United States District Court, D. New Jersey
August 9, 2005.
In re: ROYAL DUTCH/SHELL TRANSPORT SECURITIES LITIGATION.
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.
FACTS & BACKGROUND
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).
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
(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 period."
Id. It is also alleged that management decided to conceal the
reserves problem from the investing public. Id. ¶ 224. The
Complaint points to certain regional factors, such as poor
infrastructure, a lack of government financing and political and
ethical strife in the Niger Delta region, which contributed to
the Companies' inability to manage reserves. Id. ¶¶ 225-232.
It is alleged that internal documents show that the Shell Group
concluded that more than 1.5 billion barrels, or 60% of its
Nigerian reserves, did not meet SEC standards for proved
reserves. Id. ¶ 235. Furthermore, Lead Plaintiff alleges that
"at the end of 2002, the Shell Group recorded 2.524 billion barrels of proved reserves in Nigeria, but as the December
8th Report found, only 990 million barrels `fully complie[d]'
with SEC guidelines. Internal documents show that senior managers
were told in December 2002 that 720 million barrels in Nigeria
were `noncompliant' with guidelines established by the SEC, and
that a further 814 million barrels were `potentially
noncompliant'." Id. ¶ 242.
The Shell Group has been involved in developing Oman's natural
resources since oil was first discovered there in the 1930s.
Id. ¶ 248. It is alleged that the Group owns 34% of Petroleum
Development Oman ("PDO"), Oman's dominant oil and gas exploration
company. Id. The other partners are the Omani government (60%),
Total (4%) and Partex (2%). Id. Since 1997, oil production in
Oman has declined. Id. ¶ 250. Horizontal drilling, which can
extract a higher percentage of oil from certain fields and
recover oil more efficiently than traditional vertical drilling,
was not effective in Oman and resulted in large amounts of water
being produced with oil, in contrast to the original expectation
that less water would be produced with the oil. Id. ¶¶ 251-253.
Lead Plaintiff alleges that "by the end of 2000, despite the
production decline in Oman, the Group and PDO determined to
increase PDO's proved reserves estimates." Id. ¶ 261. "Based on the 1998 revisions to the Shell Group's guidelines, the Companies
revised PDO's proved reserves upward `by assuming that, for
fields of certain maturity, both proved developed and proved
undeveloped reserves would be increased to equal the expectation
[for] developed and undeveloped volumes'." Id. It is alleged
that the increase added 251 million boe to the Shell Group's
reported proved reserves as of December 31, 2000, a 40%
overstatement. Id. Furthermore, citing the GAC Report, the
Complaint states that "the reserve overstatement stemmed from
insufficient technical work that was done to support the increase
in reserves." Id. ¶ 264. The serious production declines which
were suffered thereafter and the increased reserves were
maintained based upon "aspirational production targets." Id. It
is further alleged that the Shell Group's interest in increasing
shareholder value in the short-term played a part in the
overvaluation of the reserves: because its license expired in
2012, it emphasized producing more oil sooner. Id. ¶ 265.
Norway (Ormen Lange)
The Ormen Lange field is located approximately 140km west of
Kristiansund, Norway. Id. ¶ 269. The field, which is the
second-largest gas discovery on the Norwegian continental shelf,
was well drilled in 1997. Id. Licenses for the development and
production of the field are held by: Norske Shell ("Shell
Norway") (16%), Norske Hydro Produksjon ("Norske Hydro")
(14.78%), Statoil (8.87%), State's Direct Financial Interest ("SDFI")
(45%), BPAmoco Norge ("BP") (9.44%) and Esso Norge ("ExxonMobil")
(5.91%). Id. ¶ 270. Since 1997, the project partners have
encountered technical challenges involving harsh deep-water
conditions, bitter weather conditions, freezing water
temperatures, and an uneven seabed. Id. ¶ 272. Because of such
problems, in June 2001 the project partners decided to modify the
time frame for developing the field. Id. ¶ 279. The Complaint
alleges that "[e]ven as late as 2003, the project's partners were
still struggling to determine whether European markets could
absorb the supply of natural gas from the field. Consequently,
the project partners extended the schedule for delivery of the
plan for development and operation ? to the Norwegian
authorities until the fall 2003." Id. ¶ 279. The production is
presently projected to commence in the fall of 2007. Id. ¶ 280.
The Complaint alleges that unlike its project partners, the
Companies began booking reserves from the Ormen Lange field years
before the Shell Group and its partners were able to overcome the
hurdles of the project. Id. ¶ 281. To that end, in 1999, the
Companies started booking gas reserves before an appraisal well
was drilled or before either a feasibility or a safety study was
Proffered False and Misleading Statements and Omissions
The Complaint alleges numerous allegedly false and misleading statements and omissions proffered by Defendants
between 1999 and 2003. See Compl., ¶¶ 300-462. This Court
incorporates said allegations by reference.
Truth about Reported Reserves
On January 9, 2004, the Shell Group stated that it would reduce
its reserves holdings by 20%. Id. ¶ 463. The reduction
contemplated the reclassification of 3.9 billion barrels of oil
and gas, one-fifth of the Companies' proved reserves. Id. On
January 9th, Shell Transport's ADRs fell by 6.96% and Royal
Dutch's ordinary shares (in the U.S.) fell by 7.87%. Id. ¶ 464.
On March 3, 2004, Defendant Watts and Defendant van de Vijver
were forced to resign from their positions. Id. ¶ 466. On March
18, 2004, a stock exchange release was filed with the SEC and the
Shell Group announced further downward restatements of proved
reserves for oil and natural gas. Id. ¶ 469. The Companies
stated that the equivalent of 250 million barrels of oil were
being reclassified because they did not comply with SEC
regulations and another 220 million boe, which as recently as
February 2004 were expected to be booked as proved for the year
ended 2003, would not be included. Id. ¶ 469.
On April 19, 2004, the Shell Group cut reserves for a third
time, by an additional 300 million barrels. Id. ¶ 474. In an
interview that same day, Defendant Brinded explained the
following: [E]ssentially back in early March we established that
we had a problem with the Ormen Lange booking and
when we looked into it, it caused us some concerns
that there might be wider-spread issues to deal with.
So we set in train immediately in early March an
exercise involving external experts from Ryder Scott
together with our own teams to look at those reserves
which we felt might be most at risk. After just a few
days of that exercise we had covered 40 per cent of
the reserves base and we realised that we had a
material reduction to book, or to de-book, and we
announced that on the 18th March a reduction of
470 million barrels. At that point, I said that we
were going to go on and complete the exercise on the
worldwide reserves base.
In the last four weeks that's what we've done, 300
fields have been reviewed. In fact, reductions have
been made now in total to almost 100 fields and we've
covered 90 per cent of our fields. That's all but the
very small fields essentially. So we've now completed
that exercise, as a result of this latest phase, with
a further reduction of some 300 million barrels for
the pre-2003 reserve base and a reduction of some 200
million barrels in what we would otherwise have been
booking in 2003.
. . .
But what is clear is that our competitive position in
reserves, our recent reserves replacement ratio, and
the current lifetime of our reserves doesn't leave us
that well placed competitively . . .
. . .
[T]he change is really . . . a result of this third
tranche. . . . [E]ssentially we're looking at a
different type of field . . ., one-third of them are
in proved developed reserves category. In the past
we've been stressing that 90-95 per cent of the reductions were in the underdeveloped category and
only a very small proportion in the developed
category. This time about a third are in the proved
The distinguishing feature being that proved
developed means it is on stream, it's producing.
You've built the platform, you've drilled the wells,
it's producing oil. That means you're starting to
depreciate the asset and you depreciate it based on a
proportion of the production in that year divided by
the total proven reserves base. So if you shrink your
proven reserves base, then you should be depreciating
more in that year. So when we have to make revisions
to proved developed reserves, we have to go back and
make a change to the depreciation calculation and
that change is your net income and that's why there
is a material financial impact.
. . . [I]n terms of materiality though I just want to
stress it averages something like $100 million a year
over the last four years.
Id. ¶¶ 474-477.
On May 24, 2004, for the fourth time that year, the Companies
downgraded the size of their proven oil and gas reserves. Id. ¶
480. The Companies stated that the reduction, which involved an
additional 103 million barrels, reflected "an adjustment with
respect to royalties paid in cash in Canada." Id. That same
day, the Shell Group announced that as a result of its shift
toward using stricter American accounting rules for all its
accounts, rather than a combination of Dutch and American rules,
it would restate certain of its financial results for 2001, 2002
and 2003. Id. ¶ 481.
SEC Investigation and Other Regulatory Actions On August 24, 2004, the SEC issued a Cease and Desist Order in
which it concluded:
a. The Companies violated Section 10(b) of the Exchange Act and
Rule 10b-5 thereunder. The Companies knowingly or recklessly
reported proved reserves that were non-compliant with Rule 4-10,
and failed (i) to ensure that the Companies' internal proved
reserves estimation and reporting guidelines complied with Rule
4-10, and (ii) to take timely and appropriate action to ensure
that their reported proved reserves were not overstated in their
filings with the SEC and other public statements.
b. The Companies violated Section 13(a) of the Exchange Act and
Rules 13a-1 and 12b-20 thereunder. The Companies' failures to
ensure that they estimated and reported proved reserves
accurately in compliance with Rule 4-10 caused them to file
Annual Reports on Form 20-F for the years 1997 through 2002 that
were materially inaccurate, in that they overstated the
Companies' reported reserves and accompanying supplemental
information, including the standardized measure of future cash
c. The Companies violated Sections 13(b)(2)(A) and 13(b)(2)(B)
of the Exchange Act. The Companies failed to create and maintain
accurate estimates of their proved reserves in compliance with
Rule 4-10, and failed to ensure that they implemented and
maintained adequate controls with respect to their reserves processes, sufficient to provide assurance that the reserves were
estimated and reported accurately in accordance with Rule 4-10.
Id. ¶ 296.
A separate civil action was filed simultaneously with the
proceeding that was the subject of the Cease and Desist Order.
Id. ¶ 298. In that action, SEC v. Royal Dutch Petroleum Co.
and the "Shell" Transport and Trading Company, p.l.c., No.
H-04-3359 (S.D. Tex. Aug. 24, 2004), Royal Dutch and Shell
Transport consented to the entry of a judgment by the U.S.
District Court for the Southern District of Texas, Houston
Division, pursuant to Section 21(d) of the Exchange Act, ordering
the Companies, together, to pay a $1 disgorgement and a $120
million civil penalty. Id.
The FSA also issued a Final Notice to Shell Transport and Royal
Dutch to Take Action, in which the FSA imposed a penalty of £17
million for "market abuse" and breaches of the FSA's Listing
Rules. Id. ¶ 299.
Claims for Relief
Lead Plaintiff brings this action as a class action pursuant to
Federal Rules of Civil Procedure 23(a) and (b)(3). Id. ¶ 499.
The putative Class consists of all persons who purchased Royal
Dutch ordinary shares and Shell Transport ordinary shares and
ADRs on the open market during the Class Period. Id. Plaintiff
claims that the potential members of the Class are so numerous that joinder of all members is infeasible because, during the
Class Period, there were more than two billion outstanding shares
of Royal Dutch common stock trading in Amsterdam, more than 520
million outstanding shares of Royal Dutch common stock trading on
the NYSE, more than 9.6 billion outstanding shares of Shell
Transport common stock trading in London, and more than 48
million outstanding Shell Transport ADRs trading on the NYSE.
Id. ¶ 500. The Complaint contains five claims for relief which
are summarized below. Id. ¶¶ 505-593.
Count I is asserted against both the Individual and Company
Royal Dutch/Shell Transport Defendants under Section 10(b) of the
Exchange Act, 15 U.S.C. § 78j(b). Compl., ¶¶ 506-511. Count II
alleges the same claim against Defendants PwC and KPMG. Id. ¶¶
512-535. Count III is brought against the Individual Defendants
who allegedly acted as controlling persons of the Companies
within the meaning of Section 20(a) of the Exchange Act,
15 U.S.C. § 78t(a). Compl., ¶¶ 536-539. Finally, Counts IV, seeking
damages, and V, seeking equitable relief, are brought pursuant to
Section 14(a) of the Exchange Act, 15 U.S.C. § 78n(a) against
Royal Dutch and Shell Transport. Compl., ¶¶ 540-593.
I. Rule 12(b)(1) Motion to Dismiss for Lack of Subject
A. Standard of Law Applied to Motions to Dismiss Pursuant to
Fed.R.Civ.P. 12(b)(1) Challenges to subject matter jurisdiction through a
Fed.R.Civ.P. 12(b)(1) motion to dismiss come in two different forms
facial and factual attacks. A facial attack questions the
sufficiency of the pleading. In reviewing a facial attack, a
trial court accepts the allegations in the complaint as true.
When a court reviews a complaint under a factual attack, however,
the allegations have no presumptive truthfulness, and the court
that must weigh the evidence has discretion to allow affidavits,
documents, and even a limited evidentiary hearing to resolve
disputed jurisdictional facts. 2 Moore's Federal Practice, §
12.30 (Matthew Bender, 3d ed.). In the instant case,
Defendants are not attacking the existence of subject matter
jurisdiction on the face of Plaintiff's complaint, but rather are
making a factual attack. Accordingly, this Court is not confined
to the allegations in Plaintiff's Complaint, but may consider the
affidavits, certifications, exhibits and deposition testimony
submitted to this Court to resolve the factual issues bearing on
jurisdiction. The Court must be careful, however, not to allow
its consideration of jurisdiction to spill over into a
determination of the merits of the case, and thus must tread
lightly in its consideration of the facts concerning
jurisdiction. Dugan v. Coastal Indus., Inc.,
96 F. Supp. 2d 481, 483 (E.D. Pa. 2000).
The party invoking jurisdiction, in this case the Lead Plaintiff, bears the burden of establishing that such
jurisdiction exists. McNutt v. General Motors Acceptance Corp.,
298 U.S. 178, 182 (1936); Kehr Packages, Inc. v. Fidelcor,
Inc., 926 F.2d 1406, 1409 (3d Cir.), cert. denied,
501 U.S. 1222 (1991). However, the burden is light; dismissal for lack of
jurisdiction is only appropriate where the right claimed "is so
insubstantial, implausible, foreclosed by prior decisions of this
Court, or otherwise completely devoid of merit as to not involve
a federal controversy." Dugan, at 483 (citing Growth Horizons,
Inc. v. Delaware County, 938 F.2d 1277, 1280-81 (3d Cir. 1995)).
The RDS Defendants, the Individual Defendants, KPMG NV, KPMG
International, PwC UK and PwC International move to dismiss Lead
Plaintiff's claims that are asserted on behalf of putative class
members who are foreign nationals and who purchased their shares
on foreign exchanges. Defendants argue that the United States was
not the location of "substantial and material" conduct by the
Companies because the Companies are European companies with a
largely European shareholder base that run their most vital
operations from their respective European headquarters.
Defendants contend that of the 11.7 billion combined Royal Dutch
and Shell Transport shares held worldwide, roughly 92 percent are
traded outside the United States. See RDS Br. in Support of
Motion to Dismiss for Lack of SMJ, at 7. For the reasons which follow, Defendants' motion to dismiss for lack of subject matter
jurisdiction is denied.
Conduct in the United States
Federal courts employ two judicially created tests to determine
the existence of subject matter jurisdiction over foreign
transactions: the effects test, which considers whether conduct
outside the United States has had a substantial adverse effect on
United States investors or United States securities markets, and
the conduct test, which questions whether conduct within the
United States is alleged to have played some part in the
perpetration of a securities fraud on investors outside of this
country. Tri Star Farms Ltd. v. Marconi, PLC,
225 F.Supp.2d 567, 572-73 (W.D.Pa. 2002) (citing Robinson v. TCI/US W.
Communications Inc., 117 F.3d 900, 905 (5th Cir. 1997)).
Jurisdiction is established by satisfaction of either test. Id.
In the present motions, Defendants do not challenge this
Court's subject matter jurisdiction over the claims of domestic
investors who purchased on domestic or foreign exchanges, nor do
they contest this Court's jurisdiction over the claims of foreign
investors who bought ordinary shares or ADRs on the NYSE. Rather,
Defendants challenge this Court's jurisdiction over the claims of
the putative foreign class members who purchased their securities
on foreign exchanges. Such investors did not suffer the effects
of Defendants' alleged misconduct in the United States, and therefore this Court will proceed under the conduct
When analyzing subject matter jurisdiction in the context of
transnational securities fraud, the Third Circuit has held that
the federal securities laws grant jurisdiction where at least
some activity designed to further a fraudulent scheme occurs
within this country. SEC v. Kasser, 548 F.2d 109, 114 (3d Cir.
1977). The Court, relying on the prior pronouncements by the
Second Circuit in IIT v. Vencap, Ltd., 519 F.2d 1001 (1975) and
Bersch v. Drexel Firestone, Inc., 519 F.2d 974 (2d Cir. 1975),
concluded that its ruling was "limited to the perpetration of
fraudulent acts themselves and does not extend to mere
preparatory activities or the failure to prevent fraudulent acts
where the bulk of the activities were performed in foreign
countries. . . ." SEC v. Kasser, at 114 (quoting IIT, at
1018). In Kasser, the Third Circuit concluded that the conduct
of the defendants in the United States, which included various
negotiations, the execution of a contract at issue, incorporation
of some of the defendant companies and maintenance of pertinent
records, could not be deemed to be "mere[ly] preparatory" to
fraudulent acts committed outside the country. Kasser, at 115.
The Third Circuit also set forth three policy justifications
for its decision. Id. at 116. First, the Court stated that "to
deny such jurisdiction may embolden those who wish to defraud foreign securities purchasers or sellers to use the United States
as a base of operations." Id. The Court added that it was
"reluctant to conclude that Congress intended to allow the United
States to become a `Barbary Coast,' as it were, harboring
international securities `pirates'." Id. Second, the Kasser
Court announced its concern "that a holding of no jurisdiction
might induce reciprocal responses on the part of other nations,"
which would in turn "enable defrauders beyond the reach of our
courts to escape with impunity." Id. Finally, the Court opined
that the antifraud provisions of the 1933 and 1934 Acts were
"designed to insure high standards of conduct in securities
transactions within this country in addition to protecting
domestic markets and investors from the effects of fraud." Id.
The Court reasoned that finding jurisdiction would enhance the
ability of the SEC to "police vigorously the conduct of
securities dealings within the United States." Id.
In the case at bar, Defendants suggest that the facts do not
establish the "significant and material" conduct within the
United States that is necessary to establish subject matter
jurisdiction; instead, Defendants argue that the "focal point" of
the alleged fraudulent activity was the United Kingdom and The
Netherlands. See RDS Br. in Support of Motion to Dismiss for
Lack of SMJ, at 18. To support this argument, RDS submits the
declarations of (1) John Darley, the Director of EP Technology with Shell International Exploration and Production, N.V, (2)
Roger Parkins, Senior Legal Counsel with Shell International B.V.
("SIBV"), and (3) Bart van der Steenstraten, Group Finance
Representative, The Hague, Netherlands and Investor Relations
Manager Continental Europe of Shell International, B.V.
In 2003, Darley was asked to lead a team which reviewed Shell's
"proved" reserves. See Darley Decl., ¶ 3, Attached to RDS Br.
in Support of Motion to Dismiss for Lack of SMJ. This project,
which became known as "Project Rockford," eventually led to the
Companies' recategorization. Id. According to Darley, the
Companies report "proved" reserves to investors as supplemental
information to the financial statements contained in the Annual
Reports and the Form 20-F filings with the SEC. Id. ¶ 4. This
data is compiled in an annual process known as the Annual Review
of Petroleum Resources ("ARPR"). Id. ¶ 5. The reporting of
hydrocarbon resources (including oil, gas and natural gas
liquids) in the ARPR process involves the collection of data on
existing hydrocarbon resources from Royal Dutch's and Shell
Transport's Operating Units around the world. Id. The manner in
which the Companies' Operating Units are instructed to report
their hydrocarbon resources, including "proved" reserves, is
consistent with internal guidelines that are prepared and
published each year by the Group Reserves Coordinator ("GRC") in
The Netherlands. Id. ¶ 6. The GRC is also responsible for compiling and consolidating the
Group's final proved reserves figures, including the annual RRR,
for inclusion in the Companies' Annual Reports and the 20-F
filings. Id. Defendants contend that throughout the Class
Period, the ARPR process was reviewed by a Group Reserves
Auditor, a part-time consultant to Shell who performed his
reviews in The Netherlands. Id. ¶ 7. Defendants admit that
during the year, the Group Reserves Auditor traveled worldwide to
audit the petroleum resources recorded by Operating Units in
various countries; however, it is argued that the Auditor
performed only two audits of any Operating Unit based in the
United States during the Class Period, and that one of those
audits was a joint venture involving Shell and ExxonMobil. Id.
During the course of the ARPR process a Netherlands-based
affiliate of KPMG monitored the reports of hydrocarbon resources.
Id. ¶ 9. At the conclusion of the ARPR process and after
receiving the report from the Auditor, the KPMG affiliate issued
a statement outlining the results. Id. Defendants note that all
work was performed by the KPMG affiliate in The Netherlands and
the statements of results were delivered to Royal Dutch in The
Netherlands and Shell Transport in the United Kingdom. Id.
Furthermore, Darley proposes that although some of the reserves
recategorizations the Companies have announced are located in the United States, none of the proved reserves that
Royal Dutch and Shell Transport have restated in prior years was
located in the United States. Id. ¶ 10. He explains that as
part of the reserves recategorization, Royal Dutch and Shell
Transport said they had recorded a downward revision of 172
million boe of proved reserves due to the SEC's clarification of
the requirements for determining the "lowest known hydrocarbon"
in an oil or gas field. Id. The total, roughly 59 million boe
of revisions as of the end of 2003, did not form part of the
restatement of prior years. Id. In his declaration, Darley
highlights the fact that relevant conduct occurred in The
Netherlands; however, this does not detract from his clear
submissions that other relevant conduct occurred within the
United States. This includes 59 million boe of revisions and the
audit of two operating bases in the U.S.
Plaintiff submits that the conduct in the United States falls
into three categories, each of which are fully discussed below:
(1) the calculation and determination of proved reserves by SDS
in Houston, Texas for Group Operating Companies; (2) reserves
audits undertaken by Barendregt at SDS in Houston; and (3)
presentations made to analysts and investors throughout the
(1) Shell Deepwater Services in Houston, Texas
SDS, which was formed in 1999 and fragmented in mid-2003, was responsible for dealing with the deep water activities of the
Shell Group. See Darley Dep., 22:3-23:9, Attached to Decl. of
Mark T. Millkey in Support of Lead Pl. Br. in Opp'n to
Defendants' Motion to Dismiss in Part for Lack of SMJ ("Millkey
Decl."), Ex. 1. Darley explained that SDS evaluates deepwater
hydrocarbon accumulations and has the geological and geophysical
expertise to map the size of the accumulation and define the
aerial extent of the accumulation. Id. 23:14-24:2. SDS also
defines the development plan for the recovery of the hydrocarbon
resources in the accumulation, which consists of defining "how
many wells are required, at what depth should the wells be
drilled, at what rate should the wells be produced," as well as
"what kind of facilities and infrastructure will be needed to
recover the hydrocarbons." Id. 24:3-24:12. Darley testified
that "all that work, whenever it was related to deepwater
accumulations, because deepwater accumulations require
specialists expertise and specialist knowledge, . . . was
executed by Shell Deepwater Services." Id. 24:21-24:25. Darley
added that Shell Deepwater Services was involved in all aspects
of resource definition, including the estimation and calculation
of reserves. Id. 25:2-27:2.
Darley's deposition testimony also highlighted the role played
by SDS in the calculation of the fields in Nigeria and Angola.
Darley explained the procedure the Companies employed in gathering and reporting its proved oil and gas reserves during
the Class Period. The process begins with a request from the
hydrocarbon resources coordinator and reserves coordinator, which
is then sent to all of the operating units instructing them to
prepare the year-end reserve submissions. See Darley Dep.,
51:8-52:16. Once the request is sent, the operating units prepare
their reserves and resource definition for their areas of
responsibility. Id. 52:20-53:3. Darley explained that it is the
operating units responsibility to define their reserves and
resources, and if they are well defined and understood, they
would not need any involvement from SDS. However, if SDS is
requested to do so, it may provide technical support in the form
of information or clarity from the consultant or from the
contractor who is performing the technical work on the field
development, to the operating unit. Id. 53:3-54:25. To that
end, Darley testified that "SDS provided technical support to
both Angola, Shell Development Angola, who [were] preparing their
own submission of the year-end reserves, and also to the deep
water company in Nigeria, SNEPCO . . ., when they were also
preparing their year-end submission reserves." Id. 55:10-17.
Plaintiff submits that SDS was deeply involved in the
calculation and evaluation of proved reserves in the Bonga, Erha,
and Abu fields of Nigeria, all of which were being developed by
Shell Nigeria Exploration and Production Company ("SNEPCO").
See Lead Pl. Br. in Opp'n to RDS Motion to Dismiss for Lack of SMJ,
at 6. In its opposition brief, Lead Plaintiff also makes
reference to numerous articles and e-mails which support the
position that SDS was actively working on reserves calculations
for this area. See Lead Pl. Br. in Opp'n to RDS Motion to
Dismiss for Lack of SMJ, at 6-7.
Lead Plaintiff also cites numerous e-mails and documents in
support of the position that SDS was actively working on reserves
calculations in Angola. See Lead Pl. Br. in Opp'n to RDS Motion
to Dismiss for Lack of SMJ, at 8-10. One such reference is a
November 2000 e-mail authored by then head of SDS, Matthias M.
Bichsel. Mr. Bichsel wrote the following to Heinz Rothermund, the
Group's regional director for South America and Africa:
I am responding to your e-mail from 29th October
regarding reserves booking in Angola. I attach a note
that addresses the issue in the wider context of West
Africa, since we are also working on identifying
additional volumes in Bonga.
As you will have heard already, the earlier quoted
figures of some 300 MMB of proved reserves to be
booked in 2000 were incorrect and represent volumes
of entire structures rather than what can be booked
with confidence in 2000, and in accordance to SEC
rules and Shell guidelines.
I can assure you that I am personally pushing and
cajoling my staff to get the most out of what is
possible. Contrary to what you have heard, we are not
"covering our back side" and are "overly
conservative" but are exploring every avenue to
trying [sic] to increase reserves bookings. The current total reserves booking potential is, on a
P50 basis, 195 to 315 MMB and on a P85 (proved) basis
130-190 MMB. I have asked for another set of eyes of
reservoir engineering expertise from SepTAR and SEPCo
to ensure that we are not missing anything and
literally leave no stone unturned at our next peer
See SMJ00017266, Attached to Millkey Decl., Ex. 3.
Defendants' reply brief provides additional information about
the context of the aforesaid e-mail; however, rather than
supporting Defendants' position, it only serves to reinforce the
fact that portions of the reserves calculated by the SDS were in
fact overstated and recategorized. See RDS Br. in Support of
Motion to Dismiss for Lack of SMJ, at 12-14; see also
Supplemental Decl. of John Darley.
Defendants submit Roger Parkins' declaration to support the
conclusion that senior-level oversight of the reserves setting
and reporting processes occurred in the United Kingdom and The
Netherlands, and not in the United States. However, the Third
Circuit's test for determining subject matter jurisdiction in
transnational securities cases does not require a finding of no
jurisdiction if material, substantial conduct occurs outside the
United States. Rather, the test is whether material, substantial
conduct occurred in the United States in pursuit of the
fraudulent scheme. If Plaintiff pleads and supports sufficient
allegations to sustain this burden, it will defeat Defendants'
motion to dismiss, regardless of the quantity and quality of activity which occurred in The Netherlands and the U.K.
(2) Audits at SDS in Houston
Lead Plaintiff refers to a portion of Darley's declaration
stating that during the Class Period, Anton Barendregt performed
two audits of the United States' Operating Units. While Lead
Plaintiff does not facially attack the veracity of this
statement, it cites numerous documents, produced by Defendants,
which demonstrate that Barendregt made repeated trips to Houston,
TX during the Class Period either to audit operating units
located outside the United States, or to contribute in the
booking of reserves. See Lead Pl. Br. in Opp'n to RDS Motion to
Dismiss for Lack of SMJ, at 10-12.
(3) Investor Relations in the United States
The Companies had three main investor markets worldwide
Europe, the United Kingdom and North America. The Companies had
Investor Relations offices in London, The Hague and New York.
See Lead Pl. Br. in Opp'n to RDS Motion to Dismiss for Lack of
SMJ, at 12. Darley testified that it was the function of the
Investor Relations Office "to promote the company strategies and
the company performance among the investor analyst community."
Darley Dep., 145:17-21.
The source for much of Lead Plaintiff's information regarding
investor relations is Mr. Simon Henry who, beginning in March
2001, was "responsible for all of the communications to investors worldwide, across the three main investor markets,
Europe, the U.K. and North America." See October 19, 2004
Deposition of Simon Henry before the SEC, 16:16-22, Attached to
Millkey Decl., Ex. 43. Henry explained that he was responsible
for the communications strategy including quarterly results
reporting and the reporting of any significant events. Id.
16:23-17:3. The New York Office of Investor Relations was headed
by David Sexton who, in September 2003, was replaced by Harold
Hatchett. Id. 18:15-17. Henry testified that the Investor
Relations Group conducted between 200 and 300 in-person meetings
per year with executives in 2002 and 2003. Id. 21:14-17. Henry
added that the top 50 investors in each market were the priority,
and each would have the opportunity, at least once a year, to
meet with the senior executives (a managing director or the
director of finance). Id. 21:21-22:4.
In addition to the small group meetings, Investor Relations
group executives would travel to cities in the U.S. including
Boston, New York, Los Angeles, San Francisco, San Diego, Denver
and Philadelphia. Id. 24:13-20. Henry testified that the Group
would try to visit New York "two or three times a year," and the
other cities "once a year or once every two years." Id. Henry
added that in 2002 and 2003, because of poor reviews, the
Investor Relations group tried to limit Mr. van de Vijver's
contact with outside investors in the U.K. and the U.S. Relatedly, he testified that the U.S. market was by and large
reserved for Philip Watts and Judy Boynton, and on occasion, the
president of Royal Dutch. Id. 138:23-139:24. Lead Plaintiff
also makes reference to numerous documents which demonstrate that
representatives of the Companies addressed reserves and/or RRR at
the United States meetings and presentations. See Lead Pl. Br.
in Opp'n to RDS Motion to Dismiss for Lack of SMJ, at 13-14; see
also Millkey Decl., Exs. 44-61.
Defendants argue that the inclusion of allegedly misleading
statements created abroad in SEC filings and other public
statements in the United States cannot establish subject matter
jurisdiction under the conduct test. See RDS Br. in Support of
Motion to Dismiss for Lack of SMJ, 27-28. To support their
position, Defendants cite a host of cases, one of which is Tri
Star Farms, LTD. v. Marconi, PLC., 225 F.Supp.2d 567 (W.D.Pa.
2002). In Marconi, the court noted that the "only fraudulent
conduct alleged to have taken place in the United States is the
inclusion of some of the purported fraudulent misrepresentations
and omissions in forms Marconi filed with the SEC and the
dissemination of the statements published in the British press in
the United States." Id. at 577. The Marconi Court determined
such acts to be insubstantial in comparison to the conduct which
occurred in the United Kingdom and decided that it "could not
have played a significant role in furtherance of any fraud perpetrated against the foreign investors." Id. at 578.
("Simply making fraudulent statements about what is happening in
the United States does not make those statements `United States
conduct' for purposes of the conduct test.") The court also
observed that the defendants did not use the United States as a
base of operations for perpetrating fraud, nor was it a case
"involving defendants who have unleashed from this country a
pervasive scheme to defraud the foreign plaintiffs." Id. at 578
(quoting SEC v. Kasser, 548 F.2d 109, 114 (3d Cir. 1977))
(internal quotations omitted).
Marconi is factually distinguishable from the case at bar. In
the instant case, the United States conduct involved more than
alleged misrepresentations on SEC filings. As detailed above, the
representatives of the Companies gave numerous presentations to
analysts and investors and issued press releases and other
allegedly misleading information in the U.S. to the financial and
business community. Defendants argue that this information was
only pertinent to United States investors; however, this
characterization of Plaintiff's arguments is oversimplified.
See RDS Br. in Support of Motion to Dismiss for Lack of SMJ, at
17-20. Just as foreign stock exchange data and information is
pertinent to United States investors, the reverse is also true.
Moreover, the alleged fraudulent activity which occurred in the
United States was in no way confined to the United States market, which, because of the SEC's stringent guidelines and regulations,
has become an example for foreign investors and exchanges. The
Companies' alleged fraudulent conduct which took place in the
United States would, therefore, affect foreign as well as
In support of this motion, Defendants also rely on the
declaration of Bart van der Steenstraten. Mr. Steenstraten states
that Shell communicates market-sensitive information to financial
markets at the same time throughout the world and that the focal
point of all communications activity, including the preparation
of communications and their dissemination, is in The Hague and
London. Steenstraten Decl., ¶ 10, Attached to RDS Br. in Support
of Motion to Dismiss for Lack of SMJ.
Alleged Inconsistent Statements Proffered by Lead Plaintiff
Defendants allege that Plaintiff, in its Memorandum of Law in
further support of the Pennsylvania State Employees' Retirement
System ("SERS") and the Pennsylvania Public School Employees'
Retirement System ("PSERS") motion for appointment as Lead
Plaintiff, stated that "subject matter jurisdiction in a
transnational securities case will exist only when the
defendants' acts in the United States . . . are significant and
material" to the alleged fraud. See RDS Br. in Support of
Motion to Dismiss for Lack of SMJ, at 14. Defendants submit that
Plaintiff's brief went on to state that the most significant material conduct occurred outside the U.S. Id.; see also
RDS Br. in Support of Motion to Dismiss for Lack of SMJ, at 22.
In response to this argument, Plaintiff posits that Defendants
misrepresent Lead Plaintiff's position in the Lead Plaintiff
application process and disregard the significant investigative
effort Lead Plaintiff has undertaken and the discovery it has
received since that time. See Lead Pl. Br. in Opp'n to RDS
Motion to Dismiss for Lack of SMJ, at 26. For the reasons which
follow, this Court does not agree with Defendants' representation
of Plaintiff's statements.
The following is an excerpt of the SERS and PSERS brief in
support of the application for Lead Plaintiff:
To establish subject matter jurisdiction, therefore,
KBC AM must satisfy the requirements of the conduct
test. Numerous cases in the Third Circuit have
recognized that subject matter jurisdiction in a
transnational securities case will exist only when
the defendants' acts in the United States are not
merely preparatory to fraudulent acts committed
abroad, but instead are significant and material.
. . .
The issue presently before the Court is not, however,
whether defendants' subject matter jurisdiction
defense would succeed against KBC AM. Rather, it is
whether that defense can be asserted and, if so
asserted, whether it will be a material distraction.
It is clear from the foregoing that Plaintiff has
proffered sufficient information to sustain its
burden. . . .
The facts and circumstances set forth in the
constituent complaints and found in the news media
confirm the difficulties the Court will encounter in
addressing the inevitable challenge to the Court's
exercise of subject matter jurisdiction over KBC AM's
claims. None of the corporate defendants are
incorporated in the United States, and all of the
individual defendants (with the exception of S.L.
Miller) resided abroad during the Class Period.
Because Royal Dutch has its principal executive
offices in The Hague, and Shell has its principal
executive offices in London, all major decision
making occurred not in the United States, but in
Europe. KBC AM's lead plaintiff papers point to no
significant or material acts occurring in the United
States. Indeed, the oil reserves at issue are off the
coast of Australia and in Nigeria.
Application for Lead Plaintiff Br., at 24, Attached to Millkey
Decl, at 24.
The aforesaid statements cannot be interpreted, as Defendants
suggest, to stand for the proposition that Lead Plaintiff
endorsed the position that the most significant and material
conduct occurred outside the U.S. Rather, Lead Plaintiff argued
what it knew to be true at the time, that KBC AM's papers pointed
to no "significant or material acts occurring in the United
States." See Application for Lead Plaintiff Br., at 24. This
Court will not penalize Lead Plaintiff for arguments made more
than one year ago at the very early stages of this litigation
and before any discovery was received. As is clearly detailed
above, Lead Plaintiff has conducted extensive research and has
proffered sufficient facts and information which meet the requirements of the conduct test: that significant and material
acts (applicable to all investors) relating to the alleged fraud
did, in fact, occur in the United States.
Res Judicata and the Enforceability of a Judgment by this
Defendants also conclude that the lack of enforceability of any
judgment rendered by this Court over securities purchased abroad
by foreign nationals makes the exercise of subject matter
jurisdiction futile and improper. See RDS Br. in Support of
Motion to Dismiss for Lack of SMJ, at 32-39. To sustain this
argument, Defendants have retained eight "expert jurists or legal
scholars," one for each European country in which the Companies'
securities trade, who have "raised serious concerns about whether
their courts would recognize or enforce an `opt out' class action
judgment in this case with respect to claims by foreign nationals
who purchased shares on foreign exchanges."*fn7 Id. at 33.
Each expert was asked to opine on (1) whether a court in their
country would enforce a U.S. class action judgment in favor of
Plaintiffs, and (2) whether that court would enforce a U.S.
judgment in favor of Defendants.
Judge Friendly wrote the following in Bersch v. Drexel Firestone Inc., 519 F.2d 974, 996 (2d Cir. 1975):
[W]hile an American court need not abstain from
entering judgment simply because of a possibility
that a foreign court may not recognize or enforce it,
the case stands differently when this is a near
certainty. This point must be considered not simply
in the halcyon context of a large recovery which
plaintiff visualizes but in those of a judgment for
the defendants or a plaintiff's judgment or a
settlement deemed to be inadequate.
Defendants' experts opine that any judgment could probably
not be used by RDS to forestall new lawsuits against it in
foreign jurisdictions. (emphasis added). Defendants' experts do
not conclude that there is a "near certainty" that foreign courts
will not enforce a U.S. judgment. Rather, in Defendants' brief
summarizing their experts' opinions, Defendants state that the
concerns raised are "not merely hypothetical," but are "very
real." See RDS Br. in Support of Motion to Dismiss for Lack of
SMJ, at 33.
Lead Plaintiff has also submitted expert declarations. Not
surprisingly, Lead Plaintiff's experts opine that there is no
consensus about whether the European courts in question would
recognize a judgment rendered by this Court. Plaintiff proffers
that "although [the experts] generally believe that the courts
about which they write are more likely to enforce a judgment in
favor of a Foreign Class Member than a judgment in favor of
Defendants, all of them identify credible arguments in favor of enforcement on behalf of both class members and Defendants. None
of them believes there is a near certainty that the courts in
question would refuse to enforce a judgment of this Court in this
case, regardless of the outcome." See Lead Pl. Br. in Opp'n to
RDS Motion to Dismiss for Lack of SMJ, at 31.
Defendants' res judicata arguments are unpersuasive. The
probability alleged by Defendants of foreign courts failing to
enforce a judgment of this Court is not a near certainty. In
addition to submitting the declarations, the experts have
submitted "supplemental" declarations in response to the
declarations submitted by Plaintiff's experts. It is clear to the
Court that those declarations were submitted in an effort to
convince this Court of the certainty that a judgment will not be
enforced; however, the arguments raised by both Defendants and
Plaintiff are speculative. Furthermore, this Court will not
engage in a "what if" analysis to determine the enforceability,
or lack thereof, of any judgment which may be rendered.*fn8
Defendants also assert that considerations of international
comity warrant the dismissal of the claims by foreign nationals
who purchased shares on foreign exchanges. See RDS Br. in
Support of Motion to Dismiss for Lack of SMJ, at 37-40. Defendants, relying on the Supreme Court's decision in
Hoffman-La Roche Ltd. v. Empagran S.A., 542 U.S. 155 (2004),
argue that the governments of The Netherlands and the United
Kingdom have "made conscious choices concerning the appropriate
mix of private and public action in the face of allegations of
fraudulent securities transactions, [and] have actively pursued
remedies pursuant to those choices in the precise context of
plaintiffs' claims." See RDS Br. in Support of Motion to
Dismiss for Lack of SMJ, at 38-39. Defendants admit that while
the remedies of both nations are "procedurally and substantively
more limited than those available under United States securities
laws," the remedies still deserve this Court's respect. Id. at
39-40. Otherwise, Defendants contend that this case would pose a
"serious risk of interference with a foreign nation's ability
independently to regulate its own commercial affairs." Id. at
Hoffman-La Roche is legally and factually distinguishable
from the case at bar. There, the Supreme Court analyzed, inter
alia, the ability of a foreign purchaser to bring a Sherman Act
antitrust claim based on a foreign harm. As the District Court
for the District of Maryland stated in a recent opinion, although
"the securities laws are silent as to extraterritoriality, in the
antitrust arena Congress has explicitly stated when the Sherman
Act reaches foreign activity." In re Royal Ahold N.V. Sec. &
ERISA Litig., 351 F.Supp.2d 334, 356 n. 10 (D.Md. 2004). The Royal Ahold court determined that the merit of the legal
arguments raised by the parties in that case, "should be
scrutinized according to the standards developed for securities
claims, not those based on wholly distinct antitrust laws." Id.
(citing Europe and Overseas Commodity Traders, S.A. v. Bangue
Paribas London, 147 F.3d 118, 123 (2d Cir. 1998)). This Court
agrees with the aforesaid analysis and conclusion of the Royal
Lead Plaintiff bears the burden of establishing that subject
matter jurisdiction exists. McNutt v. General Motors Acceptance
Corp., 298 U.S. 178, 182 (1936); Kehr Packages, Inc. v.
Fidelcor, Inc., 926 F.2d 1406, 1409 (3d Cir.), cert. denied,
501 U.S. 1222 (1991). As stated at the outset of this analysis,
however, Plaintiff's burden is light; dismissal for lack of
jurisdiction is only appropriate where the right claimed "is so
insubstantial, implausible, foreclosed by prior decisions of this
Court, or otherwise completely devoid of merit as to not involve
a federal controversy." Dugan v. Coastal Indus., Inc.,
96 F. Supp. 2d 481, 483 (E.D. Pa. 2000) (citing Growth Horizons, Inc.
v. Delaware County, 938 F.2d 1277, 1280-81 (3d Cir. 1995)). Lead
Plaintiff has adequately pled that Defendants have engaged in
material and substantial fraudulent conduct in the United States.
Furthermore, in response to the present motion, Lead Plaintiff
has supplied adequate financial support for that position. Accordingly, this Court has a sufficient interest in the claims
of the foreign investors; therefore, it will invoke its
jurisdiction and deny Defendants' Rule 12(b)(1) motion.
II. Defendant Watts' Rule 12(b)(2) Motion to Dismiss
A. Standard of Law Applied to Motion to Dismiss Pursuant to
Where a defendant challenges a court's exercise of personal
jurisdiction, the burden is on the plaintiff to make a prima
facie showing of jurisdiction. See Mellon Bank (East) PSFS
Nat. Ass'n v. Farino, 960 F.2d 1217, 1223 (3d Cir. 1992); Time
Share Vacation v. Atlantic Resorts, Ltd., 735 F.2d 61, 63 (3d
Cir. 1984). To meet this burden, the plaintiff must establish
"with reasonable particularity, sufficient contacts between the
defendant and the forum state." Id. (citing Provident Nat'l
Bank v. California Fed. Sav. and Loan Assoc., 819 F.2d 434 (3d
Cir. 1987)). When deciding whether to dismiss a case for lack of
personal jurisdiction, the Court must accept as true the
allegations in the complaint and resolve disputed issues of fact
in favor of the plaintiff. See Carteret Savs. Bank v.
Shushan, 954 F.2d 141, 142 n. 1 (3d Cir. 1992) cert. denied,
506 U.S. 817, 113 S.Ct. 61, 121 L. Ed. 2d 29 (1992). When
considering the personal jurisdiction arguments of the foreign
individual defendants, "the question becomes whether the party
has sufficient contacts with the United States, not any
particular state." In re Royal Ahold N.V. Sec. & ERISA Litig., 351 F.Supp.2d 334, 350 (D.Md. 2004) (quoting United Liberty Life
Ins. Co. V. Ryan, 985 F.2d 1320, 1330 (6th Cir. 1993)).
What constitutes minimum contacts varies with the "quality and
nature of the defendant's activity." Burke v. Quartey,
969 F. Supp. 921, 924 (D.N.J. 1997) (quoting Hanson v. Denckla,
357 U.S. 235, 253 (1958)). The plaintiff may demonstrate that the
court has general jurisdiction by showing that the defendant has
continuous and systematic contacts with the forum or specific
jurisdiction by showing that the cause of action arose out of
defendant's activities within or directed towards the forum.
See Helicopertos Nacionales de Colombia, S.A. v. Hall,
466 U.S. 408, 414-16 (1984). Whether asserting that the court has
general or specific jurisdiction, the plaintiff must establish
that the defendant's contacts with the forum are such that the
defendant could "reasonably anticipate being haled into court
there." Worldwide Volkswagon Corp. v. Woodson, 444 U.S. 286,
An exercise of general jurisdiction is consistent with due
process only when the plaintiff has satisfied the burden of
establishing that the defendant's contacts are continuous and
substantial. See Giangola v. Walt Disney World Co.,
753 F. Supp. 148, 154 (D.N.J. 1990); see also Exton v. Our Farm,
Inc., 943 F. Supp. 432, 437 (D.N.J 1996). Such continuous and
substantial contacts with the forum will allow a court to
exercise jurisdiction over the defendant even where the underlying cause
of action is not specifically related to defendant's contacts.
See Int'l Shoe Co. v. State of Wash., etc., 326 U.S. 310
For a court to properly exercise specific personal
jurisdiction, the litigation must arise out of in-forum
activities or activities directed toward the forum, and "it is
essential . . . that there be some act by which the defendant
purposefully avails itself of the privilege of conducting
activities within the forum [State], thus invoking the benefits
and protection of its laws." See Covenant Bank for Savings v.
Cohen, 806 F. Supp. 52, 56 (D.N.J. 1992) (quoting Hanson v.
Denckla, 357 U.S. 235, 253 (1958)).
A court must also consider whether exercising jurisdiction over
the defendant would violate traditional notions of "fair play and
substantial justice." Int'l Shoe Co. v. State of Wash., etc.,
326 U.S. 310 (1945). A court may not exercise jurisdiction in
such a way as to make litigation "so gravely difficult and
inconvenient that a party is at a severe disadvantage to his
opponent." Burger King Corp. v. Rudzewicz, 471 U.S. 462, 478
Defendant Watts moves to dismiss the Plaintiff's claims for
lack of personal jurisdiction. As Defendant Watts lives and works
outside the United States, there is no claim for general jurisdiction. Rather, the issue is whether this Court has
specific jurisdiction over this Defendant.
B. This Court Can Exercise Specific Personal Jurisdiction over
Defendant Watts, relying on the fiduciary shield doctrine,
asserts that this Court lacks personal jurisdiction because all
of the allegations against him pertain to actions taken in his
corporate capacity. See Def. Watts Br. in Support of Motion to
Dismiss, at 9. Where a claim is asserted against an officer of a
foreign corporation, some courts will exercise personal
jurisdiction over the officer for acts committed in a corporate
capacity. The case which Defendant Watts relies upon to support
his position is United Prod. Corp. v. Admiral Tool & Mfg. Co.,
122 F.Supp.2d 560 (E.D.Pa. 2000). The specific issue in Admiral
Tool was breach of a commercial contract. In fact, the
"fiduciary shield doctrine has most often been applied in cases
involving corporate disputes, such as breach of contract claims."
Giusto v. Ashland Chemical Co., 994 F.Supp. 587, 591 n. 2
(E.D.Pa. 1998). The Giusto Court noted that although the
doctrine had also been applied in cases involving torts, in light
of Calder v. Jones,*fn9 the reach of the doctrine is
questionable. In Calder, the Supreme Court considered an
argument that was based on a principle similar to the fiduciary
shield doctrine. The Court determined that while defendants' contacts with the forum "are
not to be judged according to their employer's activities there,
. . . their status as employees does not somehow insulate them
from jurisdiction. Each defendant's contacts with the forum State
must be assessed individually." Calder, at 790.
The Fourth Circuit has clearly established that the "fiduciary
shield rule is solely a matter of statutory construction under
state law and is not required under the due process clause." In
re Royal Ahold N.V. Sec. & ERISA Litig., 351 F.Supp.2d 334, 351
(D.Md. 2004) (citing Western Contracting Corp. v. Bechtel
Corp., 885 F.2d 1196, 1200 (4th Cir. 1989)). "While a forum
cannot establish personal jurisdiction over foreign defendants
based solely on their status as officers in a corporation that is
alleged to have committed fraud in the United States, if the
complaint sufficiently alleges that the defendants had a direct
personal involvement in a tort committed in the forum state, then
personal jurisdiction over the defendants does not conflict with
the fundamental notions of fairness required by the due process
clause." Royal Ahold, at 351 (quoting Columbia Briargate Co.
v. First Nat. Bank in Dallas, 713 F.2d 1052, 1064-65 (4th
Cir. 1983)) (internal quotations omitted). Because it is
consistent with the Supreme Court's analysis in Calder, this
Court finds the reasoning of the Fourth Circuit persuasive and will apply it in the instant case.*fn10
As is described in full detail above, Lead Plaintiff has
alleged that Watts signed many SEC filings that contained the
materially false and misleading information about proved
reserves. "United States courts frequently have asserted personal
jurisdiction over individual defendants who sign or, as control
persons, approve the filing or disseminating of, particular forms
required by the SEC which they knew or should have known would be
relied on by U.S. investors." Royal Ahold, at 352 (citing In
re Cinar Corp. Sec. Litig. v. Carson, 186 F.Supp.2d 279, 305-06
(E.D.N.Y. 2002); Itoba Ltd. v. LEP Group PLC, 930 F.Supp. 36,
41 (D.Conn. 1996); Derensis v. Coopers & Lybrand,
930 F.Supp. 1003, 1014 (D.N.J. 1996); Landry v. Price Waterhouse,
715 F.Supp. 98, 101 (S.D.N.Y. 1989)). Moreover, it has been offered
that Defendant Watts was in attendance and made presentations at
several U.S. conferences, and through these meetings assisted in
the dissemination of the material misrepresentations. It is
evident that the required nexus between this Defendant's contacts
and the Plaintiffs' injuries exists, because the claims are directly related to the United
States activity. Defendant Watts, therefore, must have been aware
that the information proffered about the proved reserves could
have affected the United States market and investors, as well as
those abroad. The issue, then, is whether Defendant Watts'
contacts were sufficient so that he "should reasonably anticipate
being haled into court" in this country. Worldwide Volkswagen
Corp. v. Woodson, 444 U.S. 286, 287 (1990). This Court concludes
that Lead Plaintiff has made a prima facie showing that
Defendant Watts had minimum contacts with the United
States.*fn11 Finally, as Defendant Watts submits no
arguments which convince the Court that asserting jurisdiction
over him would violate notions of fair play and substantial
justice, this Court concludes that jurisdiction over this foreign
defendant is reasonable. For the foregoing reasons, this Court
determines that it has personal jurisdiction over Defendant
III. The RDS Defendants' Rule 12(b)(6) Motions to Dismiss
In its moving brief, RDS attacks the Complaint on four grounds.
First, RDS claims that as "foreign private issuers," it is exempt from Section 14(a) of the Securities Exchange Act of
1934. Therefore, it contends that Counts IV and V of the
Complaint should be dismissed for failure to state a claim upon
which relief can be granted.
Second, the RDS Defendants argue that Plaintiff's claims under
Section 10(b) of the Exchange Act are deficient as a matter of
law, as Plaintiff cannot show reasonable reliance on alleged
misrepresentations in purchasing the Companies' securities after
January 9, 2004. Furthermore, Defendants assert that Plaintiff
cannot claim any loss with respect to securities purchased and
subsequently sold before the January 9, 2004 announcement.
Third, the RDS Defendants contend that the Complaint does not
satisfy the requirements of Fed.R.Civ.P. 9(b) or the PSLRA,
15 U.S.C. § 78u-4(b), as it does not plead particularized facts
concerning each Individual Defendants' participation in and
knowledge of the alleged misstatements. Accordingly, Defendants
seek the dismissal of the claims brought pursuant to Section
10(b) and 20 (a) of the Exchange Act against each Individual
Fourth, the Company Defendants argue that Lead Plaintiff has
not satisfied the PSLRA's requirements for pleading the scienter
of any individual whose knowledge may be attributed to Royal
Dutch or Shell Transport, and therefore it has not adequately
alleged a violation of Section 10(b). A. Standard of Law
Federal Rule of Civil Procedure 12(b)(6) authorizes a court to
dismiss a claim on the basis of a dispositive issue of law.
Nietzke v. Williams, 490 U.S. 319, 326 (1989) (citing Hishon
v. King & Spalding, 467 U.S. 69, 73 (1984); Conley v. Gibson,
355 U.S. 41, 45-46 (1957)). When considering a 12(b)(6) motion,
the Court must accept as true all allegations in the Complaint
and all reasonable inferences that can be drawn therefrom, and
view them in the light most favorable to the Plaintiff. Morse v.
Lower Merion Sch. Dist., 132 F.3d 902, 906 (3d Cir. 1997). "The
inquiry is not whether plaintiffs will ultimately prevail in a
trial on the merits, but whether they should be afforded an
opportunity to offer evidence in support of their claims." In re
Rockefeller Center Prop., Inc., 311 F.3d 198, 215 (3d Cir.
2002). The motion to dismiss will be granted only when it is
beyond doubt that Plaintiff can prove no set of facts in support
of his claims that would entitle him to relief. Nami v. Fauver,
82 F.3d 63, 65 (3d Cir. 1996) (citing Conley 355 U.S., at 45)).
Finally, in considering a motion to dismiss a securities fraud
complaint, "the Court is entitled to rely on public documents
quoted by, relied upon, incorporated by reference or otherwise
integral to the complaint, and such reliance does not convert
such a motion into one for summary judgment." In re Royal Ahold
N.V. Sec. & ERISA Litig., 351 F.Supp.2d 334, 349 (D.Md. 2004)
(quoting In re USEC Sec. Litig., 190 F.Supp.2d 808, 813 (D.Md. 2002)).
Independent of the standard applicable to Rule 12(b)(6)
motions, securities fraud claims are subject to the heightened
pleading requirements of Fed.R.Civ.P. 9(b) and the PSLRA,
15 U.S.C. § 78u-4(b)(1)(B), (b)(2). Rule 9(b) states: "In all
averments of fraud or mistake, the circumstances constituting
fraud or mistake shall be stated with particularity."
Fed.R.Civ.P. 9(b); see also In re Rockefeller, at 216. "Although
Rule 9(b) falls short of requiring every material detail of the
fraud such as date, location, and time, plaintiffs must use
`alternative means of injecting precision and some measure of
substantiation into their allegations of fraud'." In re
Rockefeller, at 216. (quoting In re Nice Sys., Ltd. Sec.
Litig., 135 F.Supp.2d 551, 577 (D.N.J. 2001)). Additionally,
with respect to state of mind, Rule 9(b) states that "[m]alice,
intent, knowledge, and other condition of mind of a person may be
averred generally." Fed.R.Civ.P. 9(b); see also In re
Rockefeller, at 216, n. 15. The Third Circuit has recognized
that the imposition of a heightened pleading requirement in fraud
actions serves important objectives including (1) providing
defendants notice of the claims against them, (2) providing an
increased measure of protection for defendants' reputation, and
(3) reducing the number of frivolous suits brought solely to
extract settlements. In re Rockefeller, at 216 (citing In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1418 (3d
While the Third Circuit has acknowledged the "stringency of
Rule 9(b)'s pleading requirements," it has also stated that, "in
applying Rule 9(b), courts should be sensitive to situations in
which sophisticated defrauders may successfully conceal the
details of their fraud." Id. (internal citations omitted).
"Where it can be shown that the requisite factual information is
peculiarly within the defendant's knowledge or control, the rigid
requirements of Rule 9(b) may be relaxed." Id. Regardless,
"boilerplate and conclusory allegations will not suffice.
Plaintiffs must accompany their legal theory with factual
allegations that make their theoretically viable claim
In addition to Rule 9(b), securities fraud allegations must
also comply with the heightened pleading requirements of the
PSLRA, 15 U.S.C. § 78u-4(b)(1), (b)(2). In re Rockefeller, at
217. Section 78u-4(b)(1) requires plaintiffs to:
specify each statement alleged to have been
misleading, the reason or reasons why the statement
is misleading, and, if an allegation regarding the
statement or omission is made on information and
belief, the complaint shall state with particularity
the facts on which that belief is formed.
Furthermore, with regard to claims such as those brought under
Rule 10b-5, the PSLRA requires that "the complaint shall, with respect to each act or omission alleged to violate this chapter,
state with particularity the facts giving rise to a strong
inference that the defendant acted with the required state of
mind." 15 U.S.C. § 78u-4(b)(2). "The particularity described in §
78u-4(b)(1) extends that of Rule 9(b) and requires plaintiffs to
set forth the details of allegedly fraudulent statements or
omissions, including who was involved, where the events took
place, when the events took place, and why any statements were
misleading." In re Rockefeller, at 217. (citing S. Rep. No.
104-98, at 15). To satisfy the pleading requirement of the PSLRA,
plaintiffs must state with particularity either "(1) facts which
show that defendants had both motive and opportunity to commit
fraud; or (2) facts that constitute strong circumstantial
evidence of conscious misbehavior or recklessness." P.
Schoenfeld Asset Mgmt. LLC v. Cendant Corp., 142 F.Supp.2d 589,
604 (D.N.J. 2001) (citing In re Advanta Corp. Sec. Litig.,
180 F.3d 525, 534 (3d Cir. 1999)). Recklessness involves "not merely
simple, or even inexcusable negligence, but an extreme departure
from the standards of ordinary care, and which presents a danger
of misleading buyers or sellers that is either known to the
defendant or is so obvious that the actor must have been aware of
it." Id. In this context, conscious behavior is defined as
"intentional fraud or other deliberate illegal behavior." Id.
The PSLRA requires that "motive and opportunity" allegations be supported "by facts stated with particularity and must give rise
to a strong inference of scienter." Schoenfeld, at 605 (quoting
Advanta, at 535) (internal quotations omitted).
With these heightened pleading requirements in mind, this Court
will undertake a detailed analysis of Lead Plaintiff's
allegations and Defendants' challenges to those pleadings.
B. Section 10(b) of the Securities Exchange Act of 1934,
15 U.S.C. § 78j(b)
Section 10(b) of the Securities Exchange Act of 1934,
15 U.S.C. § 78j (b), prohibits the "use or employ, in connection with the
purchase or sale of any security, . . . [of] any manipulative or
deceptive device or contrivance in contravention of such rules
and regulations as the Commission may prescribe . . ."
15 U.S.C. § 78j(b); see also In re Ikon Office Solutions, Inc.,
277 F.3d 658, 666 (3d Cir. 2002). Section 10(b) is enforced through
Rule 10b-5 which "makes it unlawful for any person [t]o make any
untrue statement of a material fact or to omit to state a
material fact necessary to make the statements made in the light
of the circumstances under which they were made, not misleading . . .
in connection with the purchase or sale of any security." In
re Ikon, at 666 (citing 17 C.F.R. § 240.10b-59(b).
In order to state a valid claim under Section 10(b) and Rule
10b-5, Lead Plaintiff must demonstrate that Defendants "(1) made
a misstatement or an omission of a material fact (2) with
scienter (3) in connection with the purchase or the sale of a security (4) upon which the plaintiff reasonably relied and (5)
that the plaintiff's reliance was the proximate cause of his or
her injury." In re Ikon, at 666 (citing GFL Adyantage Fund,
Ltd., v. Colkitt, 272 F.3d 189, 212 (3d Cir. 2001); Weiner v.
Quaker Oats Co., 129 F.3d 310, 315 (3d Cir. 1997)).
C. Plaintiff's Section 10(b) Claims Against the Royal
Dutch/Shell Defendants*fn12 (Count I)
Post-January 9, 2004 Share Purchases
The Class Period alleged in the Complaint includes purchases of
Royal Dutch and Shell Transport securities during the period
April 8, 1999 through March 18, 2004. Defendants assert that as a
matter of law, any purchases made after the January 9, 2004
announcement, which disclosed the majority of the proved reserves
recategorization, could not have been made in reasonable reliance
upon any prior alleged misstatements about proved reserves.
Defendants also argue that the Complaint does not adequately
plead loss causation. See RDS Br. in Support of 12(b) (6)
Motion to Dismiss, at 16-18.
In Semerenko v. Cendant Corp., 223 F.3d 165, 178 (3d Cir. 2000), the Third Circuit analyzed the fraud on the market theory
of investor reliance.*fn13 "Traditionally, purchasers and
sellers of securities were required to establish that they were
aware of, and directly misled by, an alleged misrepresentation to
state a claim for securities fraud under § 10(b) and Rule 10b-5."
Semerenko, at 178 (citing Peil v. Speiser, 806 F.2d 1154,
1160 (3d Cir. 1986)). However, the requirement of showing direct
reliance "presents an unreasonable evidentiary burden in a
securities market where face-to-face transactions are rare and
where lawsuits are brought by classes of investors;" therefore, the Third Circuit has adopted a rule, the fraud on the market
theory, that "creates a presumption of reliance in certain
cases." Id. The fraud on the market theory affords a plaintiff
in a securities action a "rebuttable presumption of reliance if
he or she purchased or sold securities in an efficient market."
Semerenko, at 178 (citing In re Burlington Coat Factory Sec.
Litig., 114 F.3d 1410, 1419 n. 8 (3d Cir. 1997)).
Under this theory, a plaintiff is entitled to three separate
presumptions when attempting to establish the element of direct
reliance: "(1) that the market price of the security actually
incorporated the alleged misrepresentations, (2) that the
plaintiff actually relied on the market price of the security as
an indicator of its value, and (3) that the plaintiff acted
reasonably in relying on the market price of the security."
Semerenko, at 178-79 (citing Zlotnick v. TIE Communications,
836 F.2d 818, 822 (3d Cir. 1988)). A defendant may rebut this
presumption by raising any defense to actual reliance, including,
inter alia, that the market did not respond to the alleged
misrepresentations, that the market was aware that the
misrepresentations were false, or that the investor would have
purchased or sold the securities at that price even with full
knowledge of the misrepresentation. Semerenko, at 179 (citing
Basic Inc. v. Levinson, 485 U.S. 224, 248 (1988); Zlotnick,
at 822)). In the case at bar, this Court determines that Lead Plaintiff
has sufficiently pled the element of reliance to withstand this
12(b)(6) challenge. The instant case is distinguishable from
Semerenko in that the January 9, 2004 announcement by the
Companies was not entirely curative. As the Lead Plaintiff
alleges, the January 9th disclosures, were only "a partial
revelation of the truth," and the Companies' securities,
therefore, remained artificially inflated. See Lead Pl. Br. in
Opp'n to 12(b)(6) Motion to Dismiss, at 59; see also Compl.,
¶¶ 463, 469-72.
However, in light of the recent Supreme Court decision Dura
Pharmaceuticals, Inc. et al., ___ U.S. ___, 125 S.Ct. 1627
(2005), this Court determines that Lead Plaintiff has failed to
adequately plead loss causation with respect to the post-January
9, 2004 share purchases. In Dura, the Court held that an
inflated purchase price will not by itself constitute or
proximately cause the relevant economic loss needed to allege and
prove loss causation. Dura, at 1631. The Court reasoned that
the "logical link between the inflated share purchase price and
any later economic loss is not invariably strong," and that with
all else being equal, the longer the time between purchase and
sale, the more likely it is that other factors caused the loss.
Id. at 1632. The Court determined:
Given the tangle of factors affecting price, the most
logic alone permits us to say is that the higher purchase price will sometimes play a role in
bringing about a future loss. It may prove to be a
necessary condition of any such loss, and in that
sense one might say that the inflated purchase price
suggests that the misrepresentation ? "touches upon"
a later economic loss. But, even if that is so, it is
insufficient. To "touch upon," a loss is not to cause
a loss, and it is the latter that the law requires.
Dura, at 1632 (citing 15 U.S.C. § 78u-4(b)(4)).
In reaching this decision, the Supreme Court drew upon the
common-law roots of the securities fraud action. Id. at
1632-33. The Court recognized that judicially implied private
securities-fraud actions resemble common-law deceit and
misrepresentation actions, which have "long insisted that a
plaintiff in such a case show not only that had he known the
truth he would not have acted but also that he suffered actual
economic loss." Id. at 1632. Furthermore, the Court noted that
the securities statutes maintain public confidence in the
marketplace by "deterring fraud, in part, through the
availability of private securities actions." However, "the
statutes make these latter actions available, not to provide
investors with broad insurance against market losses, but to
protect them against those economic losses that
misrepresentations actually cause." Id. at 1633.
This led the Supreme Court to conclude that the plaintiffs'
complaint in Dura failed to adequately allege the requirements
of proximate causation and economic loss. Dura, at 1634. The
Court noted that the Federal Rules of Civil Procedure require
only "a short and plain statement of the claim showing that the pleader
is entitled to relief," and that the securities statutes do not
impose any special further requirement with respect to the
pleading of proximate causation or economic loss. Dura, at 1634
(quoting Fed.R.Civ.P. 8(a)(2)). The complaint in Dura
contained only one statement that could be read as describing the
loss caused by the defendants' misrepresentations: that the
plaintiffs paid artificially inflated prices for Dura's
securities and suffered damages. Dura, at 1634. The Supreme
Court determined that the complaint's "failure to claim that
Dura's share price fell significantly after the truth became
known suggests that the plaintiffs considered the allegation of
purchase price inflation alone sufficient." Id. The Court
concluded that allowing a plaintiff "to forgo giving any
indication of the economic loss and proximate cause that the
plaintiff has in mind would bring about harm of the very sort the
statutes seek to avoid. It would permit a plaintiff with a
largely groundless claim to simply take up the time of a number
of other people, with the right to do so representing an in
terrorem increment of the settlement value, rather than a
reasonably founded hope that the [discovery] process will reveal
relevant evidence. Such a rule would tend to transform a private
securities action into a partial downside insurance policy."
Dura, at 1634 (quoting Blue Chip Stamps v. Manor Drug Stores,
421 U.S. 723, 741 (1975)) (internal quotations omitted).
When the Complaint in the case at bar is analyzed in light of
the Dura decision, it is evident that Lead Plaintiff has not
adequately alleged proximate causation and economic loss with
respect to the post-January 9th purchases. The Complaint
cites the January 9th announcement's impact on the market and
also details the subsequent drop in the stock prices of Royal
Dutch and Shell securities; however, the same is not pled with
respect to the March 18, 2004 announcement. As Dura instructs,
Lead Plaintiff cannot simply rely on the artificially inflated
prices of the RDS securities to support the claims which stem
from the securities purchased after January 9, 2004. Therefore,
such claims cannot survive.
Shares Purchased and Sold Within the Putative Class Period
The RDS Defendants also assert that the Complaint claims losses
based upon shares that putative Class Members purchased and held
throughout the Class Period, and also upon shares both purchased
and sold during the Class Period. See RDS Br. in Support of
12(b)(6) Motion to Dismiss, at 19. Defendants submit that the
claims based on Section 10(b) must be dismissed because Plaintiff
has suffered no legally cognizable economic loss in connection
with shares purchased and sold during the Class Period. Lead
Plaintiff asserts that the Complaint clearly demonstrates a
legally cognizable economic loss based on the first-in-first-out ("FIFO") methodology of damage calculation.
See Lead Pl. Br. in Opp'n to 12(b)(6) Motion to Dismiss, at 63.
Whether this method is sound and whether it will be adopted by
this Court is not a matter for discussion at this procedural
phase. "The determination of damages, like the determination of
liability, is a complicated and uncertain process, typically
involving conflicting expert opinions." Maley v. Del Global
Tech. Corp., 186 F.Supp.2d 358, 365 (S.D.N.Y. 2002). The motions
presently before this Court are motions to dismiss and this Court
does not accept Defendants' invitation to quantify damages at
this stage of the litigation.
Shares of Purchasers Who Have Purchased During the Class
Period and Have Not Yet Sold
Defendants also argue that the claims of those purchasers that
have not yet sold the securities cannot survive this motion to
dismiss. In light of the Dura decision, this Court agrees. Such
purchasers are invoking the exact insurance policy that Dura
warned against and any such losses are speculative, at best.
Those who purchased during the Class Period but have yet to sell
their securities have not alleged proximate causation and
economic loss; therefore those purchasers may not join the
D. Plaintiff's 10(b) Claims Against the Individual Defendants
Misstatements or Omissions Under Rule 10b-5(b), "plaintiffs must first establish that the
defendants made a materially false or misleading statement, or
that the defendants omitted to state a fact such that other
statements of fact actually made were rendered materially
misleading." In re DVI, Inc. Sec. Litig., 2005 WL 1307959, *6
(E.D.Pa. May 31, 2005) (quoting Marra v. Tel-Save Holdings,
Inc., 1999 WL 317103, *4 (E.D.Pa. May 18, 1999)). Defendants
claim that Lead Plaintiff has failed to allege that any of the
Individual Defendants made or participated in the creation of a
single misleading statement. Rather, Defendants argue that Lead
Plaintiff invokes the "group pleading" doctrine to support the
allegations in the Complaint. See RDS Br. in Support of
12(b)(6) Motion to Dismiss, at 24; Boynton Br. at 15; Watts Br.
at 19; see also Compl., ¶ 74 ("the Individual Defendants are
liable for the false statements pleaded herein, as those
statements were each `group published' information, the result of
the collective action of the Individual Defendants").
Accordingly, Defendants seek the dismissal of the Section 10(b)
claims against each Individual Defendant.
Under the group pleading doctrine,
the identification of the individual sources of
statements is unnecessary when the fraud allegations
arise from misstatements or omissions in
group-published documents, such as Annual Reports,
prospectuses, registration statements, press
releases, or other `group published information' that
presumably constitute the collective actions of those individuals involved in the day-to-day affairs of the
In re American Bus. Fin. Serv., Inc. Sec. Litig., 2005 WL
1324880 (E.D.Pa. June 2, 2005) (quoting Winer Family Trust v.
Queen, 2004 WL 2203709, at *6 (E.D.Pa. Sept. 27, 2004)).
Although the Third Circuit has not ruled on whether the group
pleading doctrine has survived the enactment of the PSLRA, the
district courts in this Circuit favor the conclusion that it has
not. See In re American Bus. Fin. Serv., Inc. Sec. Litig., at
*13; see also Winer Family Trust v. Queen, 2004 WL 2203709,
at *6; But see In re U.S. Interactive, Inc. Class Action
Sec. Litig., 2002 WL 1971252, *5 (E.D.Pa. Aug. 23, 2002)
(holding that the group pleading doctrine is valid when applied
to officers where it is almost certain that given the high-level
position of the officer within the company and the nature of the
published writing that he would have been involved directly with
writing the document or approving its content and that the
officer was privy to information concerning the accuracy of the
statements within the document). Lead Plaintiff claims that it
does not rely on the group pleading doctrine, but rather,
"identifies with particularity the who, what, where, and why
required by Rule 9(b) and the PSLRA." See Lead Pl. Br. in Opp'n
to 12(b)(6) Motion to Dismiss, at 16. Alternatively, Lead
Plaintiff asks this Court to apply the group pleading doctrine.
"Courts holding that the [group pleading] doctrine does not
survive have reasoned that to permit a judicial presumption as to particularity simply cannot be reconciled with the statutory
mandate that plaintiff must plead specific facts as to each act
or omission by the defendant." In re DVI, Inc. Sec. Litig.,
2005 WL 1307959, *6 (E.D.Pa. May 31, 2005) (quoting Marra v.
Tel-Save Holdings, Inc., 1999 WL 317103 (E.D.Pa. May 18, 1999))
(internal quotations omitted). After reviewing the case law in
this Circuit and the underlying policy rationale of the PSLRA and
the group pleading doctrine, this Court concludes that Lead
Plaintiff cannot rely on the group pleading doctrine to support a
Rule 10b-5 claim. Therefore, Lead Plaintiff must attribute at
least one statement to each of the Individual Defendants to whom
a violation of Rule 10(b) is alleged.
Defendants assert that Lead Plaintiff does not attribute a
single alleged misstatement to Individual Defendants Jacobs,
Brinded, Miller, Roels, Skinner or van den Bergh. See RDS Br.
in Support of 12(b)(6) Motion to Dismiss, at 25. Defendants
acknowledge that the Complaint alleges that the aforementioned
Individual Defendants "reviewed and authorized" assorted Company
filings; however, in Defendants' estimation, Lead Plaintiff has
not alleged facts which suggest any individual was involved in
preparing the corporate proved reserves disclosures that are
alleged to be materially misleading. Id. at 25-26.
Lead Plaintiff alerts this Court to the fact that Defendants
Watts, van de Vijver, van der Veer, van den Bergh and
Moody-Stuart all signed various annual and SEC reports on Form 20-F and Form
6-K during the Class Period, each of which are alleged to have
contained materially false and misleading misstatements. See
Lead Pl. Br. in Opp'n to 12(b)(6) Motion to Dismiss, at 16; see
also Compl., ¶¶ 48, 49, 51 & 55. Moreover, Defendants Watts,
van der Veer and Boynton signed Sarbanes-Oxley certifications
that are alleged to have been materially false and misleading.
See Lead Pl. Br. in Opp'n to 12(b)(6) Motion to Dismiss, at 16;
see also Compl., ¶¶ 48, 51, 52, 454, 455, 456 & 457.
The Third Circuit has not addressed the issue of whether
signatories to financial statements can be held to have adopted
that document as a statement. In In re Reliance Sec. Litig.,
135 F.Supp.2d 480, 503 (D.Del. 2001), the court applied the Ninth
Circuit's reasoning in Howard v. Everex Sys., Inc.,
228 F.3d 1057, 1061 (9th Cir. 2000), and concluded that an officer who
signs an SEC filing makes a statement under Section 10(b), even
if that officer did not participate in the drafting of the
document. "Key corporate officers should not be allowed to make
important false financial statements knowingly or recklessly, yet
still shield themselves from liability to investors simply by
failing to be involved in the preparation of those statements."
In re Reliance, at 503 (quoting Howard, at 1062). At this
stage of the litigation, this Court will permit Lead Plaintiff's
claims against Defendants Watts, van de Vijver, van der Veer, van
den Bergh, Moody-Stuart and Boynton to proceed, assuming the other
elements of the securities fraud claim are sufficiently pled.
With respect to Defendants Skinner and Brinded, Lead Plaintiff
alleges that they "made or participated in misstatements about
reserves during conference calls and interviews." See Lead Pl.
Br. in Opp'n to 12(b)(6) Motion to Dismiss, at 17; see also
Compl., ¶¶ 302, 353, 420, 425, 427.*fn14 The Complaint
alleges that Defendants Skinner and Brinded were present at
meetings or conferences, however, it does not allege that either
Defendant actually made a statement or omission. "While the Third
Circuit has not yet held whether a person can be a primary
violator of Section 10(b) on the basis of substantial
participation in the creation of a company's statements, most
courts have adopted a `bright line' test for primary
participation, that is in order to be liable, a person must
actually make the material misstatement or omission, which must
be attributed to him or her when disseminated." In re DVI, Inc.
Sec. Litiq., 2005 WL 1307959, *8 (E.D.Pa. May 31, 2005) (citing
Wright v. Ernst & Young LLP, 152 F.3d 169, 174 (2d Cir. 1998);
Shapiro v. Cantor, 123 F.3d 717, 720 (2d Cir. 1996); Sec.
Exch. Comm'n v. Lucent Tech., Inc., 2005 WL 771228, at *12
(D.N.J. April 6, 2005)).*fn15 Because this Court finds that it is
consistent with the heightened pleading requirements of the
PSLRA, this Court adopts the bright line standard for attributing
statements to the Individual Defendants. Accordingly, the 10(b)
allegations that Defendants Skinner and Brinded participated in
meetings and conferences in which material misrepresentations
were made are insufficient to survive the instant motion to
Lead Plaintiff has also not attributed any statements or
omissions to Defendants Miller, Roels or Jacobs. Plaintiff argues
that even where a Defendant did not make a false or misleading
statement which would subject him to liability pursuant to Rule
10b-5(a) and (c), he may still be held liable as a "secondary
actor" if he committed primary violations of the securities laws
through manipulative or deceptive acts. See
17 C.F.R. §§ 240.10b-5. To state a claim for a primary violation under Rule
10b-5(a) or (c), a plaintiff must allege that defendant "(1)
committed a manipulative or deceptive act (2) in furtherance of
the alleged scheme to defraud, (3) scienter, and (4) reliance."
In re Global Crossing, Ltd. Sec. Litig., 322 F.Supp.2d 319, 336
(S.D.N.Y. 2004). Plaintiff claims that each Individual Defendant engaged in manipulative or deceptive conduct
regardless of whether that Individual Defendant made a materially
false or misleading statement. See Lead Pl. Br. in Opp'n to
12(b)(6) Motion to Dismiss, at 27. When this theory of liability
is applied to the claims asserted against Defendants Miller,
Roels and Jacobs, said claims cannot survive the instant motion
Lead Plaintiff alleges that Defendant Miller served on the CMD
board in June 1998, when "that body considered and approved the
[Value Creation Team's] recommendation to relax the Group's
reserves reporting guidelines to allow bookings of reserves as
proved with only reasonable expectations of an available market."
See Lead Pl. Br. in Opp'n to 12(b)(6) Motion to Dismiss, at 28.
Lead Plaintiff contends that the decision to adopt the
recommendations was integral to the "scheme to inflate reported
proved reserves." Id. Furthermore, Plaintiff alleges that
Defendant Miller attended high level meetings in 2000 and 2001
with senior officers and directors of SEPCo and the Companies in
Houston at which the Nigerian overbookings were discussed. Id.
Defendant Roels' alleged participation is that he reviewed and
considered a Note for Information that warned of overstated
proved reserves and that he participated in meetings and
discussed the overstatement of the proved reserves. See Lead
Pl. Br. in Opp'n to 12(b)(6) motion to Dismiss, at 29. Finally,
Lead Plaintiff alleges that as the Chairman of the GAC from 2002
forward, Defendant Jacobs was an active participant in the scheme
to overbook proved reserves and conceal the truth from investors.
Id. at 29-30.
This Court concludes that Plaintiff has not stated with
sufficient specificity fraudulent acts engaged in by Defendants
Miller, Roels and Jacobs which tie them to the alleged scheme or
fraud. Although said Defendants are alleged to have been present
at various meetings and are alleged to have seen Notes of
Information, the pleadings do not specifically allege the actual
involvement of Defendants Miller, Roels and Jacobs. Furthermore,
for the reasons stated above, Plaintiff is also unable to sustain
a 10(a) or a 10(c) claim against Defendants Skinner or Brinded.
The Statements Were Fraudulent or Misleading
Lead Plaintiff alleges that the Companies issued materially
false public reports that overstated their proved oil and natural
gas reserves, their reserves replacement ratio and their standard
measure of future discounted cash flows. Compl., ¶¶ 3-4. There
can be no question that Lead Plaintiff has identified Defendants'
allegedly false and misleading statements with particularity. "In
addition to requiring plaintiffs to specify each statement
alleged to have been misleading, however, the PSLRA directs
plaintiffs to specify the reason or reasons why the statement is
misleading." CA Public Employees' Retirement Sys. v. Chubb, 394 F.3d 126, 145 (3d Cir. 2004); see also
15 U.S.C. § 78u-4(b)(1). With respect to the "true facts" recited in the
Complaint, the PSLRA requires Plaintiff to "state with
particularity all facts on which that belief is formed." Chubb,
at 145-46. In the instant case, much like Chubb, Plaintiff
relies on internal memoranda and confidential personal sources to
meet this pleading burden. When assessing the sufficiency of
allegations made on information and belief pursuant to
15 U.S.C. § 78u-4(b)(1), the Third Circuit has adopted the Second Circuit's
interpretation of that section of the PSLRA. Pursuant to that
view, "plaintiffs need only plead with particularity sufficient
facts to support" the beliefs, and need not plead with
particularity "every single fact upon which their beliefs
concerning false or misleading statements are based." Chubb, at
146 (quoting Novak v. Kasaks, 216 F.3d 300, 314 (2d Cir.
2000)). Furthermore, In re Scholastic Corp. v. Truncellito
"instructs that a plaintiff relying on internal reports must
specify the internal reports, who prepared them and when, how
firm the numbers were or which company officers reviewed them."
Chubb, at 147 (quoting Truncellito, 252 F.3d 63, 72-73 (2d
Cir. 2001)) (internal quotations omitted).
Unlike the pleadings in Chubb, in the case at bar, Lead
Plaintiff pleads with particularity sufficient facts to support
the beliefs alleged in the Complaint and has set forth the
statements it alleges to be misleading. See Compl., ¶¶ 300-462. Lead Plaintiff identifies when and in what capacity the
confidential sources were employed by the Companies and how the
former employees gained access to the information pled. See
Compl., ¶¶ 79-86; see also Chubb, at 148. The citations to
internal memoranda are replete with facts which identify the
author(s) and recipient(s) of the memoranda and the date and
context of each document. See Compl., ¶¶ 158-184. Accordingly,
this Court determines that Plaintiff's allegations are
Scienter of the Individual Defendants
"Scienter is a mental state embracing intent to deceive,
manipulate or defraud." In re Reliance Sec. Litig.,
135 F.Supp.2d 480, 506 (D.Del. 2001) (quoting Dirks v. SEC,
463 U.S. 646 (1983)) (internal quotations omitted). The Third Circuit
has stated that although the PSLRA established a uniform pleading
standard, it did not alter the substantive law of scienter. In
re Advanta Corp. Sec. Litig., 180 F.3d 525, 534 (3d Cir. 1999).
To that end, the Third Circuit has held that "it remains
sufficient for plaintiffs [to] plead scienter by alleging facts
establishing a motive and an opportunity to commit fraud, or by
setting forth facts that constitute circumstantial evidence of
either reckless or conscious behavior." Id., at 534-35 (quoting
Weiner v. Quaker Oats Co., 129 F.3d 310, 318 n. 8 (3d Cir.
1997)). "Motive and opportunity, like all other allegations of
scienter (intentional, conscious, or reckless behavior), must now be
supported by facts stated with particularity and must give rise
to a strong inference of scienter." In re Advanta, at 535
(citing 15 U.S.C. § 78u-4(b)(2)).*fn16 The Third Circuit has
defined a reckless statement as one "involving not merely simple,
or even inexcusable negligence, but an extreme departure from the
standards of ordinary care, and which presents a danger of
misleading buyers or sellers that is either known to the
defendant or so obvious that the actor must have been aware of
it." In re Advanta, at 535 (quoting McLean v. Alexander,
599 F.2d 1190, 1197 (3d Cir. 1979)).
The Complaint alleges that Defendants knowingly or recklessly
overstated the Companies' proved reserves and managed those
reserves to conceal the truth from the investing public. Lead
Plaintiff's allegations that the Individual Defendants knowingly
or recklessly inflated proved reserves and concealed the truth
with respect thereto by managing reserves during the Class Period
fall into three categories: presentation materials, Notes to the
CMD and internal memoranda, and e-mails and correspondence. See
Lead Pl. Br. in Opp'n to 12(b)(6) Motion to Dismiss, at 17. Presentation Materials
The Complaint cites numerous documents and/or warnings in which
the Companies' reported proved reserves were signaled to be
non-complaint with SEC rules. See Compl., ¶¶ 149-156, 181
(summaries of the allegations are included in the Facts section
above). One allegation makes reference to a 2003 presentation
which focused, inter alia, on Oman and Nigeria and which was
prepared for a meeting of the Conference. Compl., ¶ 181. A draft
of this presentation, which stated "the total volume not in
compliance with SEC guidelines in the proved reserves filing in
the 20-F as per 31/12/02 has become significant" was distributed
to some members of the Shell Group's senior staff. Id.
Notes and Memos
The Notes and memoranda detailed in the Complaint pertain to
information which was prepared for review by the CMD and other
senior executives within the Companies. See Compl., ¶¶ 157,
158, 160, 163, 167, 170, 171, 174, 176, 177 and 184. Among the
allegations are warnings of overstated reserves from GRA
Barendregt to senior Shell Group executives in the EP unit and to
KPMG and PwC. Compl., ¶ 157. Additionally, the Complaint cites
the GAC Report as revealing that senior executives "repeatedly
generated and circulated reports among other senior Shell Group
executives warning that the Companies' internal guidelines for
booking reserves were inconsistent with current SEC guidelines." Compl., ¶ 158. The content of a Note for Information summarizing
the Companies' reserves position, which was forwarded to the CMD
on February 11, 2002 by van de Vijver, is recounted in the
Complaint. In that Note, van de Vijver estimated the amount of
proved reserve exposures due to the non-compliance with SEC
A second presentation to the CMD in a Note for Discussion was
submitted by van de Vijver on July 22, 2002. That Note observed
that without the identified aggressively booked reserves in
Gorgon and Nigeria, "total proved RRR over the past 10 years
would be reduced from 102% to 88%." Compl., ¶ 163. Furthermore,
in a confidential personal Note to File, van de Vijver
acknowledged that "[a]ggressive/premature reserves bookings
provided impression of higher growth rate than realistically
possible." Compl., ¶ 167. On November 15, 2002, Defendant van de
Vijver circulated a brief outline of business plan issues to
members of his EP staff stating, inter alia, that the
finalized plan submission would not have been submitted if they
"could have been honest about past failures," including reserves
manipulation. Compl., ¶ 170.
E-Mails and Correspondence
The Complaint identifies numerous e-mails and other
communications discussing the aggressive or premature bookings
which were exchanged between Defendants Watts and van de Vijver. For example, as detailed more fully above, on September 2, 2002,
van de Vijver submitted a note to the CMD and copied Defendant
Boynton. The September 2nd Note described the effects of the
"aggressive booking in 1997-2000." Id. ¶ 166. Moreover, on
November 9, 2003 van de Vijver sent an e-mail to Watts stating
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." Compl.,
The Complaint also contains allegations which highlight
Defendants' "play for time" strategy. Lead Plaintiff cites
documents, which in its estimation, demonstrate that Defendants
devised and implemented the "play for time" strategy to conceal
the premature booking of reserves in the hope conditions would
"justify, or mitigate, the existing reserves exposures." See
Lead Pl. Br. in Opp'n to 12(b)(6) Motion to Dismiss, at 43. Lead
Plaintiff points to documents such as those created for the CMD
in July and September 2002 and the personal Note to File written
by van de Vijver in which he acknowledged that "[p]roviding
credible explanations for these issues proved near impossible
given the disconnects between external promises/expectations and
the reality of the state of the business." See Compl., ¶¶ 163 &
Defendants argue that while the communications create some inference of the Individual Defendants' knowledge, the
allegations do not rise to the level necessary to prove scienter.
See RDS Br. in Support of 12(b)(6) Motion to Dismiss, at 35.
In addition to the arguments set forth in Defendant RDS' brief
in support of this motion to dismiss, Defendants van de Vijver,
Boynton and Watts have also submitted briefs on this issue.
Defendants van de Vijver and Boynton assert that Plaintiff cannot
satisfy its pleading obligations by relying on the Individual
Defendants' positions with the Companies or their access to
corporate information. See van de Vijver Br. in Support of
12(b)(6) Motion to Dismiss, at 17-20; see also Boynton Br. in
Support of 12(b)(6) Motion to Dismiss, at 27-28. This Court is
cognizant that a complaint must plead specific allegations and is
satisfied that the instant Complaint clears this hurdle. The
Complaint makes reference to information received by Defendant
Boynton which spotlights the alleged fraud and the Defendants'
efforts to conceal the truth about the reserves.
In defense of the myriad documents which are cited in the
Complaint which focus on van de Vijver's alleged knowledge, van
de Vijver argues that the allegations simply "raise the inference
that van de Vijver tenaciously tried to untangle the complicated
reserves issues that he inherited when he became EP CEO, get the
CMD to focus on the reserve issues, and press then-CMD chairman (and his predecessor) Watts to act honestly and conservatively on
a going-forward basis when developing reserves projections."
Id. at 20. Furthermore, van de Vijver asserts that the
communications cited in the Complaint do not support a strong
inference that the proved reserves were materially
non-compliant with SEC Rule 4-10. Id. at 20. (emphasis in
This Court finds Defendant van de Vijver's arguments to be
unpersuasive. Van de Vijver's proffered reasons for issuing the
communications documented in the Complaint do not detract from
the strong circumstantial evidence of recklessness alleged in the
Complaint. See In re Burlington Coat Factory, 114 F.3d 1410,
1418 (3d Cir. 1997). Furthermore, the alleged justifications for
van de Vivjer's reckless conduct are not subjects to be analyzed
by this Court at this stage of the litigation.
Similarly, Defendant Watts contends that he "was not
orchestrating any fraud, but rather was merely part of an open
and reasonable discussion of how to comply with unclear and
changing regulatory pronouncements." See Watts Br. in Support
of 12(b)(6) Motion to Dismiss, at 20. As with Defendant van de
Vijver, Watts' argument does not detract from the strong
circumstantial evidence of recklessness alleged in the Complaint.
For the foregoing reasons, this Court concludes that
Plaintiff's Rule 10b-5(b) claims may proceed against Individual Defendants Watts, van de Vivjer, van der Veer and
Boynton.*fn17 However, because the allegations of
misstatements, scheme liability, and/or scienter do not meet the
heightened standards of Fed.R.Civ.P. 9(b) and the PSLRA with
respect to the 10(b) claims against the Individual Defendants
Moody-Stuart, van den Bergh, Jacobs, Brinded, Miller, Skinner and
Roels, said claims are dismissed.
E. Plaintiff's Claims based on Violations of Section 14(a) of
the Exchange Act (Counts IV and V)
In Counts IV and V of the Complaint, Lead Plaintiff alleges
that Defendants violated Section 14(a) of the Exchange Act and
Rule 14a-9 governing the solicitation of proxies by disseminating
Notices of Meeting containing false and misleading statements.
Compl., ¶¶ 542, 575. Section 14(a) states the following:
It shall be unlawful for any person, by the use of
the mails or by any means or instrumentality of
interstate commerce or of any facility of a national
securities exchange or otherwise, in contravention of
such rules and regulations as the Commission may
prescribe as necessary or appropriate in the public
interest for the protection of investors, to solicit
or to permit the use of his name to solicit any proxy
or consent or authorization in respect of any
security (other than an exempted security) registered
pursuant to section 781 of this title.
15 U.S.C. § 78n(a). Defendants contend that the SEC rules explicitly provide that,
"foreign private issuers like Royal Dutch and Shell Transport
`shall be exempt' from section 14(a)." See RDS Br. in Support
of 12(b)(6) Motion to Dismiss, at 14. Defendants cite SEC rule
17 C.F.R. § 240.3a12-3(b), which states, "[s]ecurities registered by
a foreign private issuer, as defined in Rule 3b-4 shall be exempt
from sections 14(a), 14(b), 14(c), 14(f) and 16 of the Act."
17 C.F.R. 240.3a12-3(b) (2004).
Plaintiff claims that when Defendants issued false proxy
materials they waived any right to the exemption. Plaintiff
relies on Wilson v. Great Am. Indus., Inc., which stated, "even
though the proxy was not legally required in this case, when
defendants choose to issue a proxy plaintiffs have a right to a
truthful one." Wilson, 979 F.2d 924, 931 (2nd Cir. 1992).
However, in Wilson, there was no applicable exemption; the
defendant company was not a foreign private issuer. Id. at 926.
Courts have held that foreign private issuers are not subject to
claims under Section 14(a) for alleged misstatements in proxy
statements. See Batchelder v. Kawamoto, 147 F.3d 915 (9th
Cir. 1998). Plaintiff has offered no case law to suggest that the
exemption to 14(a) does not apply in this situation. Rather,
Plaintiff offers various policy rationales for overturning the
SEC rule. After careful consideration, this Court declines that
invitation and also determines that the exemption to Rule 14(a) does apply in the case at bar. Therefore, Plaintiff's Section
14(a) claims against Royal Dutch and Shell Transport fail, as a
matter of law. Accordingly, Royal Dutch and Shell Transport's
motion to dismiss Counts IV and V of the Complaint is granted.
F. Plaintiff's Claims based on Violations of Section 20(a) of
the Exchange Act (Count III)
Section 20(a) imposes joint and several liability on any person
who "controls a person liable under any provision of the
[Exchange Act]." In re Alpharma Inc. Sec. Litig., 372 F.3d 137,
153 (3d Cir. 2004) (quoting Shapiro v. UJB Financial Corp.,
964 F.2d 272, 279 (3d Cir. 1992)) (internal quotations omitted).
Under the plain language of the statute, "plaintiffs must prove
not only that one person controlled another person, but also that
the controlled person is liable under the Act. If no controlled
person is liable, there can be no controlling person liability."
Id. The heightened pleading requirements of Rule 9(b) do not
apply to claims under Section 20(a). In re U.S. Interactive,
Inc. Class Action Sec. Litig., 2002 WL 1971252, *18 (E.D.Pa.
Aug. 23, 2002). "Allegations that support a reasonable inference
that [defendants] had the potential to influence and direct the
activities of the primary violator suffice to plead control
person liability." Id.
Lead Plaintiff has adequately pled underlying securities law
violations; therefore, the first requirement of a Section 20(a) violation is met. Moreover, the Complaint has proffered
sufficient facts which demonstrate the direct involvement of the
Individual Defendants Watts, van de Vijver, van der Veer and
Boynton in daily operations and their power to influence and
control the decision making of the Companies, including the
content and dissemination of statements, reports and filings
which allegedly are false and misleading. In their respective
briefs, Defendants Watts, Boynton and van de Vijver also argue
that Lead Plaintiff has failed to adequately plead facts which
allege that each was a controlling person. See van de Vijver
Br., at 34-36; Boynton Br., at 34-39; and Watts Br., at 38-40.
The factual disputes raised by Watts, Boynton and van de Vivjer
do not defeat Lead Plaintiff's allegations, because the ultimate
determination of whether the Individual Defendants were
controlling persons involves questions of fact to be resolved by
the factfinder. P. Schoenfeld Asset Mgmt. LLC v. Cendant Corp.,
142 F.Supp.2d 589, 624 (D.N.J. 2001) (citing In re Cendant Corp.
Litig., 60 F.Supp.2d 354, 379-80 (D.N.J. 1999)). Therefore,
Individual Defendants Watts, van de Vivjer, van der Veer and
Boynton's motion to dismiss Count III is denied. Additionally,
because this Court concludes that Plaintiff's 10(b) claims
against Individual Defendants Moody-Stuart, van den Bergh,
Jacobs, Brinded, Miller, Skinner and Roels fail as a matter of
law, the related Section 20(a) claims against these Defendants also fail.
IV. The Auditor Defendants' Rule 12(b)(6) Motions to
A. Statute of Limitations
KPMG NV argues that the five-year statute of limitations has
run as to any claim based on KPMG NV's audit of the Group's
year-end 1998 through 2000 financial statements. KPMG NV Br., at
36. Claims brought under Section 10(b) or Rule 10b-5 must be
filed "within one year after the discovery of the fact
constituting the violation and within three years after such
violation." Rocker Mgmt., L.L.C. et al., Lernout & Hauspie
Speech Prods., NV., 2005 WL 1365772, *3 (D.N.J. June 8, 2005)
(quoting Lampf, Plea. Lipkind, Pruptis & Petigrow v.
Gilbertson, 501 U.S. 350, 364 (1991)). Under the objective
inquiry notice standard, the limitations period begins to run
when a plaintiff "discovered or in the exercise of reasonable
diligence should have discovered the basis for [the] claim
against the defendant." Rocker, at *3 (quoting Del Sontro v.
Cendant Corp., 223 F.Supp.2d 563, 571 (D.N.J. 2002)).
Lead Plaintiff argues that under Federal Rule of Civil
Procedure 15(c), the filing of the Complaint in September 2004,
"relates back" to the filing of the first complaint in January
2004, making Plaintiff's claims based upon the 1998 Form 20-F
against the Auditor Defendants timely. Plaintiff asserts that it
did not discover evidence of the Auditors' role in the scheme until July 15, 2004, when The Wall Street Journal published a
relevant article. See Lead Pl. Br. in Opp'n to KPMG NV and PwC
UK 12(b)(6) Motion to Dismiss, at 56. Lead Plaintiff submits that
it added the Auditor Defendants to this litigation at the
earliest opportunity after this discovery. Id. For the reasons
submitted in Lead Plaintiff's Brief in Opposition to Defendant
KPMG NV and PwC UK's motion to dismiss, this Court determines
that the relation back doctrine applies in the instant case and
all claims against the Auditor Defendants are therefore timely.
B. KPMG NV's and PwC UK's Motions to Dismiss Count II of the
Lead Plaintiff alleges that in its "role as the Companies'
external accountants, KPMG NV and PwC UK undertook responsibility
for auditing and reviewing the Companies' financial statements
before they were publicly disseminated in accordance with
Generally Accepted Auditing Standards ?." See Lead Pl. Br. in
Opp'n to KPMG NV and PwC UK 12(b)(6) Motion to Dismiss, at 2.
Furthermore, Plaintiff contends that KPMG NV and PwC UK
"abrogated their responsibilities by providing materially false
audit certifications in which they represented, among other
things, that the financial statements were presented fairly, in
all material respects, in accordance with Generally Accepted
Accounting Principals ?, and that they conducted their audits in
accordance with GAAS." Id. Essentially, the Complaint alleges
that: KPMG NV and PwC UK issued "clean" audit opinions which ultimately proved to be erroneous, there were steps that the
Auditors might have taken but failed to, and there were numerous
"red flags" that the Auditors ignored or failed to investigate.
"In securities fraud claims against an auditor claims which
generally are based on the fraud of others the failure . . . to
identify problems with the defendant-company's internal controls
and accounting practices does not constitute reckless conduct
sufficient for § 10(b) liability." In re Suprema Specialties,
Inc., Sec. Litig., 334 F.Supp.2d 637, 657 (D.N.J. 2004) (quoting
Nappier v. Pricewaterhouse Coopers LLP, 227 F.Supp.2d 263, 273
(D.N.J. 2002)). What is required is for plaintiff to allege that
the auditor's conduct was "highly unreasonable, representing an
extreme departure from the standards of ordinary care [and] must,
in fact, approximate an actual intent to aid in the fraud being
perpetrated by the audited company." In re Suprema Specialties,
at 657 (citing Rothman v. Gregor, 220 F.3d 81, 98 (2d Cir.
2000)). Furthermore, "allegations of GAAP violations or
accounting irregularities standing alone, are insufficient to
state a securities fraud claim. . . . [O]nly where such
allegations are coupled with evidence of corresponding fraudulent
intent, might they suffice." In re Suprema Specialties, at 657
(quoting Nappier, at 276). Additionally, "allegations that an
auditor must have known, by virtue of its role as auditor, of the
defendant company's role [are] insufficient by themselves to permit an inference of
Lead Plaintiff argues that within the audit reports submitted
by KPMG NV and PwC UK were the false and misleading statements.
Specifically, Plaintiff points to two statements that the
auditors made in each annual opinion: (1) that the auditors
"conducted their audits in accordance with GAAS"; and (2) that
the financial statements "presented fairly, in all material
respects, the financial position of the Group." See Lead Pl.
Br. in Opp'n to KPMG NV and PwC UK 12(b) (6) Motion to Dismiss,
at 10. KPMG NV and PwC UK contend that the audit opinions
expressed no view as to the core of Plaintiff's claims the
propriety of the Companies' internal controls and the Group's
Supplementary Information. See KPMG NV Br. at 10-13; PwC UK Br.
Lead Plaintiff maintains that it did not charge the Auditors
with Rule 10b-5(b) liability because of statements about internal
controls or Supplementary Information, but rather the Group's
internal control weaknesses and overstated supplementary
information form the predicate reasons for the falsity of the
Auditors' challenged statements. See Lead Pl. Br. in Opp'n to
KPMG NV and PwC UK 12(b) (6) Motion to Dismiss, at 12. The
Auditor Defendants assert, however, that Plaintiff's argument
that these non-audited aspects of Companies somehow caused the audit opinions to be false is attenuated.
In its reply brief, KPMG NV points out that the restatement of
the financial statements does not necessarily mean that a false
audit opinion was issued. See KPMG NV Reply Br. at 10-13; PwC
UK Br. at 4. Defendant asserts that Plaintiff's argument ignores
the possiblity that the Companies restated the reserves despite
there being no material misstatement in the financial statements.
The Auditor Defendants maintain that the Companies "restated the
unaudited Supplementary Information and so chose to restate the
financial statements simultaneously even though the financial
effect was not material and would not therefore have
independently required any financial restatement." See KPMG NV
Reply Br. at 10-13; PwC UK Br. at 4 (citing Shell Transport and
Trading Co. PLC Audit & Reserves Reports Conference Call and
Presentation Final, Fair Disclosure Wire, Apr. 19, 2004, at
5). Furthermore, Defendants note that the financial statements
were restated by only .4% of net income for 2001 and 1.1% for
2002, amounts which are relatively small in relation to those in
the cases cited in Plaintiff's opposition brief. A restatement of
the Companies' financial statements occurred and although
limited, the restatement aids Plaintiff's attempt to infer
knowledge based on the massive reach of the alleged fraud. The
Auditor Defendants also attack Plaintiff's contention that they
falsely represented compliance with GAAS. As is described in great detail in the Complaint, Lead Plaintiff claims that the
Auditors had knowledge of the improper reserves bookings and that
under GAAS, the Auditors should have qualified the audit opinions
with a note about the Supplementary Information. The Statement of
Auditing Standards ("SAS") No. 52 requires an auditor to: (1) ask
management about the methods of preparing the supplementary
information, including whether it is measured and presented in
accordance with prescribed guidelines; (2) inquire as to
"management's understanding of the specific requirements for
disclosure of the supplementary oil and gas reserves
information"; (3) compare the company's recent production with
reserves estimates for properties having significant production
or reserves quantities and inquire about disproportionate ratios;
(4) compare the company's reserves information with the company's
financial statements; and (5) make additional inquiries of
management if the auditor believes that the company's
supplementary information concerning proved reserves may not be
presented in accordance with GAAP. After applying these
procedures, if the auditor has unresolved substantial doubt about
the required supplemental information and its adherence to the
prescribed guidelines, the auditor should identify this
limitation in its audit opinion in accordance with the procedures
prescribed by the professional standards. AU § 558.06; Attached
to Decl. of Jeffrey M. Haber in Support of Lead Pl. Opp'n to KPMG NV and PwC UK 12(b)(6) Motion to Dismiss, Ex. 5; see also
Compl., ¶ 521.
The Auditor Defendants argue that Plaintiff has not alleged
facts which indicate that PwC UK or KPMG NV had such substantial
or unresolved doubts. However, the examples cited in the
Complaint lead this Court to a different conclusion. The
Complaint details a presentation which Group managers made on
January 31, 2000 in which it was reported, inter alia, that a
substantial portion of the Shell Petroleum Development Company of
Nigeria, Ltd.'s reported proved reserves were vulnerable and
noncompliant with SEC rules. Compl., ¶ 149. The same presentation
also highlighted the fact that proved reserves could not be
booked in Gorgon because of "limited market availability and
already large uncommitted proved gas reserves." Id.
Furthermore, the presentation noted that reported proved reserves
in Gorgon had been a point of contention for the previous two
years with external auditors. Id.
The Supreme Court has observed that "[f]ar from a single-source
accounting rulebook, GAAP encompasses the conventions, rules, and
procedures that define accepted accounting practice at a
particular point in time." Shalala v. Guernsey Mem'l Hosp.,
514 U.S. 87, 101 (1995). "The determination that a particular
accounting principle is generally accepted may be difficult
because no single source exists for all principles." Id. Relying on this, the In re Global Crossing, Ltd. Sec. Litig.
Court determined that whether the Companies' practice of
accounting was ever acceptable under the applicable provisions of
GAAP cannot be determined in advance of the development of the
record. 322 F.Supp.2d 319, 339 (S.D.N.Y. 2004). The Court noted
that "eventual evidence on industry practice or expert testimony
are likely to shed light on this question," however, at that
procedural phase, plaintiffs' assertion that the Companies'
practices were not generally accepted must be taken as true.
This Court finds that the same principle applies in the case at
bar. Lead Plaintiff alleges facts that would permit a reasonable
factfinder to infer that the methods of accounting employed by
KPMG NV and PwC UK in certifying Royal Dutch and Shell
Transport's financial statements were deficient. Therefore, this
Court is satisfied that Lead Plaintiff has alleged false
statements and more than mere conclusory allegations that KPMG NV
and PwC UK had unresolved substantial doubt as to the content of
their reports and their compliance with GAAS.*fn18
Defendants next argue that Plaintiff has failed to plead facts
sufficient to support a strong inference of scienter, as required by the PSLRA. "In the Third Circuit, a plaintiff may
establish the requisite inference of fraudulent intent by
alleging either: 1) facts establishing a motive and an
opportunity to commit fraud; or 2) facts that constitute
circumstantial evidence of either recklessness or conscious
behavior." Nappier v. Pricewaterhouse Coopers LLP,
227 F.Supp.2d 263, 275 (D.N.J. 2002) (citing In re Advanta Corp.
Sec. Litig., 180 F.3d 525, 534-35 (3d Cir. 1999)). With respect
to motive, Plaintiff only asserts conclusory allegations that
KPMG NV and PwC UK each had an interest in ignoring the
Companies' alleged fraud in order to maintain its auditing
relationship and in order to "expand the enormous fees they were
receiving from their non-auditing services." See Lead Pl. Br.
in Opp'n to KPMG NV and PwC UK 12(b)(6) Motion to Dismiss, at 43.
This Court does not find such allegations to constitute evidence
of scienter and therefore will turn to Lead Plaintiff's proffered
direct and circumstantial evidence of conscious misconduct or
recklessness. See In re First Merchants Acceptance Corp. Sec.
Litig., 1998 WL 781118 (N.D.Ill. Nov. 4, 1998) (generation of
business motive was rejected because court recognized that
accounting firm's "greatest asset is its reputation for honesty,
followed closely by its reputation for careful work.")
Examples of direct evidence of KPMG NV's and PwC UK's conscious
misbehavior or recklessness are highlighted both in the Complaint and in Lead Plaintiff's opposition brief. The Complaint
alleges that the Auditors were aware, no later than January 1998,
that the RDS Defendants were engaged in the improper booking of
reserves as proved. See Lead Pl. Br. in Opp'n to KPMG NV and
PwC UK 12(b)(6) Motion to Dismiss, at 29; see also Compl., ¶
149. As evidence of this, Lead Plaintiff cites the January 2000
internal presentation in which it was noted that "reported proved
reserves in Gorgon had been a point of contention for the
previous two years with [the] external auditors." See Lead Pl.
Br. in Opp'n to KPMG NV and PwC UK 12(b)(6) Motion to Dismiss, at
29. PwC UK argues that "far from demonstrating complicity in
fraud, the Notice simply demonstrates that the `external
auditors' were asking questions." See PwC Reply Br., at 9.
Additionally, KPMG NV contends that this presentation "does not
approximate the type of `smoking gun' plaintiffs need to raise a
strong inference of scienter." See KPMG NV Reply Br., at 14.
(quoting Nappier, at 278 (so-called red-flags, which should be
deemed to have put defendant on notice of alleged improprieties,
must be closer to smoking guns than mere warning signs)).
Lead Plaintiff submits that the Auditors were not merely
"asking questions", but rather, took steps that were inconsistent
with their obligations. Plaintiff alleges that during the January
2000 Presentation, "[g]roup managers made a presentation that showed [a RRR] of 37% for the year ended December 31, 1999,"
however, the Companies "robustly rejected" this recommendation
and instead announced a significantly higher RRR of 56%. See
Lead Pl. Br. in Opp'n to KPMG NV and PwC UK 12(b)(6) Motion to
Dismiss, at 30. Lead Plaintiff proffers that Defendant Watts
stated that the judgment to reject the recommendation of the
Group managers and use the higher RRR was "reviewed by Shell's
external auditors." Id.
As further proof of scienter, Plaintiff observes that KPMG NV
and PwC UK received actual notice of booking improprieties from
the GRA, in the form of two memoranda. See Lead Pl. Br. in
Opp'n to KPMG NV and PwC UK 12(b)(6) Motion to Dismiss, at 31. In
January 2002, GRA Barendregt prepared a memorandum which warned
that a portion of the 2001 mature reserves was at risk of being
overstated. Id. It is alleged that KPMG NV and PwC UK received
this memorandum, as well as a similar one which was prepared the
following year. In January 2003, Barendregt warned that the
Group's guidelines for booking reserves did not comply with SEC
guidelines in all instances, and raised questions about the
integrity of the Companies' overall reserves reporting system.
Id. at 32. Lead Plaintiff alleges that "in addition to
apprising the Companies' external auditors of specific overbooked
reserves, Barendregt also expressed his concern to the Auditors
that the Companies' `scorecard' system of compensation, which linked proved reserves additions to business and individual
scorecards, was contributing to the overbooking of reserves."
Id. at 33. Furthermore, Plaintiff alleges that in his January
2003 warning, Barendregt wrote that "senior managers in the EP
division rejected doing away with reserves-related bonuses, and
that it is the auditor's firmly held belief that the
reserves-addition targets in these score cards present a
potential threat to the integrity of the Group's reserves
estimates." Id. KPMG NV and PwC contend that the reports only
refer to a small slice of the Companies' reserves which were at
risk of being overstated and that this would not have caused the
Auditors to question the financial statements themselves. KPMG
Reply Br., at 15; PwC Reply Br. at 10-12. Furthermore, KPMG
argues that such reports are not "the kind of smoking gun" needed
to show scienter. Id.
The Complaint also makes reference to circumstantial evidence
which Plaintiff submits as proof that KPMG NV and PwC UK acted
with scienter. The circumstantial evidence includes the magnitude
of the fraud, the Auditors' extensive role in reviewing the
Companies' proved reserves and internal reserves guidelines, and
the Auditors' alleged violations of GAAS. See Lead Pl. Br. in
Opp'n to KPMG NV and PwC UK 12(b)(6) Motion to Dismiss, at 35-43.
It is well recognized that "allegations of GAAP violations or
accounting irregularities, standing alone, are insufficient to
state a securities fraud claim . . . only where such allegations are coupled with evidence of corresponding fraudulent intent,
might they suffice." Nappier, 227 F.Supp.2d at 276. However, as
is detailed above, Plaintiff has alleged sufficient evidence of
corresponding fraudulent intent on the part of KPMG NV and PwC
UK. As the Third Circuit explained in McClean v. Alexander,
"the issue is whether the defendants had an honest belief that
the statements made by them were true. If they did have that
honest belief, whether reasonably or unreasonably, they are not
liable. If they did not have an honest belief in the truth of
their statements, then they are liable, so far as (scienter) is
concerned." 599 F.2d 1190, 1198 (quoting O'Connor v. Ludlan,
92 F.2d 50, 54 (2d Cir. 1937)).
In deciding a motion to dismiss pursuant to Federal Rule of
Civil Procedure 12(b)(6), the Court must construe all inferences
in favor of the Plaintiff. Additionally, in order to defeat
Defendants' motion, Plaintiff is required to plead allegations
which support a strong inference of scienter. In the case at bar,
Plaintiff meets this burden. The magnitude of the reserves
restatement and the Auditor Defendants' alleged knowledge of
related information, coupled with the specific GAAS and GAAP
violations and the "red flags" support an inference that KPMG
NV's and PwC UK's conduct was reckless. Furthermore, the Auditor
Defendants' arguments that they were simply "doing their job" by
reporting weaknesses in the financial statements of the Companies does not absolve them of liablity. For the Auditors to have
recognized potential problems yet continue to sign off on
financial statements only supports Plaintiff's claim of reckless
behavior. See In re First Merchant Acceptance Corp. Sec.
Litig., 1998 WL 781118, *11 (N.D.Ill. Nov. 4, 1998).
Accordingly, for purposes of a Rule 12(b)(6) motion and its
limitations, Plaintiff has alleged specific facts which could
establish Section 10(b) liability. Defendant KPMG NV's and PwC
UK's motions to dismiss Count II of the Complaint are denied.
C. KPMG International's and PwC International's Motions to
Dismiss (Count II)
Based upon the allegations in the Complaint, PWC International
and KPMG International have done no auditing work and have not
signed any financial assessments regarding Royal Dutch and Shell
Transport. There are several references in the Complaint to the
knowledge and conduct of a collective "PwC" and "KPMG". See
Compl., ¶¶ 512-533. Plaintiff asks this Court to allow it to
proceed based upon the notion that "PwC" and "KPMG" are "unitary,
worldwide firms," i.e., that these firms hold themselves out to
the world as one firm with accountants in offices world-wide.
See Lead Pl. Br. in Opp'n to KPMG International and PwC
International 12(b)(6) Motion to Dismiss, at 7. The Court does
Plaintiff argues that KPMG International and PwC International
hold themselves out as integrated worldwide firms and tout themselves on their websites as a "global network" or
"global firm." Id. at 8, 11. However, the Court, upon visiting
the respective International Auditor firm websites, reaches a
different conclusion. The KPMG International website states,
KPMG International is a Swiss cooperative that serves
as a coordinating entity for a network of independent
member firms. KPMG International provides no services
to clients. Each member firm is a separate and
independent legal entity and each describes itself as
The PWC website contains similar language,
"PricewaterhouseCoopers refers to a network of member firms of
PricewaterhouseCoopers International Limited, each of which is a
separate and independent legal entity." www.pwcglobal.com. In
In re Lernout & Hauspie Sec., the Court noted,
The Website's express declaration that each member of
KPMG International is a "separate and independent
legal entity" precludes any reasonable inference of
apparent authority, and Plaintiffs make no argument
that the "status" of the various KPMG member entities
vis a vis KPMG International should give them
inherent agency powers (i.e., implied authority) to
bind the entire association for their individual
230 F.Supp.2d 152, 173 (D.Mass. 2002).
In rejecting one-firm claims against the international body,
the District Court of Maryland stated,
Plaintiff's emphasis on the facts that the two firms
shared a brand name and the corporate website described a "global" firm are
similarly unavailing. It is well recognized that
"[m]ember firms in an international accounting
association are not part of a single firm and are
neither agents nor partners of other member firms
simply by virtue of using the same brand name."
In re Royal Ahold N.V. Sec. & ERISA Litig., 351 F.Supp.2d 334,
385 (D.Md. 2004).
Moreover, in Skidmore v. KPMG, the Court held, "Plaintiffs'
allegations that KPMG was acting as a `worldwide organization'
are `insufficient as a matter of law to state a claim against
KPMG LLP for the acts of the KPMG member firm in Morocco'." 2004
WL 3019097, *4 (N.D.Tex. Dec. 28, 2004). Many courts addressing
similar claims, "have required plaintiffs to plead substantially
more than a bare bones `unified company theory'." Id. (citing
In re Asia Pulp & Paper Sec. Litig., 293 F.Supp.2d 391
The District of New Jersey, in the recent decision of Rocker
Mgmt. v. Lernout & Hauspie Speech Prods., also rejected the "one
firm" theory applied to accounting firms. 2005 WL 1365772 (D.N.J.
June 8, 2005). In making this decision, Judge Lifland referred to
the KPMG Annual Report, which stated that the KPMG International
balance sheet, "represents composite information of the separate
member firms of KPMG International and is combined here solely
for presentation purposes. KPMG itself is a non-operating
association." Id. *7. The Rocker Court held, "[t]he lumping
together of KPMG offices under one `KPMG' reference offends the particularity requirements embodied in Rule 9(b) and
the PSLRA and is insufficient to rescue the deficiencies in the
allegations concerning misstatements attributable to KPMG US."
The Complaint in the case at bar, much like those in the
aforesaid cases, alleged no facts which suggest the affiliation
of KPMG International or PwC International with the Defendant
Companies. Accordingly, Defendants KPMG International's and PwC
International's motions to dismiss Count II of the Complaint are
The claims in Count II of the Complaint against PwC
International are dismissed with prejudice because the Court
foresees no reasonable likelihood that an amended pleading
complying with Fed.R.Civ.P. 11 could adequately assert that
this Defendant is liable. Hence, such an attempted argument would
likely be futile. However, because Plaintiff has summarily
alleged possible participation by KPMG International itself in
audits of Shell Nigeria reserves and accounts, this Court's
dismissal of the Count II claims against KPMG International is
without prejudice. See Lead Pl. Br. in Opp'n to KPMG
International and PwC International 12(b)(6) Motion to Dismiss,
at 21-24. If Plaintiff so chooses, it may file a second amended
Complaint (or an amendment to the present Complaint) incorporating, inter alia, allegations against KPMG
International and its alleged involvement in the audits and
accounting practices of Shell Nigeria. Federal Rule of Civil
Procedure 15(a) provides that "leave to amend shall be freely
given when justice so requires." In re Burlington Coat Factory
Sec. Litig., 114 F.3d 1410, 1434 (3d Cir. 1997). "Among the
grounds that could justify a denial of leave to amend are undue
delay, bad faith, dilatory motive, prejudice, and futility."
Id. This Court finds that Plaintiff has not acted in bad faith
nor has it acted in an effort to prolong litigation. Furthermore,
this Court does not determine that Defendant KPMG International
will be unduly prejudiced by an amendment. Finally, this Court
cannot make the conclusion, based upon the facts before it, that
an amendment as to this Defendant would be futile.
For the foregoing reasons, the motions brought by the RDS
Defendants, the Individual Defendants, KPMG NV, KPMG
International, PwC UK and PwC International to dismiss the claims
that are asserted on behalf of putative class members who are
foreign nationals and who purchased their shares on foreign
exchanges, pursuant to Federal Rule of Civil Procedure 12 (b)
(1), are denied. Defendant Watts' motion to dismiss for lack of
personal jurisdiction pursuant to Federal Rule of Civil Procedure
12 (b) (2) is also denied. The Royal Dutch and Shell Transport Group Defendants' motion to dismiss Counts I and III of the
Complaint and Individual Defendants Watts, van de Vijver, van der
Veer and Boynton's motions to dismiss Counts I and III of the
Complaint, pursuant to Fed.R.Civ.P. 12 (b) (6) et al., are
denied. Individual Defendants Moody-Stuart, van den Bergh,
Jacobs, Brinded, Miller, Skinner and Roels motions to dismiss
Count I and Count III of the Complaint are granted, and claims
against them are dismissed without prejudice. Defendants Royal
Dutch and Shell Transport's motion to dismiss Counts IV and V of
the Complaint is granted, with prejudice. KPMG NV's and PwC UK's
motions to dismiss Count II of the Complaint are denied. PwC
International's and KPMG International's motions to dismiss Count
II of the Complaint are granted and that Count is dismissed as to
PwC International with prejudice and as to KPMG International,
without prejudice. The claims of those alleged class members who
purchased the securities in question during the Class Period but
have not yet sold are dismissed, with prejudice. The claims of
those alleged class members who purchased the securities in
question after January 9, 2004 and have sold them thereafter are
dismissed without prejudice. Lead Plaintiff may, if it so
chooses, amend the present Complaint and, in compliance with
Dura Pharmaceuticals, Inc. et al., ___ U.S. ___,
125 S. Ct. 1627 (2005), plead proximate causation and economic loss with
respect to the securities purchased after January 9, 2004 (and
sold thereafter) including, but not limited to, a detailed analysis of
the impact of the March 18, 2004 announcement. Plaintiff also
may, if it so chooses, amend the present Complaint to plead
certain claims against KPMG International, and Individual
Defendants Moody-Stuart, van den Bergh, Jacobs, Brinded, Miller,
Skinner and Roels, consistent with this Opinion. Any such amended
pleading permitted above shall be filed and served within 30
days. As to any such claim now dismissed without prejudice which
is not so amended, the dismissal shall become one with prejudice.