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IN RE ROYAL DUTCH/SHELL TRANSPORT SECURITIES LITIGATION

August 9, 2005.

In re: ROYAL DUTCH/SHELL TRANSPORT SECURITIES LITIGATION.


The opinion of the court was delivered by: JOHN BISSELL, Chief Judge, District

OPINION

This matter comes before the Court on various motions to dismiss, pursuant to Federal Rules of Procedure 12 (b) (1), 12 (b) (2) and 12 (b) (6), by the Individual and Corporate Defendants of Royal Dutch/Shell Transport and Defendants KPMG NV, KPMG International, PwC UK and PwC International. On July 13 and July 15, 2005, this Court heard oral arguments on the aforesaid motions.*fn1 This court has jurisdiction over this matter pursuant to Section 27 of the Exchange Act, 15 U.S.C. § 78aa.

FACTS & BACKGROUND

  Overview

  Lead Plaintiff, the Pennsylvania State Employees' Retirement System and the Pennsylvania Public School Employees' Retirement System ("Lead Plaintiff"), brings this action on behalf of itself and all persons who purchased the securities of N.V. Koninklijke Nederlandsche Petroleum Maatschappij, a/k/a the Royal Dutch Petroleum Company, ("Royal Dutch") and The Shell Transport and Trading Company, PLC ("Shell Transport") (together, Royal Dutch and Shell Transport will be referred to as either "RDS", "The Shell Group" or the "Companies"), including the ordinary shares traded on overseas markets and the New York Stock Exchange ("NYSE") and the American Depository Receipts ("ADRs") trading on the NYSE between April 8, 1999 and March 18, 2004 (the "Class Period"). The Defendants include: RDS, several of RDS's current and former senior executives, and RDS's outside auditors, PricewaterhouseCoopers LLP ("PWC UK") and KPMG Accountants N.V. ("KPMG NV"), as well as PricewaterhouseCoopers International and KPMG International. The Complaint seeks to recover damages caused by alleged violations of the federal securities laws.

  The claims in the Complaint stem from the dissemination by RDS of what Plaintiff characterizes as "materially false and misleading statements" concerning RDS's reported proved oil and natural gas reserves. See Consolidated Amended Class Action Complaint ("Complaint"), ¶ 3. The Complaint alleges that, during the Class Period, RDS issued false public reports, overstating: (a) their proved oil and natural gas reserves by billions of barrels of oil equivalent ("boe"), (b) their reserves replacement ratio ("RRR"), and (c) their future cash flows by over $100 billion. Id. Plaintiff claims that before and during the Class Period, the RDS Defendants repeatedly represented to the investing public that RDS was successfully identifying new proved oil and gas reserves and replacing existing proved reserves depleted by production. New and existing proved reserves are key performance indicators in the oil and gas industry. Id. ¶ 4. Such representations were made in proposals to market analysts, press releases, Annual Reports, filings with the United States Securities and Exchange Commission ("SEC") and through other public media. Id. RDS's joint reports include Form 20-F, which the SEC requires to be filed annually. The RDS Defendants represented the following on Form 20-F for the years 1998-2002:
1998
Reserves
During 1998 the Group's total proved reserves for oil (including natural gas liquids) and natural gas increased from 19.4 to 20.5 billion barrels of oil equivalent. . . . The net additions to proved reserves more than replaced the 1998 production, with replacement ratios of some 140% for oil (compared with 130% in 1997) and some 250% for gas (compared with 210% in 1997).
1999
Reserves
The overall 1999 replacement ratio of proved crude oil and natural gas reserves and oil sands stands at 101% (147% excluding 1999 divestments and acquisitions). . . . The three-year rolling average replacement ratio for total crude oil and natural gas proved reserves . . . stands at 132%, reflecting the fact that oil and gas production over 1997-99 has been more than replaced by net additions over the same period.
2000
Reserves
The proved hydrocarbon reserves replacement ratio for 2000 was 105%. . . . Therefore production during the year of 1.4 billion barrels of oil equivalent was more than replaced. . . . The three-year rolling average proved hydrocarbon reserves replacement ratio . . . stands at 117%.
2001
Reserves
The proved hydrocarbon reserves replacement ratio for 2001 is 74% . . . [A]nd the three-year rolling average . . . now stands at 101%. Proved reserves are equivalent to more than 14 years of current production.
2002
Reserves
The proved hydrocarbon reserves replacement ratio for 2002 was 117% and the five year rolling average . . . now stands at 109%. . . . Proved reserves are equivalent to more than 13 years of current production.
Id. ¶ 4.

  Furthermore, the Complaint alleges that PWC UK and KPMG NV, individually and jointly, issued materially false, misleading and unqualified audit opinions that were included in the Class Period financial statements filed with the SEC by RDS. Id. ¶ 5. In the reports, PWC UK and KPMG NV purportedly misrepresented that each had conducted their respective audits "in accordance with U.S. generally accepted auditing standards ("GAAS")." Id. Furthermore, it is alleged that they falsely represented that the audited financial statements presented fairly both the financial position of the Shell Group, Shell Transport and Royal Dutch as of December 31, 1998-2002 and the results of operations and cash flows for each of those years, in accordance with generally accepted accounting principles ("GAAP"), in the Netherlands and the United States. Id.

  On January 9, 2004, before the markets opened in Europe, RDS released a disclosure entitled "Proved Reserve Recategorisation," which announced that in order to comply with SEC regulations, it would be reducing previously reported proved reserves by 20%, or approximately 3.9 billion boe. Id. ¶ 6. After that disclosure, the trading price of the ordinary shares of both Shell Transport and Royal Dutch and the ADRs of Shell Transport declined. Id. As a result of the disclosure, it is alleged that RDS lost $13.84 billion of market value. Id. After the initial announcement on January 9, 2004, RDS has further reduced its estimated proved oil and natural gas reserves three additional times — on March 18, April 19 and May 24, 2004 — for a total reclassification of 4.47 billion boe, or 23%. Id. ¶ 8.

  Since the reclassification, four civil investigations by regulatory authorities in the United States and Europe have been commenced and the United States Department of Justice has initiated a criminal investigation. Id. ¶ 11. In a January 12, 2004 article in The Wall Street Journal, former SEC chief accountant Lynn Turner was quoted as follows: "A 20% restatement of proven reserves is a humongous error. For a company like Shell to have missed its proven reserves by that much is not an oversight. It's an intentional misapplication of the SEC's rules." Id. ¶ 11. (quoting The Wall Street Journal, "Shell Cuts Reserve Estimate 20% as SEC Scrutinizes Oil Industry," January 12, 2004). The Complaint alleges that on February 3, 2004, RDS's Group Audit Committee (the "GAC") retained Davis Polk & Wardwell ("Davis Polk") to lead a limited internal review into the circumstances resulting in the overbooking of reserves. Id. ¶ 12. On April 19, 2004, RDS released the executive summary of the March 31, 2004 Report of Davis Polk to the GAC (the "GAC Report") in which Davis Polk concluded that Shell Transport had been overbooking reserves as early as 1997, during Defendant Philip Watts' and Defendant Walter van de Vijver's respective tenures as head of RDS's Exploration and Production ("EP") unit. Id. ¶ 13.

  The GAC report stated that the aforementioned executives "were alert to the difference between the information concerning reserves that had been transmitted to the public . . . and the information known to some members of management." Id. ¶ 13. The GAC report further stated that "EP managements' plan was to `manage' the totality of the reserve position over time, in hopes that problematic reserve bookings could be rendered immaterial by project maturation, license extensions, exploration successes and/or strategic activity;" however, Defendants' "strategy `to play for time' in the hope that intervening helpful developments would justify, or mitigate, the existing reserve exposures . . . failed as business conditions either deteriorated or failed to improve sufficiently to justify historic bookings." Id. ¶ 14. The Complaint alleges that the GAC Report was accepted in full by the GAC on April 15, 2004, and by the members of the Supervisory Board of Royal Dutch and the non-executive Directors of Shell Transport on April 16, 2004. Id. ¶ 15.

  The Complaint further alleges that RDS's acceptance of responsibility for the alleged conduct was also set forth in the Annual Reports disseminated by Shell Transport and Royal Dutch shortly before the Amended Complaint was filed. Id. ¶ 16. The following is an excerpt of one cited report:
In connection with the restatement of proved reserves volumes described elsewhere in this report, Royal Dutch and Shell Transport have determined, based largely upon the investigation and report to the GAC, that there were deficiencies and material weaknesses in the internal controls relating to proved reserves bookings and disclosure controls that allowed volumes of oil and gas to be improperly booked and maintained as proved reserves. The inappropriate booking of certain proved reserves had an effect on the Financial Statements, mainly understating depreciation, depletion and amortisation.
Id. ¶ 16.

  The GAC Report also described that the overbooking of oil and natural gas reserves over such a lengthy period of time was possible only "because of certain deficiencies in the Company's controls." Plaintiff alleges that "[u]nder GAAS, PwC UK and KPMG NV were required to review and understand RDS's internal control structure and determine whether reliance thereon was justified, and if such controls were not reliable, to expand the nature and scope of those controls to correct them." Id. ¶ 18. Lead Plaintiff concludes that PwC UK and KPMG NV failed to do so. Id.

  Parties

  Defendant Royal Dutch is headquartered in The Hague, The Netherlands. See Compl., ¶ 45. Its common shares are registered with the SEC pursuant to Section 12(b) of the Exchange Act and trade on the New York Stock Exchange ("NYSE"). Id. The principal trading markets for Royal Dutch shares are the NYSE and the Euronext Exchange in Amsterdam. Royal Dutch is one of the parent companies in the Shell Group and in conjunction with Shell Transport, owns, directly or indirectly, investments in the numerous companies referred to collectively as the "Group Holding Companies." Id.

  Defendant Shell Transport is headquartered in London, England. Id. ¶ 46. Its ordinary shares, as well as shares of an aggregate nominal amount of £1.50 and evidenced by ADRs, are registered with the SEC pursuant to Section 12(b) of the Exchange Act. Id. The primary market for Shell Transport's ordinary shares is the London Stock Exchange. The ADRs trade on the NYSE. Id. As the parent companies, Royal Dutch and Shell Transport do not directly engage in operational activities. Id. ¶ 47. Each own the shares in the Group Holding Companies and neither is part of the Shell Group. Id. Royal Dutch and Shell Transport appoint Directors to the Boards of the Group Holding Companies, from which they receive income in the form of dividends. Id. Royal Dutch has a 60% interest in the Group and Shell Transport has a 40% interest.

  Defendant Sir Philip Watts is a citizen of the United Kingdom. Id. ¶ 48. Watts served as a Director and as a Managing Director of Shell Transport beginning in 1997, as Shell Transport's Chairman and as Chairman of the Committee of Managing Directors ("CMD") beginning in 2001, and as a Group Managing Director beginning in 1997. Id. Watts was terminated on March 19, 2004. Id. Defendant Watts who joined the Shell Group as a seismologist in 1969 held positions in Asia Pacific and Europe, leading to positions as Exploration Director Shell-U.K. from 1983 to 1985, head of various exploration and production functions in The Hague from 1985 to 1991, Chairman and Managing Director in Nigeria from 1991 to 1994, Regional Coordinator Europe from 1994 to 1995, Director Planning Environment and External Affairs, Shell International from 1996 to 1997, and CEO of the EP unit from 1997 to 2001. Id. Watts signed the Annual Reports on Form 20-F filed with the SEC for 2001-2002 and allegedly falsely certified the 2002 Form 20-F, including the financial statements and reports, of Shell Transport and the Shell Group, pursuant to the Sarbanes-Oxley Act of 2002. The Complaint alleges that despite the Shell Group's poor performance, Watts' salary more than doubled between 1999 and 2002, due in large part to reserve replacement credits on his compensation scorecard. Id. It is alleged that in 2003 Watts received a 55% pay raise, increasing his base salary to £1.8 million (approximately $3.2 million). Id. Upon termination, Watts allegedly received a severance package that included three months' salary for 2003 (£450,000). Id.

  Defendant Walter van de Vijver, a citizen of the Netherlands, served as a Director of Royal Dutch, the CEO of the EP unit, a Managing Director of Royal Dutch, a Group Managing Director, and a member of the CMD from 2001 until his termination on March 19, 2004. Id. ¶ 49. Defendant van de Vijver joined RDS in 1979 as a petroleum engineer and worked in exploration and production in Qatar, Oman, the United States, the United Kingdom and The Netherlands. Id. Van de Vijver signed the 2002 Form 20-F and allegedly reviewed and authorized the filing of the 2001 annual report on Form 20-F. Id. Lead Plaintiff alleges that van de Vijver's salary tripled between 2001 and 2002, due in large part to reserve replacement credits on his compensation scorecard. Id.

  Defendant Malcolm Brinded is a citizen of the United Kingdom. Id. ¶ 50. Defendant Brinded has been a Director of Royal Dutch and has served as the CEO of RDS's Gas & Power unit since 2002, CEO of the EP unit since 2004, a member of the Royal Dutch Board of Management and a member of the CMD since 2002, and Vice-Chairman of the CMD in March 2004. Id. Brinded joined RDS in 1974 and has held various positions in the Company around the world, including Brunei, The Netherlands, Oman and the United Kingdom. Id. Lead Plaintiff alleges that Defendant Brinded reviewed and authorized the filing of the 2002 annual report on Form 20-F. Id.

  Defendant Jeroen van der Veer is a citizen of The Netherlands. Van der Veer, at all relevant times a Director of the Royal Dutch Board of Management, has served as a Group Managing Director since 1997. Id. ¶ 51. Van der Veer has served as President of Royal Dutch since 2000 and was promoted to Chairman of the CMD in March 2004. Id. He joined RDS in 1971 and held a number of senior management positions around the world. Van der Veer served as the Vice-Chairman of the CMD from 1997-2003 and signed the allegedly false and misleading Annual Reports on Form 20-F under the Sarbanes-Oxley Act.*fn2 It is also alleged that he reviewed and authorized the filing of the 1998 and 1999 Annual Reports on Form 20-F. Id.

  Defendant Judith Boynton is a citizen of the United States. Boynton served as RDS's Chief Financial Officer ("CFO") beginning in 2001 and as a Shell Transport Director and a Group Managing Director beginning in 2003. Id. ¶ 52. Defendant Boynton served as a member of the CMD from 2003 until her removal from all her executive and directorial positions on April 19, 2004. Id. Boynton's responsibilities included preparing RDS's financial statements which were filed with the SEC and disseminated to the investing public and shareholders of RDS. Id. Defendant Boynton was also responsible for overseeing RDS's internal disclosure and financial controls to ensure that they were adequate and complied with the federal securities laws. Id. Lead Plaintiff alleges that Defendant Boynton falsely certified RDS's annual report on Form 20-F for the year 2002 pursuant to the Sarbanes-Oxley Act. Id.

  Defendant Paul Skinner is a citizen of the United Kingdom. Id. ¶ 53. He served as a Director and as a Managing Director of Shell Transport beginning in 2000, as chief executive officer of Shell Oil Products beginning in 1999, and as a Group Managing Director and a member of the CMD beginning on January 1, 2000, until his retirement in September 2003. Defendant Skinner allegedly reviewed and authorized the filing of RDS's 2000 through 2002 Annual Reports on Form 20-F. Id.

  Defendant Maarten van den Bergh is a citizen of The Netherlands. Id. ¶ 54. He has served as a Director of Royal Dutch since 2000, a Managing Director of Royal Dutch from 1992 to 2000, and as President of Royal Dutch from 1998 to 2000. Id. From 1998 to 2000, van den Bergh served as Vice Chairman of the CMD. Defendant van den Bergh allegedly reviewed and authorized the filing of RDS's Annual Reports on Form 20-F for the years 2000 through 2002. Id.

  Defendant Mark Moody-Stuart is a citizen of the United Kingdom. Id. ¶ 55. He has served as a Director of Shell Transport and as the Chairman of Shell Transport from 1997 to 2001. Id. From 1991 through July 2001, he served as a Group Managing Director and member of the CMD. It is alleged that Defendant Moody-Stuart reviewed and authorized the filing of RDS's Annual Reports on Form 20-F for the years 2000 through 2002. Id.

  Defendant Aad Jacobs is a citizen of The Netherlands. Id. ¶ 56. Throughout the Class Period, Jacobs served as a Director of Royal Dutch, and since 2002 as Chairman of the Royal Dutch Supervisory Board and Chairman of the GAC. Id. It is alleged that Defendant Jacobs reviewed and authorized the filing of RDS's Annual Reports on Form 20-F for the years 2000 through 2002. Id.

  Defendant Harry Roels is also a citizen of The Netherlands. Id. ¶ 57. Defendant Roels served as a Managing Director at Royal Dutch and a member of the Board of Management of RDS beginning in July 1999. Id. He joined RDS in 1971 as a petroleum engineer, working in exploration and production in Malaysia, Brunei, the United Kingdom, Turkey, Norway and The Netherlands. Id. Defendant Roels relinquished his positions with RDS in June 2002. It is alleged that Defendant Roels reviewed and authorized the filing of RDS's Annual Reports on Form 20-F for the years 1999 through 2002. Id.

  Defendant Steven L. Miller is a citizen of the United States. Id. ¶ 58. Defendant Miller served as a Group Managing Director beginning in 1996 and as a Director of Shell Transport's Board of Directors beginning in 1998.*fn3 He also served as the Chairman, President and Chief Executive Officer of Shell Oil Company. Id. During Defendant Miller's tenure, he worked with the CMD in the formation of RDS's strategy and in the development and deployment of RDS's senior executives. Id. It is alleged that Defendant Miller reviewed and authorized the filing of RDS's Annual Reports on Form 20-F for the year 2001. Id.

  Lead Plaintiff alleges that the Individual Defendants (Watts, van de Vijver, Brinded, van der Veer, Boynton, Skinner, van den Bergh, Moody-Stuart, Jacobs, Roels and Miller), as officers and/or directors of Royal Dutch or Shell Transport, were privy to confidential and proprietary information concerning RDS, its operations, reported reserves and business prospects. Id. ¶ 73. Furthermore, Plaintiff proffers that the Individual Defendants "had access to internal documents, reports, and other information, including, among other things, the material, adverse, non-public, information concerning the Companies' and the Shell Group's classification of proved oil and gas reserves." Id. As a result, Plaintiff alleges, the Individual Defendants were responsible for the truthfulness and accuracy of the Shell Group's and the Companies' public statements. Id. Plaintiff also characterizes the Individual Defendants as "controlling persons" of the Companies within the meaning of Section 20 of the Exchange Act. Id. ¶ 74. The Complaint alleges that "[b]y reason of their positions with Royal Dutch and Shell Transport, they were able to and did, directly or indirectly, in whole or in material part, control the content of public statements issued by or on behalf of the Shell Group, including statements to securities analysts and financial reporters." Id. Accordingly, Plaintiff contends that the Individual Defendants are liable for the allegedly false statements, because the statements were "group-published" information, the result of the collective action of the Individual Defendants. Id.

  Plaintiff alleges that PwC and KPMG provided unqualified Independent Auditors' Reports for the Shell Group's annual reports for the years ended 1998 through 2002. Compl., ¶ 515. It is alleged that these "unqualified audit opinions and reports violated GAAS and greatly enhanced and facilitated the fraud. . . ." Id. Defendant PwC International, a membership-based company organized in the United Kingdom with its U.S. headquarters in New York, New York, is a professional services organization with member firms around the world. Id. ¶ 60. PwC International provides industry-focused assurance, tax and advisory services for public and private clients primarily in four areas: corporate accountability, risk management, structuring and mergers and acquisitions, and performance and process improvement. Id. The Complaint alleges that PwC International represents itself as a "truly global organisation" that "build[s] networks of highly skilled professionals around clients and provide[s] them with the benefit of PwC's collective knowledge and resources." Id. ¶ 62. The PwC International website states that "[o]n joining the PwC global network and becoming members of PwC International, member firms have the right to use the PwC name and to gain access to common resources, methodologies, knowledge and expertise. In return, they are bound to abide by certain common policies and to maintain the standards of the global network as formulated by the CEO of PricewaterhouseCoopers International Limited and approved by its Global Board." Id. ¶ 62.

  Defendant PwC UK is a limited liability partnership registered in the United Kingdom. Id. ¶ 63. PwC, a member of the PwC global network, audits almost one-half of the FTSE 100, the 100 largest companies in the United Kingdom. Id. PwC UK provides industry-focused assurance, tax and advisory services for public and private clients and for companies requiring an audit for statutory or regulatory reasons connected with the filing of their annual and periodic financial information; PwC UK provides an assurance service to shareholders and management on the truth and fairness of the information, and specifically addresses any other regulatory reporting requirements, such as those under the Sarbanes-Oxley Act of 2002. Id. With the exception of the descriptions given above, the Complaint refers to PwC International and Pwc UK collectively as "PwC."

  PwC was hired by the Shell Group and Shell Transport to provide independent auditing and/or consulting services, including the preparation, examination and/or review of Shell Transport's and the Shell Group's consolidated financial statements for the years 1998 through 2002, which were then disseminated to investors in the United States. Id. ¶ 65. The financial statements were presented to, reviewed and relied upon by securities purchasers, governmental agencies, the investing public and members of the financial community. Id. The Complaint alleges that by virtue of its position, PwC, at all relevant times, had access to RDS's key personnel, accounting books and records, and documents concerning proved reserves. Id. PwC personnel, who were frequently present at the Companies' respective corporate headquarters and major offices throughout the Class Period, had access to the confidential corporate financial and business information, including Shell and Royal Dutch's true financial condition, financial statements and reserve reporting problems, which Lead Plaintiff alleges PwC was aware of and/or recklessly disregarded. Id. Furthermore, it is alleged that PwC had the opportunity both to "observe and review the Companies' and the Shell Group's business and reporting practices, and to test the Company's and the Shell Group's internal and publicly reported financial statements, as well as the Shell Group's and the Company's internal controls." Id.

  PwC was involved in the preparation and dissemination of the Shell Group's and Shell Transport's quarterly and year-end financial results throughout the Class Period. Id. ¶ 66. The Complaint further alleges that PwC examined and opined on the Shell Group's and Shell Transport's financial statements for the years 1998 through 2002. Id. It is alleged that PwC falsely represented that its audits had been conducted in accordance with GAAS, and wrongfully issued "clean" or unqualified audit reports in which it allegedly misrepresented that those financial statements fairly presented the financial condition and results of operations in conformity with GAAP. Id.

  Defendant KPMG International is a Swiss cooperative of which it is alleged that all KPMG firms are members. Id. ¶ 67. KPMG International has a U.S. headquarters in New York, New York, and provides assurance, tax and legal, and financial advisory services to customers worldwide. It is alleged that like PwC International, KPMG International markets itself as a single global organization. Id. Defendant KPMG NV's headquarters is located in Amstelveen, The Netherlands, and it is part of the professional services organization of KPMG International. Id. ¶ 68. KPMG NV's core activities in The Netherlands include assurance services, financial advisory services, and tax and legal services. Id. The Complaint alleges that KPMG NV's website states that KPMG NV purports to have knowledge of a client's business and organization, such that it can act "as a business partner" of that client. Id. With the exception of the above descriptions, the Complaint refers to KPMG International and KPMG NV collectively as "KPMG."

  KPMG was hired by the Shell Group and Royal Dutch to provide independent auditing and/or consulting services, including the preparation, examination and/or review of Royal Dutch's and the Shell Group's consolidated financial statements for the years 1998 through 2002. Id. ¶ 70. Those financial statements were then disseminated to investors in the United States and were presented to, reviewed and relied upon by securities purchasers, governmental agencies, the investing public and members of the financial community. Id. KPMG personnel, who were frequently present at the Shell Group's and Royal Dutch's respective corporate headquarters and major offices between 1998 and 2002, had access to confidential corporate financial and business information, including the Shell Group's and Royal Dutch's true financial condition, financial statements and reserve reporting problems, which Lead Plaintiff alleges KPMG was aware of and/or recklessly disregarded. Id. Furthermore, it is alleged that KPMG had the opportunity to "observe and review the Royal Dutch's and the Shell Group's business and reserves reporting practices, and to test the Companies' and the Shell Group's internal and publicly reported financial statements, as well as the Shell Group's and the Companies' internal controls." Id.

  KPMG was involved in the preparation and dissemination of the Shell Group's and Royal Dutch's quarterly, as well as year-end, financial results throughout the Class Period. Id. ¶ 72. The Complaint further alleges that KPMG examined and opined on the Shell Group's and Royal Dutch's 1998 through 2002 financial statements. Id. It is alleged that KPMG falsely represented that its audits had been conducted in accordance with GAAS, and wrongfully issued "clean" or unqualified audit reports in which it allegedly misrepresented that those financial statements fairly presented the financial condition and results of operations in conformity with GAAP. Id.

  In addition to providing Independent Auditors' Reports to the Shell Group, the Complaint alleges that both PwC and KPMG also conducted reviews of the Group's quarterly financial statements which were attached as exhibits to Forms 6-K. It is alleged that this review was conducted before the Form was filed with the SEC. Compl., ¶ 516. Citing the GAC Report, the Complaint states that the Shell Group has admitted that the overbooking of the Group's oil and gas reserves was made possible "because of certain deficiencies in the Company's controls." Id. ¶ 517. It is alleged that PwC and KPMG, as the Companies' independent auditors, were required to assess the Group's internal disclosure, financial and accounting controls, to determine whether such controls had been placed in operation, were effective and complied with all applicable laws, and to provide assurance about the safeguarding of assets, financial reporting, operations and compliance with regulations. Id. Plaintiff submits that part of PwC and KPMG's responsibility was to "evaluate whether poor controls might lead to or contribute to the risk that fraud might not be detected." Id.

  Throughout the Class Period, PwC and KPMG allegedly received memoranda, conducted meetings and engaged in other communication with senior executives, board members, and the Companies' Group Reserves Auditor ("GRA") about issues such as deficiencies in the Group's internal controls, reporting standards and corporate governance, and how they related to the reserve reclassification. Id. ¶ 518. The Complaint refers to two memoranda from GRA Barendregt providing early warning of potentially serious systemic problems with Shell Transport's reserves reporting. Id. Despite this, PwC and KPMG issued "false clean audit opinions indicating they had no unresolved doubt about the Shell Group's reserve information and its compliance with GAAP." Id. ¶ 521. Furthermore, PwC and KPMG are alleged to have consistently represented that each performed its audits in a manner consistent with GAAS. Compl., ¶ 522. Lead Plaintiff submits that such representations were materially false, misleading and without reasonable basis. Id. It is alleged that PwC's and KPMG's GAAS violations stem from a "failure to qualify, modify, or abstain from issuing their respective audit opinions on the Shell Group's Class Period financial statements, when each knew or recklessly disregarded ? numerous adverse facts and `red flags'". Id. ¶ 525.

  Structure of the Companies

  Royal Dutch and Shell Transport are the parent companies of over 1,700 ventures operating in over 145 countries worldwide. Id. ¶ 92. Royal Dutch and Shell Transport share in the aggregate net assets and in the aggregate dividends and interest received from Group companies in proportion to their ownerships (60:40). Id. Shell Petroleum N.V. in The Netherlands and The Shell Petroleum Company Limited in the United Kingdom are the two Group Holding Companies. Id. ¶ 94. The Group Holding Companies between them hold all of the shares in the Service Companies and, directly or indirectly, all Group interests in the Operating Companies. Prior to the reclassification, the Shell Group Companies claimed to have one of the largest reserves of both liquid and natural gas of the major integrated public oil companies. Id. ¶ 98. Most are joint ventures, which the Shell Group companies partner with a wide range of governments and both national and international oil companies. Id. The Companies have major oil production in the United States, Nigeria, Oman, the United Kingdom, Syria, Gabon, Brunei, and Malaysia. They also have major gas operations in the United States, The Netherlands, Australia, Brunei, Malaysia and the United Kingdom. Additionally, the Companies have oil production interests in Norway, Abu Dhabi, and Denmark, and gas production interests in Denmark, Norway and Germany. Id.

  The Shell Group is organized into five main business units:
1. SEPCO, which explores, develops and produces oil and gas in the United States, with principal operations in Texas and the Gulf of Mexico. Id. ¶¶ 95-96.
2. Shell Gas & Power, which operates "downstream" to process and transport natural gas, develop power plants, and market gas and electricity to customers around the world, including governments, industrial and commercial businesses, and residential customers. It operates closely with the EP unit, which operates "upstream" in the production of gas reserves. Id. 97.*fn4 3. Shell Oil Products, which makes a wide range of high quality fuels, lubricants and specialty products, which it sells through its global network of 46,000 retail outlets. Id. ¶ 99. The Complaint alleges that it also has an interest in over 50 refineries engaged in the manufacture of a range of crude oil and petroleum products. The Companies within this group include Shell Aviation, Shell LPG, Shell Lubricants and Shell Marine Products. Id.
4. Shell Chemicals
5. Shell Renewables & Other Activities
See Compl., ¶ 95.

  Group Management

  Shell Transport has a board of directors that is comprised of non-executive directors, at least two Managing Directors of the Company who are also Group Managing Directors, and a Chairman who is also one of the Managing Directors. Id. ¶ 101 (quoting Shell Transport Annual Reports) (internal citations omitted). Royal Dutch is managed by a Supervisory Board and Board of Management. Id. ¶ 102. The Supervisory Board is appointed by the General Meeting of Shareholders from the persons nominated by the meeting of holders of priority shares. Id. The Royal Dutch Board of Management which consists of at least two Managing Directors is under the supervision of the Supervisory Board. Id. 103. Managing Directors are appointed by Royal Dutch shareholders and by the Supervisory Board; the Managing Director appointed by the Supervisory Board serves as President of the Board of Management. Id. ¶ 103. The responsibilities of the Supervisory Board include supervising the policies of the Board of Management and the general course of business of Royal Dutch and the Shell Group, and advising the Board of Management. Id. ¶ 104.

  The Boards of both Royal Dutch and Shell Transport delegate management of the Shell Group to the Committee of Managing Directors, a committee comprised of senior executives from each of the two public companies. Id. ¶ 105. The members of the CMD are identified as Group Managing Directors. Id. The CMD, which has no formal executive authority, is tasked with considering and developing the Shell Group's business plans and objectives. Id.

  In 2002, the members of the CMD were as follows:
1. Defendant Watts — Chairman of the CMD (2001-2004);
2. Defendant van der Veer (now Chief Executive of Shell) — Vice-Chairman of the CMD;
3. Defendant Skinner (resigned from Shell in 2003);
4. Defendant van de Vijver — responsible for exploration and production, contracting and procurement; 5. Defendant Roels (resigned in June 2002); and
6. Defendant Brinded — joined the CMD following Defendant Roels' resignation in July 2002.
Id. ¶ 106. The Complaint alleges that Defendant Boynton joined the CMD in 2003. Id. Members of the CMD report to a group called the "Conference," which is comprised of all of the members of the Supervisory Board and the Board of Management of Royal Dutch and the Directors of Shell Transport. Id. ¶ 107. The Conference, which acts without shareholder accountability, holds meetings regularly during the year. Id. ¶¶ 107-108. The alleged purpose of the Conference is to receive information from Group Managing Directors about major developments within the Shell Group and to review and discuss the business and plans of the Shell Group. Id. ¶ 108. The Shell Group's Annual Reports on Form 20-F define the Conference's responsibilities as follows:
The Conference reviews and discusses: the strategic direction of the businesses and of the Royal Dutch/Shell Group of Companies; the business plans of both the individual businesses and, of the Royal Dutch/Shell Group of Companies as a whole; major or strategic projects and significant capital items; the quarterly and annual financial results of the Royal Dutch/Shell Group of Companies; reports of the Group Audit Committee; appraisals both of the individual businesses and of the Royal Dutch/Shell Group of Companies as a whole; annual or periodic reviews of Group companies' activities within significant countries or regions; governance, business risks and internal control of the Royal Dutch/Shell Group of Companies; a regular programme of insights and briefings on specific aspects of the Royal Dutch/Shell Group of Companies; and other significant or unusual items on which the Group Managing Directors wish to seek advice.
Id. ¶ 108.

  Decisions made by the Conference are not legally binding on either Royal Dutch or Shell Transport. Id. ¶ 109. Senior executives of the Shell Group companies attend Conference meetings and officers of each parent company must hold separate meetings during which they can make the decisions at which they arrived jointly in the Conference binding. Id. Additionally, Royal Dutch and Shell have established three joint committees to assist with the Shell Group's governance responsibilities; one of the committees relevant to the instant litigation is the GAC. Id. ¶ 110. The GAC "regularly considers the effectiveness of risk management processes and internal controls within the Group and reviews the financial accounts and reports of the Royal Dutch/Shell Group of Companies. The Committee also considers both internal and external audit reports (including the results of the examination of the Group Financial Statements) and assesses the performance of internal and external audit." Id. ¶ 111 (quoting the Shell Group's Forms 20-F).

  Oil and Gas Reserves

  The term "reserves" generally describes the total volume of future oil production that can be expected to be commercially recovered from a reservoir, assuming that certain physical and economic conditions exist and continue to prevail for however long is required to obtain the production. Id. ¶ 113. Reserves can be divided into sub-categories such as proved and unproved; unproved reserves can further be divided into probable and possible. Id. ¶ 114. The classifications are based on the relative risk of recovery of the reserves in each category. The risk is defined as the likelihood that the expectations for future production and economic conditions will be met. Id. It is accounted for by assigning the anticipated future volume of oil production to a certain category of reserve based upon that risk. Id. In Rule 4-10, the SEC uses the term "reasonable certainty" to express a high degree of confidence that the estimated quantities will be recovered. Id. Rule 4-10(a) provides the definition of proved reserves for reporting purposes:
(2) Proved oil and gas reserves. Proved oil and gas reserves are the estimated quantities of crude oil, natural gas, and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions, i.e., prices and costs as of the date the estimate is made. Prices include consideration of changes in existing prices provided only by contractual arrangements, but not on escalations based upon future conditions.
(3) Proved developed oil and gas reserves. Proved developed oil and gas reserves are reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. Additional oil and gas expected to be obtained through the application of fluid injection or other improved recovery techniques for supplementing the natural forces and mechanisms of primary recovery should be included as "proved developed reserves" only after testing by a pilot project or after the operation of an installed program has confirmed through production response that increased recovery will be achieved.
(4) Proved undeveloped reserves. Proved undeveloped oil and gas reserves are reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion. Reserves on undrilled acreage shall be limited to those drilling units offsetting productive units that are reasonably certain of production when drilled. Proved reserves for other undrilled units can be claimed only where it can be demonstrated with certainty that there is continuity of production from the existing productive formation. Under no circumstances should estimates for proved undeveloped reserves be attributable to any acreage for which an application of fluid injection or other improved recovery technique is contemplated, unless such techniques have been proved effective by actual tests in the area and in the same reservoir.
Id. ¶ 117. (quoting 17 C.F.R. § 210.4-10).

  It is alleged that the Shell Group's publicly stated definition of "proved reserves" and "developed proved reserves," as stated in the Annual Reports filed with the SEC on Form 20-F, is in all material respects, identical to the SEC's definitions. Id. ¶ 118. While reserve reporting is a crucial indicator of how well a company is performing, other metrics are used by analysts and investors to assess the strength and future prospects of an energy company. Id. ¶¶ 119-120 (citing The Wall Street Journal, January 12, 2004). Other important metrics include: (a) Reserve Life, which compares barrels of proved reserves to annual actual production to answer, in terms of years, how long a company's proved reserves will last given the current production level; (b) Reserve Replacement Ratio, which compares additions to proved reserves to production (a RRR of 100% indicates that a company's proved reserves are being replenished at exactly the rate that the company is extracting/producing oil; a ratio of more than 100% indicates that a company is finding more hydrocarbons than it produces, thereby adding to its asset base; a ratio of less than 100% indicates that a company is depleting its proved reserves); and (c) Finding and Development Costs/Barrel, which are the costs of the process that results in the booking of proved reserves and then the extraction and sale of oil or natural gas. Id. ¶ 120.

  Overbooking of Proved Reserves

  In an article which appeared in the Wall Street Journal on March 12, 2004, it was reported that at the end of the first half of the 1990s, new discoveries were becoming harder to find, "as Middle Eastern countries expelled foreign oil companies and fields in the West matured." Id. ¶ 122. BPAmoco and ExxonMobil responded by buying up their rivals and selling off poor-performing fields; however the Shell Group primarily relied on organic growth through searching for big discoveries, and relied on drilling exploration wells in too many countries and in places where the size of any oil find would not be large enough to make a material difference. Id. ¶ 122. Between 1996 and 2000, the Shell Group allegedly spent $6 billion per year on finding new reserves. Analysts opined that the figure should have been much higher, closer to $9 billion. Id. Consequently, the Companies were replacing reserves at a much lower rate than originally represented, and the Companies' costs were significantly higher. Id. Rather than creating value through mergers and acquisitions,*fn5 Shell sought to create value through cost-cutting, a strategy first implemented in 1998 by Defendant Moody-Stuart. Id. ¶ 123. The Complaint alleges that analysts complained that focusing on cost-cutting diverted the Shell Group's commitment to fund exploration and production when the price of oil began to recover, which ultimately cost the Shell Group the opportunity to find millions of barrels of hydrocarbon discoveries. Id. ¶ 123. This difficulty in finding new reserves allegedly translated into higher costs; thus it is estimated that between 1997 and 2002 the Shell Group's cost of finding and developing oil was $4.27 per barrel; higher than ExxonMobil's $3.93 and BPAmoco's $3.73. Id. ¶ 124.

  In response to this failure to invest in finding new reserves, senior management, including the Individual Defendants, allegedly chose to manage the Shell Group's reserve figures much the way non-energy companies manage their earnings: to satisfy investors. Id. ¶ 126. Plaintiff alleges that this course of conduct was "directly contrary to the corporate transparency publicly advocated by Defendant Watts." Id. ¶ 126 (citing a Defendant Watts Speech, A Business Approach to Earning Trust in Society, KPMG Global Energy Conference, May 2003 ("It is not surprising trust in business has declined in the wake of a rash of corporate scandals. . . . I think there is every justification for people to question a business climate that allowed those things to happen. . . . We need to be transparent."). It is alleged that in 1997 senior executives of the Shell Group instructed the leadership and performance group, "LEAP", to "create value through entrepreneurial management of hydrocarbon resource volumes." Id. ¶ 127 (quoting The New York Times, March 12, 2004). LEAP sought ways to change the Companies' guidelines with respect to classifying reserves. Id. ¶ 128. LEAP proposed that the Shell Group relax the accounting guidelines it used to book reserves. Id. ¶ 129 (citing London Times, March 28, 2004). The Group allegedly implemented the revised guidelines in four countries for the year ended December 31, 1997, and as a result the Group added 145.5 million boe in proved reserves for that year. Id. ¶ 130.

  The following year, in 1998, the Group created five Value Creation Teams ("VCTs") to improve EP's profitability. Id. ¶ 131. The Complaint alleges that in a paper dated May 1998, Group Managers recommended, inter alia, that the Companies loosen their reserves guidelines. Id. ¶ 131 (citing Creating Value through Entrepreneurial Management of Hydrocarbon Resource Values). On September 16, 1998, the Companies revised their reserves guidelines, and issued that revised guidance to their operating units. Id. This was confirmed by a former Group executive in an interview which appeared in The Wall Street Journal on March 18, 2004. The executive explained that the Group loosened the rules to allow gas reserve bookings with only a "reasonable expectation" of an available market. Id. ¶ 132. The SEC allegedly reported the following in a Cease and Desist Order,
Shell instead revised its guidelines in 1998 to adopt a system under which it maintained its existing probabilistic methods for estimating proved reserves in "immature" fields, but applied more deterministic methods in "mature" fields, directing us to increase proved reserves in such fields to equal "expectation" volumes.
Id. ¶ 133.

  It is alleged that the Companies used the term "expectation reserves" to mean "the most likely estimate of hydrocarbon volumes remaining to be recovered from a project that is technically and commercially mature, or from a producing asset." Id. ¶ 135. This practice deviated from the Shell Group's early 1990s practice, which permitted executives to book proved reserves only if the Shell Group had signed a sales contract for the oil or gas. Id. ¶ 136. The Complaint alleges that, as revealed in the news media, the GAC Report, the Notice to Take Action*fn6 and the Cease and Desist Order, the new guidelines significantly inflated the Shell Group's reserves by enabling executives to book proved reserves well before making significant investments to get the oil and gas out of the ground. Id. ¶ 137. For the two years leading up to December 31, 1999, the Shell Group's revised guidelines resulted in an overstatement of the Group's proved reserves of 940 million boe. Id. ¶ 137. It is alleged that for the period 1998 through 2001, the SEC found that the change in guidelines caused the Shell Group to add more than 1.2 billion boe to reported proved reserves. Id. The Complaint alleges that the new guidelines were contrary to the SEC definition of proved reserves, which requires, inter alia, data indicating there is a "reasonable certainty" that oil or natural gas can be recovered through existing wells and equipment, and/or a plan of development has been approved. Id. ¶ 137.

  The Complaint details numerous statements of former employees who allegedly had first-hand knowledge of these issues while employed by the Companies. Id. ¶ 138. Said employees contend that the Companies made no effort to apprise employees in the field of the SEC's requirements for classifying reserves as proved. Id. It is alleged that "[o]nly with the 2003 guideline revisions did the Companies require, for the first time, certainty of an existing market and a `Final Investment Decision' on significant projects before reserves associated with the project could be classified as proved." Id. ¶ 139.

  The guideline changes recommended by LEAP allegedly allowed the Group to increase its oil and gas reserves not by discovering major new sources, but by changing its accounting to add reserves it was uncertain could ever be produced. Id. ¶ 141. (citing a confidential internal review code-named Project Rockford). The London Times reported on March 22, 2004 that Defendant Watts, the then senior executive in charge of the EP unit, was able to tell 600 Group executives in June 1998 of the success of a special management program which had addressed a fundamental problem at the Companies, and that the Companies were producing oil and gas faster than they were finding new reserves. Id. ¶ 142. The Complaint alleges that Defendant Watts did not disclose the Companies' alleged relaxation of the reporting guidelines. Id.

  In 2001, the SEC issued stricter guidelines for the calculation of reserves. Id. ¶ 144. Quoting from the GAC Report, the Complaint alleges that "[b]eginning in 2001, recognition of the strictures of SEC rules, in place since 1978, increased within the Company, in part due to the publication on the SEC website of SEC guidance regarding the importance of investment commitments and other indicia of `reasonable certainty,' with a growing recognition that the Company's reserve numbers were not in full compliance with these rules." Id. ¶ 145. In 2002, Shell Group Executives developed a Potential Reserves Exposure Catalogue, which listed the major concerns of the current inventory. Id. ¶ 147. The Complaint alleges that in this Catalogue, "modest reductions in the volume of booked reserves were made, but most booked reserves were retained." Id. ¶ 147. It is alleged that according to a later report (the December 8th Report), "the view was taken that the exposures should indeed be highlighted and addressed as a matter of priority, but that no corrective action was warranted in the meantime in relation to external disclosures." Id. The Complaint alleges that this did not comport with SEC rules as the Companies' guidelines did not require the Group to de-book the reserves that no longer qualified as proved under the SEC rules. Id. 147.

  Defendants' Alleged Knowledge of the Group's Overbookings

  The GAC Report states that as the Shell Group reported inflated proved reserves, senior Shell Group executives, including Watts and van de Vijver, communicated, via e-mail and meetings, about how to manage reserves to conceal the evidence. Id. ¶ 153. Citing the GAC Report, the Complaint alleges that "other executives and employees had, over time, varying degrees of exposure to the debate [between Van de Vijver and Watts] and, in various strata of management at Shell's Central Offices and in the field, involvement in the operations that were the subject of the bookings." Id. In a March 22, 2004, van de Vijver wrote the following:
Soon after coming to office as head of EP in June 2001, I observed that the health of the EP business was not as robust as the Company-determined performance targets set under the former EP CEO. In fact, EP was in a far worse state in mid 2001 than was ever portrayed by my predecessor to senior management or the Conference.
Id. ¶ 154.

  The Complaint, citing a confidential witness, alleges that prior to van de Vijver becoming the CEO of EP in 2001, he traveled to Houston, Texas and attended high level meetings with senior officers and directors of SEPCo and the Companies, including Defendant Miller. Id. ¶ 154a. It is alleged that at meetings in 2000 and 2001, van de Vijver "discussed many of the problems that should have precluded the Companies from booking proved reserves in Nigeria." Id. The GAC Report further informed that Defendant van de Vijver "consistently pressed the position that reserves booked during Sir Philip's term were aggressive or premature, non-compliant with Shell Guidelines for booking and, implicitly, SEC rules." Id. 155.

  Lead Plaintiff also claims that others, in addition to Defendant van de Vijver, had direct knowledge of the overstatements. The Wall Street Journal Europe reported on July 15, 2004, that Anton Barendregt (the Group Reserves Auditor during the Class Period) warned in a January 2002 memorandum, marked "confidential," that a portion of the 2001 mature reserves was at risk of being overstated. Id. ¶ 157. Allegedly, he also raised questions about the integrity of Shell's overall reserves-reporting system and warned that the Shell Group's guidelines for booking reserves were not in compliance with SEC guidelines in all cases. Id. ¶ 157. It was further reported that Barendregt circulated this memorandum to senior executives in the EP unit and to KPMG and PwC. Id. The article states that "three people familiar with the situation" confirmed that KPMG and PwC received the memorandum. Id.

  A Note of Information, which summarized the Shell Group's reserves position as of December 31, 2001, was forwarded by van de Vijver to the CMD on February 11, 2002. Id. ¶ 158. In it, van de Vijver reportedly warned that proved reserve exposures were as high as 2.3 billion boe because of non-compliance with SEC guidelines. Id. The Note stated the following:
Exposures
Securities and Exchange Commission (SEC) Alignment
Recently the SEC issued clarifications that make it apparent that the Group guidelines for booking Proved Reserves are no longer fully aligned with the SEC rules. This may expose some 1,000 mln boe of legacy reserves bookings (e.g. Gorgon, Ormen Lange, Angola and Waddenzee) where potential environmental, political or commercial showstoppers exist.
End of License In Oman PDO, Abu Dhabi and Nigeria SPDC (18% of EP's current production) no further proved reserves can be booked since it is no longer reasonably certain that the proved reserves will be produced within license. The overall exposure should the OU business plans not transpire is 1,300 mln boe. Work has begun to address this important issue.
Id. ¶ 158.

  The Complaint, citing the GAC Report, states that "[t]he Note raised issues of sufficient concern to [Watts] that he required . . . a further presentation be made to [the] CMD." Id. ¶ 159. The EP managers circulated the EP Business Appraisal for 2001 on February 20, 2002. According to the Financial Services Authority (Britain's regulator of publicly traded companies) ("FSA"), "[b]oth the `Main Issues' section and the main body of the Appraisal stated that the SEC's guidance made it clear that the approach advocated by Shell guidelines was, in may cases, too aggressive and would be likely to affect future bookings in new fields such as Nigeria and possible existing bookings representing some 1,000 million boe." Id. ¶ 160. The Complaint alleges that the "FSA also noted that the [a]ppraisal also referred to reserves which could no longer be booked because of license expiry issues and production limitations amounting to an additional 1,000 million boe." Id.

  On May 28, 2002 an e-mail was sent to van de Vijver by Defendant Watts. It stated:
You will be bringing the issue to CMD shortly. I do hope that this review will include consideration of all ways and means of achieving more than 100% in 2002 — to mix metaphors . . . considering the whole spectrum of possibilities and leaving no stone unturned.
Id. ¶ 161.
  On July 22, 2002, a second presentation was made to the CMD in a Note for Discussion submitted by van de Vijver. Id. ¶ 163. The Note allegedly identified oil and gas reserves that were "aggressive[ly]" booked. Id. It is alleged that the Note observed that without these bookings, in Gorgon and Nigeria, "total proved RRR over the past 10 years would be reduced from 102% to 88%." Id. ¶ 163. The GAC Report concluded:
it is an example of a series of documents which suggest that EP management's plan was to `manage' the totality of the reserve position over time, in hopes that problematic reserve bookings could be rendered immaterial by project maturation, license extensions, exploration successes and/or strategic activity. Simply put, it is illustrative of a strategy `to play for time' in the hope that intervening helpful developments would justify, or mitigate, the existing reserve exposures.
Id. ¶ 164.
  The minutes of the July 2002 CMD meeting allegedly recognize the delay in de-booking could not continue indefinitely:
It is considered unlikely that potential overbookings would need to be de-booked in the short-term, but reserves that are exposed to project risk or licence expiry cannot remain on the books indefinitely if little progress is made to convert them to production in a timely manner.
Id. ¶ 165.
  On September 2, 2002, van de Vijver submitted a note to the CMD. The note, a copy of which was sent to Defendant Boynton, stated the following:
Given the external visibility of our issues (lean organic development portfolio funnel, RRR low, F & D unit costs rising), the market can only be `fooled' if 1) credibility of the company is high, 2) medium and long-term portfolio refreshment is real and/or 3) positive trends can be shown on key indicators.
Unfortunately . . .:
— We are struggling on all key criteria ("caught in the box"). . . .
The immediate risk that we are facing is on the "negative spiral" of our boxed situation:
. . .
— RRR remains below 100% mainly due to aggressive booking in 1997-2000.
Id. ¶ 166.
  In September 2002, van de Vijver wrote a confidential personal Note to File which stated the following:
During the last 1.5 years the technical competence and overall integrity of the EP business within Shell has been questioned both internally and externally, most prominently through lowering of the production growth target in August/September 2001 and due to a deteriorating proved reserves replacement ratio. Providing credible explanations for these issues proved near impossible given the disconnects between external promises/expectations and the reality of the state of the business.
. . .
Bottomline was that both reserves replacement and production growth were inflated:
— Aggressive/premature reserves bookings provided impression of higher growth rate than realistically possible.
. . .
The Concerns around the "caught in the box" dilemma and stretch in the EP business plans have been flagged at the highest level in the company, but obviously "transmitted" in a careful fashion as not to compromise/undermine the previous leadership. The severity and magnitude of the EP legacy issues may therefore not have been fully appreciated.
Id. ¶ 167.
  The Complaint, citing the FSA, alleges that in September 2002 the Shell Group "created and implemented a reserves exposure catalogue to ensure a system of awareness and control of the proved reserves inventory." Id. ¶ 168 (internal citations omitted). The notes to the catalogue indicated that the reserves in some operating units would be at risk if production rate increases did not materialize. Id. Furthermore, the notes identified that certain bookings were threatened by clarifications to the SEC's rules by the Commission, requiring conservatism in the classification of proved reserves. Id. Shortly thereafter, on October 22, 2002, Defendant van de Vijver wrote to Defendant Watts and stated the following:
I must admit that I become sick and tired about arguing about the hard facts and also cannot perform miracles given where we are today.
If I was interpreting the disclosure requirement literally (Sorbanes [sic]-Oxley Act etc) we would have a real problem.
Id. ¶ 169. Defendant van de Vijver circulated a brief on November 15, 2002 which outlined business plan issues to members of his EP staff:
We finalized our plan submission and could easily leave the impression that everything is fine.
. . .
The reality is however that we would not have submitted this plan if we
1) were not trying to protect the Group reputation externally (promises made) and
2) could have been honest about past failures (business focus w.r.t. aspired portfolio, disconnects with reality, poor performance management, reserves manipulation).
Id. ¶ 170.
  On January 31, 2003, Barendregt wrote another "confidential" memorandum that he circulated to senior Shell Group executives in the EP unit, as well as to KPMG and PwC. Id. ¶ 171. The memorandum reviewed the prior year's reserves estimates and warned, inter alia, that the guidelines for booking reserves did not comport with SEC guidelines in all instances and raised questions about the integrity of the Companies' overall reserves-reporting system. Id. Furthermore, on February 28, 2003, van de Vijver sent Defendant Watts a copy of a February 23, 2003 e-mail in which van de Vijver stated to his EP staff:
We know we have been walking a fine line recently on external Messages. . . . Promising that future reserves additions are expected in 2003 . . . whilst we know that there is some real uncertainty around this. . . . [W]e know our ongoing exposures on Oman/Nigeria reserves and on early bookings, notably Gorgon and Ormen Lange.
Id. ¶ 173.

  On August 25, 2003, van de Vijver directed a draft of his Mid-year 2003 Review Summary to Watts, allegedly complaining that "The single largest issue facing EP is the shrinking opportunity portfolio exacerbated by too aggressive reserves bookings in the past. . . ." Id. ¶ 175. The Complaint alleges that on the following day, the GAC received a memorandum that addressed possible areas of non-compliance with Rule 4-10. Id. ¶ 176. The Complaint, citing the FSA, stated "[t]he GAC was advised that much, if not all, of the potential exposure arising from interpretation of the factors . . . is offset by Shell's practice of not disclosing reserves in relation to gas production that is consumed on site as fuel or (incidental) flaring and venting." Id. (internal citations omitted).

  The Complaint alleges that on November 9, 2003, after receiving what he considered an unfairly critical performance review from Defendant Watts, Defendant van de Vijver e-mailed Watts and stated that he was "becoming sick and tired about lying about the extent of our reserves issues and the downward revisions that need to be done because of far too aggressive/optimistic bookings." Id. ¶ 178. One day prior, on November 8, 2003, van de Vijver wrote an e-mail to a colleague about the Group's aggressive reserves bookings which stated the following:
As you know 2003 RRR is the most important share price influencer also as expectations are high and they do not know that we are still paying for aggressive reserves bookings [including thos[e] that have not reached FID yet !!] in the past!
Id. ¶ 179.

  According to the GAC Report, in December 2002 and November 2003, Defendant van de Vijver considered the idea of a comprehensive de-booking of all known exposed reserves. Id. ¶ 182. It is alleged that in late November 2003, van de Vijver stated in a message to the Group Reserves Coordinator, "I would prefer to restate our 1/1/03 reserves and de-book all remaining legacies to allow for a clean start." Id. The Complaint alleges that at the same time, however, van de Vijver delivered the following message to all senior EP executives in which he warned "[o]ne final word on 2003. It would be an enormous blow to the Group's credibility with the Market if we do not deliver on RRR this year." Id.

  On December 2, 2003 a memorandum was prepared by the EP staff. This memorandum, titled "Script for Walter [van de Vijver] on the proved reserves position," assumed that approximately 2.3 billion boe of proved reserves were noncompliant and that this was material to the market. Id. ¶ 183. The script stated:
If and from the time onwards that it is accepted or acknowledged by the management of the issuers (Royal Dutch and STT), that, when applying the SEC rules, the 2002 proved reserves as reported in the Form 20-F are materially wrong, the issuers are under a legal obligation to disclose that information to all investors at the same time and without delay. Not to disclose it would constitute a violation of US securities law and the multiple listing requirements. It would also increase any potential exposure to liability within and outside the US. Note that the reserves information also appears in the non 20-F Annual Reports.
Disclosure cannot await the next Form 20-F appearing in April, 2004.
Id. ¶ 183.

  The Complaint alleges that on the same day the script was provided to van de Vijver, he e-mailed one of its authors, the EP unit's head of finance, Frank Coopman, and demanded that the e-mail be destroyed. "This is absolute dynamite, not at all what I expected and needs to be destroyed." Id. ¶ 184.

  Geographic Areas
Australia
  As of December 31, 1997, when Watts was head of EP, the Companies booked as proved approximately 557 million boe of natural gas relating to the Gorgon fields. Id. ¶ 187. The Gorgon fields are undeveloped frontier gas fields located 70 miles off the northwestern coast of Western Australia. Id. It is alleged that the amount booked from the Gorgon fields represents more than 12% of the Companies' total overbooked reserves. Id. The Complaint alleges that in order to "disguise the improper booking, the Companies recorded the reserves not as `new discoveries,' which garner more attention from auditors and investors and could have been challenged more easily internally, but instead as `revisions'." Id. ¶ 188. Ordinarily, however, "revisions" are intended for "subsequent adjustments to previously reported reserves, not for reserves that have yet to be recorded as proved." Id. It is alleged that Defendant van de Vijver later publicly portrayed the misclassification as a mistake and an embarrassment. Id. The Complaint further describes the Gorgon Venture and its relation to the overbooking. See Compl., 189-203. It is alleged that in 1999, the Companies revisited the status of the Gorgon booking at several points. Id. ¶ 204.

  Nigeria

  The Complaint alleges that since the late 1970s, the oil and gas industry has been the backbone of the Nigerian economy, accounting for over 90% of total foreign exchange earnings. Id. ¶ 208. In the 1990s, the Nigerian deep and ultra-deepwater areas became the focus of major exploration by foreign oil companies and the first success came in 1993 with the discovery of the Bonga oil and gas field. Id. ¶ 209. The Bonga field is the first deepwater project for the Shell Petroleum Development Company of Nigeria, Ltd. ("SPDC") and for Nigeria. Id. ¶ 210. It is alleged that the SPDC operates the field on behalf of the Nigerian National Petroleum Corporation under a production-sharing contract, in partnership with Esso (ExxonMobil) (20%), Nigeria Agip (12.5%), and Elf Petroleum Nigeria Limited (12.5%). Id. ¶ 210. The Bonga project was beset with problems, which made proved reserves classification improper and allegedly in violation of SEC guidelines. Id. ¶ 216. The Complaint alleges that by 1999, "the SPDC had booked reserves based upon the Shell Group's 1998 revised guidelines and forecasts that, as the SEC noted, `gave the appearance that the proved portion of the reserves could be produced within the remaining license period'." Id. ¶ 217. However, the SEC found "none of these assumptions was reasonable, particularly in light of the fact that SPDC's operations performed well below the projected levels throughout the ...


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