The New York Times: Regulators' Scrutiny Rises in Britain in Shell Case
By HEATHER TIMMONS
Published: March 15, 2004
LONDON, March 14 - Britain's top market regulator has begun an informal investigation into the Royal Dutch/Shell Group's restatement of its proven reserves in January, joining Dutch regulators and the Securities and Exchange Commission in the United States.
As regulators' scrutiny increases, Shell's board is spending more time focusing on the controversy surrounding the sharp reduction in its accounting of oil and natural gas reserves, which surprised investors and analysts. "There are always board meetings now," said Aad Jacobs, chairman of Shell's audit committee, which is investigating the reason for the write-down of reserves. "We have decided to talk with each other every two or three days."
Mr. Jacobs declined to specify what the agenda would be, but said the audit committee was awaiting a final report on the matter. The committee hired the London office of the law firm of Davis, Polk & Wardwell to investigate.
The pressure on Shell and on its board and executives is unlikely to let up any time soon. On Friday, the company is to publish its annual report, which will disclose the amount paid to the former chairman, Sir Philip Watts, and the head of exploration and production, Walter van de Vijver. If either were given performance-related bonuses or raises in 2003, investors are expected to be highly critical.
The two executives were asked to leave on March 3, after a preliminary board investigation into the reasons Shell decreased its estimates by 20 percent. A series of internal memorandums obtained by The New York Times shows that Shell executives knew of the reserve discrepancy as early as 2002, but opted not to disclose the problem to investors.
Mr. Jacobs denied published reports that other executives might be asked to leave. "There are more rumors than truth" in the news media about Shell right now, he said, "and this is one of the rumors."
Both Shell's new chairman, Jeroen van der Veer, and the chief financial officer, Judy Boynton, were advised of the reserve issue in 2002, according to the internal memos.
The company confirmed Sunday that it had spoken with the British regulator, the Financial Services Authority. "As you can expect, we have been in contact with the F.S.A.," a spokesman, Matt Samuel, said. "We will continue to work with them."
A spokeswoman for the regulatory authority declined to comment whether it was investigating, but added that "listed companies have to keep the market informed of price-sensitive information without delay."
Some securities lawyers said they expected that regulators on both sides of the Atlantic might regard the investigation and any punishment of Shell and its executives as a way to prove their might, after a series of acrimonious discussions between European and American regulators over new S.E.C. guidelines applied to foreign companies.
Dana T. Ackerly II, a lawyer with Covington & Burling in Washington, said, "This may be a situation where the S.E.C. says, We've gotten a hard time from the E.U. about our rules being imposed, and now it turns out there is a problem and we actually do need to protect U.S. investors.''
What will be interesting to watch, Mr. Ackerly added, is how the S.E.C. tries to enforce punishments on foreign executives.
Some European regulators are also increasing their activity. In December 2001, the Financial Services Authority was given unlimited power to fine individuals and companies. Previously, it would only issue censures. The authority cannot file criminal charges.
Dutch regulators are under pressure to toughen their rules after investigations disclosed that Parmalat, the Italian dairy company now in bankruptcy, offered bonds through trust companies.
On Friday, Shell Transport and Trading of Britain and Royal Dutch Petroleum, the publicly listed companies that make up the Shell group, will issue their 2003 annual reports as well as a report on the combined companies that goes back four years.
Investors are expected to focus on the salaries and bonuses awarded to Mr. Watts and Mr. van de Vijver in 2003, and whether Shell will retroactively revise its reserves back to 1999. Mr. Samuel, the Shell spokesman, declined to comment on documents not yet published.