ambiguous views on number manipulation. Sir Philip talks of "considering the whole spectrum of possibilities" in boosting replacement ratios. Mr van de Vijver talks of the market being "fooled" and of "lying about the extent of our reserves issues".


The company then admits to significant internal weaknesses itself - in the internal audit function and in the compliance role of its finance department. But it devotes the rest of the summary to detailing its remedial efforts.


The Department of Justice upgraded its guidelines early in 2003 on whether whole companies should be prosecuted, a potentially devastating blow. It now has "increased emphasis on and scrutiny of the authenticity of a corporation's co-operation".


The SEC, meanwhile, opens a file at the start of an investigation that tracks how co-operative a company is. It monitors who leaves the company and the actions of those who are left behind.


The company will also have to fend off private litigation from disgruntled investors. Kenneth Vianale, a Florida lawyer, said any disclosure helped his case, but the whole report - withheld, the company said, pending outside probes - was crucial. "The question is whether they'll give us the bulk of the information."

Click here to return to Royal Dutch Shell Group .com