Royal Dutch Shell
In January, 2004, one of the largest corporate scandals in European history was revealed. On January 9, what is now known as Royal Dutch Shell (“Shell” or the “Company”) announced a massive 20% write-down of its proved oil and gas reserves. This write-down cut Shell’s reserve life from 13.4 years to 10.6, increased its worldwide 5-year average reserve replacement cost per barrel to $12.57, 128% higher than the industry average, and reduced its Appraised Net Worth by 7.1% or $9.6 billion. For years leading up to this announcement, Shell had told the investing public that it had substantial “proved reserves” from a project off the western coast of Australia and from various projects in Nigeria. Unbeknownst to investors, the reserves did not meet the requirements necessary to be classified as “proved” and were improperly reported as such in the Company’s financial reports. This meant that Shell had substantially overstated its oil and gas reserves, violating various accounting rules and guidelines, and artificially inflating a key measure of its financial position and competitive standing. This made its stock’s true value in the marketplace severely overstated.
Following the announcement of the write-down, Moody’s placed the Company’s Aaa rating under review for possible downgrade because the write-down materially and adversely affected Shell’s reserves-to-debt ratio. At this point, most analysts and commentators concluded that, because of the magnitude of the write-down and the clear SEC and industry guidelines relating to reserve classification, the reserve overstatements could not have been a result of error or accident, but rather, were knowingly overstated to preserve Shell’s credit rating and to shore up its competitive position.
A class action was brought on January 23, 2004 in the United States District Court for the District of New Jersey. Extensive discovery followed — including 57 fact depositions and 12 expert depositions — principally focused on subject matter jurisdiction and class certification issues. During this time, the court scheduled an evidentiary hearing to consider, among other things, whether the claims of non-U.S. investors should be heard by the U.S. court.
As the litigation progressed, a novel concept was utilized to resolve the claims that European and other non-U.S. investors had against the Shell defendants. In April 2007, Shell announced that the parties would use a recently enacted Dutch law to resolve these claims. These non-U.S. investor claims were then brought before the Amsterdam Court of Appeals in The Netherlands. This settlement (the “Dutch Settlement”) provided investors who both resided and purchased outside the United States, with a $340 million recovery. As required under Dutch law, a foundation had to be created to bring this settlement before the Amsterdam Court of Appeals. One of SRKW’s clients, the Belgian financial institution KBC Asset Management, stepped forward to act as a participant in this important foundation along with other European institutions. This made it an important part of the first pan-European settlement of a securities fraud action.
The Dutch Settlement is currently pending before the Amsterdam Court of Appeals. A final approval hearing is scheduled for November 20, 2008. For more information about the case and the Dutch Settlement, please visit www.royaldutchshellsettlement.com.