SEC hands Shell US$120m fine

Jeroen van der Veer, second from right, president of Royal Dutch Petroleum and chairman of the committee of managing directors,is applauded as he rings the opening bell at the New York Stock Exchange on Aug. 3. Joining him were David Lawrence, left, Shell International Group Investor Relations, John Thain, second left, NYSE CEO, and Nina Henderson, non-executive director of Shell Transport. The occassion marked the 50th anniversary of the listing of the company. The SEC fined the company on Tuesday for misleading investors. PHOTO: AP

A US$120 million fine levied on Royal Dutch/Shell Group by the US' Securities and Exchange Commission resolves the company's part in the SEC inquiry into the overstatement of oil and gas reserves, but the role of individuals is still under investigation, regulators said Tuesday.

The SEC and the oil giant announced that the settlement, which the company agreed to in principle last month, has been made formal. Under the accord, the world's third-largest publicly traded oil company also agreed to spend US$5 million on an internal compliance program.

The US$120 million civil fine is the third-largest imposed by the SEC for alleged accounting fraud, behind WorldCom Inc's agreement to pay investors US$500 million in May 2003, and US$150 million in a fine and restitution by Bristol-Myers Squibb Co announced earlier this month.

Royal Dutch/Shell neither admitted to nor denied wrongdoing in the settlement but did agree to refrain from future violations of securities laws. The company still faces an investigation by the Justice Department.

"As our investigation continues we intend to focus on, among other things, the people responsible for Shell's failures."

Harold Degenhardt, administratorof the SEC's office in Fort Worth, Texas

The Anglo-Dutch company also agreed to pay PD17 million, or about US$30 million, to settle related allegations by Britain's Financial Services Authority.

Its apologized to shareholders this spring for failures in governance that led the company to overstate its proven oil and natural gas reserves by 4.47 billion barrels, or about 23 percent, for 1997-2002. Shell has acknowledged that the overstatement of reserves and "inappropriate" accounting in other business areas resulted in profits being inflated by US$432 million.

The company's disclosure of the reserve inflation in January stunned shareholders and the oil industry and led to the dismissal of several top executives in a developing scandal.

Reserves an oil company's most valuable asset and a critical indicator of its financial condition, and any reduction in their estimated size is a serious concern for investors.

"Shell's overstatements of its oil reserves, which occurred over an extended period, mandate a strong enforcement response ... to deter Shell and others from engaging in similar misconduct," said Harold Degenhardt, administrator of the SEC's office in Fort Worth, Texas. "As our investigation continues we intend to focus on, among other things, the people responsible for Shell's failures."

The scandal led to the resignations of Shell chairman Philip Watts, head of exploration and production Walter van de Vijver, and chief financial officer Judy Boynton.

At least 30 company employees have been questioned by the SEC since it began its formal investigation in February.

"Shell has worked hard over the past months to improve its systems and controls, and implement other remedial measures to prevent any recurrence of these unfortunate events," Jeroen van der Veer, chairman of the company's Committee of Managing Directors, said in a statement issued Tuesday from London. "Shell has taken these matters seriously and has cooperated fully with the regulatory authorities."

The reserves fiasco also sparked a number of shareholder class-action lawsuits in the United States, and prompted calls from investors for a major shake-up of the company's complicated, bi-national structure. Royal Dutch Petroleum Co. of the Netherlands controls 60 percent of the company and Britain's Shell Transport & Trading Co. PLC holds the remaining 40 percent.

Trial William Lerach, who represents two pension funds in the USthat held Shell shares and are suing the company over the reserves misstatements, has called the SEC's decision to settle "short-sighted and disappointing."

Also in the scandal's wake, the SEC is considering requiring outside auditors to review and certify energy companies' oil and natural gas reserves. A June 24 memorandum from two SEC officials to the agency's chairman, William Donaldson, indicates that the move being considered would mandate that outside auditors review and certify oil and gas reserves the way they do now for companies' finances.