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The Independent: US investors launch legal action against Shell over reserves

By Michael Harrison

27 January 2004


The chairman of Shell, Sir Philip Watts, suffered a fresh setback yesterday after a group of US investors filed a class action against the oil giant accusing it of deliberately overstating its reserves in order to mislead the market.


The action, which cites Sir Philip by name with eight other directors of the Anglo-Dutch company, is being brought by the US law firm Milberg Weiss Bershad Hynes & Lerach.


News of the lawsuit comes just 10 days before Sir Philip is due to face the wrath of investors at Shell's annual results presentation, when he will be called upon to explain the "shocking and unprecedented" decision to cut the company's estimate of proven reserves by 3.9 billion barrels or 20 per cent.


The US action, brought in the district court for New Jersey, claims that Shell and the named directors violated the Securities Exchange Act by issuing a series of "material misrepresentations" relating to its reserves. In particular, the complaint alleges that Shell "deliberately violated accounting rules and guidelines" relating to the booking of reserves with the result that the company's true value in the financial markets "was severely overstated and misunderstood".


After the shock disclosure of the reserves downgrade, Shell shares plummeted, knocking 8bn from the combined value of its two quoted halves - Shell Transport and Trading and Royal Dutch. The US law firm co-ordinating the action said most analysts concluded that because of the magnitude of the cut in reserves and the clear SEC guidelines relating to classification of reserves, the overstatement could not have been the result of error or accident. Rather, the law firm says, the reserves were "knowingly overstated to preserve the companies' credit ratings and to shore up their competitive position".


Sir Philip is regarded as having compounded the fiasco by failing to attend the conference call for analysts and investors at which the bombshell was dropped. In a subsequent e-mail to staff, Sir Philip said his absence avoided clouding the news with "personality issues".


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