The opinion of the court was delivered by: JOHN BISSELL, Chief Judge, District
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.
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:
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).
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
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%.
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
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.
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
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
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).
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
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.
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
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.
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. ¶
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
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. ¶¶
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.
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.
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).
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
(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
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"
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.
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.
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
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:
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
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
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
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
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.
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.
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 ...